Poulos v Tzavellas - [2016] NSWSC 1303

Supreme Court

New South Wales

Amendment notes

Medium Neutral Citation: Poulos v Tzavellas [2016] NSWSC 1303
Hearing dates: 12 September 2016
Decision date: 12 September 2016
Jurisdiction: Common Law
Before: McCallum J
Decision:
Parties directed to calculate quantum of judgment to be entered for the plaintiffs in accordance with these reasons

Catchwords: GUARANTEES AND INDEMNITIES – guarantors’ liability for enforcement costs under loan facility – where whole debt repaid to lender by three out of five guarantors – subrogation to lender’s rights against remaining two guarantors and substitution as plaintiffs in possession proceedings – consideration of proper approach to calculation of costs payable by remaining guarantors
Legislation Cited: Civil Procedure Act 2005 (NSW), s 98
Contracts Review Act 1980 (NSW)
Cases Cited: Liverpool City Council v Estephan [2009] NSWCA 161
Category: Procedural and other rulings
Parties:
Frank Fotis Poulos (first plaintiff/first cross defendant)
Joy Poulos (second plaintiff/second cross defendant)
F Poulos Enterprises Pty Ltd (third plaintiff/third cross defendant)
Spiros Tzavellas (first defendant/first cross claimant)
Carlie Tzavellas (second defendant/second cross claimant)
Representation:
Counsel:
B Nolan (plaintiffs)
JT Johnson (defendants)
Solicitors:
JHK Legal (plaintiffs)
PJG Solicitors (defendants)

File Number(s): 2015/17317

Judgment

HER HONOUR: These are proceedings in the Possession List, initially commenced by the Commonwealth Bank of Australia (CBA). This judgment determines a matter between the parties who were originally the defendants to the proceedings relating to costs. The precise issue raised is factually complex; some explanation of the background is required.
As already noted, the proceedings were initially commenced by the CBA. The first defendant was the borrower, a company which had borrowed a sum of money for the purpose of developing an IGA supermarket business. The remaining defendants were five in number. The second and third defendants (I assume, a married couple) were Spiros Tzavellas and Carly Tzavellas. The fourth and fifth (I assume, also a married couple) were Frank and Joy Poulos. The sixth defendant was a corporate entity operated by Mr and Mrs Poulos. It is convenient to refer to the fourth, fifth and sixth defendants as the Poulos parties. The two families are referred to in the evidence as cousins.
From a time well before the commencement of the proceedings, Mr and Mrs Poulos were endeavouring, following the failure of the IGA business, to negotiate an outcome with the CBA. Mr and Mrs Tzavellas initially engaged with that process, evidently indicating at least “in principle” agreement at one point to share 50/50 the burden that fell on the guarantors to pay a shortfall in the repayment of principal by the borrower. A draft deed to that effect between the second to sixth defendants was drawn but never executed.
At some point, it appears Mr and Mrs Tzavellas had a change of heart and refused to sign the deed. They subsequently either refused or simply failed to engage in the settlement negotiations with the bank. Those negotiations dragged on for some time. As far as the material before me reveals, that was evidently due to a combination of circumstances importantly including the fact that Mr and Mrs Tzavellas were not participating in the negotiations and the Poulos parties were unable to pay the whole amount owing under the guarantees on their own.
Eventually the bank's patience ran out and, on 19 January 2015, the proceedings were commenced. The Poulos parties filed a defence to the claim but Mr and Mrs Tzavellas did not. Within a relatively short period after the commencement of the proceedings, the Poulos parties were able to gather sufficient funds to pay out the whole amount outstanding to the bank pursuant to the guarantees; that occurred on 8 May 2015. The payments were made in two separate amounts, the date of 8 May 2015 being the date of the second payment.
On 19 June 2015, a deed of settlement was executed between the bank and the Poulos parties pursuant to which their subrogation to the rights of the bank as against Mr and Mrs Tzavellas was perfected.
On 13 August 2015, an amended statement of claim was filed naming the Poulos parties as plaintiffs and the proceedings continued as against Mr and Mrs Tzavellas. The amended statement of claim claimed an amount which I was informed this morning reflects 50 per cent of the whole amount paid by the Poulos parties to discharge the debt to the CBA under the guarantees.
A defence to the amended statement of claim was filed on 2 October 2015. That document sets out various contentions as to the degree of awareness Mr and Mrs Tzavellas had as to the terms of the facilities but, as submitted by Ms Nolan, who appears on behalf of the Poulos parties, it does not disclose a defence proper.
On 19 November 2015, a cross-claim was filed making certain contentions in support of a claim by Mr and Mrs Tzavellas under the Contracts Review Act 1980 (NSW). There were various delays in the proceedings after that time, culminating in the Poulos parties having the proceedings re-listed before Davies J as Possession List Judge on 20 June 2016 in circumstances where Mr and Mrs Tzavellas had failed to serve evidence in support of the cross-claim in accordance with directions made by his Honour.
When the proceedings came before Davies J on that date, however, Mr and Mrs Tzavellas, now represented by Mr Johnson of counsel, indicated their desire to discontinue the cross-claim. While the position was not formalised that day, it appears to have been common ground that the discontinuance of the cross-claim reflected a capitulation to the claim by the Poulos parties, the only outstanding issues in the proceedings being matters related to the calculation of the amount in which judgment should be entered, principally arising out of disputes as to the proper method of calculation of interest and costs. The proceedings were listed today for hearing of those outstanding issues.
It appears to have been contemplated by Davies J that interest and costs were the only remaining issues in the proceedings but, conversely, it must be accepted that it is not clear that his Honour intended that the hearing today be the final hearing in the proceedings. In any event, the parties have brought forward a number of issues for determination today which, happily, were reduced by agreement during the course of argument.
The position reached this morning is as follows. First, the parties are agreed that interest on any amount payable by Mr and Mrs Tzavellas to the Poulos parties in response to their claim in the proceedings is to accrue at 14.48% from 8 May 2015, calculated in accordance with clauses A7 and B3.4 of the terms and conditions of the facility.
Secondly, Mr Johnson suggested that the plaintiffs should be obliged to adjust the default rates of interest in respect of the period after 8 May 2015 in accordance with the published rates of the CBA. Whilst there was little attention given to that issue during argument, it seems to me to be appropriate and fair that, if the default interest rate that would have been payable to the CBA by all guarantors in fact went down during that period, Mr and Mrs Tzavellas should have the benefit of that reduction in interest rate.
Thirdly, the only outstanding issue in the proceedings is the question of costs. The first contest as to costs is a dispute as to the time from when Mr and Mrs Tzavellas should pay the costs of the Poulos parties in accordance with the contract. It is common ground that they are liable to pay enforcement costs in accordance with the contract from either 8 May 2015 (the date on which the bank was paid out by the Poulos parties) or 19 June 2015 (the date of the deed). The contest is as to which of those dates should be the start date for those costs.
Mr Johnson submitted on behalf of Mr and Mrs Tzavellas that costs payable pursuant to the contract should not begin until the date of the deed because that is the agreed date of settlement in accordance with the terms of the deed. With his customary fairness, however, Mr Johnson acknowledged that there is a competing basis for making that determination, namely, one reflecting the fact that the whole of the debt had been repaid as at 8 May 2016, so that the right of subrogation accrued on that date. Neither party was able to point to any authority with any relevant guidance on this issue. Unguided by authority, it seems to me that the appropriate approach, the debt having been paid in full on 8 May 2015, is to prefer substance over form by giving effect to the accrued right to subrogation as at that date. On that basis, costs in accordance with the contract would be payable by Mr and Mrs Tzavellas from 8 May 2015.
The second contest as to costs arose from the contention that Mr and Mrs Tzavellas have unduly prolonged the proceedings by maintaining a defence which was without any merit. On that basis, the Poulos parties seek an order pursuant to s 98 of the Civil Procedure Act that Mr and Mrs Tzavellas pay their costs of the proceedings on an indemnity basis from 19 January 2015, the date on which the proceedings were commenced, until the date on which liability for costs under the contract commences.
The relevant principles were not in dispute. Both parties relied on the decision of the Court of Appeal in Liverpool City Council v Estephan [2009] NSWCA 161. The judgment in that case emphasises that costs are ordinarily assessed on the ordinary basis, the discretion to order otherwise being one that must be exercised judicially and in such a way as to reflect the requirement for a rational connection between the reason found for ordering otherwise and the extent of the departure from the usual rule. The judgment recognises that the matter relied upon in the present case, namely, the undue prolongation of a case by groundless contentions, is a proper basis on which the Court might determine that it should “order otherwise”.
The matter relied upon in the present case as the “relevant delinquency” was submitted by Ms Nolan to be a feature of the dispute dating back to the period of unsuccessful negotiation with the bank, commencing well prior to the time when the bank filed the statement of claim. As I have noted, there was a point at which it appears Mr and Mrs Tzavellas had indicated, at least in principle, their preparedness to shoulder the burden of half of the amount payable under the guarantees.
However, it is difficult to judge, on the strength of the correspondence alone, the full position of Mr and Mrs Tzavellas at that time. Certainly, it is not possible to form a firm view as to the status of the agreement. All that is before me is a letter between a solicitor and a person who was negotiating with the bank on behalf of the Poulos parties purportedly recording an agreement but it is not clear whether that is an agreement which would be regarded as binding or only one subject to the execution of a deed. As already noted, the deed was never executed.
I have concluded that it is not possible for me to judge, as at that period prior to the commencement of the proceedings, the apparent strength at that time of the position of either party or any future defence or cross-claim.
It is necessary then to look closely at what happened between the date when the proceedings were commenced and 8 May 2015 (the date after which I have determined costs are payable in accordance with the terms of the contract).
The relevant steps in the proceedings are helpfully summarised in the plaintiffs’ written submissions. A review of that material rather suggests that, between the commencement of the proceedings and May 2015, the principal contest was as between the CBA and the Poulos interests. Mr and Mrs Tzavellas did not file a defence to the CBA's statement of claim. Certainly, there appears to have been a measure of undue prolongation of the proceedings and a strong indication that the defence and cross-claim were unmeritorious, but those conclusions arise from events which occurred after 8 May 2015 and, indeed, after the service of the amended statement of claim.
In all the circumstances, I am not persuaded that there is a relevant delinquency such as to sound in indemnity costs in the period for which such costs are sought pursuant to s 98 of the Civil Procedure Act (as opposed to the later period when they are sought pursuant to the contract).
I should note that there remains one unresolved issue in the proceedings. Mr Johnson raised, I think for the first time today, the issue of the proportion of the liability under the guarantee that should be borne by Mr and Mrs Tzavellas, noting that there are five guarantors, three in the Poulos camp and only two in the Tzavellas camp. That issue was not raised before Davies J on 20 June 2016 and indeed was raised by Mr Johnson, not in his written submissions, but for the first time when he rose to his feet to respond to Ms Nolan's oral submissions.
The parties, however, are content to have that issue dealt with on a later date and indeed that is inevitable from the timing of its having been raised. Mr Johnson suggested that later argument on that issue will not unduly delay the final resolution of the proceedings because, in the meantime, Mr and Mrs Tzavellas propose to exercise their entitlement under the Legal Profession Act to have the costs payable by them in accordance with these reasons assessed.
ORDERS:

I note that, following upon the discontinuance of the cross claim, the defendants are to pay the plaintiffs’ costs of the proceedings as assessed on the ordinary basis up to and including 8 May 2015.

I note that, from 8 May 2015, the defendants are to pay the plaintiffs’ costs of the proceedings in accordance with the contract.

I direct the plaintiffs, by 26 September 2016, to serve a calculation of the amount claimed in accordance with these reasons.

I direct the defendants, within two weeks thereafter, to serve their response to the calculation.

I direct the defendants to file and serve by close of business on 27 October 2016 any evidence upon which they wish to rely, together with an outline of submissions, on the question of the proportion of the liability under the guarantees they should bear.

I direct the plaintiffs to file and serve any evidence in reply, together with an outline of submissions, by close of business on 3 November 2016.

I direct the defendants to make any request for a bill in assessable form, in accordance with the provisions of the Legal Profession Act, within two weeks.

I stand the matter over before me for determination of the proportion issue and any remaining issues in the proceedings on 17 November 2016.********

Amendments

14 September 2016 - incorrect hearing date on coversheet

Decision last updated: 14 September 2016

Medium Neutral Citation:	Poulos v Tzavellas [2016] NSWSC 1303
Hearing dates:	12 September 2016
Decision date:	12 September 2016
Jurisdiction:	Common Law
Before:	McCallum J
Decision:	Parties directed to calculate quantum of judgment to be entered for the plaintiffs in accordance with these reasons
Catchwords:	GUARANTEES AND INDEMNITIES – guarantors’ liability for enforcement costs under loan facility – where whole debt repaid to lender by three out of five guarantors – subrogation to lender’s rights against remaining two guarantors and substitution as plaintiffs in possession proceedings – consideration of proper approach to calculation of costs payable by remaining guarantors
Legislation Cited:	Civil Procedure Act 2005 (NSW), s 98 Contracts Review Act 1980 (NSW)
Cases Cited:	Liverpool City Council v Estephan [2009] NSWCA 161
Category:	Procedural and other rulings
Parties:	Frank Fotis Poulos (first plaintiff/first cross defendant) Joy Poulos (second plaintiff/second cross defendant) F Poulos Enterprises Pty Ltd (third plaintiff/third cross defendant) Spiros Tzavellas (first defendant/first cross claimant) Carlie Tzavellas (second defendant/second cross claimant)
Representation:	Counsel: B Nolan (plaintiffs) JT Johnson (defendants) Solicitors: JHK Legal (plaintiffs) PJG Solicitors (defendants)
File Number(s):	2015/17317