Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd
[2010] VSCA 355
•20 December 2010
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2009 3748
| KHEIRS FINANCIAL SERVICES PTY LIMITED (ACN 100 505 324) and | Fourth Parties/Appellants/ |
| v | |
| AUSSIE HOME LOANS PTY LTD (ACN 002 119 511) and AHL INVESTMENTS PTY LTD (ACN 105 265 861) | First Third Party/First Respondent/ |
| Second Third Party/Second Respondent/ Third Cross-Respondent |
S APCI 2009 3827
| AUSSIE HOME LOANS PTY LTD (ACN 002 119 511) and AHL INVESTMENTS PTY LTD (ACN 105 265 861) | First Third Party/Applicant/First Cross-Respondent |
| Second Third Party/Second Respondent/Second Cross-Respondent | |
| v | |
| BANK OF WESTERN AUSTRALIA (ACN 050 494 454) | Defendant/First Respondent/ Cross-Applicant |
| and | |
| KHEIRS FINANCIAL SERVICES PTY LIMITED (ACN 100 505 324) and GAMEL KHEIR | Fourth Parties/Third and Fourth Respondents |
S APCI 2009 3836
| AHL INVESTMENTS PTY LTD (ACN 105 265 861) | Second Third Party/Applicant/ Cross-Respondent |
| v | |
| BANK OF WESTERN AUSTRALIA (ACN 050 494 454) | Defendant/First Respondent/ Cross-Applicant |
| and | |
| AUSSIE HOME LOANS PTY LTD (ACN 002 119 511) | First Third Party/Second Respondent |
| and | |
| KHEIRS FINANCIAL SERVICES PTY LIMITED (ACN 100 505 324) and GAMEL KHEIR | Fourth Parties/Third and Fourth Respondents |
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| JUDGES | MAXWELL P, TATE JA and HABERSBERGER AJA |
| WHERE HELD | MELBOURNE |
| DATE OF HEARING | 18 October 2010 |
| DATE OF JUDGMENT | 20 December 2010 |
| MEDIUM NEUTRAL CITATION | [2010] VSCA 355 |
| JUDGMENT APPEALED FROM | Tarik Solak v Bank of Western Australia Ltd [2009] VSC 82 Tarik Solak v Bank of Western Australia Ltd (No 2) (Unreported, Supreme Court of Victoria, Pagone J, 26 March 2009) |
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COSTS – Third and fourth party proceedings – Where third parties and fourth parties succeed because defendant successful against plaintiff – Liability of plaintiff for costs restricted to issues raised by the statement of claim – Liability for the costs of third and fourth party proceedings - Whether usual rule of 'costs follow the event' applies – Whether costs should be apportioned by analogy with apportionment legislation – Whether costs should be allocated on an 'issues basis' – Need for judicial determination of issues before issues-based costs order can be made – Johnson v Ribbins [1977] 1 All ER 806, applied – Spotless Group Ltd v Premier Building and Consulting Pty Ltd [2008] VSCA 115, applied.
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| Appearances: | Counsel | Solicitors |
| For Kheirs Financial Services Pty Limited (ACN 100 505 324) and Gamel Kheir | Mr G Uren QC with Mr G Harris | Monahan + Rowell |
| For Aussie Home Loans Pty Ltd (ACN 002 119 511) | Mr J Gleeson SC | Moray & Agnew (as agent for Gilchrist Connell) |
| For AHL Investments Pty Ltd (ACN 105 265 861) | Ms S Marks | Lander & Rogers |
| For Bank of Western Australia (ACN 050 494 454) | Mr C M Caleo SC with Mr Robertson | Corrs Chambers Westgarth |
MAXWELL P
TATE JA
HABERSBERGER AJA:
Summary
This was an appeal – or, more accurately, a series of appeals – about costs. As will appear, the costs questions were more than usually complicated, because the defendant to the principal proceeding joined third parties, and they in turn joined fourth parties. In the end, however, the appeals concern the applicability of ‘the usual rule’ as to costs, that is, the rule that costs follow the event.
The plaintiff in the principal proceeding failed. The claim against the defendant was dismissed. It followed, the judge concluded, that the claims of the defendant against the third parties must also be dismissed and, likewise, the claims by the third parties against the fourth parties. His Honour proceeded, however, to state his conclusions as to the apportionment of liability as between those parties ‘in case it becomes relevant hereafter’.
Without formally adjudicating upon the issues in the third party proceedings or the fourth party proceedings, but using the State apportionment legislation as a guide, the judge purported to undertake the task of apportioning liability ‘in a real and pragmatic sense to identify who is to blame for the loss and who should bear the liability.’ He concluded that responsibility should be apportioned as follows: defendant 30 per cent, third parties 0 per cent, fourth parties 70 per cent.
Since the investigation of the plaintiff’s claims against the defendant had taken, on the judge’s assessment, only one-sixth of the trial time, his Honour confined the unsuccessful plaintiff’s liability for the defendant’s costs to those costs associated with the trial of the issue as between plaintiff and defendant. (That order was not challenged in these appeals). The question which then fell for determination was how to allocate the costs of the balance of the trial.
The contention for the third parties was that, as the defendant’s claim against them had failed, the defendant should pay their costs of the third party proceeding. Similarly, the fourth parties contended that, as the fourth party claims had been dismissed, the third parties should pay their costs of the fourth party proceeding. His Honour took a different view, however, as he considered that to apply the usual rule in this fashion might work unfairness. His Honour concluded that the apportionment of costs as between those parties should accord with his apportionment of fault amongst them.
For reasons which follow, we have concluded that his Honour erred in the apportionment of fault, as he did not adjudicate on all of the issues which had to be determined in the third party and fourth party proceedings. Accordingly, the apportionment was not a proper basis for deciding the costs questions. This was an error of principle, which re-opens the costs discretion. We have concluded that, in the circumstances, the submissions originally made by the third and fourth parties respectively should be upheld. In each case, the defendant parties had successfully defended the claims brought against them, and they were entitled to an order for costs against the unsuccessful party.
The proceeding
On 26 March 2009, Pagone J dismissed a claim brought by the plaintiff (Mr Tarik Solak) against the defendant (the Bank of Western Australia Ltd, ‘the Bank’).[1] Mr Solak had sought a declaration that a mortgage over property which he owned (’the property’) did not and could not secure any indebtedness of Mr Solak in favour of the Bank, as the mortgage had been given by a forger who had falsely represented himself to be Mr Solak (’the forger’). Mr Solak was also unsuccessful in obtaining an order securing the discharge of the mortgage registered with the Land Titles Office that appeared as an encumbrance upon the certificate of title to the property. The Bank had been successful in resisting Mr Solak’s claims on the basis of the doctrine of indefeasibility of title effected by the Transfer of Land Act 1958, which enabled it to maintain the registration of the mortgage and to enforce the covenant to pay flowing from the forgery.[2]
[1]Solak v Bank of Western Aust Ltd [2009] VSC 82 (‘Solak‘).
[2]Ibid [17].
The Bank, in defending its claim against Mr Solak, had joined Aussie Home Loans Pty Ltd ( ‘Aussie’) as first third party and AHL Investments Pty Ltd (‘AHL’) as the second third party. In turn, Aussie and AHL brought fourth party proceedings against Kheirs Financial Services Pty Limited (‘KFS’), as the first fourth party, and against Mr Gamel Kheir, as the second fourth party. (We will use the abbreviation ‘Kheirs’ to refer jointly to Mr Kheir and to KFS).
The third and fourth party proceedings were based upon arrangements between the parties for the introduction of customers seeking to borrow funds. As will appear, the forger had contacted Mr Kheir seeking to borrow money on the security of the property and had subsequently secured those funds from the Bank in April 2006 through Kheirs and Aussie.
Having dismissed the plaintiff’s claim against the Bank, his Honour made orders dismissing the Bank’s claim against the third parties (paragraph 2) and, in turn, dismissing the third parties’ claims against the fourth parties (paragraph 3). As will appear, however, he had not adjudicated on either the third party or the fourth party claims. He further dismissed all claims between the Bank, the third parties and the fourth parties (paragraph 4).
His Honour then made orders for costs in the following terms:
6 The Plaintiff [Mr Solak] pay the Defendant’s [the Bank’s] costs of the issues raised by the statement of claim but not those incurred by the Defendant (or any other party) arising from the Third Party notices, the Fourth Party notices or the notices for contribution between them.
7. The Defendant [the Bank] pay 30 per cent of the Third Parties’ [Aussie and AHL’s] costs of the proceedings.
8. The Fourth Parties [Kheirs] pay 70 per cent of the First Third Party’s [Aussie’s] costs of the proceeding to be assessed and paid on a full indemnity basis.
9. The Fourth Parties [Kheirs] pay 70 per cent of the Second Third Party’s [AHL’s] costs of the proceeding.
These appeals concern the orders for costs made in respect of the third party and fourth party proceedings. The effect of those orders was that the costs of the third parties (Aussie and AHL) were to be paid as to 30 per cent by the Bank and as to 70 per cent by the fourth parties.
Costs follow the event in third and fourth party proceedings
The Supreme Court has a broad judicial discretion to award costs in the exercise of the power conferred by s 24(1) of the Supreme Court Act 1986, which provides:
Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court … is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.
An award of costs made by a trial judge, being discretionary, is thus subject to interference by an appellate court only where the discretion has miscarried, for example, because it has been exercised according to a wrong principle or on a manifestly erroneous view of the facts.[3]
[3]Spotless Group Ltd v Premier Building and Consulting Pty Ltd [2008] VSCA 115, [11].
The usual rule is, of course, that costs follow the event. In the absence of special circumstances, a successful litigant should receive his or her costs.[4] As Viscount Cave LC said in Ritter v Godfrey:[5]
[T]here is such a settled practice of the Courts that in the absence of special circumstances a successful litigant should receive his costs, that it is necessary to show some ground for exercising a discretion by refusing an order which would give them to him.
[4]Donald Campbell and Company, Limited v Pollak [1927] AC 732, 809 at 811. While the former Rule of Court (Rules of the Supreme Court 1916, Ch I, O LXV r 1) provided expressly that, with respect to ‘any action, cause, matter or issue … tried with a jury, the costs shall follow the event’ unless good cause was shown, the rule was replaced in 1938 without reference to the usual rule. There is no reference to the usual rule in the current Supreme Court (General Civil Procedure) Rules 2005, Order 63.
[5][1920] 2 KB 47, 52-3.
Importantly for present purposes, the usual rule has been held to apply also to third and fourth party proceedings. The proceeding between a defendant and a third party is viewed as a separate ‘event’,[6] as is that between a third party and a fourth party.
[6]Johnson v Ribbins [1977] 1 All ER 806, 811.
In Burke v Gillett,[7] the plaintiff failed against the defendant, and the defendant in turn failed against the third party (its solicitor), because an agreement drawn by the third party was held to be valid. Tadgell J (with whom Ormiston and Smith JJ agreed) concluded that, as the third party claim had been ‘fully litigated’[8] and the third party had been ‘ultimately vindicated’, the defendant should pay the third party’s costs of the proceeding:
Assuming that the defendants acted reasonably in bringing the third party proceedings, that was not sufficient to justify an order either that the third party should not receive its costs or that the defendants should not be made responsible for them.
In my opinion, costs of the third party proceedings and of the third party’s appeal should follow the event, as it was indicated in Johnson v Ribbins … should ordinarily be the case.
[7][1996] 1 VR 196.
[8]Ibid 200.
The reference here to Johnson v Ribbins[9] was to a statement made by Goff LJ, in delivering the judgment of the Court of Appeal, in which he said:[10]
In the exercise of that discretion [to award costs] … in our judgment the court should be guided by the principle that normally costs follow the event as is expressly provided by RSC Ord 62, r3(2), and should, therefore, normally order the defendant, though successful in the action, to pay the costs of the third party if he also be successful. …
Counsel for the defendants argued that one cannot apply RSC Ord 62, r 3(2), to third party proceedings, because the only relevant event is the outcome of the proceedings as a whole. One cannot, so he submitted, look at the third party proceedings separately. We cannot accept that view as a general proposition and certainly not as applicable to this case, though it might be true in particular cases. Generally, we think it will be found, and certainly so in this case, that the defendant and the third party stand in relation to one another as if the defendant had brought a separate action against the third party … In L E Cattan Ltd v A Michaelides & Co, whilst careful to point out that it was a matter of discretion, and that he was not fettering the arbitrator’s discretion, Diplock J prescribed this as the normal rule in the not dissimilar case of chain contracts.
[9][1977] 1 All ER 806.
[10]Ibid 810-11 (emphasis added, citations omitted).
Johnson v Ribbins[11] involved a claim by a plaintiff mortgagor that the defendant, the mortgagee, had sold the property, a hotel, at a gross undervalue, in the exercise of the mortgagee’s power of sale. The defendant was successful in resisting the plaintiff’s claim. The trial took 11 days, much of which was occupied in investigating the defendant’s allegations that his solicitor had effected the sale with undue haste and that his real estate agents had been negligent. The agents had been joined as third parties. The trial judge rejected the defendant’s allegations and dismissed the third party proceedings. In those circumstances, the Court of Appeal held, there was nothing on the facts of the case to justify departure from the usual rule that costs follow the event. It would not be right to deprive the third party of an order for costs to which it was otherwise entitled against the defendant.[12]
[11][1977] 1 All ER 806.
[12]This left the defendant to try to recover from the impecunious plaintiff.
In Burke v Gillett,[13] Tadgell J was careful to distinguish the circumstances of the case before him from those in Devon Downs Administrators Pty Ltd v Theodoropoulos[14] and Allman v Country Roads Board,[15] where it had been unnecessary to adjudicate on the third party claim. In Allman, the third party proceedings were contingent upon the liability of the defendant being established, and the defendant had been successful in avoiding liability. In considering the nature and purpose of third party proceedings, Pape J said:[16]
In Hordern-Richmond Ltd v Duncan … Cassels J … said: ‘The cause of action which entitles a defendant to bring a third party before the court is the liability of the third party to make contribution or pay an indemnity. That cause of action has not arisen until the liability of the defendant has been ascertained. Under [the relevant statute and Rules of Court] governing third-party proceedings, notice of them is given to a third party before liability is established. It is one of the peculiarities of that procedure which enables this to take place before there is any liability. But the plaintiff can never get a judgment against the third party; …. Neither, in such proceedings, could the defendant succeed and yet leave the plaintiff with judgment against the third party. It is only on the defendant’s being made liable that the defendant has any cause of action against the third party. Whatever for convenience of procedure may be the order for directions for the trial, however the witnesses may be called and heard, or whether the proceedings by the plaintiff against the defendant are tried at the same time as the proceedings by the defendant against the third party matters not. The position is quite clear. The proceedings by the defendant against the third party are independent of and separate from the proceedings by the plaintiff against the defendant, except that, when the defendant is made liable to the plaintiff, he then has his right open against the third party to establish, if he can, that he possesses a right to indemnity and contribution from that party’. …
In these circumstances I cannot see any justice in ordering a party who is brought into the action solely by way of proceedings to decide his liability to contribute ‘in a contingent event’, i.e. in the event of the defendant being held liable, to pay the costs of the defendant who succeeds in preventing the contingency from becoming a reality.
[13][1996] 1 VR 196.
[14](Unreported, Supreme Court of Victoria, Kaye J, 7 April 1982.)
[15][1959] VR 614.
[16]Ibid 619-21.
In relation to costs, his Honour said:[17]
The result is that the plaintiff having failed in this action … must pay the penalty of all unsuccessful plaintiffs, and bear the defendant’s costs. …
So far as the third party proceedings are concerned, I think it would be incorrect to enter judgment for the third parties against the defendants, because, as I have already shown, these proceedings are contingent on the defendant’s liability being established. Since it has not been established, the third party proceedings were never litigated …
I think in all the circumstances justice will be done if I make no order on the third party proceedings except to order that the third parties … are to have such costs against the defendant … as they have incurred by reason of the service upon them of the third party notices, but excluding any costs of the trial. [18]
[17]Ibid 624-5.
[18]There was a related action involving similar parties which had been commenced earlier that was heard together with Allman v The Country Roads Board. Orders for costs were made in the earlier proceedings and, as Kaye J later said, any further award of costs, including those of the trial, ‘was scarcely justified … the justice of the case no doubt did not necessitate that they [the third parties] should receive double costs incurred because the two actions were heard together’: Devon Downs (Unreported, Supreme Court of Victoria, 7 April 1982) 4a.
Similarly, in Devon Downs,[19] Kaye J held that there should be no substantive order in the third party proceeding. Applying Allman, Kaye J said:[20]
The defendants, not having been found liable to the plaintiff, the third party proceedings were not determined. Therefore, in my view, no order or judgment ought to be made or pronounced. No issue has been determined between the defendants and the third party, and in particular, the issue of whether there is a right to an indemnity or contribution in the defendants against the third party. …
In the result, I do not intend to make any order for judgment in respect of either the third or fourth party proceedings.
[19](Unreported, Supreme Court of Victoria, Kaye J, 7 April 1982.)
[20](Unreported, Supreme Court of Victoria, 7 April 1982) 1a – 3a.
Dealing with costs, Kaye J referred to the relevant Rules of Court, which at the time provided for the Court ‘to give such directions as to costs as the justice of the case may require’.[21] He said:[22]
[i]t is clear that the Court has a wide discretion and it may make such order for costs as the justice of the case may require. It would seem therefore that this is hardly a departure from the normal principle that costs follow the event.
[21]Rules of the Supreme Court 1957, Ch I, O 16(A), r 13. That rule was later repealed. The general rule governing costs now applies to third party proceedings: Supreme Court (General Civil Procedure) Rules 2005, Order 63.
[22]Devon Downs (Unreported, Supreme Court of Victoria, 7 April 1982) 3a.
In considering what the justice of the case required, Kaye J considered the reasonableness of the joinder and the conduct of the party during the litigation, especially with respect to its responsibility for the length of the trial. His Honour concluded that, in the circumstances of the case, the defendant’s joinder of the third party was reasonable, and ordered that the third party’s costs be paid by the plaintiff directly. He also ordered that the defendant’s costs of and incidental to the commencement of the third party proceedings, limited to interlocutory matters and including costs reserved, be paid by the third party. (Tadgell J, in Burke v Gillett,[23] considered that this limited order in favour of the defendants against the third party reflected the inability of the third party, the defendant’s solicitors, ‘to explain a number of matters which might have shown that the defendants were unreasonable in joining it as a third party’.)
[23][1996] 1 VR 196, 200.
The principle in Johnson v Ribbins[24] was applied by the Full Court of the Federal Court in Gladstone Park Shopping Centre Pty Ltd v Wills.[25] That was a proceeding alleging misleading conduct by the owners of a shopping centre inducing entry into a lease. The defendant owners had resisted the applicant’s claim and had joined their leasing agents as third parties, seeking an indemnity in the event that the applicant was successful. The owners were successful in defeating the tenant’s claim. Their claim against the agents was also rejected.
[24][1977] 1 All ER 806.
[25](1984) 6 FCR 496 (‘Gladstone Park’).
The agents successfully sought an award of costs in their favour against the owners. The owners appealed. In dismissing the appeal, Beaumont J (with whom Northrop and Davies JJ agreed) held that a party which commences a proceeding against another bears the risks of doing so. In their Honours’ view, the owners’ decision to join the agents:[26]
may be seen as something done with a view to advancing their own interests by seeking to secure immediate indemnity or contribution … in the event that [the applicant] should succeed in her claim. In those circumstances, it is only just that the appellants [the owners] … should bear the costs of the attempt to secure such an advantage for their own benefit.
[26]Ibid 510.
In Furber v Stacey,[27] the New South Wales Court of Appeal held that the usual rule was prima facie applicable to third party proceedings, subject to the overriding power of the court to do justice between the parties. Hodgson JA (with whom Einstein J agreed) said:[28]
The prima facie principle to be applied … is that costs follow the event. …
However, this principle is subject to the ability of the Court … to make such orders as it appears to the Court should be made, as the justice of the case may require. In relation to third party proceedings … it may be appropriate to make further or other orders. There is a useful discussion of this matter by King CJ in Lombard Insurance Co. (Australia) Ltd v Pastro … as follows:
As the discretion to award costs, like other judicial discretions, must be exercised judicially, the courts have developed principles for the guidance of judges in exercising the discretion. The basic guiding principle is that costs ordinarily follow the event. The application of that principle to unsuccessful third party proceedings presents difficulties as the diverse outcome of the decided cases indicate. There is no great difficulty where a third party claim by a defendant is unsuccessful because the defendant has failed to establish its right to recover from the third party the amount which it is required to pay to the plaintiff, or the amount which it would have been required to pay if the plaintiff’s claim had been successful. In such cases the defendant is ordinarily required to pay the costs of the third party and cannot recoup them from the plaintiff. Where, however, the third party claim fails solely because the plaintiff has failed in its claim against the defendant, the position is more complex. The principle that costs follow the event dictates that ordinarily the defendant is liable for the costs of the successful third party.
[27][2005] NSWCA 242.
[28]Ibid [30]-[31] (citations omitted, emphasis added). (Basten JA was in dissent.)
The following principles can be derived from these authorities:
(1)The usual rule as to costs applies to proceedings as between defendant and third party, the ‘event’ being the success or failure of the defendant’s claim against the third party.
(2)Where the third party claim is dismissed because the plaintiff’s claim against the defendant fails, the defendant will ordinarily be liable for the third party’s costs of the third party proceeding.
(3)The award of costs remains a matter of discretion, however, and there may be circumstances of the case which justify a departure from the usual rule.
(4)In deciding (in a case of the kind referred to in (2)) whether any departure from the usual rule is warranted, the Court will ordinarily need to consider at least the following matters:
· the reasonableness of the defendant’s decision to join the third party;
· whether the joinder of the third party was reasonably foreseeable by the plaintiff, such that the plaintiff might be viewed as having some responsibility for the costs of the third party proceeding. (An order for the plaintiff to pay the defendant’s costs may thus include the defendant’s liability to pay the third party’s costs of the third party proceeding.);
· the responsibility of plaintiff, defendant and third party, respectively, for the time taken up in the hearing of the third party proceeding.
These principles would apply equally to fourth party proceedings.
Before considering how these principles apply to the case at hand, it is first necessary to consider the procedural background.
Procedural background
Kheirs was granted leave to appeal against the costs orders made against them. The respondents to that appeal (proceeding 3748 of 2009) are Aussie and AHL. Aussie has applied for an extension of time to serve a Notice of Cross-Appeal.
Aussie has separately sought leave to challenge the costs order made in its favour. The respondents to that application (proceeding 3827 of 2009) are the Bank, AHL, and Kheirs. The Bank has applied for leave to cross-appeal in the event that Aussie is granted leave to appeal.
AHL also seeks leave to appeal against the costs order made in its favour. The respondents to that application (proceeding 3836 of 2009) are the Bank, Aussie, and Kheirs. As with Aussie, the Bank has applied for leave to cross-appeal in the event that AHL is granted an extension of time and leave to appeal.
All of the applications, and the resulting appeals and cross-appeals, were heard concurrently with the Kheirs appeal.
The reasons of the trial judge on the parties’ claims
Having rejected the submissions of Mr Solak, and having found for the Bank, his Honour noted that it was therefore ‘unnecessary for [him] to consider the claims and cross-claims between defendant, third parties and fourth parties.’[29] He proceeded, however, to ‘state [his] findings and [his] conclusions about any apportionment of liability in case it becomes relevant hereafter’.[30]
[29]Solak [18].
[30]Ibid.
The claims and cross-claims were based upon contractual arrangements between the parties and, inter alia, alleged breaches of the Fair Trading Act 1999 (Vic); Fair Trading Act 1987 (NSW) and s 52 of the Trade Practices Act 1974 (Cth). The claims were said to give rise to apportioned liability on the basis that the forger, Aussie and Kheirs were concurrent wrongdoers under Part IVAA of the Wrongs Act 1958.
Of particular significance to those arrangements was the Origination Agreement made in September 2002 between the Bank and Aussie, by which Aussie was appointed as ‘the Originator’ to refer clients for financial services to the Bank throughout Australia including, relevantly, New South Wales, Victoria and Western Australia. Clause 4.1 of the Origination Agreement provided:
The Originator agrees to comply with the Service Procedures including provision of Client Information and provision of a properly completed and signed signature identification statement in the Bank’s standard form.
The expression ‘signed signature identification statement in the Bank’s standard form’ was not defined but the Bank did have a form for the identification of customers (a 100 Point Signatory Identification Form) which was incorporated by Aussie as part of its computer program package for home loan applications made available to its brokers for completion.[31] The 100 Point Signatory Identification Form contained the requirement ‘Originals must be sighted’. On the front page of Aussie’s Home Loan Application Form to the Bank, there was a signature required for the ‘Mortgage Adviser’ (here, signed by Mr Kheir) after the statement:[32]
I confirm all applicable requirements have been satisfied, including but not limited to the sighting of original documentation for all savings, income and FTRA identification evidence.
[31]Kheirs submitted that the form referred to in clause 4.1 was not the 100 Point Signatory Identification Form. We consider this below, at [78].
[32]Emphasis added.
Clause 9.1 governed indemnities. It read:[33]
The Originator agrees to indemnify and keep indemnified the Bank against any liability or loss, expenses, damages, actions, claims and costs (including legal costs on a solicitor and own client basis) sustained or incurred, arising directly or in connection with:
(a)any Event of Default;
(b)any breach by the Originator of this Agreement;
(c)any default, negligence, act or omission of the Originator or any of its employees, agents and independent contractors in the course of or related to this Agreement; and
(d)any breach of any of the representations and warranties made by the Originator contained in this Agreement.
[33]Emphasis added.
The claim by the Bank against Aussie was, in essence, that the loan application submitted to the Bank on behalf of the forger contravened clause 4.1 of the Origination Agreement. The application included the completed Bank’s standard identification form identifying the borrower yet without Aussie (through its Mortgage Adviser, Mr Kheir) having sighted the original identification documents. It was this breach that the Bank argued caused the loss it suffered by giving an advance to the forger.[34] That was the loss for which it claimed indemnity against Aussie pursuant to clause 9.1 of the Origination Agreement, and hence against AHL pursuant to the Novation Deed.
[34]An advance of $560,000 was made on 5 April 2006.
Between Aussie and AHL the relevant contract was the Novation Deed by which his Honour found that AHL effectively assumed the obligations of Aussie under the Origination Agreement with effect from 1 July 2004. AHL was thus the party liable to the Bank for Aussie’s default (if any).
The ground of Aussie’s claim against Kheirs was based upon an alleged breach of the “Aussie Representative Contractor Agreement”. That agreement entitled KFS, through Mr Kheir, to introduce potential customers to Aussie who would, in turn, be matched to financiers such as the Bank. With respect to the identification of customers, clause 3.4 provided:[35]
In order to reduce the risk of fraud, it is an essential pre-condition of the introduction of a Customer to us that the Customer is personally interviewed and identified. This interview must be conducted by an Aussie Mortgage Adviser. In addition to Aussie’s normal Policies and Procedures in this regard, the Aussie Mortgage Adviser must comply with the following.
The person who conducts the interview (the Interviewer) must have a face-to-face interview with each Customer.
(a)During the interview, the Interviewer must establish that the Customer can speak English sufficiently to understand the nature of the transaction. …
(b)The Interviewer must identify each Customer by original photo-identification. This can be done by sighting a Driver’s Licence or Passport or some other photo identification card. …
[35]Emphasis added.
The Aussie Representative Contractor Agreement also provided for an indemnity in the event of breach. Clause 5, entitled ‘Indemnity and Set Off’, provided:
(a)You indemnify us against all or any loss, damages, claims, costs and expenses that we incur as a result of you, any Aussie Mortgage Adviser, any Associate, or any other person involved in any way in the introduction of Loans or Cross Sale Products through you to us:
(i) failing to observe any of the provisions of this Agreement …
Mr Kheir never had a face-to-face interview with the forger. Their transaction began when in February 2006 the forger telephoned Mr Kheir and claimed to be Mr Solak. He said he was located in Melbourne (Kheirs being based in New South Wales), had several unencumbered properties and required a loan for some developments he was undertaking in Turkey. Mr Kheir had never met the real Mr Solak but knew of him, as he had watched him appear several times on commercial sports television as a kick boxer. The forger had greeted Mr Kheir with an Islamic greeting, saying he had been referred by someone with whom Mr Kheir had previously dealt, and the two had a general discussion about Mr Kheir’s recent pilgrimage to the Haj. Mr Kheir received by fax the identification documents he had asked to be completed, including copies of the real Mr Solak’s passport and licence, copies of personal tax returns, financial statements and company tax returns with personal details including the real Mr Solak’s name, address, date of birth, and statements of assets and liabilities, including the duplicate certificate of title. Mr Kheir then entered that information into a computer program that would rank available loan offers in terms of the best deal available. He spoke to the forger by phone who then chose the Bank as the preferred lender.
Mr Kheir gave evidence that, due to his concern about how to deal with a remote application (given that he was in Sydney and the person purporting to be Mr Solak was in Melbourne), he telephoned a Mr Dean Gillespie at the Bank, who had responsibility for relationships with brokers. Mr Kheir said that he asked Mr Gillespie what he should be doing and Mr Gillespie said that he could fax the application to the client, have him sign it, and that he must retain the original signed application on file. He said that at no time did Mr Gillespie advise him to get an authorised referee of the client, nor tell him of the existence of a form for authorised referees on the Bank’s website – the ‘acceptable referee form’ – separate from the 100 Point Signatory Identification Form he had used. Mr Gillespie gave a different version of the conversation. He said that he ‘would’ have informed Mr Kheir that he could send Mr Solak to a branch in Melbourne for identification, if identification had been raised. On neither version of the conversation was there any specific discussion about how the actual form that was completed ought to be completed in the case of a remote application.
The trial judge found that Mr Gillespie did not in his first conversation with Mr Kheir express any view about how the requirement of identification in the Bank’s forms could be satisfied other than by completion according to its terms. He also found that, as Mr Kheir had previously worked with the Commonwealth Bank, was an experienced broker, and was well aware of the obligation to obtain a 100 point identification of persons when opening bank accounts, it was not the case that Mr Kheir was told that he need not have complied with the obligation to satisfy the 100 Point Signatory Identification Forms.
After the telephone conversation with Mr Gillespie, Mr Kheir printed out the Bank’s Home Loan Application Form from the laptop computer provided by Aussie and faxed it to the person purporting to be Mr Solak for completion. The signed parts of the form were returned to Mr Kheir who checked it for completeness and faxed the 42-page document directly to the Bank. At the bottom of the front page was Mr Kheir’s signature directly under the confirmatory statement described above.[36] He gave evidence that he understood that ‘FTRA’ referred to the requirement to obtain 100 points of identification. The tenth page in the fax was a page completed and signed by him, headed ‘100 Point Signatory Identification Form’ which required, as mentioned above, the sighting of originals. Mr Kheir completed both alternative sections of the form and signed and dated it (the alternatives being, on the one hand, when copies were going to be forwarded to the Bank and, on the other hand, the completion of identity information in a table if the original documents were not being so forwarded, in all cases the originals being ‘sighted’). He left blank the section asking: ‘Results of check – Has verification been achieved?’.
[36]See [37] above.
Mr Kheir did not sight the original documents used by the forger to obtain the loan, as required by the terms of the Bank’s form provided by Aussie, just as he did not conduct a face-to-face interview with the forger, as required by Aussie under the Aussie Representative Contractor Agreement.
The application form sent by Mr Kheir was processed by the Bank. No one at the Bank appeared to have noticed that the 100 Point Signatory Identification Form had not been completed correctly and nor was there compliance with the Bank’s own internal procedures of undertaking personal identification before opening an account. On 8 March 2006, the Bank wrote to Mr Kheir informing him that the loan application had been unconditionally approved. The Bank sent further documentation to the forger for completion, as did the solicitors retained to prepare the mortgage documents. All documents were received and completed by the forger and returned. A Bank equity access account was opened in the name of Mr Solak and funds of $560,000 were disbursed on 5 April 2006.
Apportionment
In assessing the claims of the various parties with respect to apportionment of liability, the trial judge noted that:[37]
The claim and cross-claims between defendant, third parties and fourth parties raise many interesting and difficult questions concerning the basis of liability and potential apportionment of liability between concurrent wrongdoers based upon potentially different statutory provisions in different jurisdictions.
His Honour went on:
Little purpose will be served by a detailed examination of the various contentions because, in the end, the critical question is how I would apportion the loss between the concurrent wrongdoers upon a common standard. Accordingly, I shall confine myself to some general observations about the competing claims and deal mainly with my conclusions about apportionment on the facts.
[37]Solak [34].
His Honour appeared to have accepted that the claim made by the Bank against Aussie and AHL was not an apportionable claim under the Trade Practices Act 1974 (Cth), not being one for damages made under s 82 of that Act within the meaning of ‘apportionable claim’ in s 87CB. The Bank had also contended that it was not an apportionable claim under any potentially applicable State legislation, namely, the Wrongs Act s 24AF, the Civil Liability Act 2002 (NSW) (the ‘NSW Act’), s 34; or the Civil Liability Act 2002 (WA) (the ‘WA Act’), s 5AI.
The Amended Third Party Notice made it plain that the Bank’s claim was for breach of clause 4.1 of the Origination Agreement (the requirement to provide to the Bank a properly completed and signed identification statement in the Bank’s standard form). The Bank claimed to be entitled to be indemnified by Aussie under clause 9.1 of the Origination Agreement (and thereby by AHL, pursuant to the Novation Deed) for any loss it suffered as a result of the breach, including legal costs on a solicitor and own client basis.
The trial judge approached the Bank’s claim against the third parties on the basis that the apportionment legislation of the various jurisdictions depended fundamentally upon whether the claim was one ‘arising from a failure to take reasonable care’. It did not matter whether this was precisely how the claims had been pleaded.[38] His Honour said:[39]
The policy in the [apportionment] legislation is to ensure that those in fact who caused the actionable loss are required to bear the portion of the loss referable to their cause. That task ought not be frustrated by arid disputes about pleadings. Support for that conclusion may be found by the circumstance that a ‘failure to take reasonable care’ can arise as much from an obligation in tort as in contract. In this case [the Bank’s] … claim for indemnity based upon a failure to sight original documents (that is, a breach of contract) may aptly be described as a failure to take reasonable care for the purposes of the apportionment provisions. … [The Bank‘s] action is in my view one ‘based on an alleged failure’ by the third parties to take ‘reasonable care’.
[38]Ibid [35].
[39]Ibid (footnote omitted).
Approaching the matter in this way, his Honour went on to examine ‘in a real and pragmatic sense’ who was to blame amongst the various parties. His primary focus was upon the ‘causal potency’ of the various factors which singularly or collectively brought about the loss caused. He ultimately concluded that responsibility for the Bank’s loss should be apportioned as follows:
·Kheirs: 70 per cent;
·the Bank: 30 per cent;
·Aussie: 0 per cent.
The judge considered that 70 per cent was appropriate for Kheirs because Mr Kheir was the primary cause of the loss as between the parties before the Court. It was his contractual obligation to identify by sight the person claiming to be Mr Solak. He neither did this nor put the Bank on notice that a vital element of the transaction (sight-identification of the applicant for a home loan and sighting of original documents) had not been completed by him. In his Honour’s view, Mr Kheir’s failure to take reasonable care also consisted of receiving only signed pages of the loan application document without knowing what other pages the applicant was declaring to be true and correct; receiving tax returns unsigned and later signed and obviously backdated; and receiving faxes from different post office fax machines rather the one to which Mr Kheir sent his faxes, all of which occurred without any follow-up by him.
For its part, the Bank was held to be at fault because Mr Gillespie did not turn his mind to the important task of how identification of a customer in the context of a remote application was to be made, or its ramifications. Moreover, the failure of the Bank to have appropriate internal processes to ensure the fraud was prevented also contributed to the loss.
His Honour considered Aussie’s contribution to the ultimate loss to be insignificant because it was entitled to rely on the proper training it provided and on the systems it had in place to avoid fraud.
His Honour said that, if he had been required to take into account the actions of the forger as a cause of the loss,[40] the apportionment would have been: 50 per cent to the forger; 35 per cent to Kheirs and 15 per cent to the Bank, while Aussie’s liability remained at 0 per cent.
[40]See Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505; Ginelle Finance Pty Ltd v Diakakis [2007] NSWSC 60; Chandra v Perpetual Trustees Victoria Ltd (2007) 13 BPR 24, 675.
His Honour said that he would ‘dismiss the proceeding between plaintiff and defendant with the consequence that the subsequent proceedings between defendant, third parties and fourth parties will also, in effect, be dismissed.’[41] He also said he would re-list the proceedings ‘to hear the parties on the form of orders and on any question concerning the costs …’. On the further hearing, his Honour made orders dismissing all claims.
[41]Solak [48] (emphasis added).
The reasons of the trial judge on costs
His Honour correctly foresaw that it was the orders on costs that would give rise to the ‘more contentious issues’.[42] He was urged by all parties, other than Mr Solak, to follow the usual rule that costs should follow the event. The ‘event’ was said by the fourth parties to be the failure of the principal proceeding brought by the plaintiff and, flowing with it, all the issues raised in the third and fourth party proceedings. His Honour rejected that argument. He pointed out that a great deal of the trial (about five-sixths of the hearing)[43] had been taken up with issues not agitated by Mr Solak who, he said, had been the innocent victim of a fraud and whose interests had been adversely affected by the conduct of the other parties, especially that of Kheirs. He concluded that it would be wrong to order that Mr Solak bear all the costs of the Bank, including those of the third and fourth parties which ‘might flow back up through to the defendant’.
[42]Solak v Bank of Western Australia Ltd (No 2) (Unreported, Supreme Court of Victoria, 26 March 2009) (‘Solak (No 2)’) [9].
[43]Ibid [15].
In considering the applicability of the usual rule, his Honour said that the ‘event’ on which Mr Solak had failed was the indefeasibility issue. The costs orders ‘should reflect the relative success and failure of the parties on the different issues in the proceeding’.[44] Mr Solak could not be held to have failed on ‘the many other factual and legal issues raised by the other parties’. Accordingly, in his Honour’s view, Mr Solak’s liability for costs should be limited to the costs of the indefeasibility issue. (That order is not under challenge, and will be unaffected by the outcome of those appeals).
[44]Ibid [14].
With respect to the costs incurred by the other parties, his Honour said this:[45]
The costs of the defendant [the Bank], the third party [Aussie and AHL] and the fourth parties [Kheirs] should, in my view, as between themselves, be borne on the basis of the proportionate wrongdoing as I found them to be on the evidence, subject to what I will say about the contractual indemnity which the first third party [Aussie] claims. Accordingly, I will order that the costs of the third parties [Aussie and AHL] be paid by the defendant and by the fourth parties as to 30 per cent and 70 per cent respectively.
[45]Ibid [16].
His Honour went on to consider the indemnity under clause 5 of the Aussie Contractor Representative Agreement, set out above.[46] He qualified his order against Kheirs by saying that:
The quantum of the first third party’s [Aussie’s] costs payable by the fourth party [Kheirs] is, however, subject to an indemnity in clause 5 of the Aussie Contractor Agreement[47] …
I will order that the first third party’s [Aussie’s] costs payable by the fourth parties [Kheirs] be assessed and paid on a full indemnity basis by the fourth parties [Kheirs ].[48]
[46]See [42] above.
[47]Solak (No 2), [16].
[48]Ibid [20]. On the appeal, Aussie conceded that clause 5 only bound Kheirs and not Mr Kheir personally. This point is dealt with below.
The Bank argued before his Honour that it should recover from Kheirs the difference in costs between the party and party costs which it expected to recover from Mr Solak and the solicitor and client or indemnity costs which would not be paid by Mr Solak, on the basis that it was entitled to recover that difference from Kheirs by reason of their wrongful conduct. His Honour rejected this argument, especially in light of the failures of process he had found to have been committed by the Bank.
In his reasons on costs, his Honour made no mention of the indemnity in favour of the Bank against AHL (through Aussie) pursuant to clause 9.1 of the Origination Agreement. He had, however, remarked, in the substantive proceeding, that if it had been necessary to consider whether the Bank’s loss included interest for the purposes of the indemnity under clause 9.1, he would have included the interest component claimed by the Bank against AHL (through Aussie) pursuant to the Origination Agreement and the Novation Deed. [49]
[49]The trial judge also ordered that the costs of the adjournment of the costs hearing occasioned by all the parties be paid for by Kheirs.
The applications
Aussie’s contention is that the trial judge ought to have ordered that Aussie be paid 100 per cent of its costs, and not just the 70 per cent awarded. Aussie seeks an order that, pursuant to the contractual indemnity, 100 per cent of its costs be paid by Kheirs.
Aussie argues, on the other hand, that if the appeal by Kheirs is allowed and Aussie is ordered to pay all or part of their costs, then Aussie should be regarded as a wholly successful party vis-à-vis the Bank, and the Bank should be ordered to pay 100 per cent of Aussie’s costs of the third party proceedings, of defending the contribution proceedings brought by AHL, and of prosecuting the fourth party proceedings. Further, by way of a ‘Bullock’ order,[50] the Bank should be ordered to pay all of the costs Aussie is ordered to pay to Kheirs.
[50]Bullock v London General Omnibus Co. [1907] 1 K.B. 264, 272; Edgington v Clark [1964] 1 QB 367.
Aussie explained the delay in seeking leave to appeal by reference to the discussions it had engaged in with the other parties exploring, ultimately unsuccessfully, the possibilities for settlement. It deferred the institution of its cross-appeal[51] until Kheirs had been granted leave to bring their appeal,[52] and the cross-appeal had been foreshadowed at that time. The extension of time was opposed by the Bank.
[51]17 August 2009.
[52]16 June 2009.
We consider that, in the circumstances, the extensions of time sought should be granted. We also grant leave to Aussie to appeal and to cross-appeal.
AHL sought orders, in the event that Kheirs were successful in their appeal, for the Bank to pay 100 per cent of AHL’s costs, and, by way of a ‘Bullock’ order, the costs of Kheirs. The application for an extension of time and for leave to appeal were opposed by the Bank. AHL offered the same explanation for the delay as Aussie. For similar reasons, we consider that an extension of time and leave to appeal should be granted to AHL. It was appropriate for all the issues raised by the appeals and cross-appeals of both Aussie and AHL to be dealt with at the same time.
The Bank has not sought to appeal from the trial judge’s orders (and is thus not a party to proceeding 3748 of 2009), on the ground that the costs of an appeal would be out of proportion to the costs in issue. We have some sympathy for those misgivings. However, it has applied for leave to cross-appeal in the appeal brought by Aussie, with leave (proceeding 3827 of 2009). The Bank, in its cross-appeal, seeks an order that there be no order as to Aussie’s costs; in the alternative, that AHL pay Aussie’s costs of defending the Bank’s third party claim.
The Bank contends that the joinder of both Aussie and AHL was necessitated by the failure until the second day of trial for them to advance a common position as to the operative day of the Novation Deed, and that, in consequence, it should not be liable for Aussie’s costs, whatever the outcome of any other costs issues.
The Bank has also issued a notice of cross-appeal, provisional on AHL being granted leave to appeal in proceeding 3836 of 2009, and seeks leave to cross-appeal (to the extent necessary). By its cross-appeal, it seeks orders setting aside paragraphs 2 and 7 of the orders (with respect to AHL), and, in lieu of paragraphs 2 and 7, orders that AHL pay the Bank’s costs of Mr Solak’s claim against the Bank, and the Bank’s costs of its claims against Aussie and AHL, both costs to be taxed on an indemnity basis. The Bank says it is entitled to an order that AHL pay its costs because of, or by analogy with, the indemnity provisions of the Originating Agreement with AHL (as novated by the Novation Deed).
We grant leave to the Bank to cross-appeal in the appeal brought by Aussie and grant leave for it to cross-appeal in the appeal brought by AHL.
The substantive submissions
On appeal, Kheirs argued – as they had before the judge – that they had been involuntarily brought before the Court at the suit of Aussie and AHL, and had been successful in having those proceedings dismissed. Costs should therefore follow that ‘event’, in accordance with the usual rule. There was nothing in the facts of the case that would justify departure from the usual rule. It was argued that a third party which elected to bring a fourth party into proceedings necessarily accepted the risk that the claim against the fourth party might fail, with costs following that event. It did not matter, or at least was not conclusive, that it was reasonable for Aussie and AHL to join them. It was quite exceptional for a successful party to be ordered to pay its opponent’s costs. The trial judge had not found any disentitling behaviour in Kheirs’ conduct of the litigation (as distinguished from their causal or legal responsibility for any loss the Bank might have suffered). Failure by a successful party on some issues did not, in itself, constitute exceptional circumstances. In any event, the submission went, costs were not awarded on an ‘issues’ basis.
This last contention directly challenged the statement of the trial judge, that all of the costs orders were to reflect ‘the relative success and failure of the parties on the different issues in the proceeding’.[53] The submission for Kheirs pointed out that costs could not properly have been awarded on an ‘issues’ basis because there were a number of issues – being issues relevant to the liability of Kheirs to Aussie and AHL, and to the liability of Aussie and AHL to the Bank – on which there had been no adjudication. There were material questions on which no findings had been made and which remained undetermined. Those issues not having been decided, no view could be formed about which party would have had success on which issues.
[53]Solak (No 2), [14].
The issues said to have been left undecided were:
(1) the claim by the Bank against AHL of a breach (through Aussie) of clause 4.1 of the Origination Agreement. It had been argued that, in the circumstances of the case, clause 4.1 did not apply;[54]
[54]Kheirs and Mr Kheir had raised this issue at trial on the basis that if accepted it would have a ‘trickle down’ effect to their liability to Aussie and AHL. The argument concerned the type of form to which clause 4.1 referred. We consider this at [78] below.
(2) the effect of the release which the Bank had given to Aussie when the Origination Agreement was novated to AHL;
(3) the question of whether there had been relevant reliance by the Bank on actions taken by Kheirs and whether it had been misled by anything they had done (issues that were argued to have been neither alleged nor proved by the Bank, thus removing the foundation of a misleading conduct claim[55]);
[55]Vella v Australia and New Zealand Banking Group Ltd [2009] NSWSC 123, [50]-[57].
(4) whether KFS and Mr Kheir owed a duty of care to AHL, and the relevance of their being unaware of AHL’s involvement in the arrangements between the Bank and Aussie;
(5) the question of causation, namely, the claim that the Bank had not proved that its payments to the forger were caused by the failure of Mr Kheir to sight original identification documents when the loan application was made. It had been submitted at trial that the payments to the forger were caused by the Bank’s own failure to take reasonable steps against fraud before paying a substantial sum of money. The Bank had had direct dealings with the forger without the involvement of either KFS or Mr Kheir in relation to the obtaining of a mortgage, the opening of a bank account and the payment of monies;
(6) the claim that the transaction was not one to which the indemnity in clause 5 of the Aussie Representative Contractor Agreement applied. This was argued to be because that agreement governed the introduction of loans and cross sale products to Aussie, not, as here, the direct provision, on behalf of Aussie, of client reference services to the Bank.[56]
[56]We consider that the sixth issue was decided by the trial judge, in favour of Aussie (see [114], below).
AHL supported the Kheirs submission that there were issues left undecided. AHL highlighted the absence of findings which would have been necessary if the Court were to determine the Bank’s claim for indemnity costs against AHL.
Taking the first undecided issue as an example, the question of whether there had been a breach of clause 4.1 of the Origination Agreement depended on what was meant by the phrase ‘signature identification statement in the Bank’s standard form’ referred to in clause 4.1. It was argued at the trial by Kheirs that the phrase referred to a ‘Signatory Identification Statement – Acceptable Referee’ form (which was not provided by Aussie to KFS and, therefore, never completed by Mr Kheir or provided to the Bank), and not to the ‘100 Point Signatory Identification Form’ (which, as mentioned above, was provided by Mr Kheir to the Bank without the originals of the identifying documents having been sighted). If clause 4.1 referred to the former, a failure with respect to the latter would not constitute a breach of the obligation under clause 4.1. The trial judge made no determination on that issue.
Another unresolved question concerned the contention of Kheirs that the Bank had an identification procedure, to be used for the purpose of remote loan applications, involving what was called the ‘acceptable referee form’ (whether or not this was the form referred to in clause 4.1). This form was known to Aussie and AHL but Aussie had not included it in the computer software provided to Kheirs, and AHL had not required that Aussie include it in that computer software. According to Kheirs, if the Aussie computer had produced the ‘acceptable referee form’ in response to the inquiry made of it by Mr Kheir for a remote loan, it would have been utilised in the loan application to the Bank. This might well have avoided the fraud or, at least, have prevented the Bank from bringing a proceeding against Aussie and AHL, who would not then have proceeded against Kheirs. This defence was not ruled upon by the trial judge.
The failure of Aussie to provide to Kheirs the ‘acceptable referee form’ was also relevant to the Bank’s claim in this Court to enforce against AHL the contractual indemnity under clause 9.1 of the Origination Agreement. It was said that it would not now be safe for this Court to make a finding of breach of contract by Aussie which caused the Bank loss (by reference to the award of costs), as many of the relevant matters (including causation) had not been determined at trial. Those were matters on which evidence would need to be adduced and tested, and hence could not be decided by this Court.
Aussie responded[97] by indicating that it had been made apparent in Aussie’s pleadings that the Novation Deed took effect from 1 July 2004,[98] and that the Bank could have asked AHL to confirm that date. Moreover, Aussie had raised a proposal, on the second day of the trial, that the Bank might not resist an application for the dismissal of its claim against Aussie but this was not pursued by the Bank.
[97]As the submission had been made for the first time at the hearing, leave was given to AHL, Aussie and the Bank to file further written submissions on the issue.
[98]Paragraph 9.2 of Aussie’s Defence to the Amended Third Party Notice dated 16 September 2008. The trial took place on 17-19, 23-25 February 2009.
We agree with Aussie that the Bank, on being made aware at trial that any liability arising from the conduct and transactions the subject of the proceeding rested with AHL and not with Aussie, should have discontinued its proceedings against Aussie. That the Bank, after the second day of trial, ‘conducted its case’ only against AHL did not amount, as a matter of civil procedure, to the discontinuance of a proceeding. Although Aussie had an additional reason for remaining represented at the trial – namely, that it was necessary for it to be there to resist AHL’s Notice of Contribution – it was clear that the claim for contribution was treated as only a minor issue in the proceeding.[99] As the Bank’s proceedings against Aussie were not discontinued, it was appropriate that Aussie remain represented at the trial.
[99]The contribution claim was admitted in part but not as to negligence.
Glen v Union TrusteeCo. of Australia Ltd,[100] was the principal authority relied on by the Bank to support the proposition that only a single set of costs should be ordered. But the circumstances of that case were quite different from the circumstances here. The context was the administration of a deceased estate, and the Court held that ‘[i]n administration proceedings … the ordinary rule is that where any person entitled to an interest in any estate the subject matter of the proceedings has assigned or encumbered his share or interest, then the assignor and assignee, or encumbrancer, are only entitled to one set of costs between them’.[101] In the Ritz Hotel[102] case, where Glen v Union Trustee[103] was applied in the context of a proceeding for the expungement and removal of trademarks,[104] the very subject-matter of the proceeding (the interests in the trademarks) had been assigned shortly before the commencement of the hearing.
[100](1936) 54 CLR 463.
[101]Glen v Union Trustee Co. of Australia Ltd. (1936) 54 CLR 463, 467.
[102](1989) AIPC 90-567, 38.
[103]Ibid.
[104]But see Gray v Guardian Trust Australia [2003] NSWSC 704, [86], where Austin J considers that ‘[p]roperly understood, the [single set of costs] rule relates to recovery out of trust property or an estate, rather than recovery against a party in litigation’.
The existence of a Notice of Contribution between AHL and Aussie in the proceeding is itself a strong indication that the single set of costs rule ought not be applied in the circumstances of the case,[105] the rule being recognised as at most a rule of practice.
[105]Sunday Times Newspapers Co Ltd v McIntosh (1933) 33 SR(NSW) 371, 378; Lysmar Pty Ltd v Lee [2000] NSWSC 662, [28].
Furthermore, it is apparent that the interests of Aussie and AHL were not, relevantly, ‘common interests’. Only Aussie could, and did, seek to enforce the indemnity under the Aussie Contractor Representative Agreement between it and KFS and Mr Kheir.[106] It was in Aussie’s interest, in order to enforce the indemnity, for it to claim that KFS had failed to observe a provision of the Aussie Contractor Representative Agreement and that the non-observance resulted in the payments being made to the forger and the incurring of costs associated with the proceedings. By contrast AHL, in resisting the Bank’s third party claim, sought to argue that it may have been the Bank’s failure to observe its internal procedures that caused the payments to the forger (an issue remaining undecided), which thus gave rise to the proceedings and the incurring of costs. It could thus not be concluded that, as between Aussie and AHL, ‘there [was] no possibility of conflict of interest’.[107]
[106]As mentioned above, the indemnity was not enforceable against Mr Kheir personally, as was conceded on the appeal.
[107]Statham v Shephard (No 2) [1974] 23 FLR 244, 246-7.
Furthermore, in the circumstances before the trial judge, it was the Bank that chose, before the trial, to commence and continue proceedings against Aussie (as the first third party) and AHL (as the second third party), in circumstances where it had been aware of the existence of the novation of the Origination Agreement but had not confirmed with AHL the operative date of the novation. It was the Bank that chose, during the trial, to continue to proceed against both Aussie and AHL in the knowledge that the novation had taken effect from 1 July 2004 while the conduct giving rise to the proceeding had occurred from February to April 2006. The Bank made no objection at the trial to the separate representation of Aussie and AHL, nor to the making of separate written and oral submissions by each of them at the trial or the hearing on costs.
We would dismiss the cross-appeal.
Disposition of the proceedings
For the reasons set out above, paragraphs 7, 8 and 9 of the orders must be set aside and the discretion with respect to an award of costs must be exercised afresh. The error of principle satisfies the test in Spotless Group Ltd v Premier Building and Consulting Pty Ltd.[108]
[108][2008] VSCA 115, [11].
More specifically, we would allow the appeal brought by KFS and Mr Kheir against Aussie and AHL (in proceeding 3748 of 2009) and set aside paragraphs 8 and 9 of the orders. So too would we allow the appeals brought by Aussie (proceeding 3827 of 2009) and by AHL (proceeding 3836 of 2009) and set aside paragraph 7 of the orders. We would dismiss the cross-appeals in all three proceedings.
We do not consider that the proceedings should be remitted to the trial judge for further determination. We are mindful that the appeals relate only to the question of costs and a further trial of the claims before his Honour, for the purpose of obtaining that determination, would incur costs that would be disproportionate to the costs in issue.
Accordingly, for the reasons given earlier, we would order that:
(a)the Bank pay the costs of Aussie and AHL of the third party proceeding; and
(b)Aussie and AHL pay the costs of KFS and Mr Kheir of the fourth party proceeding.
The costs to be paid by the Bank to Aussie and AHL should include the costs that Aussie and AHL are ordered to pay to KFS and Mr Kheir. We consider that the proceeding was in substance a ‘chain of contracts’ case and that ultimate responsibility for the costs incurred by the third parties should, in the circumstances, lie with the defendant.[109] Once the Bank brought third party proceedings against Aussie and AHL, it was inevitable that they would join KFS and Mr Kheir.[110] We consider that the costs of Aussie and AHL, including the costs they are ordered to pay to KFS and Mr Kheir, ought fairly be borne by the Bank, especially as Mr Kheir directly introduced clients to the Bank without the intervention of either Aussie or AHL and the communications between the parties which were relevant to the completion of the transaction with the forger did not involve either Aussie or AHL, but took place directly between Mr Kheir and Mr Gillespie from the Bank.
[109]Cattan Ltd v Michaelides & Co. [1958] 2 All ER 125, 128; Edgington v Clark [1964] 1 QB 367.
[110]Roads and Traffic Authority of New South Wales v Dederer (2007) 234 CLR 330, 382-3 [180].
We propose making ‘Bullock’ orders against the Bank (in the appeals brought against the Bank by Aussie and by AHL respectively) with respect to all of the party and party costs of KFS and Mr Kheir in relation to the fourth party proceedings. While this order for the payment of Aussie and AHL’s costs is made by reference to costs they have each been ordered to pay in the appeal brought by KFS and Mr Kheir (proceeding 3748 of 2009), to which the Bank is not a party, we consider that such an order is justified as it relates to costs incurred in the proceeding before the trial judge to which the Bank was a party, and those costs were the subject of a closely related appeal heard at the same time as the cross-appeals brought by the Bank.[111] The Bank was on notice that ‘Bullock’ orders were sought for any costs that Aussie or AHL might be ordered to pay KFS and Mr Kheir and it was given a proper opportunity to be heard on the making of ‘Bullock’ orders against it.
[111]Symphony Group Plc v Hodgson [1994] QB 179, 191-2; Aiden Shipping Co. Ltd. v Interbulk Ltd [1986] AC 965.
Orders for the disposition of the proceedings
We propose making orders in the following terms. We have indicated the identity of the relevant parties, by reference to the abbreviations we have stipulated above.
In proceeding 3748 of 2009:
(1) The appeal [brought by KFS and Mr Kheirs] be allowed.
(2) Paragraphs 8 and 9 of the orders of the trial Judge dated 26 March 2009 be set aside and in lieu thereof order that the first respondent to the appeal/the first third party [Aussie] and the second respondent to the appeal/ the second third party [AHL] each pay 50% of the costs incurred by the appellants/ the fourth parties [KFS and Mr Kheirs] arising from the fourth party notices, on a party and party basis.
(3) An extension of time be granted to the first respondent to the appeal/the first third party [Aussie] to seek leave to cross-appeal.
(4) Leave be granted to the first respondent to the appeal/the first third party [Aussie] to cross-appeal.
(5) The cross-appeal [brought by Aussie] be dismissed.
In proceeding 3827 of 2009:
(1) An extension of time be granted for the applicant/ the first third party [Aussie] to apply for leave to appeal.
(2) Leave be granted to the applicant/the first third party [Aussie] to appeal.
(3) The appeal be allowed.
(4) With respect to the costs of the appellant/ the first third party [Aussie], paragraph 7 of the orders of the trial Judge dated 26 March 2009 be set aside and in lieu thereof order that the first respondent to the appeal/ the defendant [the Bank] pay the costs incurred by the appellant/the first third party [Aussie] arising from the third party notice, on a party and party basis, and pay those costs of the trial below which the appellant/the first third party [Aussie] has been ordered in proceeding 3748 of 2009 to pay to the fourth parties [KFS and Mr Kheirs], on a party and party basis.
(5) Leave be granted to the first respondent to the appeal/ the defendant [the Bank] to cross-appeal.
(6) The cross-appeal be dismissed.
In proceeding 3836 of 2009:
(1) An extension of time be granted for the applicant/the second third party [AHL] to apply for leave to appeal.
(2) Leave be granted to the applicant/the second third party [AHL] to appeal.
(3) The appeal be allowed.
(4) With respect to the costs of the appellant/ the second third party [AHL], paragraph 7 of the orders of the trial Judge dated 26 March 2009 be set aside and in lieu thereof order that the first respondent to the appeal/the defendant [the Bank] pay the costs incurred by the appellant/the second third party [AHL] arising from the third party notice, on a party and party basis, and pay those costs of the trial below which the appellant/the second third party [AHL] has been ordered in proceeding 3748 of 2009 to pay to the fourth parties [KFS and Mr Kheirs], on a party and party basis.
(5) Leave be granted to the first respondent to the appeal/ the defendant [the Bank] to cross-appeal.
(6) The cross-appeal be dismissed.
Proposed Orders for Costs of the Proceedings in the Court of Appeal
With respect to the costs of the proceedings in the Court of Appeal, we propose making orders in the following terms but will hear from the parties before pronouncing final orders.
In proceeding 3748 of 2009:
(1) The first and second respondents to the appeal [Aussie and AHL] each pay 50% of the appellants’ costs of the appeal, on a party and party basis.
(2) The cross-appellant [Aussie] pay the costs of the cross-appeal of the first and second cross-respondents [KFS and Mr Kheir] on a party and party basis, with no order as to costs with respect to the third cross-respondent [AHL].
In proceeding 3827 of 2009:
(1) The first respondent to the appeal [the Bank] pay the costs of the appellant [Aussie] of the appeal with no order as to costs with respect to the costs of the appeal of the second, third and fourth respondents [AHL, KFS and Mr Kheir].
(2) The cross-appellant [the Bank] pay the appellant/first cross-respondent’s [Aussie’s] costs of the cross-appeal, on a party and party basis, with no order as to costs of the cross-appeal with respect to the second cross-respondent [AHL].
In proceeding 3836 of 2009:
(1) The first respondent to the appeal/the defendant [the Bank] pay the costs of the appellant [AHL] of the appeal with no order as to costs with respect to the costs of the appeal of the second, third and fourth respondents [Aussie, KFS and Mr Kheir].
(2) The cross-appellant [the Bank] pay the costs of the cross-appeal of the appellant/cross-respondent [AHL], on a party and party basis.
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