Homai Kermani v Westpac Banking Corporation
[2010] VSC 556
•9 December 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
LIST D
No. 7750 of 2009
| HOMAI KERMANI | Plaintiff |
| v | |
| WESTPAC BANKING CORPORATION (ACN 007 457 141)(SUCCESSOR IN LAW OF ST. GEORGE BANK LIMITED (ACN 055 513 070) | Defendant |
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JUDGE: | Davies J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 October 2010 | |
DATE OF JUDGMENT: | 9 December 2010 | |
CASE MAY BE CITED AS: | Homai Kermani v Westpac Banking Corporation | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 556 | |
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PRACTICE & PROCEDURE – Whether proceeding an abuse of process – Where matters raised and dealt with in earlier proceedings – Where plaintiff connected to litigants in earlier proceeding – Whether plaintiff privy of party in earlier proceeding – Where plaintiff had a real interest in earlier proceedings – Where plaintiff failed to take steps in earlier proceeding – Whether application a collateral attack on earlier decision – Whether plaintiff re-litigating same issues – Considerations – Champerslife Pty Ltd v Manojovlski (2010) 75 NSWLR 245 – Supreme Court (General Civil Procedure) Rules 2005 r 23.01
CONTRACT – Mortgage – Where securities called – Where guarantee provided for the payment of legal costs on an indemnity basis – Where bank received rebate on a sliding scale on total costs incurred – Where plaintiff alleges rebate illegal – Whether contractual arrangement between bank and solicitors contrary to public policy – Whether scheme tainted with illegality
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R. Merkel QC with Mr G. J. Parncutt | Comlaw |
| For the Defendant | Mr C. M. Scerri QC with Ms P. Neskovcin | Allens Arthur Robinson |
HER HONOUR:
A. Introduction
The defendant (“SGB”) has made application for an order dismissing or permanently staying the proceeding as an abuse of process on the basis that the plaintiff (“Dr Kermani”) seeks in this proceeding to re-litigate claims already dealt with by the Court of Appeal in earlier proceedings and to attack the judgment of the Court of Appeal collaterally and because the proceeding is doomed to fail. I have concluded for the reasons that follow that SGB has made out its claim that this proceeding is an abuse of process.
B. Subject matter of this proceeding: the guarantee
The subject matter of this proceeding concerns a guarantee given by Dr Kermani to SGB (“the guarantee”) in June 2000 to secure the repayment of a loan of $3.575m that SGB made to Pinnacle Investments Pty Ltd (“Pinnacle”) to acquire a property (“the Sunbury Road land”).[1] Pinnacle was a company controlled directly by Dr Kermani’s husband, Mr Boman Irani, and indirectly by Dr Kermani through Shalridge Pty Ltd (“Shalridge”) which owned 75% of the shares in Pinnacle. In 2001, SGB provided further facilities to Pinnacle for purposes connected with the development of a land fill operation on the Sunbury Road land. Dr Kermani’s guarantee also secured those further facilities. The guarantee was limited to the net realisable value of real estate and a portfolio of shares that she owned. These assets were mortgaged by Dr Kermani to SGB as part of the securities held by it. Additionally, SGB held unlimited guarantees and other forms of securities given by Mr Irani and companies associated with Dr Kermani and Mr Irani.
[1]Amended Statement of Claim filed 2 July 2010, [3] – [4].
In 2002 Pinnacle defaulted under the facilities.[2] SGB served demands on Pinnacle, Dr Kermani and Mr Irani under their guarantees, which were not met. In due course SGB, as mortgagee in possession, sold the Sunbury Road land and litigation arose out of the sale of that land[3] which a judge has described as having a “tortuous history”.[4]
[2]Ibid [6].
[3]Ibid.
[4]Boman Irani v St George Bank Limited (2008) 22 VR 135, [5] (Hargrave AJA).
C. The first proceeding
In the first proceeding the guarantors, including Dr Kermani, made a number of claims against SGB. SGB counterclaimed seeking declarations that it was entitled to enforce its securities for Pinnacle’s debt.
(a) Irani v St George Bank Limited [2004] VSC 260; on appeal Irani & Ors v St George Bank Limited [2007] VSCA 33
Only some of the guarantors’ claims were litigated in the first proceeding for reasons that are set out in the judgment of Byrne J delivered 27 August 2004.[5] Those claims concerned alleged breaches by SGB of the terms of its arrangements with Pinnacle and the guarantors. The claims that were litigated were dismissed and SGB was successful in its counterclaim. Byrne J declared that SGB was entitled to enforce its securities. An appeal against Byrne J’s judgment was eventually dismissed by the Court of Appeal.[6]
(b)Irani v St George Bank Limited (No 2) [2005] VSC 403; Irani v St George Bank Limited (No 3) [2005] VSC 456
[5]Irani v St George Bank Limited [2004] VSC 260 (Unreported, Byrne J, 27 August 2004).
[6]Irani v St George Bank Limited [2007] VSCA 33 (Unreported, Buchanan, Chernov & Neave JJA, 9 March 2007).
In the meantime, the remaining claims of the guarantors were tried by Whelan J.[7] Whelan J dismissed the remaining claims raised by the guarantors and made an order for costs on an ordinary basis against the defendants to the counterclaim. Whelan J refused a late application by SGB to amend its counterclaim to claim the total money sum owed to it under the various finance facilities.[8] Whelan J also declined to award SGB indemnity costs on the basis of a clause in each of the guarantees that the guarantor indemnify SGB against all costs that it incurred in exercising or attempting to exercise any power or right in relation to the recovery of guaranteed money. However, his Honour did not shut SGB out from pursuing a contractual claim for recovery of indemnity costs, should that become necessary following the sale of the securities.[9]
[7]Irani v St George Bank Limited (No. 2) [2005] VSC 403 (Unreported, Whelan J, 13 October 2005).
[8]Irani v St George Bank Limited (No 3) [2005] VSC 456 (Unreported, Whelan J, 26 October 2005).
[9]Ibid [22].
D. The second proceeding
SGB commenced realising the securities and having done so, alleged that a debt was still outstanding comprised of unpaid legal costs on an indemnity basis. It pursued its contractual claim for recovery of indemnity costs.
(a) St George Bank Limited v Irani & Ors [2006] VSC 217
SGB commenced a proceeding against all the guarantors other than Dr Kermani whose limited recourse securities had been realised and the proceeds applied in reduction of Pinnacle’s debt. Dodds-Streeton J gave summary judgment for SGB on liability.[10]
(b) St George Bank Limited v Irani & Ors (No. 2)[2007] VSC 116
[10] St George Bank Limited v Irani [2006] VSC 217 (Unreported, Dodds-Streeton J, 12 May 2006).
Whelan J then heard the quantum issues. SGB relied on certificates of the amount owing that were conclusive evidence of the amount, except in the case of “manifest error”. In the course of the trial it emerged that SGB had cost agreements with its solicitors that entitled it to a rebate on a sliding scale based on the total annual fees paid in all matters. For the guarantors it was submitted that the rebate had not been credited and therefore there was manifest error in the certificates. Whelan J accepted that submission and ordered the taking of an account.[11]
[11]St George Bank Limited v Irani(No. 2) [2007] VSC 116 (Unreported, Whelan J, 2 May 2007).
Other submissions were also put that were based on illegality and public policy, although these matters had not been pleaded:
(a) it was submitted that the arrangement between SGB and its solicitors contravened s 317 of the Legal Practice Act 1996 (Vic) and s 2.2.9 of the Legal Profession Act 2004 (Vic) which each provided that a legal practitioner must not enter into an arrangement under which the non legal practitioner is entitled to share in the income of the legal practitioner;
(b) it was also submitted that these arrangements contemplated the wrongful exaction of costs from third parties as was found to be the case by the Full Court in Hamilton v Haw.[12]
[12][1962] VR 215.
Whelan J rejected those submissions.
(c) Boman Irani Pty Ltd v St George Bank Limited [2008] VSCA 246
Whelan J’s judgment was appealed by the guarantors and the appeal was dismissed by the Court of Appeal. As SGB has submitted that the claims sought to be agitated in this proceeding were finally disposed of by the Court of Appeal, it is necessary to refer to the judgment of Hargrave AJA (with whom Warren CJ and Neave JA agreed) at some length to follow the process of reasoning of the Court of Appeal in dismissing the appeal. His Honour commenced with the history of the litigation:[13]
[13]Boman Irani Pty Ltd v St George Bank Limited (2008) 22 VR 135.
[7] All of the claims raised by the guarantors in the first proceeding were dismissed. The bank was successful in its counterclaim. The court declared that the bank was entitled to enforce its securities.
[8] After the publication of the reasons for judgment in the first proceeding, the bank sought to amend its counterclaim to seek judgment against the guarantors for the total money sum owed to it under the various finance facilities. This application was opposed. During the course of argument, senior counsel for the guarantors proffered an undertaking on behalf of the guarantors that, should the bank subsequently commence proceedings to recover a monetary sum due under the guarantees, they would "not raise any Anshun estoppel or related point as a defence to such action." Further, the trial judge was of the view that it would be unfair to permit the bank to make a monetary claim at such a late stage of the proceeding. In reaching his decision to dismiss the application to amend, the judge took into account a number of factors, including the fact that, after realisation of the securities, it may never be necessary for the bank to seek judgment for a money sum.
[9] The issue of costs was the subject of argument at the conclusion of the first proceeding. The bank sought its costs of the proceeding on an indemnity basis, relying upon the express terms of the facility documents and guarantees. The trial judge did not accede to this request, and ordered that the bank receive party and party costs of the first proceeding. However, the trial judge did not shut the bank out from pursuing a contractual claim for recovery of indemnity costs, should that become necessary following the sale of the securities. His Honour concluded:
If the New South Wales Court of Appeal's analysis in Abigroup Ltd v Sandtara Pty Ltd is correct, [the bank] can pursue contractual recovery of any entitlement to indemnity under the provisions of the guarantees.
[10] Under the terms of the guarantee, the guarantors undertook to pay to the bank any money which Pinnacle was actually or contingently liable to pay to the bank or which the bank was entitled to debit to Pinnacle's account. The transaction documents under which Pinnacle obtained finance from the bank included, in numerous places, an obligation upon Pinnacle to pay to the bank, on a full indemnity basis, all legal costs incurred by the bank, or by any receiver or agent appointed by the bank under any security for the facilities, in connection with the facilities or any default thereunder. It is clear from the terms of the facility documents that Pinnacle's liability was to "indemnify" the bank in respect of its own liability for legal costs.
[11] The bank proceeded to realise its securities. Having done so, it alleged that a debt was still outstanding. That debt was comprised of the balance of unpaid legal costs on any indemnity basis. The bank's legal costs of the first proceeding and the enforcement of its securities had been very substantial. Some, but not all, of these costs had been recovered from the realisation of the securities. The bank wished to claim the balance from the guarantors. Accordingly, the bank commenced a second proceeding against the guarantors seeking judgment for the unpaid balance of its costs. Dr Kermani was not sued in the second proceeding. Her guarantee was limited to recourse to certain securities provided by her, which securities had been realised by the bank and the proceeds applied in reduction of Pinnacle's debt. Accordingly, references to "the guarantors" in the balance of this judgment do not include Dr Kermani.
[12] The defence filed in the second proceeding sought to re-agitate many of the issues decided against the guarantors in the earlier proceeding. In May 2006 Dodds-Streeton J (as she then was) heard an application by the bank for summary judgment and an application by the guarantors for an order that the proceeding be stayed. Her Honour delivered reasons on 12 May 2006. In substance, she found in favour of the bank save on the issue of the quantum of its claim. No appeal is brought against this decision.
[13] On 4 August 2006 Dodds-Streeton J made a declaration that the guarantors were liable to the bank under the guarantee for an amount to be assessed. She dismissed the guarantors' summons seeking a stay of the proceeding and made various costs orders. She referred the proceeding to another judge for further directions. That judge made discovery orders and fixed the trial of the proceeding on quantum. It was ordered that the trial be on affidavit, with provision made for the parties to give notice requiring the attendance of any person for cross-examination.
[14] The bank made discovery of the bills of costs received by it from its solicitors, which it had paid and debited to Pinnacle's account. The bills were in a redacted form. The bank did not discover any costs agreements made between it and its solicitors.
[15] The trial on the issue of quantum began on 9 October 2006. The bank relied upon affidavits of a bank officer, Alan Bateson. Mr Bateson exhibited a certificate of indebtedness under clause 9.4 of the guarantee, which provides:
9.4 St George's statement of money owing conclusive evidence
Except in the case of manifest error, a written statement, certificate or determination by St. George setting out the amount of money owing or any determination of an amount to be paid under this agreement or any component part, shall be conclusive evidence of the amount owing or the determination and will be binding on the Guarantor.
[16] In his certificate, Mr Bateson certified that the sum of $263,094.93 was owing as at 13 September 2006.
[17] A notice requiring Mr Bateson to attend for cross-examination was given, but was subsequently withdrawn.
[18] On the first day of the quantum hearing, the guarantors made complaints concerning the bank's discovery. They applied for an order directing the bank to "justify the calculation" in the certificate of indebtedness. The judge refused this application. The guarantors also complained that the bills of costs from the bank's solicitors which had been discovered had been redacted. The judge ordered that unredacted copies of the bills be provided and adjourned the trial until 12 October 2006.
[19] At the adjourned hearing, the guarantors sought to rely upon further affidavit material. The affidavits raised issues as to reconciliation of the unredacted bills of costs with the relevant bank statements and, most importantly, as to the existence of any costs agreement relevant to the bills of costs. The bank sought and obtained an adjournment to answer the new affidavit material.
[20] Further affidavits were sworn on both sides as a result of which it emerged that there were relevant costs agreements and that those agreements entitled the bank to a rebate of fees from the bank's solicitors on a sliding scale based upon total annual fees for all matters, save for some immaterial exceptions. Initially, an employee of the bank's solicitors swore an affidavit stating that there was no relevant costs agreement. However, this was later corrected by an affidavit sworn by a partner of the bank's solicitors on 25 October 2006.
[21] The evidence disclosed the existence of a separate costs agreement between the bank and its solicitors for each year in which legal costs debited to Pinnacle's account were incurred by the bank. In summary, in each year, the bank wrote to a number of legal firms in Australia seeking written proposals for the provision of legal services to the bank in the coming year. In each invitation, the bank requested the tendering firms to specify the percentage rebate that the firm was prepared to give the bank in respect of fees in certain billing ranges. The costs agreement for the first relevant year related to the period 1 November 2002 to 30 September 2003. In its written proposal to the bank for that period, the solicitors who acted for the bank in connection with the Pinnacle account and its enforcement set out the rebate percentages which they were prepared to refund to the bank in the specified billing ranges and concluded:
As at the time of preparing this letter we have not had the opportunity to review the issue of the rebate of legal fees paid by third parties (ie the borrower or customer). In submitting this Request for Proposal we assume St. George will take responsibility for making any disclosures that it is lawfully required to make to third parties to notify that person or entity that St. George is to receive a rebate from fees paid by that third party.
[22] This statement does not appear in the proposals made by the bank's solicitors for subsequent costs agreements. The reasons for this were not explored in the evidence.
[23] It is unnecessary to disclose the relevant billing ranges or percentage rebates agreed to between the bank and its solicitors. It is sufficient to note that the rebates were substantial.
[24] The quantum hearing resumed on 30 October 2006. An expert gave evidence on behalf of the guarantors as to the period required to calculate any rebates of fees paid by the bank's solicitors to the bank. The quantum hearing was adjourned until 12 December 2006. The judge directed that counsel and the expert retained on behalf of the guarantors have access to the costs agreements on a confidential basis and that, prior to the adjourned hearing, a statement of any manifest errors relied upon by the guarantors be filed and served. No statement of manifest errors was filed or served prior to the adjourned hearing because of a concern about breaching the confidentiality order in respect of the costs agreement. However, an unsworn affidavit of the expert retained by the guarantors was filed and served.
[25] It is necessary to consider the submissions made at the adjourned quantum hearing on 12 December 2006. This is because the bank contends that issues which are sought to be raised on appeal were not the subject of argument before the trial judge on that day or in written submissions filed thereafter.
[26] At the adjourned hearing on 12 December 2006, the guarantors' expert, Mr Abrahams, was called to give evidence and adopted the unsworn affidavit with one correction. The bank relied upon a further affidavit of Mr Bateson which, amongst other things, produced a new certificate specifying the amount outstanding as at 30 November 2006 at $252,574.88, stating that this amount had been calculated excluding the costs of the proceeding and taking into account certain errors of calculation underlying the first certificate.
[27] Before the trial judge, the appellants submitted that the certificate of indebtedness relied upon by the bank contained manifest errors because no allowance was made for the annual volume rebate of fees which the bank's solicitors had repaid to the bank in accordance with the relevant costs agreements between the solicitors and the bank. The trial judge accepted that this was so. The trial judge's reasons for his conclusion that the bank was required to credit the volume rebates received by it from its solicitors were stated succinctly:
Manifest error: failure to account for rebates
[27] An affidavit sworn by a partner of the Bank's solicitors ... revealed that as part of the "panel arrangements" which the Bank's solicitors have with the Bank those solicitors are "required to pay to the Bank a rebate of fees paid by the Bank, calculated by a sliding scale". Copies of the relevant documents and a summary of the total rebates paid were produced as confidential exhibits to that affidavit.
[28] Before me the Bank did not accept that the defendants were entitled to have the rebates taken into account in assessing the amount due. It was argued on behalf of the Bank that the arrangements were referrable to the total fees paid by the Bank to the firm in any given year, were not in any relevant sense referrable to particular customers, and were what was described as "counter payments" paid by the solicitors so as to secure for themselves the benefit of being on the Bank's panel.
[29] I reject this approach. The Bank alleges in this proceeding that the terms of the finance facilities provided to Pinnacle require Pinnacle to pay on demand all costs and expenses incurred by the Bank including legal costs on a full indemnity basis: statement of claim, para 4. It is then alleged that by the guarantee the defendants irrevocably guaranteed due payment and performance of the facilities and indemnified the Bank in respect of non-payment and non-performance: statement of claim, para 5. I do not consider that costs or expenses "incurred" by the Bank include costs and expenses which have been repaid to it. Nor, in my view can guarantors be required to pay to the Bank by way of "indemnity" legal costs and expenses which have been repaid by the solicitors' firm. Accordingly, my conclusion is that the calculation of the amount outstanding must give appropriately calculated credits for the rebates.
[28] The bank has not appealed against the trial judge's reasons in this regard. Nor is there any cross-appeal or notice of cross-contention filed. However, in the course of argument on appeal, counsel for the bank maintained the bank's position that it was not obliged to credit Pinnacle's account with the amount of volume rebates received by it which are referrable to the legal costs incurred in connection with Pinnacle's facilities and their enforcement.
[29] It was submitted on behalf of the guarantors to the trial judge that the bank's claim under the guarantee should be dismissed because, in the absence of the ability to rely upon the certificate of indebtedness, there was no other evidence before the court as to the quantum of the debt. The trial judge rejected this approach, and ordered that the question of quantification be referred to a master for determination without reliance upon the certificate of indebtedness. The grounds of appeal challenging this course were abandoned at the commencement of argument on the appeal.
[30] Further, counsel for the guarantors submitted to the trial judge that, because the amount claimed by the bank was constituted by legal costs incurred by it, the bank's claim should be dismissed because it was based upon an illegal agreement between the bank and its solicitors to share income from a legal practice, in contravention of s 317 of the Legal Practice Act 1996 and s 2.2.9 of the Legal Profession Act 2004. The trial judge rejected the appellants' submissions in this regard. The grounds of appeal challenging this aspect of the trial judge's decision were abandoned in argument.
[31] An issue arises as to whether, at the hearing on 12 December or in later written submissions considered by the trial judge, the guarantors relied upon a further argument based upon illegality or public policy. This involves a comparison of the submissions in fact made to the trial judge with the arguments advanced on appeal. I will deal with this issue when considering those arguments.
[32] In December 2007 the account was taken by a master. The account certified by the master included substantial credits to reflect an appropriate proportion of the fee rebates received by the bank which were referrable to the legal costs debited by the bank to Pinnacle's account. We were informed by senior counsel for the guarantors that the amount exceeded $80,000. The bank did not contest this.
[33] The guarantors then appealed against the determination by the master on the taking of accounts. That appeal was dismissed by the trial judge. The argument relied upon on the hearing of the appeal from the master did not involve any attack upon the master's calculations. Rather, senior counsel having been brought into the matter, a new point was relied upon. As the appeal from the master was a hearing de novo and the guarantors did not seek to rely upon any new material than had been relied upon before the master, this new point was entertained by the trial judge. In summary, it was submitted on behalf of the guarantors that the bank, having obtained an order for party and party costs in the earlier proceeding, could not proceed to recover under its contractual entitlement to be paid indemnity costs until the process of taxation of the party and party costs had taken place pursuant to O 63 of the Supreme Court (General Civil Procedure) Rules 2005 and until interest in accordance with s 101 of the Supreme Court Act 1986 had been calculated. The trial judge found against the guarantors in this regard, and dismissed the appeal from the master's decision determining the amount due under the guarantee.
[34] For reasons which were not explained, Dr Irani has not appealed to this court. The appeal is brought by the corporate guarantors only. Further, at the commencement of the appeal hearing, the court was informed that one of the appellants, Thirteenth Corp Pty Ltd, had been placed in liquidation and the liquidator had given no instructions to prosecute the appeal on its behalf. However, for convenience and consistency, I will nevertheless refer to the remaining appellants as "the guarantors".
[35] On appeal, the guarantors raise three issues. First, they contend that the bank's claim should be dismissed on grounds of illegality or public policy ("the illegality grounds"). Second, the guarantors contend that the master's determination of the quantum of the amount due under the guarantee should be set aside, and the determination of any residual contractual entitlement of the bank to be paid its legal costs of enforcement of its securities should be deferred until after taxation of the bank's party and party costs awarded in its favour in the earlier proceeding ("the deferral ground"). Third, the guarantors seek to raise a new issue, not raised before the trial judge, that the bank should be refused relief on discretionary grounds ("the discretionary ground").[14] (footnotes omitted)
[14]Ibid [7] – [35].
The guarantors argued before the Court of Appeal, amongst other things, that the bank’s claim should be dismissed on the grounds of illegality or public policy.[15] Hargrave AJA’s judgment recorded that:
[37] The guarantors contend that the court should infer that the bank intended at all relevant times, and adopted a "deliberate policy", to conceal the volume rebate provisions of the costs agreements. It was submitted that the bank intended to rely upon the combined effect of those provisions, and the standard form of indemnity costs provisions contained in its facility agreements and related security documents ("transaction documents"), to exact payment from its customers and guarantors of legal costs which, after the rebates were taken into account, exceeded the costs which the bank had incurred in connection with the facilities and their enforcement.
[38] It was submitted that such an inference was inescapable on the facts. Reliance was placed upon the warning given to the bank by its solicitors in 2002 that the volume rebate provisions may require a disclosure to customers and other third parties who may be liable to the bank to indemnify it in respect of its legal costs; the fact that this warning was deleted from subsequent proposals from those solicitors; the bank's failure to disclose the volume rebate provisions of the costs agreements to Pinnacle or the guarantors; the fact that the bank did not discover the costs agreements until a specific order was made that it do so; the fact that the bank persists in its contention that it is not obliged to give credit for the volume rebates in fact received by it; and the fact that the indemnity costs provisions relied upon by the bank were, on their face, obviously standard form provisions contained in its transaction documents.
[39] In these circumstances, it was submitted on behalf of the guarantors that the evidence justified a finding that the bank engaged in the tort of deceit, misleading or deceptive conduct (or unconscionable conduct) in contravention of the Trade Practices Act 1974 or, at the very least, intentional sharp practice which was contrary to public policy.[16]
[15]Ibid [35].
[16]Ibid [37] – [39].
SGB had submitted before the Court of Appeal that this claim had not been raised below and that it was too late to do so for the first time on appeal.[17] Hargrave AJA stated:
As matters stood on 12 December 2006, no allegation was made against the bank in the defence and counterclaim that it had acted illegally or contrary to public policy. Arguments based on such contentions were first raised, without any prior notice, at the hearing on 12 December 2006. On that day, the evidence on the quantum hearing before the trial judge was completed. Counsel then acting for the guarantors made submissions first. After making submissions that there was manifest error in the certificate of indebtedness because no credit was given in respect of the volume rebates received by the bank, counsel for the guarantors stated that he wished to submit that the bank's claim should be dismissed on grounds of illegality or public policy. At this point, it became apparent that no notice of these arguments had been given to the bank. Notwithstanding this, the trial judge allowed counsel for the guarantors to develop his submissions. In summary, it was submitted that the costs agreements were illegal agreements between the bank and its solicitors to share income from a legal practice and that, accordingly, the whole of those agreements were unenforceable against third parties such as the guarantors. It followed that the bank's claim for indemnity costs, being based upon the illegal costs agreements, should be dismissed and the bank should be limited to claiming costs under the applicable practitioner remuneration order or scale of costs, or alternatively legal costs which are of a reasonable amount on a solicitor and client taxation.[18] (footnotes omitted)
[17]Ibid [40].
[18]Ibid [42].
Hargrave AJA concluded that it had “not squarely” been submitted before Whelan J on behalf of the guarantors that his Honour should find that SGB and its solicitors, intended to deceive customers and third parties, such as Pinnacle and the guarantors.[19] Hargrave AJA concluded that it appeared that counsel for the guarantors had “limited his submissions to the fact that, viewed as a whole, the costs agreements in this case, like in Hamilton v Haw, “contemplated the improper exaction of excessive costs””.[20] Accordingly, and as no such case was pleaded or particularised, Hargrave AJA did not allow the guarantors to argue that the evidence before Whelan J justified a finding that SGB engaged in the tort of deceit, conduct in contravention of the Trade Practices Act 1974 (Cth) or that the conduct of the bank constituted intentional sharp practice which was contrary to public policy.[21]
[19]Ibid [50].
[20]Ibid [50].
[21]Ibid [52].
His Honour then made the following findings on the claim of wrongful exaction:
[56] In my view, when taken as a whole the relevant arrangements did contemplate the improper exaction of excessive legal costs from the bank's customers, their guarantors and other third parties liable to indemnify the bank in respect of its legal costs. The fact that the bank may have acted in the honest belief that it was entitled to be paid all of its legal costs without any credit in respect of the volume rebates attributable to legal costs debited to Pinnacle's account is not to the point. Viewed objectively, the conduct of the bank in seeking to retain the volume rebates for itself was wrongful and unjust. If the guarantors had paid all of the legal costs demanded of them, I can see no good reason why they could not have recovered the excessive costs from the bank as moneys paid by mistake on principles of unjust enrichment.
[57] In summary, although the bank sought to wrongfully exact excessive legal costs from Pinnacle and the guarantors, it did not do so. The trial judge found that the bank was obliged to give credit to Pinnacle and the guarantors for the relevant proportion of the volume rebates received by it. This aspect of the trial judge's decision is not challenged on appeal. Accordingly, although the trial judge did not accept it, the effect of his decision is to give full recognition to the submission before him that recovery of all of the legal costs claimed by the bank would be against public policy because such recovery would include the wrongful exaction of excessive costs, as explained in Hamilton v Haw. This is the commercial effect of the trial judge's decision at the quantum hearing, when he found that the certificate of indebtedness contained a manifest error because it did not give credit for the volume rebates and ordered that an account be taken of the amount due after appropriate allowance was made for those rebates.
[58] For the above reasons, the grounds of appeal based upon illegality and public policy fail. However, notwithstanding my conclusion on this issue, I would express my strong disapproval of the bank's conduct in seeking to wrongfully exact excessive costs from Pinnacle and the guarantors, and in continuing to maintain (including before this Court on appeal, but without filing any notice of cross-appeal or cross-contention) that it was entitled to do so. Further, on the evidence in this case, and taking into account the bank's continued submission that it was not obliged to give credit for the volume rebates received by it, the inference is open that the bank has for some years been wrongfully exacting excessive costs from borrowers, their guarantors and other third parties who are liable to indemnify the bank in respect of legal costs. The issue is not limited to this case, or even to this State. It appears that the bank has adopted a similar approach throughout the country. Having regard to the way in which the trial of this case was conducted, no inference can be drawn in this case that the bank acted otherwise than honestly in seeking to exact excessive costs, in the belief that it had a proper entitlement to do so.[22] (footnotes omitted)
[22]Ibid [56] – [58].
Hargrave AJA held that SGB sought wrongfully to exact excessive legal costs but the appeal based on illegality and public policy, on the limited ground permitted, nonetheless failed because there had been no wrongful exaction as Whelan J found SGB was obliged to give credit to Pinnacle and the guarantors for the volume rebates received by SGB.
An application for special leave to the High Court[23] was refused by Gummow and Bell JJ who stated:
We are not satisfied that any point of general public importance respecting the principles of legality in contract law arises from the taking of the account in this case so as to make allowance as it did for the credit in respect of the volume rebates.[24]
[23]Shalridge Pty Ltd v St George Bank Ltd [2009] HCATrans 116 (29 May 2009).
[24]Ibid 16, lines 639-642.
E. The current proceeding
In this proceeding, Dr Kermani has sued SGB for recovery of the amount appropriated out of the sale of her property and shares that were referrable to the legal costs that SGB incurred in enforcing the repayment of Pinnacle’s debt. The suit is based on claims of illegality and public policy.
The statement of claim alleges that:
(a) Pinnacle financed the purchase of the Sunbury Road land by a loan made to it by SGB in the sum of $3.575 million;[25] and that securities were granted to SGB to secure repayment of the loan in the form of a mortgage granted by Pinnacle over that land, a guarantee by Dr Kermani to SGB which was secured by a mortgage over her property and a charge granted by her over a portfolio of shares that she held;[26]
[25]Amended Statement of Claim filed 2 July 2010, 1-2 [3] - [4].
[26]Ibid 2 [5].
(b) it was a term of the Pinnacle mortgage that Pinnacle was to indemnify SGB fully in respect of all legal costs incurred by SGB (“the Pinnacle costs agreement”);[27] that it was a term of the guarantee (“the guarantee costs agreement”) and of Dr Kermani’s mortgage that she was liable to pay to SGB any legal costs that Pinnacle was liable to pay to St George under the Pinnacle costs agreement;[28] and that it was a further term of the guarantee, and of Dr Kermani’s mortgage and charge, that SGB was entitled to sell her property and share portfolio to discharge her liability to SGB pursuant to the securities, including in respect of legal costs.[29]
(c) that “the terms described in paragraph 6, 7 and 8 … were standard terms employed by St George in its loan and guarantee agreements with borrowers and guarantors (“the default terms”)”;[30]
(d) that from year to year between 2002 and 2006 SGB and its solicitors entered into a cost agreement concerning SGB’s liability to pay the solicitors’ legal costs in which the solicitors were acting for SGB in respect of defaults by borrowers or guarantors under the default terms.[31]
[27]Ibid 2 [6].
[28]Ibid 3 [7].
[29]Ibid 3 [8].
[30]Ibid 3 [9].
[31]Ibid 3 [10].
It is alleged in paragraph 11 that it was a term of those cost agreements that SGB was entitled to receive a reduction in, or a rebate of, legal costs calculated by reference to the annual volume of work carried out by the solicitors acting as SGB’s solicitors.[32]
[32]Ibid 4 [11].
In paragraph 12 it is alleged:
[12] On the date that St George entered into each of the HGR costs agreements, and at all material times thereafter, St George intended to, and thereafter did, rely upon and enforce the default terms by exacting from borrowers (including Pinnacle) who were the subject of loan defaults, and from guarantors in respect of those borrowers (including the plaintiff), St. George’s gross legal costs:
(a) without taking into account, or accounting for, the rebates;
(b)without disclosing the rebates to the borrowers (including Pinnacle), or to the guarantors (including the Plaintiff).
Particulars
St George’s bank statements for Pinnacle for the period 2000 to 2006 do not contain any credit entries for the rebates given to HGR by St George and St George did not account for the rebates it received from HGR during the period. St George debited St George bank account of Pinnacle with the gross legal costs charged by HGR without any deduction for the rebates.
Further particulars will be provided after discovery.
It is alleged in paragraph 13 that Pinnacle defaulted in respect of the repayment of the loan, that SGB sold Dr Kermani’s property and share portfolio and that SGB, in reliance upon the terms of the Pinnacle costs agreement and the guarantee costs agreement:
appropriated for its benefit out of the proceeds of sale, the gross amount of the legal costs claimed by [the solicitors] to be payable in respect of Pinnacle’s default in relation to the loan without taking into account, or accounting for, the rebates (“the Pinnacle legal costs”).
Particulars
St George’s bank statements for Pinnacle for the period 2000 to 2006 set out the gross amount of legal costs charged by HGR. The plaintiff refers to and repeats the particulars subjoined to paragraph 21. The statements do not contain any credit entry for the rebates given to HGR by St George. St George did not account for the rebates it received from HGR during the years 2000 to 2006. St George debited the St George bank account of Pinnacle with the gross legal costs charged by HGR without deduction of the rebates. Further particulars will be provided after discovery.
It is alleged in paragraph 14 that the solicitors paid or credited rebates to SGB, which included rebates in respect of the enforcement of the securities for Pinnacle’s loan. The particulars set out amounts paid in 2004, 2005, 2006 and 2007 for the legal costs relating to Pinnacle amounting to $89,500.90. The particulars also provided that:
Further particulars of the total rebates paid by HGR to [SGB] will be provided upon discovery.
It is then alleged that by reason of the matters in paragraphs 11, 12, 13 and 14:
at all material times on and after each of the HGR Costs Agreements were entered into, St George wrongfully intended to, and did:
(a) rely upon and enforce the default terms, the securities, the Pinnacle costs agreement and the guarantee costs agreement, by exacting from Pinnacle, the plaintiff (and other borrowers and guarantors), the gross amount of legal costs, including the rebates (and in particular, the Pinnacle costs rebates);
(b) appropriate for its own benefit the rebates (and in particular, the Pinnacle costs rebates);
(c) rely upon and enforce the default terms in respect of costs in a manner that was contrary to public policy and/or illegal.
Particulars
No rebate credits were credited to the Bank Account of Pinnacle on the day the rebates were received by St George, or at any material time thereafter.
Exhibit AB1 to the Affidavit of Alan Bateson sworn 15 October 2007 sets out the rebate credits received by St George Bank in respect of Pinnacle’s legal costs:
(a) 24.10.2003 Pro rata HGR rebate for Pinnacle Costs $32,299.12
(b) 14.10.2004 Pro rata HGR rebate for Pinnacle Costs $22,320.24
(c) 27.10.2005 Pro rata HGR rebate for Pinnacle Costs $20,519.49
(d) 24.10.2006 Pro rata HGR rebate for Pinnacle Costs $6,164.49
(e) 2.11.2006 Pro rata HGR rebate for Pinnacle Costs $6,322.57
(f) 23.1.2007 Pro rata HGR rebate for Pinnacle Costs $1,962.99
$89,599.90
It is then alleged that SGB neglected to disclose these matters to the borrowers, including Pinnacle, or the guarantors, including Dr Kermani.[33] It was further alleged that these matters were not known at any time by those borrowers, including Pinnacle or by the guarantors, including Dr Kermani.[34]
[33]Ibid 7, second [16].
[34]Ibid 7, second [16].
It is pleaded in paragraph 17 that the costs agreement, the Pinnacle costs agreement and the guarantee costs agreement:
were acted upon and enforced by [SGB] in a manner that was contrary to public policy and/or illegal and accordingly were unenforceable as against the plaintiff.
A claim is also made that SGB was an unqualified person within the meaning of the Legal Practice Act 1996 (Vic) and wrongfully shared legal costs, including the Pinnacle legal costs, with the solicitors. It is alleged that the rebates received by SGB constituted a sharing of legal fees by an unqualified person contrary to s 317 of the Legal Practice Act 1996 (Vic) and s 2.2.9 of the Legal Profession Act 2004 (Vic). Further it is alleged that the costs agreements were contrary to public policy, illegal and unenforceable as against the plaintiff.[35]
[35]Ibid 8 [18] – [20].
The plaintiff seeks declarations to that effect and an order for repayment.
F. Reasons
The Court is empowered by r 23.01(1)(c) of the Supreme Court (General Civil Procedure) Rules 2005 to stay a proceeding generally that is an abuse of the Court’s process. The Court also has the inherent jurisdiction to control its own processes and to prevent misuse of it.
Senior counsel for SGB submitted that this proceeding is an abuse of process because:
(a) the claims that Dr Kermani has raised in this proceeding are claims that were raised and dealt with in substance in the second proceeding, in circumstances where Dr Kermani, as the sole director and shareholder of Shalridge which was a party to the second proceeding, must have been aware of the claims that were raised in the second proceeding, yet chose to stand by and took no steps to have her claim determined in that proceeding;
(b) that this proceeding amounts to a collateral attack on the decisions made in the second proceeding; and
(c) that this proceeding is doomed to fail as the claims were determined in the second proceeding in a way that is adverse to her.[36]
[36]Walton v Gardiner (1993) 177 CLR 378, 393-4.
Senior counsel for Dr Kermani submitted that Dr Kermai was not bound by the judgments in the second proceeding because she was not a party to that proceeding and her ownership and control of Shalridge did not make her the privy of Shalridge. It was also submitted that even if she was a privy of Shalridge, there is no estoppel as privy because the claims in this proceeding are not identical with, or in substance the same as, the claims determined in the second proceeding. It was argued that Whelan J and the Court of Appeal had not permitted the defendants in the second proceeding to argue claims of illegality and public policy based on deliberate concealment, deceit and sharp practice but rather and specifically had determined the claims on the basis that SGB had acted honestly in seeking to exact excessive costs in the belief that it was entitled to do so.[37] It was also argued that it was not open to Dr Kermani in the second proceeding to take any steps in her own personal interests because there was a confidentiality order over the costs agreement, which precluded her from inspecting the document and the Harman undertaking meant that she could not use or rely on that document as a non-party.
[37]Boman Irani Pty Ltd v St George Bank Limited (2008) 22 VR 135, [58].
In my view, the submissions of the SGB should be accepted.
First, the claims in this proceeding are, in substance, the same as the claims that were the subject of judicial disposition in the second proceeding. It is not to the point that the judgments in the second proceeding did not determine the merits of those claims. Those claims were raised before, and dealt with by, the Court of Appeal in the second proceeding.
Secondly, the fact that Dr Kermani was not a party to the second proceeding does not mean that it may not be an abuse of process for her to pursue the claims raised in this proceeding.[38] That is not to say that a subsequent proceeding will be an abuse of process simply because there were earlier proceedings concerning the same subject matter or because the issue sought to be litigated in the subsequent action could have been raised in the earlier proceeding. That is just one consideration. Another consideration is whether there is a connection between the litigants. As Handley JA stated in Champerslife Pty Ltd v Manojovlski,[39] earlier proceedings by one litigant could not make later proceedings by another an abuse of process unless there was a relevant connection between the parties.[40] It does not have to be shown that the litigant in the subsequent proceeding is the privy of a party in the earlier proceeding. There does not have to be an identity of parties or their privies for an action to be dismissed as an abuse of process.[41] But it is a factor for consideration that one of the litigants was the corporate embodiment of a party in the other litigation.[42]
[38]Spencer Bower and Handley Res Judicata (4th Ed, 2009) 316 [26.15(c)]: “The doctrine can apply where the claimant or the defendant or both are different”.
[39](2010) 75 NSWLR 245.
[40]Ibid 265, [114].
[41]State Bank of NSW v Stenhouse (1997) Aust Torts Reports 81-423; Haines v Australian Broadcasting Tribunal (1995) 43 NSWLR 404.
[42]Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1; Champerslife Pty Ltd v Manojlovski (2010) 75 NSWLR 245; Balanced Securities Ltd v Thomas [2010] QDC 337.
Thirdly, the issue of an abuse of process involves a “broad merits-based judgment”.[43] In Johnson v Gore Wood[44] Lord Bingham had stated:
The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied … that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify … dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because a matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merits-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focusing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. [45]
Handley JA in Champerslife Pty Ltd v Manojovlski[46] observed that “realities” must be relevant where the issue is abuse of process and that the “broad merits-based judgment” excludes any narrow or artificial approach.[47] The principle that underlies abuse of process is that litigation should completely determine a controversy so that there is finality in the judicial disposition of the controversy. Where the claims pursued in the subsequent action “properly belonged to the subject” of the earlier litigation, the subsequent proceeding will be an abuse of process.[48]
[43]Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1; Champerslife Pty Ltd v Manojlovski (2010) 75 NSWLR 245.
[44][2002] 2 AC 1.
[45]Ibid 31.
[46](2010) 75 NSWLR 245.
[47]Ibid [114].
[48]Ibid 263.
It is plain that Dr Kermani did have a real interest in the outcome of the second proceeding. Dr Kermani was not a party to that proceeding but SGB was suing the other guarantors in reliance on a clause in their guarantees, which was contained in the same terms in Dr Kermani’s guarantee. The defences raised by those guarantors were equally applicable to Dr Kermani. I reject the submission that it was not open to Dr Kermani to take any steps in the second proceeding in her own personal interest. I accept that the confidentiality order meant that Dr Kermani was unable to review the terms of the costs agreement, but equally so, the terms of the confidentiality order prevented each of the other guarantors from reviewing the cost agreement. This did not preclude them from raising defences based on claims of illegality and public policy. I also accept that the use of the costs agreement was subject to the Harman undertaking. Neither the confidentiality order nor the Harman undertaking would have prevented Dr Kermani from taking steps to have her claims determined in the second proceeding. Dr Kermani was plainly aware of the defences proposed to be agitated by the guarantors by reason that she was the sole director and shareholder of Shalridge, a party to the second proceeding. Armed with that knowledge, Dr Kermani could have applied to be joined as a defendant for the purpose also of relying on those defences.
Fourthly, proceedings before a Court will be stayed as an abuse of process if it amounts to a collateral attack on the judgment in the earlier proceeding. Consistent with the principle that a person who has a full opportunity to present their whole case will not be permitted to reargue the case, if a person stands by and waits to see the outcome of a case in which they have a distinct interest without making themselves a party, they will be bound by the result and will not be allowed to reopen the issue in another piece of litigation.[49] As I have held, Dr Kermani had that opportunity but stood back, without making herself a party. In my view, it would be an abuse of process for Dr Kermani to re-litigate the same issues in these circumstances. Dr Kermani cannot escape that consequence because Whelan J and the Court of Appeal did not allow the guarantors to put their illegality argument in the way in which I have held that the claims in this proceeding also raise in substance. The second proceeding finally determined the dispute between SGB and the guarantors based on the costs agreement. The defendants in the second proceeding are bound by the Court of Appeal decision. In my view it would undermine public confidence in the administration of justice and bring the system into disrepute to allow Dr Kermani effectively to make a collateral attack on the refusal of the Court to allow the additional claims to be raised, by raising them in this proceeding in the circumstance where she stood by and waited to see the outcome of the second proceeding.
[49]Ann Street Mezzanine Pty Ltd (in liq) v Beck (2009) 175 FCR 532.
Fifthly, the income sharing claim is in my view doomed to fail because it is the same issue that was determined adversely to the guarantors in the second proceeding. That claim should be permanently stayed as an abuse of process on that basis alone. The submission that the sharing claim is inextricably bound up with the more general illegality claim and affords an additional basis for the illegal intent and purpose underlying the more general claim should be rejected. There is no discernable difference in the nature of the claims as pleaded.
It was also submitted for Dr Kermani that there are significant public policy considerations that strongly militate against dismissal of her claim. If the proceeding constitutes an abuse of process because of the circumstances in which Dr Kermani seeks to re-litigate issues already decided, there is no occasion for this Court to permit the continuance of the proceedings.
In view of my conclusion that the proceeding should be permanently stayed as an abuse of process, it is unnecessary to consider the issues about the form of the pleadings.
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