When can a borrower challenge the lender's legal costs?

The Court of Appeal had to determine whether a borrower could challenge the legal costs charged by a lender's lawyers to the lender as a result of the borrower's default in Beba Enterprises v Gadens Lawyers [2013] VSCA 136.

Background   

A mortgagee entered into a loan agreement in 2009 with the borrower (‘Beba’) as mortgagor, pursuant to which $3 million was lent to Beba.

Under the loan agreement (and an associated fixed and floating charge) Beba was obliged, among other things, to:

(a) repay the principal of $3 million on or before 31 January 2009;

(b) pay interest on any sum in respect of which there was a default in payment, which sums could be capitalised at the option of the lender; and

(c) pay to the lender on demand ‘all costs, charges and expenses (including legal costs as between solicitor and client) reasonably incurred by [the lender] because of any default of [Beba]'. 

Inevitably, Beba defaulted on the loan, and the lender incurred in excess of $60,000 in legal and accountancy costs arising out of Beba's default.

Ultimately, after negotiations over several days and involving the parties’ lawyers and accountants, the lender and Beba entered into a compromise agreement to settle the dispute. Part of the compromise was that Beba would pay a contribution of $60,000 towards the legal and accounting costs incurred by the lender arising out of the default.

After paying the last instalment of the compromised sum, Beba sought a Costs Court review of the legal costs that the lender paid under Part 3.4 of the Legal Professional Act (“LPA”). 

A part of the review process was to seek orders that the lender's lawyers (Gadens) provide sufficient information (which may have included the provision of a copy of an itemised bill of costs) to allow Beba to consider whether to make application for review of the legal costs, or alternatively that Gadens fees be costs assessed.

Gadens opposed the orders sought on the bases that, first, the Costs Court had no jurisdiction in the circumstances, and secondly, the costs had been compromised and therefore Beba had no right to have the costs assessed. Associate Justice Wood of the Costs Court disagreed and purported to make orders against Gadens.

In the Supreme Court of Victoria, Emerton J allowed an appeal from Wood As J's decision. 

As to the jurisdictional question, Her Honour noted (at paragraph 23): 

Accordingly, the Costs Court has power to order the provision of itemised bills and the like for the purpose of facilitating a costs review, whether or not the costs review has been commenced at the time the order is sought or made.

Then, as to the substantial dispute about whether the costs had been compromised, Emerton J concluded (at paragraph 39):  

In my view, both the structure of the settlement agreement and the evidence about its negotiation make it clear that the parties to the agreement had in mind that the payment of $60,000 would conclusively resolve the issue of what costs [the lender] was entitled to recover as a result of the default and that it would not be open to one or other of them to re-open or revisit this question. The parties settled the question of costs in a way that made it very difficult to disentangle the legal costs from the other elements of the compromise package so as to enable the Costs Court to review the legal costs. The parties did not specify, and the Court cannot now know, whether the $60,000 that was paid was to be applied rateably across the fees of PPB Advisory and Gadens, or according to some other arrangement.  Although Beba now seeks review of only four bills of costs, its original summons appended 16 bills of costs from Gadens to [the kender]. In the circumstances, no particular item of legal costs could be identified as having been claimed and paid. If the parties intended that Beba retain its entitlement to have [Beba]’s legal costs reviewed by the Costs Court, the settlement agreement would have addressed how that could occur, given the difficulty arising from grouping together the legal and advisory costs and the fact that what was paid was described as ‘a contribution’, rather than a payment of the full amount of the legal costs or the full amount of the advisory costs.

Ashley JA (with whom Redlich and Priest JJA agreed), in the Court of Appeal, dismissed the appeal from Emerton J's decision. 

On appeal, Beba argued in effect that legally it could not contract out of its right to a review of the legal costs charged to the lender, and as a result, the compromise did not affect its right to seek such a review in the Costs Court.

The Court of Appeal rejected that argument. At paragraph 65 of Ashley JA's decision, His Honour stated:  

In my opinion, the judge was correct to conclude that s 3.4.48A did not preclude Beba entering into an agreement which finally compromised legal costs as between itself and the lender, such as to shut out its right to request information under s 3.4.38(7) and to apply for a costs review under s 3.4.38(2). That conclusion, I consider, flows from both the language of the present provisions, and historical development of the Act. 

The Court of Appeal also dismissed Beba's argument that there had been no accord and satisfaction between Beba and the lender, or alternatively between Beba and Gadens.

In the circumstances, it is clear that a third party payer (such as a borrower) does have a right to challenge the legal costs paid by the lender and passed on to the borrower under the loan agreement. However, if the parties reach a compromise, the right to review the legal costs should be expressly reserved if the borrower plans to later seek a review of the legal costs charged to the lender.

W G Stark
Hayden Starke Chambers