A1 Catering Services Pty Ltd v Manassen Holdings Pty Ltd (No 2) [2024] NSWSC 530

Catchwords: COSTS — party/party — bases of quantification — factors relevant to the court’s discretion when quantifying costs Supreme Court New South Wales Medium Neutral Citation: A1 Catering Services Pty Ltd v Manassen Holdings Pty Ltd (No 2) [2024] NSWSC 530 Hearing dates: On the papers Date of orders: 03 May 2024 Decision date: 03 May 2024 Jurisdiction: Equity Before: Richmond J Decision: Plaintiff to pay the second defendant’s costs on an indemnity basis. Catchwords: COSTS — party/party — bases of quantification — factors relevant to the court’s discretion when quantifying costs Legislation Cited: Civil Procedure Act 2005 (NSW) Cases Cited: A1 Catering Services v Manassen Holdings Pty Ltd [2024] NSWSC 178 Dee-Tech Pty Ltd & Anor v Neddam Holdings (No 2) [2012] NSWSC 517 Gomba Holdings ( UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd ( No 3) [2023] NSWSC 720 Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 Kyabram Property Investments Pty Ltd v Murray [2006] NSWSC 54 Lollis v Loulatzis [2008] VSC 35 Ritter v Godfrey [1920] 2 KB 47 Secure Funding Pty Ltd v Conway [2013] NSWSC 1536 Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171 Dee-Tech Pty Ltd & Anor v Neddam Holdings Pty Ltd (No 2) [2012] NSWSC 517 Texts Cited: GE Dal Pont, Law of Costs (5 th ed, LexisNexis, 2021) Category: Costs Parties: A1 Catering Services Pty Ltd (Plaintiff) Manassen Holdings Pty Ltd (Second Defendant) Representation: Counsel: A Gauja (Plaintiff) A Smith (Second Defendant) Solicitors: Taylor Rose (Plaintiff) Summer Lawyers (Second Defendant) File Number(s): 2021/45819 Publication restriction: Nil JUDGMENT These reasons deal with the question of costs left open in my decision of 27 February 2024 ([2024] NSWSC 178) ( Judgment ) in which the Court held that the plaintiff, A1 Catering Services Pty Ltd ( A1 Catering ) was not entitled to the return of the amount of $300,000 withheld by the second defendant, Manassen Holdings Pty Ltd ( Manassen ) , as security for costs in respect of anticipated litigation ( Security ) . The parties have provided written submissions on costs and have agreed that the Court should decide the question of costs on the papers. Manassen was entirely successful and now seeks an order for its costs of the proceedings on an indemnity basis relying on its contractual entitlement to claim its costs in connection with the enforcement of the loan documents from the borrower, A1 Catering . A1 Catering accepts that costs should follow the event but submits that costs should be ordered on the ordinary basis. In relation to the costs application, Manassen re lie d on an affidavit of its solicitor, Elizabeth Debono annexing correspondence between the parties regarding the preparation s for trial including the removal of material from the court book no longer considered relevant by A1 Catering . C ontractual entitlement to costs Cl ause 13.1 of the loan agreement between Manassen (as Lender) and A1 Catering (as Borrower) provides (emphasis added) : The Borrower will pay to the Lender on demand and keep the Lender indemnified against all expenses (including GST and legal costs and disbursements on a solicitor and own client basis) incurred by the Lender in connection with : (c) (Enforcement): the enforcement, attempted enforcement or preservation of any rights under any Transaction Document including, without limitation, any expenses incurred in the evaluation of matters of material concern to the Lender and the Lender’s internal costs for the time being of its employees in relation to any enforcement, attempted enforcement, preservation or evaluation costed at the rate certified by the Lender to be the rate then usually charged by it to the Lender’s clients for the services of its employees. The term ‘ Transaction Document ’ is defined so as to include, relevantly, the loan agreement and each ‘ S ecurity ’ which is in turn defined to include the real property mortgages given by A1 Catering and the gener al security deed given by it. The clauses of the real property mortgages given by A1 Catering to Manassen are set out at [42] – [ 44] of the Judgment. While those mortgages have been discharged, t he discharge of mortgage clause set out at [45] of the Judgment goes on to provide that “ any personal covenant or agreement by [A1 Catering] to pay the Secured Moneys or any indemnity by [A1 Catering] in favour of [ Manassen ] in this mortgage remains in full force despite any release or discharge (whether in part or whole) ” . Clauses 17.1 – 17.3 of the general security deed (which has not been discharged) are set out at [46] of the J udgment . Relevantly: By cl 17.1 provide s A1 Catering (as Grantor) , agrees to pay the ‘ Costs ’ of Manassen (as Secured Party ) “ in otherwise acting in connection with this Security Deed or any other Transaction Document, such as enforcing or preserving rights (or considering enforcing or preserving them) ” . By cl 17.2, A1 Catering agrees to indemnify Manassen for “ any liability or loss arising from, and any Costs in connection with … any person exercising or attempting to exercise rights in connection with this Security Deed or any other Transaction Document after an Event of Default ” . The term ‘ Costs ’ is defined to include “ charges and expenses including those incurred in connection with legal and other advisers on a f u ll indemnity basis ” , and the term ‘ Transaction Document ’ is defined to include the loan agreement , the real property mortgages given by A1 Catering to Manassen and the general security deed . Cl 17.3 provides (emphasis added) : 17.3 The Grantor agrees that: (a) the Costs referred to in clause 17.1 and the liability, loss or Costs in clause 17.2 include legal Costs in accordance with any written agreement as to legal Costs or, if no agreement, on whichever is the higher of a full indemnity basis or solicitor and own client basis ; and (b) the Costs referred to in clauses 17.1(a) and 17.1(b) include those paid, or that the Secured Party reasonably believes are payable, to persons engaged by the Secured Party in connection with this Security Deed or any other Transaction Document (such as consultants). The parties’ submissions Manassen submits that the effect of these clauses , in particular cl 13.1 of the loan agreement and cl 17.1 – 17.3 of the general security deed, is that the plaintiff is required to meet the legal costs incurred by Manassen on either an indemnity or ‘ solicitor and own client ’ basis in connection with the enforcement , attempted enforcement, or preservation of its rights under the Transaction Documents . In particular, the protection of Manassen ’ s right to ret ain the Security was the preservation of a right under the T ransaction D ocuments. The plaintiff ’ s characterisation of the withholding of monies as not a ‘ substantive ’ right is baseless, and inconsistent with authorities relating to a mortgagee retaining security for costs as part of a redemption action . Manassen also submitted that w hile the contractual entitlement to costs is tempered by the general discretion vested in courts in relation to costs, where a contractual right to costs arises that discretion ‘ should ordinarily be exercised so as to reflect that contractual right ’ : Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 194 cited with approval in Hoho Property Pty Ltd v Bass Finance No 37 Pty Ltd (No 3) [2023] NSWSC 720. Manassen submits that its conduct in retaining the Security and defending the proceedings was reasonable in the circumstances. A1 Catering submits that costs should not be awarded on an indemnity basis for three reasons. First, following it s abandonment of various causes of action on 24 October 2022 by the amendment of its statement of claim, the only substantive dispute between the parties was the dispute over the return of the Security which raised the two issues identified at [49] of the Judgment . It submits that the costs incurred in defending the claim from that time were no longer ‘ in connection with … the enforcement, attempted enforcement or preservation of any rights under any Transaction Document ’ . This is on the basis that t he rights secured by the Security are the ‘ substantive ’ rights under the Transaction Documents, such as the entry into the mortgage, the conduct of the receiver, and the reasonableness of fees, and not the right to withhold funds for security for costs. Second, the Court should exercise its discretion not to award costs on the indemnity basis as the plaintiff acted reasonably in narrowing the real issues in dispute to those two issues concerning the retention of the Security , and its case on those two issues was not unarguable, and its conduct both in narrowing the issues in dispute and pursuing its case on those issues was consistent with s 56 of the Civil Procedure Act 2005 (NSW). In addition, A1 Catering submitted that Manassen ’ s conduct of the case from 24 October 2022 protracted the length of the trial through the introduction of extraneous and irrelevant matters by (a) unnecessary interlocutory disputes regarding subpoenas and notices to produce, (b) the inclusion of a significant amount of irrelevant material in the court book and (c) the lengthy cross-examination of Mr Whalebone in relation to matters that ultimately did not assist in the determination of the case. Such an approach to litigation weighs against awarding a successful litigant costs on an indemnity basis: Ritter v Godfrey [1920] 2 KB 47 at 60 ; Lollis v Loulatzis [2008] VSC 35 at [29] . Third, A1 Catering submitted that it was a relevant factor weighing against the award of costs on an indemnity basis that a successful defendant has led the plaintiff to bring an action, where without that inducement the action would likely not have been brought: GE Dal Pont, Law of Costs (5 th ed, LexisNexis, 2021) at [8.45]; Ritter v Godfrey [1920] 2 KB 47 . In Ritter , Eve J at 66 stated that an example of this approach was a ‘ persistent refusal on the part of an agent or trustee to answer inquiries, to give reasonable explanations, to impart information …’ . Here, A1 Catering ’ s solicitor sent a letter to Manassen ’ s solicitor on 22 August 2016 ( referred to at [23] of the Judgment) which after stating that “ we fail to see any basis on which you assert that a dispute ‘ has arisen or is reasonably anticipated to arise in relation to a mortgage ’ ” ) went on to say this : We cannot see a basis in the loan and mortgage documents on which your client can demand an addition (sic) $300,000 as security for potential legal costs to be incurred by your client . We invite you to specify which provisions in the loan and mortgage documents you rely on to support that assertion . Further, in the absence of any dispute as indicated above, any attempt to abrogate our clients’ rights in exchange for a full release of any future claims against your client amounts to a clog in (sic) the equity of redemption . Your client is effectively not settling unless their liability is released . Any release is completely independent of your client being paid its liability . One is not contingent on the other. In response, Manassen ’ s solicitor stated in the email also referred to at [23] of the Judgment : The decision you should review is Bank of New South Wales v O’Conno r (1889) 14 AppCas 273; Project Research Pty Ltd v Permanent Trustee of Australia Ltd (1990) 5 BPR 11,225. If you read those decisions, you may gain a better understanding of the mortgagee’s position and rights. In later correspondence, A1 Catering ’ s solicitors disputed the applicability of those authorities. It was submitted for A1 Catering that t he failure of Manassen to specifically identify its contractual basis for withholding the Security until the commencement of the proceedings is a relevant factor weighing against the award of costs on an indemnity basis. Consideration Costs are in the discretion of the Court and may be awarded on the ordinary basis or on an indemnity basis: Civil Procedure Act 2005 (NSW), s 98. In circumstances where there is a contractual entitlement for the payment of costs on an indemnity basis which is valid and enforceable, the Court will ordinarily exercise its discretion in accordance with the contractual entitlement: Gomba Holdings UK Ltd & Ors v Minories Finance Ltd (No 2) [1993] Ch 171 at 194; Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [12] – [14]; Kyabram Property Investments Pty Ltd v Murray [2006] NSWSC 54 at [17] – [18]; Dee-Tech Pty Ltd & Anor v Neddam Holdings Pty Ltd (No 2) [2012] NSWSC 517 at [44]. In the last of these decisions, White J (as his Honour then was) considered whether the successful lessor was entitle d to claim indemnity costs under cl 4.10.3 of its leas e which entitled it to “ reasonable legal costs relating to a default by the lessee ” . His Honour held that it did not and awarded costs on the ordinary basis. His Honour said: [ 44] Clause 4.10.3 does not justify the making of a costs order on the indemnity basis. Where parties have contracted that costs be paid on a particular basis, it will usually be proper that the statutory discretion as to costs be exercised so as to approximate as closely as possible the parties’ contract ( Gomba Holdings UK Ltd v Minories Finance Ltd (No 2) [1993] Ch 171 at 194 ; Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87 at [12]; Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171 at [36]). Under the current legislation (s 98 of the Civil Procedure Act and Pt 42 of the Uniform Civil Procedure Rules) costs the subject of an order under s 98 are to be assessed on one of two bases, either the ordinary basis or the indemnity basis. [45] If costs are assessed on the ordinary basis, a costs assessor is to determine whether or not it was reasonable to carry out the work to which the costs relate, whether or not the work was carried out in a reasonable manner, and what is a fair and reasonable amount of costs for the work concerned (Legal Profession Act 2004, s 364(1)). That is what would be required in a determination of what reasonable legal costs were incurred by the lessor relating to a default by the lessee. [46] If costs were ordered to be assessed on the indemnity basis, the lessor would be entitled to all its costs, other than those that appeared to have been unreasonably incurred, or appeared to be of unreasonable amount (r 42.5(b)). If costs were ordered on the indemnity basis and the costs assessor was in doubt as to whether a particular item of charge was reasonable, he or she would be obliged to allow it. However, under cl 4.10.3 of the lease, the lessor would be entitled only to those costs which were reasonable, not those costs which might be reasonable . It would not be in accordance with the lease to cast on the lessee the burden of proving that a charge was unreasonable . In other words, whilst contractual provisions may have the effect that costs should be ordered on the indemnity basis rather than the ordinary basis, whether that is so depends upon the terms of the particular contract . In the case of the present lease, an order for costs on the ordinary basis is in accordance with the contractual term. [47] Counsel for Neddam Holdings referred to Macquarie International Health Clinic Pty Ltd v South Sydney West Area Health Service (No 2) where the lease required the tenant to pay reasonable costs, but costs were ordered on the indemnity basis. However, in that case the lease went on to say that the costs were to be paid on a solicitor and own client basis . It was for this reason that the Court of Appeal ordered costs on the indemnity basis . Those words are not present in this case. Critical to his Honour ’ s conclusion that the contractual indemnity did not entitle the successful party to indemnity costs was that it was expressly limited to the recovery of “ reasonable legal costs ” . There is no such qualification in the contractual indemnities involved here, which expressly confer an entitlement to costs on a “ solicitor and own client basis ” which is sufficiently close to indemnity costs that it justifies a discretionary order for indemnity costs on the principle s t ated at [ 17 ] above, if the costs are within the scope of the clause : Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 2) [2011] NSWCA 171 at [36] . I accept Manassen ’ s submission that the defence to the claim brought against it by A1 Catering to recover the Security was, within the meaning of cl 13.1 of the loan agreement and cl 17.1 of the general security deed , ‘ in connection with ’ the preservation of any rights under any Transaction Document ; it was also in connection with exercising rights in connection with the security trust deed or any other Transaction Document for the purposes of cl 17.2 of the general security deed. An order that Manassen ’ s costs be paid on an indemnity basis will therefore reflect the contractual indemnity . H owever A1 Catering will be entitled to contest those costs which are ultimately claimed which it says are unreasonably incurred or are of an unreasonable amount , as such costs will not be recoverable due to r 42.5(b) of the Uniform Civil Procedure Rules (2005). While this may involve, as White J notes in the above passage, the onus being placed on A1 Catering to establish the extent to which the costs are unreasonabl e , this reflects the agreement it entered into with Mannassen . I t is appropriate that the Court give effect to that agreement: see Kyabram Property Investments Pty Ltd v Murray [2006] NSWSC 54 at [18]; Secure Funding Pty Ltd v Conway [2013] NSWSC 1536 at [10]. As to the exercise of discretion, in my view none of the matters raised by A1 Catering provide a good reason to make an order which differs from the contractual entitlement of Manassen to costs on an indemnity basis. I reject the plaintiff ’ s argument that Manassen had effectively induced A1 Catering into pursuing the cause of action by failing to specifically identify the contractual provision entitling it to retain the Security . Manassen ’ s amended defence filed in response to the amended statement of claim raised in a number of places that the contractual terms of the loan documents were relied on to support the retention of the Security (see eg [32(e) and (f)] and [49] – [ 55] of the amended defence). At no stage after that amendment did A1 Catering change course, nor was any evidence adduced that Mr Whalebone, who w as the guiding mind of A1 Catering, would have altered his approach to the litigation upon being informed earlier of this contention by Manassen . Moreover, the comments by Eve J in Ritter do not assist because it cannot be said that there was a ‘ persistent refusal ’ t o identify Manassen ’ s basis for retention of the Security. Similarly, I do not regard Manassen ’ s conduct of the proceedings as unreasonable in all the circumstances. The documents included in the court book and the cross-examination of Mr Whalebone in relation to the events leading up to the retention of the Security were each relevant to the question whether the amount retained was a reasonable estimate of the likely costs to be incurred by Manassen (and hence the amount of the contingent liability for which it was entitled to a contractual indemnity which liability fell within the secured money under its securities). While the Judgment does not go into this in detail, it is the reason why the history of the dispute is referred to in the background facts . I n so far as the interlocutory disputes over subpoenas and notices to produce are concerned, there is no evidence before the court to enable an assessment of the reasonableness of those interlocutory disputes, but as noted above A1 Catering will have an opportunity to contest their reasonableness on the taxation of the costs. For these reasons, in my view, the appropriate order is that A1 Catering pay Manassen ’ s costs on an indemnity basis. Orders Accordingly, I will make an order for the plaintiff to pay the second defendant ’ s costs of the proceedings on an indemnity basis. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 May 2024