Russo v Buck (No 2) - [2007] SASC 157

SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
RUSSO v BUCK & ORS (No 2)
[2007] SASC 157
Judgment of The Honourable Chief Justice Doyle
8 May 2007
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - POWERS OF COURT
Plaintiff and defendants filed application for an order for costs following determination of original action - original action brought by plaintiff for orders that he was not bound by two loan contracts - plaintiff partially successful - plaintiff was not bound by second loan agreement on account of forgery - plaintiff was bound by first loan contract and related mortgage - inclusion of indemnity provision in mortgage - impact of indemnity provision on judicial discretion on the question of costs - indemnity provision requires the plaintiff to indemnify the first and second defendants against legal costs on a solicitor own client basis - effect of rule 264(5)(b) of Supreme Court Civil Rules 2006 (SA) - where entitlement to costs as between solicitor and own client, costs ordered on the basis of an indemnity - plaintiff to pay costs of the action of third and fourth defendants as between party and party - plaintiff to pay one-half the costs of the action of the first defendant on the basis of an indemnity.
Supreme Court Civil Rules 2006 (SA), r 264(5)(b), referred to.
Russo v Buck & Ors [2006] SASC 380; Citibank Savings Ltd v Pirrotta [1998] ANZ ConvR 442; Perpetual Trustees Australia Ltd & Ors v Barker (2004) 232 LSJS 400; Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588, considered.

RUSSO v BUCK & ORS (No 2)
[2007] SASC 157
Civil: Application

DOYLE CJ: In this action I delivered judgment on 19 December 2006: see Russo v Buck & Ors [2006] SASC 380.
I made orders disposing of the action on 27 February 2007.
Mr Russo has made an application for an order for costs in his favour. A like application has been made by the first to fourth defendants.
The following paragraphs from my earlier reasons give an indication of the nature of the case and of the issues that arose, although by no means a complete indication:
[1]In this action Mr Russo claims orders the effect of which would be to determine that he is not bound by two loan contracts between him and Mr and Mrs Buck (“the Bucks”) nor by a second mortgage given by him as security for the loans. He has joined as defendants Private Funds Management Pty Ltd (“PFM”), a company that acted on behalf of the Bucks in relation to the loans, and Ms Conn, a director of PFM and the person who manages PFM’s business. He claims damages from each of these defendants.
[2]The fifth defendant is Mr Buttigieg, a friend of Mr Russo’s. Mr Buttigieg persuaded Mr Russo to enter into the first loan contract to help Mr Buttigieg raise money for a used car business in which he was involved.
[3]Mr Buttigieg is an undischarged bankrupt. He has not filed a defence. He appeared in person at the trial, supporting Mr Russo by and large.
…
[23]In summary, these are the issues. First, whether the first contract of loan is enforceable between the Bucks and Mr Russo. Second, the legal consequence of the fact that PFM received the funds from the Bucks after it made the first advance to Mr Russo. Third, whether Mr Russo authorised or agreed to the “roll overs” in September 2001 and March 2002, and if he did not, the legal consequence of that. Fourth, whether Mr Russo agreed to the second advance of $70,000, and the legal consequence of the fact that the advance was made the same day as the Buck’s cheque to PFM was received. Fifth, whether Mr Russo agreed to the further “roll overs” of the loan or loans, and whether, after the further advance, there was a single loan or two separate loans. Sixth, the effect of the order for possession on Mr Russo’s entitlement to raise the issues that he raises.
In the action Mr Russo attacked the validity or binding effect of loan agreements entered into on 15 March 2001 and on 6 June 2002. He also attacked the validity or binding effect of a second mortgage granted by him in favour of the Bucks at the time of entering into the first loan agreement. Any liability under the second loan agreement was also secured by the mortgage.
He also claimed damages and other relief from PFM and from Ms Conn, arising out of the part PFM played in negotiating and arranging the loan agreements. PFM (through Ms Conn) conducted all of the dealings on behalf of the Bucks. The Bucks had no direct contact with Mr Russo at any time.
Mr Russo commenced the proceedings on 6 September 2004.
Possession proceedings had been brought under the mortgage by the Bucks on 8 July 2003. These proceedings went by default. The Bucks took possession on 25 February 2004, but restored possession to Mr Russo a few days later after a substantial payment on account of moneys owing was made. Further possession proceedings were instituted on 11 June 2004. Mr Russo appeared and was represented in these proceedings. In his Statement of Claim in the present case Mr Russo raised a number of alternative claims. The Statement of Claim was poorly drawn and, in a number of respects, was confusing. In para [23] of my reasons set out above, I have summarised the main issues at trial.
I found that Mr Russo was bound by the first loan agreement. I found that he was not bound by the second loan agreement, because his signature on it had been forged by another person acting with Mr Buttigieg. I found that he was bound by the mortgage. I referred to a Master the determination of the amount owing, if any, under the first loan contract and under the mortgage.
While Mr Russo has successfully attacked one of the two loan agreements relied on by the Bucks, he failed to have the mortgage set aside. If any amount is still due under the first loan agreement, or under the mortgage, the Bucks will be entitled to possession of the mortgaged property, unless that amount is paid. It is possible that nothing is owing under the first loan agreement, although if I make an order for costs against Mr Russo, and those costs are secured by the mortgage, that amount at least will be secured by the mortgage.
Mr Sallis, counsel for Mr Russo, submits that I should not decide the costs issue until the Master has determined if anything is owing under the first loan agreement or under the mortgage, because the decision on that question will have a significant impact on the exercise of my discretion as to costs.
I do not accept that submission. Mr Russo attacked the validity or binding effect of the two loan agreements and of the mortgage. He has had a limited success. That remains the case even if it ultimately turns out that nothing is now owing under the first loan agreement. Mr Russo could have limited his case to a claim that nothing was now due under the first loan agreement, and that nothing was secured by the mortgage because the second loan agreement did not bind him. He chose to make a wider attack, embracing an attack on the validity or binding effect of the first loan agreement and of the mortgage.
For those reasons a conclusion by the Master that nothing is owing under the first loan agreement, or secured by the mortgage, will not alter the fact that Mr Russo has had only a partial success with the claims that he advanced.
Accordingly, there is no reason why I should not make a decision on the question of costs.
Mr Hoffmann QC, for the first to fourth defendants, submits that in exercising my discretion as to costs I should act so as to reflect a contractual entitlement to costs given by the terms of the first loan agreement and by the terms of the mortgage. He relies on decisions of the Full Court to that effect in Citibank Savings Ltd v Pirrotta [1998] ANZ ConvR 442 and in Perpetual Trustees Australia Ltd & Ors v Barker [2004] SASC 58; (2004) 232 LSJS 400 at [19] – [21]. See also Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1992] 4 All ER 588 at 604-608.
The relevant condition of the loan agreement is as follows:
It is a condition of this offer that, upon acceptance, you shall become liable to pay to the Mortgage Manager on demand all costs, charges and expenses paid or incurred by it in relation to the proposed loan, and that such liability shall not be in any way affected by the fact that the proposed loan does not proceed or that it proceeds for a different principal sum or on different terms from those stated therein. In so far as such costs, charges and expenses comprise legal fees, they shall be paid by you on a solicitors and own client basis.
The mortgage manager referred to in that clause is PFM.
This provision benefits only the third defendant, and perhaps Ms Conn. I do not agree that the Bucks can claim the benefit of this provision through PFM. No attempt has been made to establish that PFM is liable to indemnify them for their costs of action. In any event, the condition refers only to costs “in relation to the proposed loan”. That language is not wide enough to cover later legal disputes of the kind that arose here.
Clause 41 of the mortgage provides that:
41. INDEMNITY
At all times during the continuance of this Mortgage the Mortgagor shall indemnify and keep indemnified the Mortgagee against any liability, claim, action, suit, cost or expense (including legal costs on a solicitor and own client basis) to, by or of any person (including the Mortgagor) in respect of:-
41.1. any act or omission of the Mortgagor or any of the employees of the Mortgagor arising out of or in connection with this Mortgage;
…
41.7. the exercise, non-exercise, purported exercise or delay in exercising any of the rights or powers of the Mortgagee or rights or powers of a Receiver or any attorney of the Mortgagor under this Mortgage; or
…
I agree that this provision applies to the present case.
It requires Mr Russo to indemnify the Bucks against a liability, including legal costs incurred by them on a solicitor and own client basis, to any person (which would include their solicitors), in respect of an act or omission of Mr Russo (as mortgagor), or in respect of the exercise of the Bucks’ powers as mortgagee.
The liability to their solicitor for costs, that the Bucks have incurred, is in respect of the exercise of their powers by instituting proceedings for possession. That is the case because Mr Russo’s claims were a challenge to, or in resistance to, their exercise of their rights under the mortgage.
It follows that this provision of the mortgage is a factor supporting the exercise of my discretion in favour of the Bucks at least. The provision does not require me to exercise my discretion in favour of the Bucks.
It is desirable to consider the position apart from this provision. If I concluded that Mr Russo was entitled to the costs of the action, or to a substantial part of them, I would not be obliged to exercise my discretion in favour of the Bucks because of the terms of the provision just referred to. Whether they could make a separate claim against Mr Russo under the relevant provision of the mortgage is another issue: see Gomba Holdings at 605-607.
Without regard to the provision of the mortgage, I consider that Mr Russo should pay the bulk of the costs of the action. I accept the submission by Mr Hoffmann that the action was, in substance, an attack on the entitlement of the Bucks to exercise their powers under the mortgage.
That attack has failed. So has the attack on the first loan agreement. The claim against PFM and Ms Conn has failed entirely.
There are other factors that influence me in coming to my conclusion. As I have already said, Mr Russo’s Statement of Claim raised a confusingly varied series of claims, a number of which are plainly misconceived. He satisfied me that the second loan agreement was forged on the basis of evidence some of which was not clearly foreshadowed before the trial, or even in Mr Sallis’s opening, evidence which in part seems to have become available almost by luck and late in the piece. The claims against PFM and Ms Conn were, in my opinion, misconceived. I realise that it will be extremely difficult to separate the costs of PFM from those of the Bucks.
For those reasons I would, in any event, order that Mr Russo pay all of the costs of PFM and Ms Conn as between party and party and one half of the costs of the Bucks as between party and party, of the action so far. That order is, of course, subject to specific costs orders that have been made along the way. As well, the costs of the inquiry before the Master raise different issues.
I return to the question of the impact on my discretion of the indemnity provision in the mortgage. I remind myself that this provision does not entitle PFM or Ms Conn to an order for costs on the stated basis.
In my opinion it is appropriate to order that Mr Russo should pay one-half of the costs of the Bucks on the basis of an indemnity. The effect of r 264(5)(b) of the Supreme Court Civil Rules 2006 is that where there is an entitlement to costs as between solicitor and own client, the costs should now be ordered on the basis of an indemnity. That basis is appropriate in the present case having regard to the provisions of the mortgage.
In the exercise of my discretion I do not consider it appropriate to order that Mr Russo pay all of the Bucks’ costs. I consider it appropriate that the costs order should continue to reflect the fact that Mr Russo had some success.
I appreciate that a taxation of costs on the basis I have ordered will be difficult, but I am unable to identify any basis for making an order of costs that removes the distinctions that I have drawn between PFM and Ms Conn on the one hand, and the Bucks on the other hand.
Accordingly, I order that Mr Russo pay the costs of action of PFM and Ms Conn as between party and party, and one-half of the costs of action of the Bucks on the basis of an indemnity. This order is subject to specific cost orders made along the way.