Cani Portfolio Pty Ltd v Badov
[2018] VSC 257
•21 May 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
S CI 2017 02220
| CANI PORTFOLIO PTY LTD | Plaintiff |
| v | |
| ROMAN BADOV | Defendant |
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JUDGE: | Ierodiaconou AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 23 April 2018 |
DATE OF JUDGMENT: | 21 May 2018 |
CASE MAY BE CITED AS: | Cani Portfolio Pty Ltd v Badov |
MEDIUM NEUTRAL CITATION: | [2018] VSC 257 |
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CONTRACT — Whether interest under deed of settlement to be calculated according to loan deed or statute — Uncertainty — Whether interest clause in settlement deed void for uncertainty — Penalty — Whether interest under settlement deed according to loan deed is a penalty — Interest rate held to be out of all proportion to the greatest loss that might follow from breach of loan agreement — Interest rate to be calculated under s 58 of Supreme Court Act 1986 — Application for costs on indemnity basis under deed of settlement, loan deed and mortgage — Exercise of discretion as to basis of award of costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T Greenway | |
| The Defendant appeared in person |
HER HONOUR:
Cani Portfolio Pty Ltd (‘Cani’) is a moneylender. Mr Badov guaranteed monies loaned by Cani to his business, Free Spirit Airlines Pty Ltd (‘FSA’). Monies were initially advanced to FSA under a facility agreement. After default, monies were advanced under a loan agreement. Mr Badov provided a second mortgage on the family home[1] (‘the land’) as security for the monies advanced under the loan agreement. FSA defaulted on payments and Mr Badov did not meet his obligations as guarantor. After Cani commenced this proceeding, Mr Badov and FSA executed a Deed of Settlement and Release[2] (‘settlement deed’) with it to resolve this proceeding. However, they defaulted on payment of the settlement monies. The proceeding has now been reinstated. Cani seeks judgment in its favour. The principal amount outstanding is not in dispute, nor is Cani’s mortgage over the land. The only issues in dispute are the calculation of interest and costs. The interest clause[3] in the settlement deed provides that interest is to be calculated in accordance with the loan deed[4] or alternatively pursuant to statute. The costs clause[5] is similarly constructed.
[1]The land referred to is Lot 3447 on Plan of Subdivision 431531N and being the whole of the land contained in Certificate of Title Volume 10533, Folio 347: affidavit in support of summons of Laura Elise Hogg affirmed 1 December 2017; the mortgage over the land is referred to in the further affidavit of Laura Elise Hogg, affirmed 26 March 2018, exhibit LEH-2.
[2]Affidavit in support of summons of Laura Elise Hogg affirmed 1 December 2017, exhibit LEH-1.
[3]Settlement deed, recital I(c).
[4]The loan deed is contained in the further affidavit of Laura Elise Hogg affirmed 26 March 2018, exhibit LEH-1.
[5]Settlement deed, recital I(d).
The two questions for determination in this proceeding are as follows:
(a) How is the interest clause to be construed?
(b) How is the costs clause to be construed?
Settlement Deed
The settlement deed contains a series of recitals that provide a succinct background to the present proceedings.[6]
[6]Where relevant the terms defined in these recitals are adopted in this judgment.
A.On or around 30 September 2016, Free Spirit Airlines Pty Ltd (ABN 52 155 143 338) (FSA) (as borrower), Roman Badov (Defendant) (as guarantor) and Cani Portfolio Pty Ltd (ABN 64 112 087 831) (Plaintiff) (as lender) entered into an Invoice Funding Facility Agreement (Facility Agreement) whereby the Plaintiff agreed to advance funds to FSA.
B.FSA and the Defendant defaulted on repayments under the Facility Agreement.
C.In consequence to the above, on or around 31 January 2017, FSA, the Defendant and the Plaintiff entered into a deed (Loan Deed) pursuant to which in consideration of the Plaintiff agreeing to advance additional funds to FSA and forbear the immediate repayment of advances made under the Facility Agreement, the Defendant guaranteed repayment of the amounts owing under the Loan Deed providing security over his house property in favour of the Plaintiff.
D.Pursuant to the Loan Deed, by an instrument of mortgage dated 10 February 2017, numbered AN658114E and registered in the Office of Titles, the Defendant mortgaged the property located at [the address] more particularly described in Certificate of Title Volume 10533 Folio 347 (Land) to the Plaintiff to secure the payment of the amounts owing by FSA and the Defendant under the Loan Deed (Mortgage).
E.The Loan Deed provided for repayment of the total amount of $181,723.74 (Loan Deed Sum) by way of twelve weekly instalments to the Plaintiff (Instalments), with interest to accrue upon default of repayment of the Loan Deed Sum in accordance with the terms of the Loan Deed.
F.The first instalment of $16,723.74 (including reimbursement of the Plaintiff’s legal costs incurred in connection with the Loan Deed and Mortgage) was due on 6 February 2017. The Plaintiff received payment of $15,000 on 7 February 2017.
G.The second instalment of $15,000 was due on 13 February 2017. The Plaintiff received payments of $5,000 on 17 February 2017 and $5,000 on 10 March 2017.
H.Other than as stated at Recitals F and G above, no further repayments have been made by the Defendant or FSA to the Plaintiff under the Loan Deed.
I.On 8 June 2017, the Plaintiff caused to be filed a Writ and Statement of Claim against the Defendant in the Supreme Court of Victoria being proceeding number S CI 2017 02220 (Proceeding), claiming:
(a)possession of the whole of the Land;
(b)that the Defendant pay the sum of $206,597.84 (being the Loan Deed Sum less payments made as set out at Recitals F and G above, together with accrued default interest under the Loan Deed up to 6 June 2017) (Judgment Debt);
(c)interest at the rate calculated in accordance with the Loan Deed from 6 June 2017 until payment, or alternatively interest pursuant to statute;
(d)costs in accordance with the Loan Deed and the Mortgage, or alternatively costs pursuant to statute; and
(e)any other or further order as the Court deems appropriate.
(Claimed Relief)
J.On or about 2 August 2017, the Defendant filed and served a Defence to the Statement of Claim in the Proceeding which, among other things, admits that the Loan Deed Sum was advanced by the Plaintiff, the repayment schedule of instalments required under the Loan Deed, what constitutes an event of default under the Loan Deed, the default interest to be applied where an event of default occurs under the Loan Deed and the indemnification given by the Defendant regarding costs, damages, etc in case of an event of default under the Loan Deed.
K.The parties have agreed to resolve all matters between them concerning the Proceeding on the terms and conditions set out in this Deed.
As part of the settlement deed, Mr Badov and Cani agreed that if there was a default on his payments under it, the matter could be reinstated. That has occurred.
The settlement deed includes the following clauses.
2. ADMISSION OF DEBT
Each of the Defendant and FSA unconditionally affirm and confirm the debt obligations under the Loan Deed, such that the obligation to pay to the Plaintiff the Judgment Debt and interest accruing on the outstanding amount of the Loan Deed Sum is current and continuing and, where required, is renewed.
…
4. NON-PAYMENT OR LATE PAYMENT
4.1If the Defendant fails to make any of the payments on the dates set out at clause 3 above, the Plaintiff will be entitled to prosecute its causes of action in the Proceeding and obtain judgment for the Claimed Relief, with costs of reinstating the Proceeding and obtaining judgment on a solicitor/client indemnity basis.
4.2If the Defendant makes one or more of the payments on the dates set out in clause 3 above but fails to make all of the payments in accordance with clause 3:
(a)the Plaintiff is entitled to prosecute its causes of action in the Proceeding and obtain judgment for the Claimed Relief, with costs of reinstating the Proceeding and obtaining judgment on a solicitor/client indemnity basis; and
(b)the Plaintiff will credit any amount paid by the Defendant against the Judgment Debt.
4.3In the event of a failure by the Defendant to make payment of the Settlement Amount in accordance with clause 3 of this Deed, the Defendant agrees that the Plaintiff can produce and rely on this Deed as conclusive evidence of all necessary consents of the Defendant to the prosecution of the Proceeding and the entry of judgment against the Defendant for the Claimed Relief, less any payments made by the Defendant pursuant to the terms of this Deed.
…
10. ENTIRE AGREEMENT
This Deed contains the entire agreement between the parties with respect to the subject matter of this Deed and represents all of the terms upon which the parties agree to settle the Proceeding.
11. BAR TO ACTIONS
Subject to the terms of this Deed, each party acknowledges that this Deed may be produced in any claim, suit, demand, action and other proceedings in respect of the matters to which this document refers as evidence of the agreement reached in this matter and as a bar to such proceeding.
…
13. COUNTERPARTS
This Deed may be executed in counterparts, and all executed counterparts will be deemed to constitute one document.
14. TIME OF ESSENCE
Time is of the essence for any date or period mentioned in this Deed relating to any act, matter or thing to be performed by a party.
15. SEVERABILITY
A clause or part of a clause in this Deed that is illegal or unenforceable may be severed from this Deed and the remaining clauses or parts of the clause of this Deed continue in force.
By virtue of cls 2 and 4.2(a) of the settlement deed, in the event of default after partial payment of the monies owing under the settlement deed, Mr Badov admits the debt and agrees to judgment against him in respect of the claim pleaded by Cani.
In her affidavit in support of the summons affirmed on 1 December 2017, Ms Hogg, the plaintiff’s solicitor, deposes to Mr Badov making payments totalling $59,440 pursuant to the settlement deed, but failing to pay the third instalment when it became due on 15 November 2017 and failing to make any subsequent payments. Mr Badov does not dispute this.
Consequently Mr Badov has breached the settlement deed and Cani relies upon cl 4 of the settlement deed to seek the Claimed Relief defined in recital I.
Turning now to the first question.
How is the interest clause to be construed?
Cani submits that the interest clause must be read in the context of the proceeding as it adopts the language of the Statement of Claim: it is a cascading clause whereby interest should be calculated in accordance with the loan deed. Cani says the word ‘or’ in the interest clause is disjunctive and therefore only one of the alternatives is intended to apply: interest according to the loan deed or interest according to statute.
There are two types of interest arising under the loan deed. The first is a fixed amount of interest, being $15,000, provided for by cl 6.1 of the loan deed (‘the fixed interest’). The fixed interest applies to two sums advanced to FSA totalling $165,000. The second is provided for by cl 6.2, arises in the event of a default (‘the default interest’) and applies in addition to the fixed interest as follows:
…further interest will be payable on the Loan, calculated at the rate of 0.25% of the Loan then outstanding, per calendar day, until the whole of the Loan is repaid to the Lender.[7]
[7]Loan deed cl 6.2.
The word ‘Loan’ in cl 6.2 is defined as follows:
“Loan” means and includes all loans, advances or financial accommodation of any nature whatsoever from the Lender to the Borrower and shall include without limitation the Advance and all moneys, debts and liabilities of any nature whatsoever due or owing or which may become owing whether previously, presently or at some future date by the Borrower to the Lender and shall further include the Interest, any other interest, fees, costs, charges, losses, damages or expenses due to or incurred by the Lender of any nature whatsoever relating to, touching upon or arising out of this Deed, including all of the Lender’ [sic] legal costs on a solicitor and own client basis paid or incurred by the Lender in relation to the negotiation, preparation, execution and (if applicable) stamping and registration of this Deed, the security over the Charged Property and any other instruments to be negotiated, prepared, executed and (if applicable), stamped and registered for the purposes of this Deed or the security over the Charged Property.[8]
[8]Loan deed cl 1.1.
Because the above definition of ‘Loan’ includes interest, and the default interest is payable on the ‘Loan’, a literal reading of the loan deed reveals the default interest to be compound interest.
An alternative reading of the clause, that the default interest is a simple (rather than compound) interest clause, is relied upon by Cani in its calculations of the interest owing.
Cani submits that if the Court concludes that the interest rate according to the loan deed is unenforceable, then that part of the clause should be severed using cl 15 of the settlement deed. In that event, it submits that the alternative position would be to apply statutory interest pursuant to s 58 of the Supreme Court Act 1986. Section 58 provides for interest not exceeding the penalty interest rate under s 2 of the Penalty Interest Rates Act 1983 ‘from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain)’. Cani’s written submissions also make reference to s 60 of the Supreme Court Act 1986.
Cani relies upon the decision of the Court of Appeal in Yarra Capital Group Pty Ltd v Sklash Pty Ltd.[9] In particular, Cani highlights the following principles:[10]
[9][2006] VSCA 109 (‘Yarra Capital’).
[10]Submissions on Behalf of the Plaintiff [27].
(a) the onus of showing that a contractual provision is a penalty lies upon the party who is sued upon it, although the terms of the clause may be sufficient to give rise to the inference that it is a penalty;[11]
(b) in determining the status of an alleged penalty clause, the courts treat the parties' freedom to contract as they choose as an important consideration;
(c) the question of whether a sum stipulated is [a] penalty or liquidated damages is a question of construction to be decided on the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach.[12]
[11]Yarra Capital [2006] VSCA 109, [11].
[12]Ibid [12].
Cani relies upon the Court of Appeal’s finding in Yarra Capital that the daily penalty provision at a rate of interest equivalent to many hundreds of per centum per annum was not extravagant or oppressive. Cani submits the relevant matters considered by the Court of Appeal were as follows.
(a) The loan[s] were made for a very short term. The parties must have contemplated that they would be repaid in full within a relatively short time.
(b) Given the short term nature of the loans, the annualisation of the default amount expressed as a percentage of the loan that was to last only a few months unfairly exaggerates the true burden of the default provision.
(c) It was necessary to consider the circumstance that the loans were essentially unsecured.
(d) There would be great difficulty and expense in establishing the quantum of damage that might arise by reason of breach given the market in which the parties operated, and the rate agreed by the parties obviated the need for a complex examination that might otherwise be required. The courts are more reluctant to grant relief on the basis that an agreed amount is a penalty in such cases.
(e) It was self-evident that the market in which the [lender] operated was materially different to the one in which banks and like institutions lend money.[13]
[13]Submissions on Behalf of the Plaintiff [29].
Adopting the reasoning of the Court in Yarra Capital, Cani submits that the relevant terms of the loan deed and its intended operation at the time of its making can be characterised as ‘of high commercial risk’. Cani says this is because ‘the borrower was in default at the time the further sum of $40,000 was advanced’ and that ‘the duration of the loan deed was very short, namely two months.’[14] Cani says that although the loan was secured, it was secured by a second mortgage, and that consequently the loan was partially unsecured and therefore analogous with Yarra Capital.
[14]Submissions on Behalf of the Plaintiff [24]. I note that the loan deed, cl 7, and affidavit of Rajesh Patel sworn 19 April 2018 [16] put the term at closer to three months.
Cani relies on the acknowledgement in cl 12 of the settlement deed that each party has the opportunity of seeking separate and independent legal advice concerning all aspects of the settlement deed.
In conclusion, Cani submits that the default interest rate under the loan deed of 0.25% per day is not a penalty and is therefore enforceable.
Mr Badov was self-represented at the hearing. He acknowledges that approximately $136,000 remains owing under the settlement deed and that Cani holds a second mortgage over the land. Mr Badov disputes that interest should be calculated on the basis of the default rate prescribed by the loan deed. He says that this would lead to a result that was burdensome and disproportionate. He submits that interest should be calculated at the rate prescribed by statute.
Analysis
In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[15] the High Court outlined the fundamental principles governing the construction of contractual terms.
This Court, in Pacific Carriers Ltd v BNP Paribas, has recently reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined. It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.[16]
[15](2004) 219 CLR 165.
[16]Ibid 179 [40] (citations omitted).
A leading textbook, Cheshire and Fifoot’s Law of Contract states:
If a contract contains contradictory provisions, the court’s task is, so far as possible, to resolve the conflict by looking at the contract as a whole and ascertaining the parties’ evident intention.[17]
Is the interest clause void for uncertainty?
[17]N Seddon, R Bigwood and M Ellinghaus, Cheshire & Fifoot: Law of Contract (Butterworths, 10th ed, 2012) 263 [6.5] (citation omitted).
The first issue that arises is whether the interest clause is void for uncertainty because it is constructed in a manner which identifies two possible alternatives without indicating which is to be preferred.
In Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd,[18] Barwick CJ held that a contract will not necessarily be void for uncertainty because it can be construed with more than one possible meaning or more than one result.
As long as it is capable of a meaning, it will ultimately bear that meaning which the courts [sic] … decides is its proper construction … The question becomes one of construction, of ascertaining the intention of the parties, and of applying it.[19]
[18](1968) 118 CLR 429.
[19]Ibid 436–7.
However, the language employed by the parties should not be ‘so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention’.[20] In that respect, Barwick CJ distinguished between uncertainty of meaning, on the one hand, and absence of meaning or intention, on the other hand.
[20]Ibid 437 quoting Lord Wright in Scammell and Nephew Ltd v Ouston [1941] AC 251.
In concluding that a clause was void for uncertainty Emerton J summarised the following relevant principles of contractual construction:
(a) when faced with issues of uncertainty and incompleteness, the Court should strive to uphold the validity of bargains;
(b) the importance of upholding bargains is reinforced where the parties have acted on the agreement;
(c) the language used will be interpreted broadly and fairly and not narrowly or pedantically; and
(d) an agreement will be enforced if it is not utterly impossible to place a reasonable meaning on the language used and to discern the parties’ intention.[21]
[21]Cityrose Trading Pty Ltd v Booth [2013] VSC 504, [69] (citations omitted).
I do not consider that the interest clause is void for uncertainty. The settlement deed is one upon which the parties have acted. It is possible to place a reasonable meaning on the language used and to discern the parties’ intentions. The interest clause refers back to the paragraphs claiming relief in the statement of claim. Construction of the clause should be consistent with that. That is, if Cani was unsuccessful in obtaining the highest relief sought (interest in accordance with the loan deed), then the alternative and lesser calculation of relief would apply (interest pursuant to statute). This alternative method is also consistent with the severance clause in the settlement deed.
Applying this interpretation, the question arises as to whether Cani would succeed in obtaining interest in accordance with the loan deed. This gives rise to the next issue.
Is the interest calculation based on the loan deed a penalty clause?
The principles governing the law of penalties are authoritatively stated by Dunedin LJ in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd.[22]
[22][1915] AC 79 (‘Dunlop’).
1Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
2The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.
3The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
4To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a)It will be held to be penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach …
(b)It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid …
(c)There is a presumption (but no more) that it is a penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’.
On the other hand:
(d)It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.[23]
[23]Ibid 86–8 (citations omitted).
A sum stipulated will be a penalty if there is a ‘degree of disproportion’ between the sum and the likely loss ‘sufficient to point to oppressiveness.’[24] That is, ‘out of all proportion’ or disproportion that points to oppressiveness.[25]
[24]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 667 [27] citing AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 193.
[25]Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656, 667, [27] citing AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170, 190.
A ‘penalty is in the nature of a punishment for non-observance of a contractual stipulation’.[26]
[26]Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205, 216 [9]; see also Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525, 545 [22] (‘Paciocco’).
A provision for the payment of interest at a higher rate after default which does not operate retrospectively is not a penalty provided it can be seen as a genuine pre-estimate of compensation for loss the lender would suffer by being kept out of its money.[27]
[27]David Securities Pty Ltd v Commonwealth Bank of Australia (1990) 23 FCR 1, 30–1).
In Bay Bon Investments Pty Ltd v Selvarajah,[28] White J held (referring to Accom Finance Pty Ltd v Mars Pty Ltd):[29]
its significance for present purposes is that it demonstrates, as the transactions in this case demonstrate, that there is a market for loans of last resort at very high interest rates. However, there comes a point (as his Honour observed at [55]), where a rate is so high that it cannot be considered proper. That point is reached where the rate operates in terrorem and as a punishment for default rather than as compensation to the lender for being kept out of its money.[30]
[28][2008] NSWSC 1251 (‘Bay Bon’).
[29][2007] NSWSC 726.
[30]Bay Bon [2008] NSWSC 1251, [54] (emphasis in original).
White J acknowledged that the onus of proof is on the defendant to prove that the provision is a penalty, however:
it appears to me that once some evidence is adduced which may be sufficient to satisfy that onus, there is an evidentiary onus on the plaintiff to explain the nature of its business, the rates at which it is able to lend, and how, when the contracts were entered into, it would have been anticipated that the moneys would be re-deployed on repayment of the loans. This information was entirely in the plaintiff’s camp. Evidence is to be weighed according to the power of a party to produce it. Where facts are peculiar within the knowledge of one party, comparatively slight evidence may be sufficient to discharge the onus of proof lying on the opposite party.[31]
[31]Ibid [51] (citations omitted).
The relevant time for considering the ‘question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not at the time of the breach’.[32]
[32]Dunlop [1915] AC 79, 86–7 (citations omitted).
The default interest pursuant to the loan deed is either simple or compound interest at 0.25% daily, depending on the view taken of the definition of ‘loan’ in the loan agreement (as discussed above). Adopting Cani’s interpretation, if it is simple interest, the annual rate is approximately 91%.[33] (If it is compound interest, the annual rate is obviously substantially more.) Whilst I accept that this was a short-term loan and not without risk, as FSA was in default under the Facility Agreement at the time it was entered, it is also relevant that it is a loan secured by a mortgage and by the assignment of two unpaid invoices.[34] An inference may be drawn that the rate is a punishment for default, not a genuine pre-estimate of damages occasioned by a breach. Indeed, there is no evidence that it is a genuine pre-estimate of loss. Whether the default interest be compound or simple, the high rate of default interest is out of all proportion to the greatest loss that might follow from the breach.
[33]In comparison the fixed interest under the loan deed is equivalent to an annual interest rate of about 40%.
[34]Loan deed cls 2.1, 4.6.
The affidavit of Rajesh Patel, sole director of the plaintiff, sworn 19 April 2018, states that non-payment:
deprives the Plaintiff from utilising the unpaid funds in further lending, therefore impacting the operations and profitability of the Plaintiff’s business. Pursuing legal avenues to recover such unpaid funds also diverts operating capital and adversely impacts profitability of the business.[35]
[35]Affidavit of Rajesh Patel sworn 19 April 2018 [7].
This evidence is imprecise and contains no calculations of loss. What is the usual interest rate of loans? What interest does the moneylender pay on money borrowed to on-lend (if that is what has occurred)? How are the costs to be quantified?
I also observe that Cani provides no evidence of any calculations made as to the value of its security, that is, the equity it has in respect of the second mortgage on the land, or the value of the two unpaid invoices given as security.
Cani submits that in Yarra Capital the majority considered relevant the ‘difficulty and expense that would be involved in establishing the quantum of the damage that would arise by reason of their breach of contract given the market in which the parties operated it was difficult to calculate‘ and that it is similarly in the business of moneylending. However, no evidence was led of the difficulties of calculating the quantum. In Yarra Capital the Court considered the minimum loss likely to be suffered by reference to the lender’s expected earnings under the loan agreement of $175 compared to the default interest of $125 – $450 per day.
Cani relies upon Yarra Capital, a case concerning experienced commercial parties operating in a high risk short term lending market with ‘unusually high, if not exorbitant’ borrowing costs[36] and where annualised interest rates of between 120% and 182.5% were considered not to be penalties.[37] That case may be distinguished from the circumstances here where there is no evidence of a genuine pre-estimate of loss or of the difficulties of establishing such loss[38] and, significantly, in this case the loan is secured.
[36]Yarra Capital [2006] VSCA 109, [17]; schedule B shows annualised borrowing fees were approximately 44% to 240% of the principal sums.
[37]However note the Court’s opposition to the annualisation of the default amounts: ibid [15].
[38]See ibid [13], [16]; see also Paciocco (2016) 258 CLR 525.
Given the above, I find that insofar as the interest clause relates to interest to be calculated according to the default interest under the loan deed, it is a penalty. Therefore it is void. Alternatively, it could be severed pursuant to the severance clause as being invalid. Whether void or invalid, the alternative position applies, namely that interest should be calculated according to statute.
Cani claims interest pursuant to statute from 6 June 2017.
Section 58(1) of the Supreme Court Act 1986 provides:
If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 or, in respect of any bill of exchange or promissory note, at 2% per annum more than that rate from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.
The language of s 58 of the Supreme Court Act is mandatory — unless good cause is shown, interest must be allowed under the section if the criteria are met. No good cause was identified by Mr Badov. Indeed, he submits that interest should be awarded according to statute. I agree.
For completeness, I observe that Cani relies upon either s 58 or s 60 of the Supreme Court Act. As s 58 is applicable, then s 60 is not, by virtue of s 60(2)(e).
Interest pursuant to s 58 is to be calculated from the date of demand. I will give the parties an opportunity to make submissions as to the date of demand and whether it predates the proceeding.
How is the costs clause to be construed?
Cani submits the costs clause should be construed such that Mr Badov pay its costs of ‘reinstating the Proceeding and obtaining judgment on a solicitor/client indemnity basis’ pursuant to cl 4.2 of the settlement deed and costs ‘in accordance with the loan deed and the Mortgage’ pursuant to recital I(d).
Under the loan deed Mr Badov is liable for Cani’s costs and expenses of enforcement of any rights under the loan deed, including reasonable legal costs and expenses on a full indemnity basis.
Cani relies on Taree Pty Ltd v Bob Jane Corporation Pty Ltd[39] (‘Taree’) for the proposition that while costs always remain discretionary, where there is a contractual right to those costs the discretion will ordinarily be exercised so as to reflect that contractual right.[40]
[39][2008] VSC 228.
[40]Ibid [43].
Cani submits that ‘interest pursuant to statute’ means the ordinary discretion of the Court to award costs taking into account appropriate relevant factors. Pursuant to Taree, the costs terms of the loan deed, mortgage and settlement deed, are relevant factors and provide additional and compelling reasons for the Court to award costs on a full indemnity basis.
Mr Badov submits that costs should be awarded pursuant to statute.
Analysis
In Deputy Commissioner of Taxation v Bourke & Williams,[41] Derham AsJ extracted the following principles that are apposite:
[41][2018] VSC 113.
(a)in cases such as this, where there is an agreement specifically requiring the payment of costs in a particular circumstance, the terms of any agreement as to costs will inform the Court’s discretion as to the basis of taxation of costs;
(b)the Court should ordinarily exercise its discretion in accordance with the agreement;
(c)whether the terms of any agreement as to costs entitle a party to more than party and party costs is ultimately a matter of construction;
(d)the terms of the agreement must provide in plain and unambiguous language that costs are to be paid on a special basis, otherwise costs should be awarded on a party and party basis only;
(e)when determining the basis upon which costs shall be awarded, the Court looks to the language of the agreement and compares it to the language of the Rules governing the bases of costs to determine the scale for which the agreement provides;
(f)in Whild, Croft J held that a mortgage clause allowing recovery of ‘reasonable expenses’ reflected the language of a solicitor-client costs order under r 63.30 of the Rules, and awarded costs on that basis;
(g)in this case, clause 1 allows for the recovery of ‘any costs and expenses’ (see above at [43]). Thus the Court should, unless good cause is shown, order that the plaintiffs’ costs be paid by the Estate on an indemnity basis in conformity with r 63.30.1 of the Rules, which allows all costs ‘except in so far as they are of an unreasonable amount or have been unreasonably incurred’.[42]
[42]Ibid [61] (citations omitted).
The same principles of construction apply as to the interest clause above.
A similar analysis applies to the interest clause above. That is, the clause should be interpreted in the context of it being settlement of proceedings. It should therefore be interpreted as follows: if Cani does not succeed in obtaining the highest relief it is seeking (costs in accordance with the loan deed and mortgage), then the alternative and lesser calculation of relief applies (costs pursuant to statute).
The loan deed references ‘reasonable legal costs and expenses on a full indemnity basis’. Under the mortgage, costs are payable on a ‘full indemnity basis’.[43]
[43]Clause 12 of the Memorandum of Common Provisions AA1334.
Clause 4.2 of the settlement deed provides for the circumstance where the defendant makes one or more payments but not all of them. They are the relevant circumstances here. In that event, cl 4.2 (a) provides that Cani should obtain ‘costs of reinstating the proceeding and obtaining judgment on a solicitor/client indemnity basis’. The plaintiff relies upon this clause.
Costs on a solicitor / client basis are different from costs on an indemnity basis. Whilst the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’) previously referred to costs on a solicitor / client basis, that is no longer the case. Costs incurred for work done after 1 April 2013 are on the standard basis unless otherwise ordered by the Court or provided by the Rules.[44] This proceeding was not initiated until well after 1 April 2013, namely in 2017, and reinstated in 2018.
[44]Rules 63.31.
The phrase ‘solicitor/client indemnity basis’ in cl 4.2(a) is drafted to cover the time span of this change of rules, although it was unnecessary to do so.
The costs clause and cl 4.2(1) in the settlement deed, together with the relevant clauses in the mortgage and loan deed, all refer to costs on an indemnity basis. Plainly, they provide agreement for costs to be paid on a special basis. Rule 63.28 sets out the bases for taxation on a standard, indemnity or other basis. Rule 63.30.1 provides that on a taxation on an indemnity basis ‘all costs shall be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred’.
Given the above, I will make an order that the plaintiff’s costs be paid by Mr Badov on an indemnity basis in conformity with r 63.30.1.
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