NAB v Lavin [2011] NSWSC 440

A guarantor was sued by the NAB for $7.8 million. The guarantor wanted to bring a cross-claim against the bank but was precluded from doing so until the guaranteed debt was discharged (by the terms of the mortgage).

The guarantor’s properties (which were mortgaged) were sold and about to settle, and were worth well in excess of the debt to the bank. The bank sought a declaration that the mortgages could not be discharged unless the guarantors, in addition to paying out the debt, paid a large sum of money into court as security for their costs in defending against the proposed cross-claim.

The guarantor did not dispute that the terms of the mortgage required a part of the proceeds of the sale to be paid into Court, as security for costs. However he argued that the bank had not specified a reasonable figure so that consequently the bank’s entitlement was extinguished. The figure nominated by the bank was $700,000. The guarantor argued that $150,000 was reasonable without giving details as to how that figure was arrived at.

Prior to the hearing, the bank was asked to advice how the sum of $700,000 was calculated, but provided no answer. Nor did it lead any evidence at the hearing to explain how the figure had been arrived at. The bank argued that it had no obligation to explain how the $700,000 figure was arrived at.

Each party argued that the onus fell on the other to establish what should be paid into court as security for the contingent liability for costs of the foreshadowed cross-claim. The Judge held that the onus to establish the reasonableness of its estimate fell on the bank, noting:

The Bank was not contractually entitled to require payment into court of any amount which it arbitrarily selected. The figure of $700,000 on its face was extravagant and could not have reflected a reasonable assessment of the costs of the foreshadowed litigation.

The judge indicated he would have at that point ordered that nothing be paid, but the bank sought to re-open the case and lead some evidence. The guarantor responded with counter-evidence, with the upshot that the sum ultimately set by the court was $343,000.

In arriving at that figure the court noted that it was legitimate to:

  1. Calculate the bank costs on an indemnity basis (as provided for in the mortgage); and
  2. Include an amount representing the possibility of an appeal.

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