This court of appeal decision considered the enforceability an indemnity costs clause in a mortgage. Through its review of the case law the following principles can be gleaned:
- An order for the payment of costs of proceedings by one party to another party is always a discretionary order: s.76(1)(a) of the Supreme Court Act;
- Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right;
- A mortgagee is not to be deprived of a contractual to costs without any adjudication as to whether or not the mortgagee should be deprived of those costs.
The borrower in this case argued that because the pleadings had not sought indemnity costs it was now not fair to order indemnity costs. Justice Beazley, who gave the opinion of the court, agreed noting:
When the lender brought this matter to Court, it would be reasonable for the borrowers to assume that they were facing the entirety of the lender’s claim against them. On the face of the pleadings there was nothing to indicate that the claim for costs was other than the conventional claim for costs. If any other claim was being made, the lender should, in my opinion, have specifically pleaded it in accordance with the requirement of Pt 15 r.13(1) of the Supreme Court Rules, which provides that a plaintiff shall plead specifically any matter which, if not pleaded specifically, may take the defendant by surprise.
Nothwithstanding the apparently unequivocal nature of this determination His Honour gave room for this decision to be distinguished by emphasising the significance of the failure to plead on offers of compromise:
The requirement is of no small moment. Costs of litigation are a heavy burden in any event. A costs order, if made in the terms of the contractual provision in this case, would be substantially more and would attract interest at the mortgage default rate. The borrowers were entitled to know what claim they were facing so that they could make informed decisions in respect of any step they might take in the litigation, including, but not limited to, making an offer of compromise.
Costs of the Cross-Claim
Although the costs on the Cross Claim were refused on the same basis the court in obiter indicated that the costs on the cross claim would have been refused anyway on other grounds. Namely that the drafting of the contractual clause was not wide enough to include a cross claim with His Honour concluding:
When the clause is read as a whole, the phrase “expenditure incurred … for or in connection with the mortgage”, does not naturally extend to the costs of defending a claim that the mortgage has been entered into unconscionably or that it was unjust in the circumstances in which it was made.