Papantoniou v Brown

[2015] NSWCA 168

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Papantoniou v Brown [2015] NSWCA 168
Hearing dates:	6 May 2015
Decision date:	22 June 2015
Before:	Beazley P at [1]; Macfarlan JA at [2]; Sackville AJA at [3]
Decision:	1. Extend the time for the filing of a notice of appeal until 8 April 2015. 2. Appeal allowed. 3. Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the First Cross-Claim. 4. Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the Third Cross-Claim. 5. Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the Second Cross-Claim. 6. In lieu of the Orders referred to in Order 3 and 4 above, make the following Orders: (a) Dismiss the First Cross-Claim. (b) Dismiss the Third Cross-Claim. 7. Note that on the taking of an account between the appellant (Ms Papantoniou) and the respondents (the Browns), an amount is payable by Ms Papantoniou to the Browns calculated in accordance with these reasons for judgment. 8. Direct the parties to bring in agreed short minutes of order within fourteen days quantifying the amount payable by Ms Papantoniou to the Browns in accordance with these reasons for judgment and apportioning such amount between the Browns. 9. If no agreement is reached, direct that: (a) Ms Papantoniou file her proposed short minutes of order, together with brief written submissions in support, within fourteen days; (b) the Browns to file their proposed short minutes of order together with brief written submissions in support within a further seven days.
Catchwords:	CONTRACTS REVIEW ACT – procedural fairness - solicitor agrees with two brothers to purchase their sisters’ share of co-owned property on the basis that the solicitor borrows the whole of the purchase price on the security of the property and the brothers guarantee the loan – solicitor acts for one of the brothers – solicitor defaults on loan – lender takes possession – brothers seek to set aside mortgage and guarantee in proceedings against the solicitor – primary Judge grants relief under the Contracts Review Act 1980 (NSW) in respect of the original agreement – whether grant of relief available on the pleadings – whether the solicitor denied procedural fairness
Legislation Cited:	Civil Procedure Act 2005 (NSW), ss 56(1), 90, 100 Contracts Review Act 1980 (NSW), ss 7(1)(b), 8 Conveyancing Act 1919 (NSW), Part IV, Div 6 Family Provision Act 1982 (NSW) (repealed) Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 3 Supreme Court Act 1970 (NSW), s 63 Suitors’ Fund Act 1951 (NSW) Uniform Civil Procedure Rules 2005 (NSW), rr 7.14(1), 36.1, 51.16, 51.53, 51.9
Cases Cited:	Baxendale v London, Chatham and Dover Railway Company (1874) LR 10 Exch 35 Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269 Dare v Pulham [1982] HCA 70; 148 CLR 658 D & J Fowler (Australia) Ltd v Bank of New South Wales [1982] 2 NSWLR 879 Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486 Friend v Booker [2009] HCA 21; 239 CLR 129 Garrad v Cottrell (1847) 10 QB 679; 116 ER 258 Gould v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490 House v The King [1936] HCA 40; 55 CLR 499 Perpetual Trustee Company Ltd v Papantoniou [2014] NSWSC 685 Perpetual Trustee Company Ltd v Papantoniou (No 2) [2014] NSWSC 746 Perpetual Trustee Company Ltd v Papantoniou (No 3) [2014] NSWSC 885 In re International Contract Company; Hughes’ Claim (1872) LR 13 Eq 623
Texts Cited:	J O’Donovan and J Phillips, Modern Contract of Guarantee (Looseleaf ed 2015, Thomson Lawbook Co)
Category:	Principal judgment
Parties:	S Papantoniou by her tutor Christodoulos Papantoniou (Appellant) R Brown (First Respondent) R Brown as executor of the Estate of the late James Anthony Thomas Brown (Second Respondent)
Representation:	Counsel: B Katekar / Ms J Little (Appellant) MWE Maconachie (First and Second Respondents) Solicitors: SRM Lawyers (Appellant) Barwick Boitano Lawyers (First and Second Respondents)
File Number(s):	2014/190930
Decision under appeal	Court or tribunal: Supreme Court of New South Wales Jurisdiction: Common Law Division Citation: [2014] NSWSC 685 [2014] NSWSC 746 [2014] NSWSC 885 Date of Decision: 30 May 2014; 10 June 2014; 3 July 2014 Before: Campbell J File Number(s): 2010/28341

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant, a solicitor representing one of the respondents, entered into a contractual arrangement with two brothers (one of whom later died) to purchase their sisters’ share of a co-owned property. The brothers agreed that the appellant could borrow funds for the purchase and could provide a mortgage of the property as security. The brothers also agreed to provide guarantees to the lender.

The appellant made the purchase using borrowed funds secured over the property and the brothers provided the guarantees. The appellant defaulted on the loan and the lender took possession of the property. One brother incurred expenses unsuccessfully resisting the lender’s claim.

The respondents (one brother and the estate of the other) subsequently filed cross-claims to have the mortgage and guarantee set aside pursuant to the Contracts Review Act 1980 (NSW) (Contracts Review Act). The appellant also filed a cross-claim seeking an indemnity from the respondents in respect of interest she had paid to the mortgagee and other expenses incurred by her. She also claimed an order for an account.

The primary Judge found that the original contractual arrangement was unjust under the Contracts Review Act and declared it void to the extent that it required the appellant’s liability to be borne by the respondents. The primary Judge also made orders requiring the appellant to pay compensation to the respondents to reimburse them for discharging the mortgage and incurring various other expenses due to the appellant’s default.

The appellant appealed against the decisions made by the primary Judge on the cross-claims. The principal issues on appeal are:

(1)   Whether a claim for relief in relation to the original contract was pleaded or argued at trial.

(2)   Whether the appellant was denied procedural fairness.

(3)   Whether the primary Judge should have made certain allowances in favour of the appellant on the taking of accounts.

Held (per Sackville AJA, Beazley P and Macfarlan JA agreeing), allowing the appeal:

In relation to (1):

The primary Judge’s finding that the contractual arrangement was unjust was outside the cross-claims pleaded by the respondents. No such allegation was made in terms and the cross-claims did not allege material facts that, if proved, would establish that the contractual arrangement was unjust: (at [105]). The respondents made no submissions at trial that their case was that the contractual arrangement was unjust or that the court should grant relief to avoid the unjust consequences of the original contract. Accordingly, the conditions as laid down in Dare v Pulham for the conduct of a case outside the pleadings were not satisfied: (at [110], [111])

Dare v Pulham [1982] HCA 70; 148 CLR 658; Gould v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490; Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486

In relation to (2):

The appellant was denied procedural fairness because had the respondents articulated a claim for relief in relation to the original contract, even if not pleaded, the appellant would have had the opportunity to adduce evidence and make submissions in opposition to the claim: (at [112]). She was denied that opportunity.

In relation to (3)

As against the appellant, the respondents were not entitled to claim the expenses of unsuccessfully resisting the lenders claim for possession: (at [138], [142])

Judgment

1. BEAZLEY P: I have had the advantage of reading in draft the reasons of Sackville AJA. I agree with his Honour's reasons and with the orders he proposes.

2. MACFARLAN JA: I agree with Sackville AJA.

3. SACKVILLE AJA: This is an appeal from decisions made by a judge of the Common Law Division (Campbell J) on three cross-claims that remained after finalisation of a mortgagee’s claim for possession. The primary Judge’s substantive reasons were given in a judgment delivered on 30 May 2014, in which he made orders dealing with each of the cross-claims: Perpetual Trustee Company Ltd v Papantoniou [1] (Primary Judgment). His Honour revoked these orders and substituted new orders in a supplementary judgment, but the changes reflected only minor mathematical recalculations: Perpetual Trustee Company Ltd v Papantoniou (No 2) [2] (Supplementary Judgment). A third judgment dealt with costs applications: Perpetual Trustee Company Ltd v Papantoniou (No 3). [3]

   1. [2014] NSWSC 685.

   2. [2014] NSWSC 746.

   3. [2014] NSWSC 885.

4. The mortgagors of the property were the three registered proprietors who held their interests as tenants in common. The mortgagee succeeded in obtaining orders for the sale of the mortgaged property.

5. Two of the mortgagors were brothers, James Brown and Robert Brown. The third mortgagor was the appellant (Ms Papantoniou), a solicitor who had acted on behalf of James in proceedings under the Family Provision Act 1982 (NSW) (Family Provision Act). The dispute arose between the Browns and Ms Papantoniou following her default in repaying moneys due under a Deed of Loan which was the subject of the mortgage. Robert Brown is the first respondent. He is also the second respondent, but in his capacity as executor of James Brown’s estate, James having died on 13 May 2009.

6. In this judgment I refer, without intending any disrespect, to the brothers as Robert and James, respectively. I refer to them together as the Browns. I also use that term to refer to Robert and James’ estate together.

7. James’ will appointed Robert to be the executor of his estate and made Robert the residuary beneficiary. Robert obtained a grant of probate of James’ will on 3 November 2009. Robert filed two cross-claims in the proceedings against Ms Papantoniou. In one he claimed relief in his own right and in the other he claimed relief in his capacity as executor of James’ estate. In both cases, relief was sought under the Contracts Review Act 1980 (NSW) (Contracts Review Act). Ms Papantoniou filed her own cross-claim against the Browns seeking an indemnity from the Browns in respect of interest she had paid to the mortgagee and other expenses incurred by her. She also claimed an order for an account.

8. The primary Judge found that the Browns and Ms Papantoniou had entered into a contractual arrangement in July or August 2006 (2006 Contract), pursuant to which she would borrow moneys from an unnamed lender to enable her to acquire an interest in a property situated at Isabella Street, North Parramatta (Property). The arrangement provided for the loan to Ms Papantoniou to be secured on the Property, of which the Browns were (and remained) co-owners. The Browns also agreed to provide personal guarantees to the lender.

9. A Deed of Loan was entered into on 5 October 2006 between Ms Papantoniou and Perpetual Trustee Co Ltd (Perpetual) as custodian for a commercial lender (Challenger). [4] The loan of $250,000 was secured by a mortgage over the Property in favour of Perpetual (Mortgage) executed by all three co-owners as mortgagors. The Browns also executed a Deed of Guarantee and Indemnity in favour of Perpetual (Guarantee), by which they guaranteed the performance by Ms Papantoniou of her obligations under the Deed of Loan. When Ms Papantoniou defaulted under the Deed of Loan, Perpetual commenced possession proceedings in the Common Law Division (Possession Proceedings).

   4. It is not necessary to distinguish between Perpetual and Challenger. I therefore refer only to Perpetual.

10. The primary Judge found (at [109]) that the 2006 Contract between Ms Papantoniou and the Browns was unjust within the meaning of s 7(1) of the Contracts Review Act. The “essential injustice” of the 2006 Contract, according to his Honour, was that Robert and James could well be left “holding the can” for Ms Papantoniou’s debt if she defaulted under the Deed of Loan and chose not to remedy her default.

11. On the basis of this finding, the primary Judge made orders pursuant to s 7(1)(b) of the Contracts Review Act on each of Robert’s cross-claims. His Honour declared the 2006 Contract to be void:

“to the extent to which it provides for the liability of [Ms] Papantoniou for the loan from [Perpetual] to be borne by Robert Brown and James Brown”.

12. The primary Judge also made orders requiring Ms Papantoniou to pay compensation to Robert and James’ estate in order to reimburse them for the amounts they had paid to discharge the mortgage to Perpetual and meet other expenses occasioned by Ms Papantoniou’s default. The compensation, inclusive of interest, amounted to $319,865.46.

13. The primary Judge in substance dismissed Ms Papantoniou’s cross-claim.

14. Ms Papantoniou appeals against the decisions made by the primary Judge on the cross-claims. Her principal contention is that she was denied procedural fairness because his Honour granted relief to Robert (in both capacities) on the basis of a case that he neither pleaded not argued. She seeks orders that the Browns’ cross-claim be dismissed. Ms Papantoniou also appeals against the dismissal of her cross-claim and seeks an account of her dealings with the Browns with a view to her receiving credit for certain expenses for which she says the Browns should be responsible. As will be seen, [5] the grounds of appeal are contained in a Further Amended Notice of Appeal (FANA) filed in court on 6 May 2015.

    5. At [76] below.

Factual Background

15. The following account of the facts is based on matters not in dispute, findings made by the primary Judge and documentary evidence.

The Family Provision Proceedings

16. The Property was the family home of Mrs Shirley Brown and her husband, James Snr. Mrs Brown and James Snr had four children: James, Robert and two daughters, Colleen and Aileen.

17. After the death of James Snr in 1983, Mrs Brown resided on the Property with James until her own death in 2004. Following their mother’s death, James and Aileen brought proceedings under the Family Provision Act seeking greater provision out of the estate for their maintenance and advancement in life (Family Provision Proceedings).

18. James was described by the primary Judge (at [6]) as having a history of drug and alcohol problems and as living on a disability pension. The primary Judge found (at [24], [33], [100]) that Robert worked in a semi-skilled job, was of modest means and was relatively unsophisticated. James retained Ms Papantoniou to represent him in the Family Provision Proceedings. Robert represented himself.

19. The Family Provision Proceedings were settled after a mediation. The terms of settlement were embodied in Heads of Agreement dated 2 December 2005. The Heads of Agreement provided for the Property to be sold by private sale and, if that was not successful, by auction. It was agreed that the net balance of the estates of Mrs Brown and James Snr would be distributed among the children in the following proportions:

Aileen   -   11 per cent

Colleen -   23 per cent

James -   42 per cent

Robert -    24 per cent

The Heads of Agreement also provided that certain costs, including some of the costs incurred by James to Ms Papantoniou’s firm in the Family Provision Proceedings, would be paid out of the net proceeds of sale.

The 2006 Contract

20. Attempts to sell the Property proved unsuccessful. On 14 July 2006, shortly after a failed auction had taken place, James and Robert signed an acknowledgment addressed to Papantoniou and Associates (Ms Papantoniou’s legal firm), as follows:

“We acknowledge that Stella Papantoniou has shown interest and may proceed to purchase the remainder shares of the above property. We agree for Stella Papantoniou to borrow money for the purchase and development cost for the above property & agree that the above property shall be used for security.”

21. The primary Judge found (at [29]), partly on the basis of admissions in the pleadings, that James, Robert and Ms Papantoniou entered into a contractual arrangement no later than 4 August 2006. His Honour found (at [94]) that the terms of the arrangement were as follows:

“(a)   [Ms] Papantoniou would purchase the sisters’ shares totall[ing] 34 per cent, matching, as a proportion, the offer of $470,000 which had been made after [the unsuccessful] auction;

(b)   Robert Brown and James Brown would maintain and continue to hold their respective interests as adjusted pursuant to the settlement;

(c)   [Ms] Papantoniou would fund her purchase by way of mortgage to which she, James Brown and Robert Brown would be mortgagors;

(d)   Robert Brown and James Brown would guarantee her indebtedness (under the mortgage) with the exception of some legal fees … [N]either James Brown nor Robert Brown were to be borrowers, and had no need to borrow to acquire their respective shares in the property. …

(e)   It was a feature of the contract that [Ms] Papantoniou would have no exposure to any risk of the objects of the contract failing because her substantial personal assets (she had a net worth of $2.3m) would not be in any way put forward. Apart from paying the interest running on the monies she borrowed it was not possible for her to make any actual loss, over and above her acquired share, because she borrowed every dollar that she expended in implementing the contract right down to the 10 percent deposit and the interest payable for the agreed term of the mortgage of 12 months;

(f)   It was a feature of the agreement that [Ms] Papantoniou would be protected from the risk of loss by the consideration that the security of the property was more than adequate to cover her indebtedness, and the personal guarantees provided by James Brown and Robert Brown would provide another layer of security for the lender.” (Italics in the original.)

22. On 4 August 2006, Ms Papantoniou entered into a contract of sale to purchase the sisters’ 34 per cent interest in the Property for $159,800. [6] Ms Papantoniou paid a deposit of $15,980.

    6. The vendors were recorded on the contract of sale as James and Colleen but nothing turns on this.

23. On the same date, short minutes of order were signed finally resolving the Family Provision Proceedings. These orders, which were entered on 9 August 2006, were more elaborate than the Heads of Agreement. The orders provided that certain of the orders concerning the reallocation of the parties’ interests in the Property were conditional on the sale to Ms Papantoniou of the sisters’ 34 per cent interest in the Property.

The Loan

24. On 22 August 2006, Ms Papantoniou applied to Perpetual for a loan of $200,000 “to purchase a property for investment purposes”. On 1 September 2006, Perpetual approved a loan of $250,000 to Ms Papantoniou. She was to be the sole borrower, but security was to be provided by a mortgage over the Property.

25. The primary Judge noted (at [33]) that the evidence did not disclose why the amount of the approved loan was substantially greater than both the purchase price paid by Ms Papantoniou for her interest and the loan of $200,000 for which she had applied. His Honour did find, however, (at [95]), that the purpose of the 2006 Contract was to enhance the value of the Property by securing development approval from Parramatta City Council for the erection of units or townhouses on the site.

26. Perpetual required a certificate of independent advice to be provided in respect of the Browns before the loan could proceed. Ms Papantoniou referred the Browns to a solicitor, Ms Griffin, who was an associate of hers. Ms Griffin gave advice over the course of three conferences to the Browns concerning the loan and security documentation required by Perpetual. The primary Judge found (at [36]) that Ms Griffin discussed with the Browns the financial potential of the proposed development, but also made sure that they understood that the Property was at risk if Ms Papantoniou defaulted on the loan.

24. After receiving Ms Griffin’s advice, Robert and James each signed a declaration dated 24 September 2006. This document acknowledged that the Guarantor had received independent legal advice concerning the loan and security documentation and had voluntarily signed the Mortgage and Guarantee. In addition, Robert and James each signed an acknowledgement that he had received legal advice from Ms Griffin that included advice that a default by the borrower could lead to the lender suing him personally and taking possession of the Property.

25. The parties then entered into a number of transactions:

• Ms Papantoniou borrowed $250,000 from Perpetual pursuant to the Deed of Loan dated 5 October 2006. The term of the loan was 12 months, but the loan could be extended.

• Robert, James, Ms Papantoniou and Perpetual executed the Guarantee, which was dated 25 September 2006. [7] Under the Guarantee, Robert and James guaranteed Ms Papantoniou’s indebtedness to Perpetual pursuant to the Deed of Loan and any extensions thereof.

• On 5 October 2006, Robert, James and Ms Papantoniou executed the Mortgage over the Property in favour of Perpetual as the mortgagee. The Mortgage secured the moneys due under the Deed of Loan and any further financial accommodation provided to Ms Papantoniou by Perpetual.

  7. The primary Judge refers at different points to the Guarantee being executed on 25 September 2006 and 5 October 2006. The first date seems to be correct.

29. Settlement of the loan to Ms Papantoniou took place on 5 October 2006. In accordance with instructions provided by her, the loan moneys of $250,000 were disbursed as follows (at [42]):

• $143,798.41 to James’ estate, being the balance due on settlement to the sisters for the purchase of their interests in the Property;

• $24,814.55 to Perpetual’s solicitors, inclusive of $20,000 in prepaid interest required by the Deed of Loan;

• $15,980.00 to Ms Papantoniou to reimburse her for the deposit she paid in respect of her purchase of the sisters’ interests in the Property;

• $3,817.30 to Ms Papantoniou’s firm to reimburse Ms Papantoniou for expenses in connection with her loan application;

• a further $33,310.24 to the firm as part payment of fees said to be due for acting on James’ behalf in the Family Provision Proceedings;

• a further $23,463.50 to Ms Papantoniou to cover the initial costs of the development, $20,350.00 of which was the subject of an invoice issued by consultants on 9 October 2006; and

• $4,816 for stamp duty, adjustments on settlement and bank cheque fees.

30. As has been noted, the Deed of Loan required repayment of the principal after 12 months. Perpetual subsequently extended the loan for a further 12 months, expiring in October 2008.

31. On 9 October 2008, a meeting took place between Ms Papantoniou, Robert, Ms Griffin and a mortgage broker (at [47]). James by this stage was too ill to attend. Ms Papantoniou stated that she intended to get out of the project and asked Robert to buy her share. He refused to do so.

32. At about this time, Perpetual agreed to extend the loan until 1 April 2009, but advised that there would be no further renewal. During the final extension, Ms Papantoniou pursued a further development application, but nothing came of it. She failed to repay the loan on the due date of 1 April 2009 but continued to pay interest, although not at the default rate specified in the Deed of Loan.

The Possession Proceedings

33. Perpetual instituted the Possession Proceedings in the Common Law Division in January 2010. By this time, James had died and the registered proprietors of the Property (the defendants in the Possession Proceedings) were:

• Robert, as to a 24 per cent share;

• Robert, in his capacity as executor of James’ estate, as to a 42 per cent share; and

• Ms Papantoniou, as to a 34 per cent share.

The amount due under the Deed of Loan and the Guarantee when the Possession Proceedings were instituted was approximately $259,000.

34. Between September 2009 and February 2010 negotiations took place between Ms Papantoniou and Robert for the sale of her interest in the Property to Robert (at [73]-[74]). At one point, agreement appeared to be reached on a price of $272,000 (which implicitly valued the Property at $800,000). However, the parties did not conclude a final agreement because of disputes about legal fees and other ancillary matters.

35. Ms Papantoniou did not contest Perpetual’s claim for possession of the Property, but Robert did. By an amended cross-claim filed on 19 August 2010, he sought relief against Perpetual, including orders under the Contracts Review Act setting aside the Mortgage and the Guarantee. The amended cross-claim did not make it clear whether Robert was claiming relief solely in his own right or whether he was also making a claim in his capacity as executor of James’ estate.

36. At some stage not identified in the appeal books, Ms Papantoniou filed a second cross-claim in the Possession Proceedings. The second cross-claim included a claim for indemnity against Robert and James’ estate in respect of interest and other amounts paid or liabilities incurred by her.

37. On 16 November 2010, orders were made in the Possession Proceedings with the consent of all parties. The orders appointed Perpetual as a co-owner of the Property and vested the Property in trustees for sale under a statutory trust for sale pursuant to Part IV Div 6 of the Conveyancing Act 1919 (NSW). Leave was given to each of the mortgagors to bid for or buy the Property, upon condition that the purchase price was sufficient to satisfy the debts due to Perpetual and the trustees.

38. On 22 December 2010, Robert, as executor of James’ estate, filed a third cross-claim in the Possession Proceedings. Somewhat curiously in view of the resolution of Perpetual’s claim against the mortgagors, the third cross-claim sought orders under the Contracts Review Act declaring the Mortgage and Guarantee void.

Robert’s Purchase

39. By a contract of sale dated 18 March 2011, Robert agreed to purchase the Property from the trustees for $200,600. The price was calculated by reference to the value of the 34 per cent share of the Property to which Robert was not beneficially entitled. For this purpose, the trustees attributed a value of $590,000 to the Property as a whole (at [76]).

40. The sale to Robert was apparently settled on the same day the contract of sale was signed. The amount actually paid by Robert was $476,254.21. The following payments were made from this sum (at [77]-[78]):

• $395,342.29 to pay out Perpetual;

• $21,145.51 to pay the trustees’ costs of the sale;

• $1,170.10 to pay unpaid rates.

These amounts totalled $417,657.90.

41. In order to ascertain the value of the equity of each of the registered proprietors of the Property, it was apparently agreed that the sum of $417,657.90 should be deducted from the Property’s assessed value of $590,000. The resultant figure was then allocated to each of the parties as follows:

• Robert (24 per cent):      $41,362.11

• James’ estate (42 per cent):   $72,383.68

• Ms Papantoniou (34 per cent):   $58,596.31

The amount of $58,596.31, representing Ms Papantoniou’s equity in the Property, was placed in a controlled account to await the outcome of the cross-claims in the Possession Proceedings (at [79]).

Final Form of the Cross-Claims

42. Following settlement of the sale to Robert, each of the cross-claims filed in the Possession Proceedings was amended. The form of each cross-claim addressed in the Primary Judgment was as follows:

• the Second Further Amended First Cross-Claim filed on 8 February 2013 (First Cross-Claim), pleading Robert’s cross-claim;

• the Further Amended Third Cross-Claim filed on 8 February 2013 (Third Cross-Claim), pleading the claim by James’ estate; and

• the Further Amended Second Cross-Claim filed on 7 December 2011 (Second Cross-Claim), pleading Ms Papantoniou’s cross-claim.

43. The First and Third Cross-Claims sought relief only against Ms Papantoniou. In each case, subject to one exception, the relief sought was in substance the same. The principal relief sought in the First Cross-Claim was as follows:

“An order pursuant to section 7(1)(b) of the Contracts Review Act 1980 (NSW) or under the general law, that the Guarantee … be varied through the insertion of the following term (the Indemnity Clause):

The Debtor [Ms Papantoniou] hereby indemnifies the Guarantor [James and Robert], if more than one Guarantor jointly and severally, and will keep the Guarantor indemnified from and against all losses damages costs (including legal) expenses and all other liabilities incurred or to be incurred by the Guarantor, under the terms of this Guarantee, including losses damages costs (including legal) expenses and all other liabilities in relation to any claim for relief made against the Guarantor, in respect of this Guarantee.”

44. The First Cross-Claim also sought an order under the “Indemnity Clause” that Ms Papantoniou indemnify Robert against moneys paid by him to Perpetual and the trustees and an order that the moneys held in the controlled account be paid out to Robert and James’ estate in proportion to their entitlements.

45. The exception to which I have referred is that the Third Cross-Claim sought, in the alternative, an order for “equitable compensation in relation to loss and damage suffered from the breach of the fiduciary obligations owed by Ms Papantoniou to [James]”. The claim was based on Ms Papantoniou’s alleged breach of the fiduciary duties she owed James while acting as his solicitor.

46. It is important to appreciate that neither the First Cross-Claim nor the Third Cross-Claim sought any relief in relation to any contract or arrangement between the Browns and Ms Papantoniou that was entered into before execution of the Mortgage and the Guarantee. Subject to the claim by James’ estate founded on breach of fiduciary duty, the relief sought in the Cross-Claims was limited to the insertion of the Indemnity Clause into the Guarantee and consequential orders requiring Ms Papantoniou to reimburse the Browns for moneys paid by them to discharge the liabilities secured over the Property and to meet associated expenses.

The Primary Judgment

47. The primary Judge noted (at [1]) that he was delivering the Primary Judgment to resolve the three cross-claims filed in the Possession Proceedings. His Honour did not identify the issues arising on the cross-claims. However, he recorded (at [14]) that there was no dispute between the parties that they had:

“entered into a tripartite arrangement whereby [Ms] Papantoniou agreed to purchase the combined 34 percent share of the property due to Aileen and Colleen under the terms of the settlement with a view to either developing the property, or at least obtaining development approval so that it could be sold at an enhanced value.”

48. His Honour found (at [21]) that at the time of the tripartite arrangement Robert had an equity in a property at McGraths Hill that would have been sufficient, if that property had been sold, to enable him to buy out his sisters’ interest in the Property. His Honour accepted (at [24]) Robert’s evidence that he trusted Ms Papantoniou (although she was not his solicitor) and that he left to her the financing arrangements concerning the Property.

49. The primary Judge found (at [28]) that it was Ms Papantoniou’s idea, once the Property was passed in at auction, that she should purchase the sisters’ interests and that she and the Browns should seek development approval for units or townhouses in order to increase the value of the Property. The primary Judge also found (at [27]) that Ms Papantoniou failed to ensure that the Browns received independent advice. This failure involved putting her personal interests ahead of theirs.

50. As I have noted, his Honour found (at [29]) that the 2006 Contract was entered into no later than 4 August 2006. By that date all were “committed” (although his Honour did not say precisely to what), but neither James nor Robert by this stage had received independent advice. They expected, however, that Ms Papantoniou as a solicitor and high income earner, would repay any moneys advanced by the lender. His Honour made no finding that the Browns knew of Ms Papantoniou’s assets, but she stated in the loan application that she had net assets of $2.3 million.

The Loan Transaction

51. The primary Judge noted (at [32]-[33]) that initially Perpetual approved an advance of $200,000, but that the Deed of Loan ultimately provided for a loan of $250,000. The evidence did not disclose when the amount to be advanced was increased.

52. In order to satisfy Perpetual’s requirement that the Browns provide a certificate of independent advice, Ms Papantoniou referred the Browns to Ms Griffin (at [35]). The primary Judge was satisfied (at [40]) that in “broad terms” Ms Griffin advised the Browns that in the event of default by the borrower they could be liable to the lender. She had also explained that the lender could take possession of the Property and, in the event of a shortfall, sue them for the deficiency. But, his Honour found (at [40]) that when the Browns:

“received the benefit of Ms Griffin’s advice they were already fully committed to the venture. It was too late for them to pull out. Although the consent orders were expressed to be conditional upon a sale to [Ms] Papantoniou that sale, as I have already found occurred when contracts were exchanged on 4th August 2006. The point for Robert Brown and James Brown is, really, independent financial and legal advice should have been given before 4th August 2006 when there was still time to pull out, if so advised. The real purpose of Ms Griffin’s involvement was to protect the mortgagee.” (Emphasis added.)

53. The primary Judge considered (at [56]) that Ms Papantoniou’s motive in entering into the venture with James and Robert “was in substantial part to make a profit”. Although his Honour was not prepared to conclude that Ms Papantoniou had deliberately lied, her evidence was contradictory and the apparent contradictions had not been satisfactorily explained (at [68]-[69]). His Honour accepted (at [71]) that, in part, Ms Papantoniou wanted to help James, but:

“she was motivated by the opportunity to make a profit especially if she could structure the arrangement so the risk of failure fell on the Brown family home, rather than on any of her personal assets.”

Identifying the Contract

54. His Honour stated (at [93]) that the starting point in assessing the claims for relief under the Contracts Review Act made in the First and Third Cross-Claims was to identify the contract in respect of which relief was sought and when it was formed. Those appearing for the Browns had focused:

“on the wrong contract at the wrong time by considering the contract of guarantee actually signed by each of the Brown brothers on 24th or 25th September 2006”.

55. In his Honour’s view, the Guarantee was:

“but a step in putting into effect a contract that had been formed in July 2006, and certainly no later than 4th of August 2006 when [Ms] Papantoniou exchanged contracts to purchase the sisters’ shares in the property. That is the relevant contract and the relevant time for considering the statutory question. What occurred in September and October culminating in settlement of [Ms] Papantoniou’s purchase on 5th October 2006 were steps in the implementation of an already formed agreement.” (Emphasis added.)

56. His Honour then recorded (at [94]) the terms of the 2006 Contract. [8] He found (at [95]) that the purpose of the contract:

“was to enhance the value of the property by holding it until an application for the development of the site by the erection of townhouses or home units was approved by the local government council. When this primary objective was achieved a decision would be made about whether to sell then at an enhanced value because of the development approval, or proceed, as a secondary objective to undertake the development to make a greater profit by selling the individual townhouses or units.”

8. Set out at [21] above.

The Finding of Injustice

57. His Honour concluded (at [97]) that the provisions of the 2006 Contract were unjust because, as a practical matter, they imposed the whole of the risk of financial failure on the Browns, despite Ms Papantoniou being better placed to bear the risk. Moreover, the Browns had no capacity or opportunity to make an informed decision as to whether they should enter the 2006 Contract (at [98]). In addition, his Honour was satisfied (at [100]) that there was material inequality of bargaining power between Ms Papantoniou and the Browns. James was especially vulnerable and Ms Papantoniou was obliged, as his solicitor, to protect his interests. Robert, although not Ms Papantoniou’s client was relatively unsophisticated and was not legally represented. He acted mostly out of concern for his brother and trusted Ms Papantoniou.

58. In his Honour’s view (at [101]), it should have been obvious to Ms Papantoniou that the lender would require the Browns to receive independent advice. But the time for that to be done was:

“before the contract was entered into and they all became committed, not just to each other, but also to the sisters, in the first instance, and then to the lender on settlement.”

59. His Honour said (at [103]) that once the interests of other persons, such as the sisters and the lender, became involved:

“it was not reasonably practicable for James Brown and Robert Brown to renegotiate or to reject any of the provisions of the contract. As I have found, by the time the contract for the sale of the sisters’ interest to Mrs Papantoniou was exchanged on 4 August 2006, they were committed. In reality, they were in no position to reject any of the documents explained to them by Ms Griffin. It was already too late for that then.” (Emphasis added.)

While Ms Griffin gave advice, her involvement was too late and thus did nothing to lessen the injustice of the contract (at [106]).

60. The primary Judge, as I have already noted, found (at [109]) that the “essential injustice” of the contract was that Robert and James could well be left “holding the can” if Ms Papantoniou defaulted, as she did. Had Robert been given timely, independent advice, he might have been told that he could achieve his dominant purpose of looking after his brother by selling his McGrath Street property and acquiring his sisters’ share of the Property. If he had been given that advice he probably would have accepted it (at [112]). The finding that the 2006 Contract was unjust was enhanced by the unfairness of a disability support pension and an ordinary working member of the community should be required to “underwrite the liabilities of a successful professional” (at [113]).

61. The primary Judge held (at [116]) that in order to avoid the unjust consequences of the 2006 Contract, it was appropriate to declare the 2006 Contract void to the extent to which it required Robert and James to bear the financial risk of Ms Papantoniou’s default. [9]

    9. Later in the Primary Judgment, his Honour recorded (at [146]) that Ms Papantoniou had not submitted that s 6(2) of the Contracts Review Act precluded the relief sought by the Browns. Section 6(2) provides that a person may not be granted relief in relation to a contract insofar as the contract was entered into in the course of or for the purpose of a trade, business or profession carried on by that person.

62. The primary Judge rejected (at [119]) a submission by Ms Papantoniou that Robert had acted unreasonably in late 2008 and early 2009 in refusing to take over the mortgage. It was Ms Papantoniou’s loan and she had the primary responsibility to discharge it. His Honour considered (at [121]) that Robert had acted reasonably in February 2009 when, with the benefit of legal advice, he had made offers to settle the dispute. His Honour also considered (at [122]) that Robert’s conduct after Perpetual instituted the Possession Proceedings was not unreasonable. He was not in a position to pay out the mortgage immediately but took up the opportunity to become, in effect, a preferred purchaser under the terms of the judicial sale.

60. The primary Judge said (at [123]) that if he was wrong about the application of the Contracts Review Act, he would have been satisfied that Ms Papantoniou breached the fiduciary duties she owed to James “by entering the contract with him”. In doing so, she obtained a benefit at her client’s expense (at [125]). However, his Honour thought (at [127]) that the finding was of little practical consequence as the measure of equitable compensation was likely to be broadly similar to compensation awarded under s 8 of the Contracts Review Act.

The Primary Judge’s Approach

64. The primary Judge recognised that his approach to the claims for relief had not been put forward by the Browns:

“[128]   I fully appreciate that the approach I have taken to the Contracts Review claim is different from the approach advanced by the claimants. However, their focus on the guarantee of 24th and 25th September 2006 is substantially because it imposed liability of [Ms] Papantoniou’s debt on Robert Brown and James Brown. The factors which persuade me that the contract was unjust are the factors that they advanced. The substance of my findings are based upon their claim, but as I have said by focusing on the contract of guarantee with the lender, they have addressed the wrong contract. But in substance, the argument they advanced is the argument I have accepted.

[129] Subject to the requirements of the natural justice rule 36.1 Uniform Civil Procedure Rules 2005 confers broad powers on the Court granting relief and I rely upon the rule in approaching the matter as I have done. I will make an order declaring the contract void in part as I have indicated. But as I have said, given what has occurred and the intervention of the rights of third parties, the practical relief available to the claimants is ancillary relief s 8.”

The Second Cross-Claim

65. His Honour disposed of the Cross-Claim (by Ms Papantoniou), as follows:

“[130]   … [Ms] Papantoniou’s cross-claim really amounts to a claim to set-off. As I have explained above, she seems to proceed on the basis that James Brown and Robert Brown have some right to claim against her. She would characterise this as a general law right to subrogation or indemnity of a surety who has discharged the debtor’s obligations.

[131]   As I have tried to explain, that is not what happened here. Mr Robert Brown in his twin capacities was not called upon to observe his obligations under the guarantee given to the lender, although he did pay out the balance of the debt over and above the contract price of $200,600 paid to acquire in substance [Ms] Papantoniou’s share. But he acquired title not by subrogation arising from a discharge of the debt by a surety; he acquired title as a purchaser from Trustees exercising power under a judicial sale.”

Assessment of Compensation

66. The primary Judge then assessed the compensation due to the Browns on the First and Third Cross-Claims. The starting point was the amount paid by Robert to the trustees for sale to acquire the Property. By paying $476,254.21, Robert acquired an additional 34 per cent interest beyond his existing 66 per cent (in his dual capacities). Since the 34 per cent interest was valued at $200,600, Robert paid an extra $275,654 to acquire that interest. Prima facie, therefore, reimbursement of that amount by Ms Papantoniou was required to undo the injustice created by the 2006 Contract (at [136]).

67. The primary Judge did not consider it appropriate to take into account any “occupation fee” by reason of James residing on the Property or to make any adjustment for the capital appreciation of the Property between 2006 and 2011 (at [137]-[138]). His Honour recorded (at [140]) that upon settlement of the loan on 5 October 2006, Ms Papantoniou had received in excess of $45,000 from two separate sources in respect of legal fees incurred by James. About $12,000 had been paid out of James’ estate in accordance with the consent orders, but $33,310 was paid to Ms Papantoniou’s firm out of the loan moneys advanced by Perpetual. The primary Judge was not prepared to discount the compensation payable by Ms Papantoniou for any fees due to her firm, except for fees totalling $4,000 for which the firm had not been paid by James or his estate. However, his Honour allowed Ms Papantoniou a deduction in respect of development costs (66 per cent of $20,350, amounting to $13,431) and rates ($1,170).

68. Although his Honour did not expressly say so in this section of the Primary Judgment, he made no deduction from the compensation payable by Ms Papantoniou for the costs payable to Perpetual by reason of its defence of Robert’s cross-claim against it under the Contracts Review Act. These costs, amounting to $82,806.98, formed part of the amount of $476,254.21 paid by Robert to Perpetual on 18 March 2011.

69. The deductions made by the primary Judge reduced the starting figure of $275,654 to $257,053. After adding interest under s 100 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act) from 11 March 2011 to the date of judgment, the total amount payable as compensation was $319,865.46. His Honour divided this amount in proportion to the Browns’ respective shares in the Property. Thus James’ estate was to receive compensation of $131,456.59, while Robert was to receive $188,408.87. [10]

    10. The ratio of 42:58 reflected the acquisition of Robert of Ms Papantoniou’s 34 per cent interest, giving him a 58 per cent share in the Property as tenant in common with James’ estate, which retained a 42 per cent share. The figures set out in this paragraph reflect the calculations in the Primary Judgment (at [140]-[145]) as amended in the Supplementary Judgment.

70. His Honour directed (at [148]) that the funds held on trust pending resolution of the litigation should be paid out to Ms Papantoniou, but only when she provided evidence that she had satisfied the judgments in favour of the Browns. In the Supplementary Judgment, the primary Judge recorded (at [7]) that the amount held on trust had been depleted by the payment from the fund of certain costs payable by Ms Papantoniou to the Browns pursuant to interlocutory orders. The balance in the account after that payment was $51,159.09.

Procedural Matters

Extension of Time

71. On 4 December 2014, Ms Papantoniou filed a notice of appeal accompanied by a notice of motion seeking an extension of time for the filing of the Notice of Appeal. An extension of time was required because the notice of appeal should have been filed on 30 August 2014 to comply with the requirements of rr 51.9 and 51.16 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) (assuming the “material date” for the purpose of the rules to be the date of the orders made in the Primary Judgment).

72. The affidavits read in support of the motion for an extension of time established a reasonable explanation for the delay of approximately three months. The evidence included medical reports indicating that Ms Papantoniou suffered serious medical problems after her solicitors filed a notice of intention to appeal.

73. Mr Maconachie nonetheless opposed the application for an extension of time. He did so on the basis that Ms Papantoniou had not satisfied the orders requiring her to pay compensation and that the primary Judge had acceded to an application by Robert that the moneys held in trust pending resolution of the proceedings be released to him. That application had been made after the time for filing a notice of appeal had expired. Mr Maconachie submitted that it would prejudice Robert if he was exposed to the risk of the appeal succeeding and the Court ordering him to repay the moneys released by the trustees. This difficulty was overcome when Mr Katekar made it clear that even if Ms Papantoniou’s appeal succeeded, she would not seek orders requiring Robert to repay the moneys released to him. In other words, she accepted that Robert was entitled to compensation at least equivalent to the amount already released to him.

74. On this basis, Mr Maconachie sensibly did not persist with the contention that Robert would be prejudiced by an extension of time for filing a notice of appeal. Since the appeal was argued on the basis of an amended notice of appeal filed on 8 April 2015, it is appropriate to extend the time for filing a notice of appeal until 8 April 2015.

Appointment of Tutor

75. On 8 April 2015, the day the amended notice of appeal was filed, Ms Papantoniou’s solicitor filed a Consent to Act as Tutor signed by Ms Papantoniou’s son, Christodoulos Papantoniou. Mr Papantoniou had previously sworn an affidavit annexing medical reports suggesting that Ms Papantoniou was suffering from dementia and had experienced difficulties in providing instructions. The amended notice of appeal, however, made no reference to the appeal being instituted by Ms Papantoniou through a tutor.

76. In order to address this issue and to clarify the orders sought by Ms Papantoniou in relation to the Second Cross-Claim (that is, her cross-claim), Mr Katekar, who appeared with Ms Little for Ms Papantoniou, filed the FANA in Court on 6 May 2015. The FANA identifies the appellant as Ms Papantoniou by her tutor, Mr Papantoniou.

The Grounds of Appeal

77. Grounds 1 and 2 of the FANA complain that the primary Judge erred in finding that the 2006 Contract (referred to in the Primary Judgment as the “tripartite contract” or the “tripartite arrangement”) was unjust and awarding relief on that basis when no such claim had been pleaded or argued at trial. The primary Judge’s finding is said to have denied Ms Papantoniou procedural fairness.

78. Ground 3 alleges, in the alternative, that even if Ms Papantoniou was not denied procedural fairness, the primary Judge:

• erred in finding that the 2006 Contract provided for Ms Papantoniou’s liability to the lender to be met by the Browns;

• erred in finding that by the time the Browns received independent legal advice it was too late for them to pull out since they were already committed to the venture;

• should have found that any liability of the Browns arose from the Guarantee and Mortgage, not from the 2006 Contract;

• should have found that at the time the Browns received independent advice they could have refused to enter into the Guarantee and the Mortgage, if advised to do so.

79. Ground 4 claims that even if the primary Judge was correct to grant relief under the Contracts Review Act, he erred in calculating the compensation by adopting an incorrect starting figure and by failing to give Ms Papantoniou credit for certain items, such as costs due to her firm and interest paid by her.

80. Ground 5 in the FANA claims that the primary Judge should have directed an account of the dealings between Ms Papantoniou and the Browns. The FANA seeks an account of the dealings between Ms Papantoniou and the Browns and that in the carrying out of the account the Browns should be “held responsible” for a number of items.

Submissions

Ms Papantoniou’s Submissions

Grounds 1 and 2

81. Mr Katekar submitted that the case pleaded in both the First and Third Cross-Claims and run at the trial was that the Guarantee and the Mortgage were unjust in the circumstances in which they were made. The relief claimed in each Cross-Claim was an order pursuant to s 7(1)(b) of the Contracts Review Act that the Guarantee be varied by the insertion of the “Indemnity Clause”. At no stage, so Mr Katekar argued, did Robert either plead or conduct a case that the 2006 Contract was unjust or claim that relief should be granted in respect of it. In particular, the Browns had never sought an order that the 2006 Contract be declared void, in whole or in part.

82. Mr Katekar submitted that the case pleaded by the Browns was always doomed to fail because the Guarantee never exposed them to the risk identified by the primary Judge – that is, that they would be responsible for any default by Ms Papantoniou in meeting her obligations under the Deed of Loan. Perpetual had never sought to enforce the Guarantee against the Browns. In any event, she was the principal debtor under both the Deed of Loan and the Mortgage. If Ms Papantoniou defaulted, she would be liable under general law principles to indemnify the Browns against any liability they incurred to Perpetual by reason of her default, whether under the Mortgage or the Guarantee.

83. Whatever the defects of the case pleaded by the Browns, so Mr Katekar argued, this was the case they chose to conduct and to which Ms Papantoniou responded. She was denied procedural fairness because the ground on which the Browns succeeded was never identified prior to the delivery of the Primary Judgment. Consequently, Ms Papantoniou did not have the opportunity to address issues that were crucial to defending the case found against her. The evidence did not focus, for example, on whether the Browns were advised by Ms Griffin that they were not obliged to execute the Guarantee and Mortgage or whether they appreciated that they did not have to proceed with the development of the Property by reason of the 2006 Contract. The submissions made on Ms Papantoniou’s behalf at the trial did not deal with factual issues that the primary Judge resolved against her, such as his Honour’s finding that the 2006 Contract committed the Browns to the project and rendered Ms Griffin’s advice of little or no value.

Ground 3

84. Mr Katekar submitted that the primary Judge erred in finding that the Browns were contractually bound by the 2006 Contract and that the agreement committed them to the Mortgage and the Guarantee. He contended that the 2006 Contract was no more than an agreement to agree, since the agreement concerned an as yet to be arranged loan on terms that were not identified.

85. In any event, nothing in the terms of the 2006 Contract as found by the primary Judge committed the Browns to enter into the Mortgage and Guarantee. The 2006 Contract provided only for Ms Papantoniou to borrow enough to acquire her share of the Property, not the sum of $250,000 actually borrowed. In any event, it was implicit in the 2006 Contract that any commitment to a third party would be contingent on satisfying the third party’s requirements, including independent advice. If the Browns had been advised that they were not obliged to execute the proffered Mortgage and Indemnity (as must have been the case), it was plainly not too late for them to refuse to proceed.

Ground 4

86. Mr Katekar submitted that, assuming the primary Judge was entitled to award compensation, he should have given credit to Ms Papantoniou for the following amounts:

• $33,310.24 for legal costs payable by James’ estate to Ms Papantoniou’s firm;

• $1,583 paid by her for rates and taxes;

• $82,806.98 in legal costs payable to Perpetual “as the result of Robert Brown’s misconceived and groundless defence” of the Possession Proceedings;

• 66 per cent of the costs of the trustee for sale of $21,145.51 (amounting to $13,956.03);

• interest paid by Ms Papantoniou on the loan in respect of unreimbursed rates and development costs paid by her (the primary Judge having deducted a proportion of the rates and development costs, but not interest).

Ground 5

87. Ms Papantoniou’s written submissions were relatively uninformative as to the nature of the account sought by her and the allowances that she contended should be made in her favour. In response to questions from the bench, Mr Katekar clarified Ms Papantoniou’s position. He subsequently sought and was granted leave to file the FANA.

88. Mr Katekar accepted two important propositions that substantially narrowed the scope of the dispute:

• first, he accepted that Ms Papantoniou, as between herself and the Browns, was the principal debtor and, therefore, she was liable to indemnify the Browns for any amounts paid by them to discharge her debt to Perpetual;

• secondly, he accepted that the starting point for the taking of an account should be the sum of $257,053 adopted by the primary Judge. [11]

  11. See at [69] above. This sum allowed $4,000 in costs due to Ms Papantoniou’s firm, as to which there was no dispute.

89. On this basis, Mr Katekar submitted that Ms Papantoniou should be given credit for the items identified in Ground 4 of the FANA. Mr Katekar further submitted that in order to save costs, this Court should determine the allowances that should be made and should not remit the proceedings to the Common Law Division

The Browns’ Submissions

Grounds 1 and 2

90. The Browns acknowledged that the First and Third Cross-Claims did not seek relief in respect of the 2006 Contract. Mr Maconachie submitted, however, that each of the Cross-Claims adequately identified the claims ultimately accepted by the primary Judge. In particular, the pleadings alleged that the parties had entered into the 2006 Contract and that the Browns entered into the Mortgage and the Guarantee pursuant to the 2006 Contract. Thus, Ms Papantoniou must have understood the significance of the 2006 Contract to the Browns’ case.

91. Mr Maconachie also submitted that counsel for Ms Papantoniou had been alerted during the hearing to the approach the primary Judge ultimately adopted. According to Mr Maconachie, his Honour on several occasions adverted to the possibility that the “original agreement” was unjust, thereby foreshadowing that he might make such a finding. The finding his Honour actually made, as he explained (at [128]) was based on the factors that the Browns had advanced. It was open to the primary Judge to grant relief to the Browns, since s 90 of the Civil Procedure Act requires a court to give such judgment as the nature of the case requires. In taking this course, therefore, his Honour did not deprive Ms Papantoniou of procedural fairness.

Ground 3

92. Mr Maconachie submitted that it was not open to Ms Papantoniou to contend that the 2006 Contract was not contractually binding, since she had admitted in her defence to the Cross-Claim that it was. The fact that a lender would require the Browns to obtain independent advice was no barrier to the binding nature of the 2006 Contract. Similarly, the increase in the amount of the loan from $159,800 as contemplated in the 2006 Contract (perhaps with an additional amount for stamp duty and costs), to the sum of $250,000 actually advanced, did not change the nature of the “tripartite agreement”.

Ground 4

93. Mr Maconachie contended that the assessment of compensation under s 8 of the Contracts Review Act involved an exercise of discretion and thus could be set aside only if his Honour acted on a wrong principle or committed an error of the kind identified in House v The King. [12] No such error had been established.

    12. [1936] HCA 40; 55 CLR 499 at 504-505.

94. In relation to the largest item, $82,602.98 in costs payable to Perpetual, Mr Maconachie relied on the primary Judge’s finding (at [122]) that Robert did not act unreasonably after Perpetual commenced the Possession Proceedings. He also submitted that Ms Papantoniou had unreasonably refused Robert’s offer in 2009 to purchase her interest in the Property. These considerations supported the primary Judge’s conclusion that no deduction from the compensation payable by Ms Papantoniou should be made for the costs claimed by Perpetual in consequence of Robert’s unsuccessful cross-claim against it.

Ground 5

95. Mr Maconachie did not submit that an account should not be taken of the dealings between Ms Papantoniou and the Browns, should Ms Papantoniou succeed in her challenge to the orders made under the Contracts Review Act. However, he argued that in the taking of an account, the deductions or allowances sought by Ms Papantoniou should not be accepted. I deal with these contentions later.

Reasoning

Grounds 1 and 2: Procedural Fairness

The Pleadings

96. In Dare v Pulham,[13] the High Court explained the functions of pleadings and the circumstances in which relief may be granted on the basis of a cause of action or material facts that have not been pleaded:

“Pleadings and particulars have a number of functions: they furnish a statement of the case sufficiently clear to allow the other party a fair opportunity to meet it; they define the issues for decision in the litigation and thereby enable the relevance and admissibility of evidence to be determined at the trial; and they give a defendant an understanding of a plaintiff’s claim in aid of the defendant’s right to make a payment into court. Apart from cases where the parties choose to disregard the pleadings and to fight the case on issues chosen at the trial, the relief which may be granted to a party must be founded on pleadings. But where there is no departure during the trial from the pleaded cause of action, a disconformity between the evidence and particulars earlier furnished will not disentitle a party to a verdict based upon the evidence. Particulars may be amended after the evidence in a trial has closed, though a failure to amend particulars to accord precisely with the facts which have emerged in the course of evidence does not necessarily preclude a plaintiff from seeking a verdict on the cause of action alleged in reliance upon the facts actually established by the evidence.” (Citations omitted; emphasis added.)

13. [1982] HCA 70; 148 CLR 658 at 664. See also Gould and Birbeck and Bacon v Mount Oxide Mines Ltd (In Liq) [1916] HCA 81; 22 CLR 490 at 517 (Isaacs and Rich JJ); Forrest v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486 at [26]-[27] (French CJ, Gummow, Hayne and Kiefel JJ).

97. The Browns relied on several key paragraphs in the First and Third Cross-Claims to support their contention that they had adequately pleaded that the 2006 Contract was unjust. The paragraphs are as follows:

“20   On or before 14 July 2005, Papantoniou, James and Robert entered into a contract partly written, partly oral, which contained the terms stated in subparagraphs a-f below:

a.   Robert and James would assist Papantoniou in purchasing the 34% interest in the Property held by Colleen Le Cussan and Aileen Ann McDonald (the Papantoniou Purchase).

b.   Papantoniou would not use any of her own existing funds for the Purchase.

c.   Papantoniou would finance the Purchase exclusively from a loan.

d.   The loan would be secured against the Property.

e.   Robert and James would provide personal guarantees for the loan.

f.   Papantoniou would draw up and submit to Parramatta City Council plans for the redevelopment of the Property

…

21   Pursuant to the purchase agreement, Papantoniou, Robert and James entered into the Loan Agreement, the Mortgage and the Guarantee …

…

65 [The Browns plead] under s 7(1) of the Contracts Review Act 1980 (NSW) that the Guarantee and the Mortgage were unjust in the circumstances relating to them at the time they were made and as they were subsequently relied upon by Papantoniou.”

98. The Cross-Claims pleaded (pars 34, 36) that Robert and James received no independent legal or financial advice about the 2006 Contract and the Mortgage and that inadequate advice was given in relation to the Guarantee. The Cross-Claims also alleged (par 39A) that when Robert and James entered the 2006 Contract (referred to in the Cross-Claims as the “purchase agreement”) and when they executed the Mortgage and Guarantee, Ms Papantoniou knew that all three transactions were not intelligible to them.

99. Ms Papantoniou’s Defence to the Cross-Claims (Defence) responded to the allegations as follows:

“9.   In answer to paragraphs 20 to 22 [Ms Papantoniou] says:

…

h.   James and Robert requested and [Ms Papantoniou] agreed that she purchase the sisters’ shares in the Property and obtain the purchase price of the sisters’ shares in the Property by a mortgage over the Property;

i.   [Perpetual] offered a Loan Agreement and Mortgage on the terms pleaded in … the Cross Claim;

j.   [Ms Papantoniou] purchased the sisters’ shares and entered into the Loan Agreement and Mortgage;

k.   In consideration of [Perpetual’s] agreement to enter into the Loan Agreement and Mortgage Robert and James agreed to enter into the Guarantee.

l.   The parties contemplated the prospective redevelopment of the property but the essential terms for a development were not agreed with the consequence that there was no contract regarding any future use of the property.

m.   By reason of the matters pleaded in (l) there was a contract only as to the matters recited in paragraphs 20(a) to (e).

18.   In answer to paragraph 39A … [Ms Papantoniou] says she believed

a.   that James Brown and Robert Brown understood the substance of the [2006 Contract], the Mortgage and the Guarantee …

…

29.   In … answer to paragraph 65 … [Ms Papantoniou] says that the Guarantee and Mortgage were for the benefit of James and did benefit him in that they allowed him to live in secure accommodation in the home in which he had lived all his life until he died when he would otherwise have been unable to live in comfortable circumstances.” (Emphasis added.)

100. The Defence did not claim that the Browns received legal advice before entering into the 2006 Contract, but did allege that they had received independent advice before entering into the Mortgage and the Guarantee.

Did the Browns Plead the Case Found by the Primary Judge?

101. It is true that the Cross-Claims pleaded what was described as a “contract” entered into on or before 14 July 2006. It is also true that Ms Papantoniou in her Defence effectively admitted that a contract had been entered into, although she denied that it included a term relating to the future development of the Property. But nowhere in the Cross-Claims did the Browns allege that the 2006 Contract was unjust within the meaning of s 7(1) of the Contracts Review Act. Paragraph 65 of the Cross-Claims pleaded only that the Mortgage and the Guarantee were unjust. And as Mr Maconachie acknowledged, the only relief sought in the Cross-Claims related to the Guarantee. In particular, the Cross-Claims made no claims for declaratory relief in relation to the 2006 Contract that could have provided a foundation for the orders made by the primary Judge.

102. The terms of the 2006 Contract, as alleged in the Cross-Claims and admitted in the Defence, obliged the Browns to assist Ms Papantoniou to obtain finance for her purchase of the sisters’ 34 per cent interest in the Property. The Browns were also required to permit the loans to be secured against the Property and to provide guarantees to the (unidentified) lender. A contract containing these terms exposed the Browns to a risk in the event of default by Ms Papantoniou.

103. Any assessment of the risk, however, has to take account of the principle that a surety who discharges a debtor’s liability is regarded as having paid money to the use of the principal debtor and may recover an indemnity by means of an action against the debtor for money paid. [14] Thus the risk to the Browns by entering the 2006 Contract was limited by four factors: Ms Papantoniou, as Mr Maconachie accepted, was to be the principal borrower; the Browns as guarantors and co-mortgagors had a right of indemnity against Ms Papantoniou; she had an interest in the Property equivalent in value (at the time she acquired her interest) to the amount to be borrowed; and she apparently had other substantial assets to call upon if she was required to indemnify the Browns against any liability incurred by them.

     14. Friend v Booker [2009] HCA 21; 239 CLR 129 at [55] (French CJ, Gummow, Hayne and Bell JJ); Bofinger v Kingsway Group Ltd [2009] HCA 44; 239 CLR 269 at [8] per curiam; J O’Donovan and J Phillips, Modern Contract of Guarantee, (Looseleaf ed 2015, Thomson Lawbook Co) at [12.100]; Law Reform (Miscellaneous Provisions) Act 1965 (NSW), s 3; D & J Fowler (Australia) Ltd v Bank of New South Wales [1982] 2 NSWLR 879.

104. The Cross-Claims alleged (par 34) that had the Browns obtained adequate legal advice from Ms Griffin, they would have understood the potential risks of entering into the Guarantee. No similar allegation was made about the 2006 Contract. While the Cross-Claims pleaded (par 21), somewhat obliquely, that the Mortgage and Guarantee were entered into “pursuant to” the 2006 Contract, they did not plead that the 2006 Contract obliged or “committed” them to execute the Mortgage and Guarantee. Yet the critical finding made by the primary Judge was that the 2006 Contract committed the Browns to enter into the Mortgage and Guarantee and that Ms Griffin’s advice concerning the risks of doing so had simply been given too late to be of practical utility. That finding had no basis in the pleadings.

105. In my opinion, contrary to Mr Maconachie’s submissions, the Cross-Claims cannot be read as alleging that the contract pleaded in par 20 was unjust. Not only was no such allegation made in terms, but the Cross-Claims did not allege material facts that, if proved, established that the 2006 Contract was unjust or even indicated that the Browns would endeavour to make out such a case at the trial. It follows that the primary Judge’s conclusion that the terms of the 2006 Contract, as found by his Honour, were unjust was outside the case pleaded by the Browns. This conclusion is consistent with his Honour’s acknowledgement (at [128]) that his approach did not reflect the way the Browns had put their case.

Did the Browns nonetheless run the case at trial?

106. The Browns’ failure to plead the case the primary Judge found against them might not matter if, in the words of the High Court in Dare v Pulham, the parties chose to disregard the pleadings and to fight the case on issues chosen at the trial. Mr Maconachie said this is what happened. He acknowledged that the Browns made no submissions to the primary Judge expressly seeking relief based on the injustice of the 2006 Contract. But he submitted that at an early stage of the trial Ms Papantoniou was put on notice that relief of that kind might be sought in the proceedings.

107. At the trial, the Browns’ counsel commented on the “startling fact” that the admitted agreement between Ms Papantoniou and the Browns contemplated that she would borrow the money necessary to acquire her interest, but that the loan would be secured on the Property and guaranteed by the Browns. However, this comment fell well short of foreshadowing that the Browns would seek relief in relation to the 2006 Contract, much less that they would seek to amend their pleadings to make out a case for such relief.

108. In any event, later exchanges proceeded on the basis that the case was to be conducted in accordance with the pleadings. In opening, counsel for the Browns explained to the primary Judge that their case had been pleaded in a particular way in order to obtain admissions from Ms Papantoniou and that he would seek rulings as to evidence on the basis of the pleadings. This was followed by an exchange between the primary Judge and Ms Papantoniou’s counsel, which made the position quite clear:

“MS MERKEL: … I have a simple answer to the Contracts Review Act case that the other rights that were invested in the parties from the beginning say there was no such injustice, that they were free to exercise and to some extent didn’t. That then comes to some of the pleading points because there has been criticism of the defence and if an explanation is brought forward it is because there were difficulties in ascertaining how to answer the claims in a simple way according to the rules.

HIS HONOUR: I suppose you’ve just made the submission that you’re entitled to keep [the Browns] strictly to [their] pleadings. At the same time part of the approach taken by [the Browns] is to analyse the pleadings and say, well, they want to keep your client strictly to the pleadings. If admissions had been made which advantaged them in making out the contract is unjust, well, they want to hold you to them. It is not uncommon in this sort of litigation that they’re sauce for the goose, sauce for the gander.

MS MERKEL: I am content to argue that none of the admissions even on this analysis actually get them to the Contracts Review point because they don’t get them to an unjust contract …

…

MS MERKEL:   I submit it comes down to fairness in the particular case where a failure to provide proper pleading or particulars would lead to an ambush.

HIS HONOUR: One of the problems on the hearing and issues relating to pleadings, their adequacy or inadequacy, their compliance with the rules or non-compliance with the rules, are matters that need to be addressed in an interlocutory phase or a stage. When parties are content to put the pleadings as they are before the Court for the determination of the issues between them. In those circumstances I think my primary duty is to decide the case in accordance with them.”    (Emphasis added.)

109. The primary Judge reiterated the importance of the pleadings on the sixth day of the trial:

“HIS HONOUR: Can I say this to both parties. I expect all arguments to be firmly grounded on the pleadings. If there’s a dispute between you about whether or not a point is fairly arguable, then I’d expect that counsel advancing it to demonstrate by reference to the pleadings, why it is fairly arguable, or alternatively, to demonstrate, to paraphrase the language of the High Court in Dare v Pulham, there’s been some mutual agreement to the path from the pleadings in terms of where the battleground lies.” (Emphasis added.)

110. Despite his Honour’s reference to Dare v Pulham, the Browns made no submission that their case was that the 2006 Contract was unjust or that the Court should grant relief designed to avoid the unjust consequences of the 2006 Contract. In final submissions, the primary Judge commented that the “logical place to make [an] adjustment to the overall transaction is at the point of the original tripartite agreement”. The Browns’ counsel said in response that he could see the logic in that observation, but he took the matter no further. Certainly he made no attempt to reformulate the Browns’ case.

111. In my view, the trial was conducted on the basis that each party would be held to the pleadings. There is no merit in the contention that the conditions laid down in Dare v Pulham for the conduct of a case outside the pleadings were satisfied.

Procedural Fairness

112. Had the Browns articulated a claim for relief in relation to the 2006 Contract, even if not pleaded, Ms Papantoniou would have had the opportunity to adduce evidence and make submissions in opposition to the claim. She might have argued, for example, that any injustice in the terms of the 2006 Contract had been ameliorated by the Browns’ entitlement to claim an indemnity from Ms Papantoniou in the event that they were required to make good her default. Ms Papantoniou also might have adduced evidence as to her financial position, with a view to demonstrating that the Browns’ right to an indemnity not only had commercial value but that they were not at any significant risk of loss.

113. As I have noted, the primary Judge found that once the Browns entered into the 2006 Contract, they were “committed” to the Mortgage and to the Guarantee. His Honour made this finding notwithstanding that Ms Papantoniou borrowed substantially more than the amount contemplated in the 2006 Contract and that the Browns received (as the primary Judge found) independent legal advice between the date of the 2006 Contract and the execution of the security documentation. It does not appear that the nature of any “commitment” was explored in evidence or in submissions at the trial.

114. Had the Browns articulated a claim that the 2006 Contract was unjust because it committed them to the Mortgage and Guarantee, Ms Papantoniou could have been expected to confront that claim with both evidence and submissions. Contrary to the primary Judge’s view, it is difficult to see how as a matter of law the 2006 Contract could have obliged the Browns to execute the Mortgage and Guarantee in the form submitted to them. Further consideration is likely to have been given to the content of the advice Ms Griffin gave to the Browns and to whether the Browns understood that they were not irrevocably committed to the Mortgage and Guarantee. After all, what was the point of Ms Griffin giving legal advice if, as the primary Judge thought, it came too late?

115. Section 90 of the Civil Procedure Act does not assist the Browns. Section 90 requires the court after trial to give such judgment or make such order as the nature of the case requires. An order is not required by the “nature of the case” if to grant relief would have the effect of denying procedural fairness to one party. Nor does s 63 of the Supreme Court Act 1970 (NSW) assist the Browns, since it requires the Court to grant such remedies as any party may appear to be entitled to “in respect of any legal or equitable claim brought forward”. If the relevant claim is not brought forward, s 63 is not enlivened.

The Claim Founded on Breach of Fiduciary Duty

116. The Third Cross-Claim filed on behalf of James’ estate pleaded that Ms Papantoniou breached the fiduciary duties she owed to James as his solicitor. The Third Cross-Claim sought an order for equitable compensation but did not specify how, if at all, that relief would differ from the compensation claimed by the Browns under the Contracts Review Act. At the trial, the Browns did not contend that equitable compensation should be assessed by reference to the loss sustained by James’ estate in consequence of him being a party to the 2006 Contract. (Robert did not plead a claim based on breach of fiduciary duty, presumably because Ms Papantoniou did not act for him.)

117. The primary Judge considered (at [123]) that his finding concerning Ms Papantoniou’s breach of fiduciary duty had no practical ramifications and he granted no specific relief attributable to that finding. Robert (in his capacity as executor of James’ estate) did not file a notice of contention seeking to uphold the primary Judge’s orders requiring Ms Papantoniou to pay compensation on the basis of her breach of fiduciary duty. Nor did Mr Maconachie submit that the breach of fiduciary duty case presented to the primary Judge was directed to the 2006 Contract, as distinct from the Mortgage and Guarantee executed by James.

Relief

118. Ms Papantoniou’s complaint that the findings made by the primary Judge denied her procedural fairness is well-founded. The orders made by his Honour must be set aside.

119. The consequence of a denial of procedural fairness will often be an order for a new trial, since the trial has miscarried. [15] In the present case, such an order is not appropriate. The case actually pleaded by the Browns, as the primary Judge appreciated, could not and cannot succeed. The inclusion of the so-called “Indemnity Clause” in the Guarantee (as sought in the Cross-Claims) would not improve the Brown’s position. Not only did Perpetual not seek to enforce the Guarantee but the Browns were entitled to an indemnity against Ms Papantoniou on general law principles without the intervention of the Court.

     15. UCPR r 51.53(1) provides that the Court must not order a new trial on any ground unless it appears that some substantial wrong or miscarriage has occurred.

120. No application has been made or foreshadowed by the Browns to replead this case so as to seek relief of the kind granted by the primary Judge. Any such application would face formidable obstacles. In any event, in the absence of an application to amend, there is no basis for remitting the Browns’ Cross-Claims to be reheard. Furthermore, as will be seen, the litigation can be resolved by orders made on Ms Papantoniou’s Cross-Claim without the parties being required to incur the expense and uncertainty of a retrial.

121. Accordingly, the First and Third Cross-Claims must be dismissed.

Ground 3: Findings made by the Primary Judge

122. Since Ms Papantoniou’s appeal succeeds in relation to the orders made on the First and Third Cross-Claims, there is no need to address Ground 3 of the notice of appeal. Had it been necessary to do so, however, I would have concluded his Honour erred in finding that the 2006 Contract committed the Browns to executing the Mortgage and Guarantee and that the independent legal advice that they received came too late to mitigate any injustice flowing from the terms of that Contract.

123. The primary Judge found that the “tripartite agreement” incorporated the terms alleged by the Browns in their Cross-Claims. Those terms were largely admitted by Ms Papantoniou in her Defence. The contractual arrangement concluded by August 2006 did not oblige the Browns to enter into any security arrangements proposed by Ms Papantoniou. If they were committed to anything, it was to mortgage the Property on reasonable terms to secure a loan to Ms Papantoniou to enable her to acquire the sisters’ 34 per cent interest. They were also to provide a guarantee to the lender as further security for a loan limited to the amount required to enable Ms Papantoniou to purchase the sisters’ interest. While the parties contemplated that a development application would be lodged, the terms of the 2006 Contract as pleaded and as found by the primary Judge, did not require the Browns to mortgage the Property or provide a guarantee in respect of a loan to Ms Papantoniou for a greater amount.

122. The primary Judge found that Ms Papantoniou must have realised that a lender would require the Browns to receive independent advice. Ms Griffin appears to have given advice on the assumption that the Browns were not committed to the security arrangements proposed by Perpetual. In any event, independent legal advice might have been expected to explain that the Browns were not committed to the proposed arrangements which materially differed from those envisaged in the 2006 Contract, unless they agreed to accept them. The primary Judge’s finding that the advice came too late was not supported by the evidence nor by his Honour’s findings as to the terms of the 2006 Contract.

Ground 4: Assessment of Compensation

125. There is no need to address the primary Judge’s assessment of compensation. The amounts in dispute will be considered in dealing with Ground 5 of the notice of appeal.

Ground 5: Taking of an Account

126. Both Mr Katekar and Mr Maconachie appeared content that this Court should resolve any dispute arising from Ground 5 in the FANA. Given that Mr Katekar took as his starting figure the amount of $257,053 assessed by the primary Judge as compensation under the Contract Review Act, Mr Maconachie did not dispute that this Court should determine the final amount payable by Ms Papantoniou to the Browns. This course facilitates the overriding purpose stated in s 56(1) of the Civil Procedure Act, namely to facilitate the just, cheap and quick resolution of the real issues in dispute.

Fees Claimed by Ms Papantoniou

127. The primary Judge’s starting figure of $257,053 payable by Ms Papantoniou as compensation under the Contracts Review Act did not give her credit for the fees of $33,310.24 said to be due to her firm for acting on behalf of James in the Family Provision Proceedings. Effectively, therefore, the order for compensation required Ms Papantoniou to repay that sum to Robert.

128. Mr Katekar accepted that Ms Papantoniou had breached the fiduciary duties she owed to James by arranging payment of the fees out of the moneys advanced by Perpetual, since at the time the loan was settled the costs due by James to Ms Papantoniou’s firm had not been assessed. [16] Nonetheless, Mr Katekar submitted that in the taking of accounts, Ms Papantoniou should be given credit for the fees, since a costs assessor had made a determination of costs on 22 December 2011 requiring Robert (as James’ executor) to pay the full amount. Although Ms Papantoniou had not been entitled to reimburse herself for costs out of the loan moneys, James’ estate owed Ms Papantoniou an equivalent amount. Thus any account should reflect that fact.

     16. Mr Katekar seemed to accept that at that time Ms Papantoniou was not entitled to recover the fees from James’ estate, presumably because a costs assessment had been required and had not been completed. It also appears that James authorised payment of the costs from the loan moneys, but there was no evidence that he had been advised that Ms Papantoniou was not entitled to reimburse her firm from the loan moneys.

129. Mr Maconachie initially submitted that no allowance should be made to Ms Papantoniou for any fees due to her firm by reason of her breach of fiduciary duties. In oral argument, however, he sensibly conceded that Ms Papantoniou’s firm is now entitled to fees from James’ estate by reason of the costs determination. He also sensibly accepted that even though the fees were due to Ms Papantoniou’s firm, an account should give credit to Ms Papantoniou for those fees. On this basis, therefore, any compensation due to James’ estate in consequence of Ms Papantoniou’s breach of fiduciary duties would be offset by her entitlement to fees under the costs assessment. Mr Maconachie acknowledged that it followed that the only relief Robert could claim in respect of Ms Papantoniou’s breach of fiduciary duties was any additional interest James’ estate had to pay Perpetual by reason of the loan moneys being used to pay the fees claimed by Ms Papantoniou. Mr Maconachie did not quantify the amount of interest, but accepted that it would be modest.

130. In my view, the starting figure of $257,053.00 due to the Browns should be reduced by the fees due to Ms Papantoniou’s firm ($33,310.24), but increased by the amount of interest paid or payable to Perpetual under the Deed of Loan in respect of that sum from the date of the loan (5 October 2006) until the date of repayment (18 March 2011). The calculation should take account of any penalty interest payable to Perpetual under the Deed of Loan because of Ms Papantoniou’s default.

131. As I have noted, the Browns did not file a notice of contention seeking to support the primary Judge’s decision not to give Ms Papantoniou credit for the fees due to her firm on the ground of her breach of fiduciary duties owed to James. However, the absence of a notice of contention directed to this issue can be attributed to Ms Papantoniou’s failure in her notice of appeal and written submissions to identify clearly the basis on which she was seeking a credit for the fees due to her firm. It is for this reason that I have taken into account Ms Papantoniou’s breach of fiduciary duties in determining the adjustment that should be made in respect of the fees.

Costs payable to Perpetual

132. In assessing compensation that Ms Papantoniou should pay to the Browns under their Contracts Review Act claims, the primary Judge declined to deduct the costs awarded to Perpetual in defending Robert’s claim against it under the Contracts Review Act (amounting to $82,806.98). Although his Honour did not expressly say so, he presumably declined to deduct the costs because he found (at [122]) that Robert had not acted unreasonably after Perpetual instituted the Possession Proceedings. The finding that Robert had not acted unreasonably seems to have been intended to include Robert’s actions in seeking relief against Perpetual under the Contracts Review Act, even though he failed to obtain any relief.

133. I did not understand Mr Maconachie to submit that the primary Judge’s finding that Robert had not acted unreasonably precluded Ms Papantoniou, on the taking of accounts, from resisting Robert’s claim to be indemnified against his costs liability to Perpetual. He seemed to accept – in my view correctly – that Robert’s claim to be indemnified (as distinct from relief under the Contracts Review Act) depended on the scope of his right of indemnity against Ms Papantoniou as the principal debtor.

134. Neither party referred to authorities analysing the circumstances in which a guarantor (or a person in a similar position) is entitled to recover from the principal debtor costs incurred by the guarantor in unsuccessfully resisting enforcement action by the creditor. According to a leading text, the principle is that a guarantor can recover from the principal debtor the costs reasonably incurred in resisting the creditor’s claim. [17] However, it is not clear that the authorities cited for this proposition, such as Garrad v Cottrell,[18] support a statement of principle in this form. Another view is that a surety cannot claim against the principal the costs of litigation in which the surety claims to have been discharged as against the creditor, or which the surety conducts purely for his or her own benefit. [19]

     17. J O’Donovan and J Phillips, Modern Contract of Guarantee (Looseleaf ed 2015, Thomson Lawbook Co) at [12.800].

     18. (1847) 10 QB 679; 116 ER 258.

     19. In re International Contract Company; Hughes’ Claim (1872) LR 13 Eq 623 at 624-625 (Wickens V-C); Baxendale v London, Chatham and Dover Railway Company (1874) LR 10 Exch 35 (holding that a contractor entitled to an indemnity from a carrier of goods could not claim the costs of defending an action by the consignor, as the costs were not “the proximate consequences of the carrier’s breach of duty” (at 43 (Keating J)); J O’Donovan and J Phillips, Modern Contract of Guarantee (Looseleaf ed 2015, Thomson Lawbook Co) at [12.800].

135. Robert might have encountered difficulties in establishing that he acted reasonably in defending Perpetual’s claim for possession of the Property, at least for the purposes of determining whether he was entitled to be indemnified by Ms Papantoniou against his liability to pay Perpetual’s costs. That is a different question from whether Robert can be regarded as having acted reasonably for the purpose of determining the appropriate relief that should be granted against Ms Papantoniou under the Contracts Review Act. Any assessment of the reasonableness of Robert’s conduct in the context of his claim to be indemnified by Ms Papantoniou would need to take into account that he could have protected his interests (and those of James’ estate) simply by relying on his right to be indemnified by Ms Papantoniou, without any need to resist Perpetual’s claims in the Possession Proceedings.

136. I do not think it is necessary to resolve this question finally. Mr Maconachie ultimately resisted Ms Papantoniou’s claim that Robert should bear the costs payable to Perpetual in the Possession Proceedings on the ground that she unreasonably refused to accept Robert’s offer in late 2009 to buy her interest in the Property. [20] The primary Judge recorded his “impression” that Ms Papantoniou may have acted in a high handed fashion at about this time and that she had attempted to put pressure on Robert. But his Honour made no finding that Ms Papantoniou had acted unreasonably in refusing Robert’s offer. Indeed, he said (at [121]) that Ms Papantoniou had a point about some of the matters she had raised.

     20. See at [34] above.

137. This Court was not taken to evidence that would support a finding that Ms Papantoniou unreasonably rejected any offer by Robert to purchase her interest (if in fact an unconditional offer was made). In any event, as Mr Maconachie accepted, Ms Papontoniou was under no legal obligation to accept an offer to purchase her interest. And even if she did act unreasonably in rejecting an offer, it is hard to see any connection between that rejection and the costs incurred by Robert in the Possession Proceedings.

138. For these reasons, in taking an account between Ms Papantoniou and Robert (as executor of James’ estate), the amount of $82,806.98 in legal costs paid by Robert to Perpetual should be regarded as Robert’s responsibility.

Trustees’ Costs of Sale

139. The primary Judge, in assessing compensation due to the Browns under the Contracts Review Act, did not deduct any portion of the costs of the trustees for sale, which formed a component of the sum of $476,254.21 paid by Robert to the trustees. As I have noted, Ms Papantoniou contended that 66 per cent of the trustees’ costs should be deducted from the amount payable by her. Mr Maconachie opposed such a deduction on the ground that Ms Papantoniou acted unreasonably in rejecting Robert’s offer to buy her interest.

140. For the reasons I have given in relation to the costs paid by Robert to Perpetual’s, Ms Papantoniou should be given credit for 66 per cent of the trustees’ costs (amounting to $13,956.03).

Other Expenses

141. Mr Maconachie did not oppose Ms Papantoniou receiving credit for unreimbursed rates and taxes paid by her ($1,583) and a proportion of the interest paid by her in respect of moneys expended in rates, taxes and development costs. The amount of interest that should be taken into account was not quantified.

Determining the Amounts Payable

142. The starting point for determining the amount payable by Ms Papantoniou to the Browns is $257,053.00. From this amount, the following deductions are to be made:

• $33,310.24 in respect of legal fees due to Ms Papantoniou’s firm;

• $82,806.98, being the costs paid by Robert to Perpetual in consequence his defence of the Possession Proceedings;

• $1,583 in respect of rates and taxes paid by Ms Papantoniou;

• the interest referred to in [141] above, yet to be quantified; and

• $13,956.03, reflecting 66 per cent of the costs of the trustee for sale.

143. A sum should be added to the amount payable to the Browns to take account of the interest on the loan referable to the fees paid to Ms Papantoniou’s firm. [21] Credit will have to be given to Ms Papantoniou for the amount already paid to Robert.

     21. See at [129] above.

Orders

144. The following orders should be made:

1.   Extend the time for the filing of a notice of appeal until 8 April 2015.

2.   Appeal allowed.

3.   Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the First Cross-Claim.

4.   Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the Third Cross-Claim.

5.   Set aside Orders (2) and (3) made by Campbell J on 10 June 2014 in relation to the Second Cross-Claim.

6.   In lieu of the Orders referred to in Order 3 and 4 above, make the following Orders:

(a)   Dismiss the First Cross-Claim.

(b)   Dismiss the Third Cross-Claim.

7.   Note that on the taking of an account between the appellant (Ms Papantoniou) and the respondents (the Browns), an amount is payable by Ms Papantoniou to the Browns calculated in accordance with these reasons for judgment.

8.   Direct the parties to bring in agreed short minutes of order within fourteen days quantifying the amount payable by Ms Papantoniou to the Browns in accordance with these reasons for judgment and apportioning such amount between the Browns.

9.   If no agreement is reached, direct that:

(a)   Ms Papantoniou file her proposed short minutes of order, together with brief written submissions in support, within fourteen days;

(b)   the Browns to file their proposed short minutes of order together with brief written submissions in support within a further seven days.

145. My present views on costs are as follows:

• Ms Papantoniou should pay the Browns’ costs of her motion to extend the time for filing a notice of appeal;

• the Browns should pay Ms Papantoniou’s costs of the First and Third Cross-Claims;

• there should be no order as to the costs of the Second Cross-Claim;

• the Browns should pay 75 per cent of Ms Papantoniou’s costs of the appeal; and

• the Browns should have a certificate under the Suitors’ Fund Act 1951 (NSW)

146. These views reflect the Browns’ lack of success on the Cross-Claims and the fact that the Second Cross-Claim appears to have received little attention at the trial. Some discount should be made from the award of the costs of the appeal to Ms Papantoniou because it only became apparent late in the appeal that she was making some significant concessions as to the amount she should be required to pay to the Browns.

147. If the parties accept these views, the costs orders should be incorporated in the short minutes of order. If they do not, the written submissions should explain the costs orders that are sought.

**********

Endnotes

Decision last updated: 22 June 2015