Provident Capital Ltd v Bortolin Papa (No 2)

[2011] NSWSC 1266

Supreme Court

New South Wales

Medium Neutral Citation:	Provident Capital Ltd v Bortolin Papa (No 2) [2011] NSWSC 1266
Hearing dates:	17/10/2011
Decision date:	27 October 2011
Jurisdiction:	Common Law
Before:	Fullerton J
Decision:	See paragraph 28
Catchwords:	COSTS - calculation of amount owing plus interest under varied agreements where original agreement was found unjust under the Contracts Review Act -whether general rule that costs of successful party are paid by unsuccessful party should be displaced - Bullock order
Legislation Cited:	Civil Procedure Act 2005 Contracts Review Act 1980
Cases Cited:	Commonwealth of Australia v Gretton [2008] NSWCA 117 Provident Capital Ltd v Bortolin Papa (No 1) [2011] NSWSC 460 Gould v Vaggelas [1985] HCA 75; 157 CLR 215 Roads and Traffic Authority of NSW v Dederer [2007] HCA 42; 234 CLR 330 Tomanovic v Global Mortgage Equity Corp Pty Ltd (No 2) [2011] NSWCA 256
Category:	Costs
Parties:	Provident Capital Ltd (Plaintiff/First Cross Defendant) Gina Giovanna Bortolin Papa (Defendant/Cross Claimant) George Caramanlis (Second Cross Defendant)
Representation:	BK Nolan (Provident Capital Ltd) G Segal (Bortolin Papa) G Curtin SC (Caramanlis) Tiernan Lawyers (Provident Capital Ltd) Rhodes Legal (Bortolin Papa) Colin Biggers & Paisley (Caramanlis)
File Number(s):	2008/287567

Judgment

1. HER HONOUR : On 23 May 2011 I gave judgment the effect of which was that Provident was unsuccessful in the proceedings it brought against Mrs Bortolin Papa for the recovery of monies advanced under two loan agreements and in obtaining an order for possession of the property that secured the loans and that Mrs Bortolin Papa succeeded in her cross claim against Provident ( Provident Capital Ltd v Bortolin Papa (No 1) [2011] NSWSC 460).

1. The precise relief sought under the cross claim was an order that the loan agreements not be enforced (and the mortgage not be enforced) other than in relation to an amount advanced by Provident to discharge an existing mortgage over the secured property when the first loan agreement was entered into with interest on that amount to be calculated at the rate nominated in the mortgage.

1. Mrs Bortolin Papa also sought an order that she be permitted a period of 90 days from the determination of the cross claim in her favour to enable her to discharge her obligation to repay the amount owed to Provident and retain possession of the secured property in which she currently resides. There was no opposition to that course. Argument as to the terms of the final orders was also stood over as was the issue of costs.

1. In the same judgment I dismissed the cross claim Mrs Bortolin Papa brought against Mr Caramanlis for damages for breach of his duty to advise her in relation to the loan agreements, her obligations under those agreements, and the legal effect of the Borrowers Declarations which Provident required her to execute as a part of the loan documentation. I stood over the issue of costs on that cross claim to afford all parties the opportunity to review the judgment before receipt of submissions.

1. The matter was re-listed for argument on 17 October 2011.

1. At the further hearing Ms Nolan acknowledged Provident's liability to pay Mrs Bortolin Papa's costs of the proceedings and the costs of her cross claim. Leaving to one side whether I am persuaded that Mrs Bortolin Papa should have the benefit of a Bullock order requiring Provident to meet any order for Mrs Bortolin Papa to pay Mr Caramanlis' costs, the amount owing to Provident and how it should be calculated remained in issue between Provident and Mrs Bortolin Papa.

1. Ms Nolan submitted that the loan agreements should be varied to reduce the amount of the advance to an amount equal to the funds committed to discharge the existing mortgage but that the remaining terms of the loan agreements should be enforced. Mr Segal submitted that Provident ought not be permitted to recover interest calculated by reference to loan agreements which were found by me to be unjust under the Contracts Review Act 1980 . He also submitted tha t the specific relief sought in the cross claim, namely that the agreements not be enforced otherwise than in respect of the amount advanced to permit discharge of the existing mortgage, should be construed as seeking relief from enforcement of the remaining provisions of the loan agreement, in particular the formula by which the amount owing should be calculated, inclusive of interest.

1. The formula that Provident contended was calculated by reference to the adjusted loan advance of $184,401 (the amount committed to discharge the existing mortgage) which, together with various fees and charges expressly provided for in the loan agreements as payable by the borrower, resulted in an adjusted loan balance of $196,306.67 as at the date of settlement upon which interest accrued. After making appropriate allowance for the interest that was paid between 5 May 2007 and 5 September 2008 in the amount of $71,016.90 (calculated at 10.99% under the agreements up until 4 April 2008 and thereafter at the penalty rate of 16.99%), the amount Provident claimed as owing as at 17 October 2011 is $288,181.86.

1. According to the formula advanced by Mr Segal, the adjusted loan balance at the date of settlement was $187,664.97. He submitted that the establishment fees, Provident's legal fees and expenses, stamp duty and interest to the date of settlement are obligations imposed under the loan agreements which ought not be enforced. Mr Segal then submitted that interest should be calculated in accordance with the Memorandum of Mortgage which provides that where there is no related agreement (in this case no loan agreement), the mortgagor's obligation is to pay interest on the secured monies at the rate applicable from time to time under s 101 of the Civil Procedure Act 2005. The secured money is relevantly defined as "money which the mortgagee lends to the mortgagor" which in this case, so it was submitted, is the adjusted loan balance of $187,644.97. Clause 4 of the Memorandum of Mortgage provides for the use to which the mortgagee may apply the monies it receives as follows:

4. Mortgagee's Use of Money

The Mortgagee may use any money that it receives concerning the secured money to reduce the secured money in any way the Mortgagee determines, whether by reducing:

4.0.1. the principal amount of any secured money; or

4.0.2. the interest payable on any secured money; or

4.0.3. any expense or loss incurred by the Mortgagee relating to any secured money; or in any other way.

1. Mr Segal submitted that because Mrs Bortolin Papa paid in excess of the interest that was due to Provident, the only use to which the monies could have been applied (after allowing for interest on the initial advance) was in reduction of the principal, such that her obligation was to pay interest only upon so much of the principal that remained outstanding from time to time. By this calculation, the amount said to be owing to Provident as at 17 October 2011 was $126,422.56. In the alternative, an amount of $135,797.56 was proffered. This was arrived at by applying the discount rate of 10.99% under the agreement but otherwise calculating the amount owed in accordance with the Memorandum of Mortgage.

1. In [204] of the judgment I concluded that the loan agreements were unjust for the reasons set out in [187] - [203] and [205] - [208] and that Mrs Bortolin Papa was entitled to relief under the Contracts Review Act . In that discussion I identified a range of factors which, in combination, satisfied me that such a finding was appropriate. A factor which carried particular weight was the failure on Provident's part to make any inquiries as to Mrs Bortolin Papa's capacity to fulfill her obligations as borrower under the loan agreements. I note that Mr O'Sullivan gave evidence that were Provident to have known Mrs Bortolin Papa's actual situation it would not have contracted with her given her limited financial circumstances and the fact that she had no interest in the business into which the funds were to be committed.

1. I also accepted, contrary to Mrs Bortolin Papa's evidence, that she was aware of the amount she was borrowing for her son, and the amount of the monthly interest instalments, and that she knew that her house was at risk if he was unable to make those payments. I was also satisfied that she gained no financial or other benefit under the loan agreements and was, in a practical sense, "a silent and compliant dupe" who was manipulated by her son for his own selfish ends.

1. Section 7(1) of the Contracts Review Act provides for a range of discretionary relief designed to avoid, as far as practicable, an unjust result after a finding that a contract was unjust in the circumstances in which it was made. I am satisfied that to enforce the terms of the loan agreements, save only in relation to the amount advanced (the position for which Provident contends) would be an unjust result which could and should be avoided. On the other hand, I am not persuaded that Mrs Bortolin Papa should be relieved entirely of the impact of the terms under which she contracted. Importantly, although Mrs Bortolin Papa made none of the monthly repayments between May 2007 and the date of default, each being drawn from her son's business, Provident's calculation credits her with these amounts in full.

1. I propose to calculate the amount owing referable to Provident's calculation of the initial loan balance at $196,306.67 which, I note, is calculated in accordance with the operating provisions of the loan agreement which accrue as part of the loan. In doing so I take into account her evidence that she was motivated to assist her son and to refinance her existing arrangement with Bendigo Bank to this end. Although there was no evidence or argument directed to whether she would have been exposed to similar fees and charges were she to have refinanced with another lender, I do not regard the contractual terms in the loan agreements as unusually onerous.

1. In accordance with s 7(1)(a) of the Contracts Review Act , I will not enforce clause 4.7 of the loan agreement which would allow for the application of the penalty rate of 16.99% on an accrual basis, or clause 4.1 which would allow for the calculation of interest on a compound basis from the date of default. I adopt the alternate basis upon which Mr Segal proposed that interest be calculated, namely at 10.99% per annum, being the ordinary rate under the loan agreements. I do not consider it to be productive of an unjust result were interest at that rate to be calculated referable to the initial loan advance less the amount of interest actually paid.

1. In addition, Provident is not permitted to enforce clause 14.3 of the agreement or to seek to recover any early repayment fee as referred to in Ms Nolan's submissions at paragraph 6(k).

1. Accordingly, the amount owing under the loan agreement will need to be calculated for the purpose of final orders as follows: repayment of the initial loan amount of $196,306.67 with interest on that amount for 1657 days (that is, from 5/04/2007 to 27/10/2011) at 10.99%, less the amount of $71.016.90 already paid.

The costs of the cross claim against Mr Caramanlis

1. Mrs Bortolin Papa resists the order sought by Mr Caramanlis that she pay his costs of the cross claim. If she is ordered to pay his costs she seeks an order that they be paid by Provident.

1. Mr Curtin submitted that in exercising the costs discretion under s 98 of the Civil Procedure Act the general rule in r 42 of the Uniform Civil Procedure Rules is that the costs of the successful party are paid by the unsuccessful party and that the party seeking to disturb that general rule bears the onus of establishing a proper basis for so doing. In Tomanovic v Global Mortgage Equity Corp Pty Ltd (No 2) [2011] NSWCA 256 Campell JA summarised the principles as follows:

[97] In Oshlack v Richmond River Council (1998) 193 CLR 72 McHugh J said, at [69], 97-98:

"In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874, Devlin J formulated the relevant principle as follows:

'No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct.'

'Misconduct' in this context means misconduct relating to the litigation: King & Co v Gillard & Co [1905] 2 Ch 7; Donald Campbell & Co Ltd v Pollak [1927] AC 732 at 812, or the circumstances leading up to the litigation: Bostock v Ramsey Urban District Council [1900] 2 QB 616. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation: Jones v McKie [1964] 1 WLR 960; [1964] 2 All ER 842; Bostock [1900] 2 QB 616 at 622, 625, 627; unnecessarily protracts the proceedings: Forbes v Samuel [1913] 3 KB 706; succeeds on a point not argued before a lower court: Armstrong v Boulton [1990] VR 215 at 223; prosecutes the matter solely for the purpose of increasing the costs recoverable: Hobbs v Marlowe [1978] AC 16; or obtains relief which the unsuccessful party had already offered in settlement of the dispute: Jenkins v Hope [1896] 1 Ch 278."

[98] Though McHugh J's judgment was a dissenting judgment, I did not see anything in the joint judgment of Gaudron and Gummow JJ or in the judgment of Kirby J (all three of whom made up the majority) that is to the contrary. Its statement of principle seems to me, with respect, to be correct as far as it goes. However, because it states when the court may properly depart from the usual order as to costs it still leaves a discretion as to whether, in any particular case that falls within the scope of the examples that McHugh J gives, it is appropriate for the court actually to depart from the usual order as to costs. Further, the list of examples that McHugh J gives does not purport to be an exhaustive listing of the circumstances in which an overall successful party ought not receive costs, or ought bear costs of the other side. Nor does his Honour seek to differentiate the sort of circumstances in which an overall successful party should not receive costs (with the effect that each side bears its own costs) from the circumstances in which the overall successful party should pay the costs of the loser.

1. Mr Segal submitted that in this case my express rejection of Mr Caramanlis' evidence concerning the advice he claimed to have given to Mrs Bortolin Papa in conference in April 2007 and 2008 (see [167] and [175]) and my criticism generally of the quality of legal service he provided to Mrs Bortolin Papa (see [179] and [202]) amounts to disentitling conduct sufficient to deprive him of his costs.

1. Mr Curtin emphasised, correctly in my view, that the relevant misconduct (or disentitling conduct) is in the conduct of the litigation (as illustrated in the above extract) and that the conduct of a party in the transaction, or in the relationship under consideration, does not usually operate to disturb the general rule. While he acknowledged the Court's legitimate expectation that the duty of candour and probity owed by a solicitor is perhaps at its highest when the solicitor is a witness in proceedings in which he has been joined as a party, and that any departure from that exacting standard in his conduct as a witness or party is deserving of harsh criticism, to translate my disapproval of Mr Caramanlis having given what must be deliberately false evidence, by ordering that he should bear his own costs as a successful litigant does not, or should not automatically follow. He also pointed out that I did not regard Mrs Bortolin Papa or her son as having given entirely truthful evidence either.

1. Mr Curtin submitted that there was nothing in Mr Caramanlis' conduct of the litigation that operated to displace the general rule. He relied upon evidence of Mr Caramanlis' offer of $100,000, inclusive of costs, to settle the cross claim with a view to those funds being available to assist Mrs Bortolin Papa in funding the litigation with Provident. That offer was rejected.

1. Mr Curtin also relied upon my finding that the ultimate success of the cross claim was necessarily dependent upon proof of a causal link between the alleged breach of duty and damage (in this case, as it turns out, the additional costs associated with obtaining refinance of the existing mortgage) and that the evidence was deficient to establish that connection in this case even if breach were established.

1. Taking into account the competing submissions and the authorities which inform the operation of the exception to the general rule, I am left with a sense of disquiet as to the way in which Mr Caramanlis conducted his defence to the cross claim, in particular his evidence concerning the circumstances in which the Borrowers Declarations came to be executed and his evidence as to the legal effect of the documents in light of the pleadings. My findings at [175] - [179] reflect that concern as did the exchange with counsel in the course of final submissions.

1. In the result, I am of the view that fairness dictates (see Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121]) that Mr Caramanlis ought not be permitted to recover the costs associated with drafting the defence to the cross claim or preparing his affidavit (or that of Ms Voulgaris), or the costs associated with any argument directed to the legal effect of the Borrowers Declarations in the hearing. He should also not be permitted to recover the costs of his appearance as a witness in the proceedings were he to claim them. Otherwise his costs should be met by Mrs Bortolin Papa.

Should Provident pay those costs under a Bullock order?

1. Ms Nolan submitted, in my view correctly, that although in its defence to the cross claim brought by Mrs Bortolin Papa Provident relied upon what it claimed was her receipt of independent legal advice before executing the loan documentation in both April 2007 and April 2008, inclusive of the advice concerning the Borrowers Declaration, it was not necessary (in the sense of reasonable or proper) for Mrs Bortolin Papa to bring proceedings against Mr Caramanlis for the purposes of either making out her cross claim against Provident or meeting Provident's defence (see Roads and Traffic Authority of NSW v Dederer [2007] HCA 42; 234 CLR 330). To put it another way, Provident did not lead her to bring proceedings against her solicitor by bringing the proceedings or in its conduct of the proceedings (see Gould v Vaggelas [1985] HCA 75; 157 CLR 215). As Ms Nolan submitted, Mrs Bortolin Papa could simply have elected to rely upon her evidence (which was served by way of an affidavit) that she was not so advised, imposing on Provident the forensic onus of calling Mr Caramanlis as a witness in its case to meet that evidence if it wished. Instead, she elected to join him for the express purpose of seeking to recover damages in the event that Provident succeeded in enforcing the loan agreements against her. This much was made clear from what I recited in [11] of the judgment as the agreed position of the parties as to how the cross claim should be approached if the dispute between Provident and Mrs Bortolin Papa was resolved in her favour.

1. I am satisfied that simply because there were factually interrelated issues in the substantive proceedings, in Mrs Bortolin Papa's cross claim against Provident and in the cross claim she brought against Mr Caramanlis does not operate to enliven the discretion to make a Bullock order. It is necessary for her to establish that there was something in Provident's conduct that makes it appropriate to exercise the discretion in her favour. I am not satisfied that discretionary considerations favour making a Bullock order and I decline to do so.

Orders

1. In accordance with the short minutes of order I make the following orders and declarations:

1. I order that the Loan Agreements dated 5 April 2007 (the First Loan Agreement) and 3 April 2008 (the Second Loan Agreement) entered into between the plaintiff and the defendant be varied or set aside as follows:

(a) The Principal Sum referred to in the First Loan Agreement be varied so that it is reduced to be and is deemed to have always been $196,306.67.

(b) Clause 4.7 in the First Loan Agreement be varied to the extent that it otherwise did not require the plaintiff to accept interest at the Discount Rate so as to require the plaintiff and shall always have been deemed to have required the plaintiff to accept payment of interest at the Discount Rate.

(c) The Definition of "Loan Balance" in the First Loan Agreement be varied so as to delete therefrom all words following upon the words "Loan Balance" excepting the words "Loan Amount".

(d) The Second Loan Agreement be set aside.

2. I declare that the amount owing by the defendant to the Plaintiff pursuant to the First Loan Agreement as under (1) above as at 27 October 2011 including all interest payable to that date is $185,725.38.

3. I declare that the daily rate of interest payable by the defendant under the First Loan Agreement as varied under (1) above on the sum of $185,725.38 is $55.92.

4. I order that the plaintiff pay the defendant's costs of and incidental to the plaintiff's claim and the defendant's cross claim against the plaintiff.

5. I order that the cross claim brought by the defendant against the second cross defendant be dismissed.

6. I order that the cross claimant pay the second cross defendant's costs of and incidental to that cross claim save and except the costs:

(a) incurred by that cross defendant in drafting the Defence to Cross Claim; and

(b) incurred by that cross defendant in preparing the Affidavit of that cross defendant; and

(c) incurred by that cross defendant in preparing the Affidavit of Ms Voulgaris; and

(d) associated with argument directed to the legal effect of the borrower's declaration; and

(e) of his appearance as a witness in the proceedings.

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Decision last updated: 03 November 2011