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Watch bank’s small print in court action

Catchwords: Property law, mortgages, Legal Profession Act NSW S 350(2), associated and non-associated third party payer, S 302A, indemnity clause under bank mortgage for bank’s legal costs, assessment fair and reasonable

Any farmer considering taking a bank to Court should closely consider the terms of the farm mortgage and costs’ assessment.

Generally, a successful litigant in a Court case gets costs – in simple terms, the loser pays the winner’s costs.

So if the farmer is successful, there may be an expectation that the farmer’s legal costs, paid out to the farmer’s solicitor and barrister, would be paid by the bank. This expectation is often wrong.

Have a close look at the farm mortgage.

In most mortgages, you will find that the mortgagor or farmer fully indemnifies the bank for payment of all costs, charges and expenses paid by the bank to the farmer or the bank’s solicitors in any matter connected with the security, including any Court case and in spite of any Court order.

So if the farmer wins and gets the farmer’s costs, and the bank pays them, then technically they will have to be paid back to the bank under the mortgage indemnity clause.

But that is not the end of it. The successful farmer will also end up having to pay the bank’s legal costs.

There is now jurisdiction under the Legal Profession Act 2004 (NSW) [“LPA”] S350(2)  for a costs’ assessor to assess for a “third party payer” , the “fair and reasonable costs” which the bank has paid its solicitors.

The definition of a “third party payer” is a person who is not a client of the law practice (the bank)  and is under a legal obligation to pay (or has paid) all or part of the legal costs (S302A LPA) and is “associated” or “non-associated”; the latter meaning that the obligation is owed to the bank and not the law practice.

The latter would include the farmer under the farm mortgage indemnity clause who is required to pay the bank’s costs, win lose or draw.

This was not always the case.  Under the old s199(1)(a) of the 1987 legislation, the farmer could have had the bank’s own solicitor’s costs taxed, as “person liable” to pay those costs.  However, this provision did not survive the 1993 reforms. Yet, the intentions of those reforms were to create “proper protection against overcharging and a quick and efficient review system”. (Hansard 16/9/93, p3276) The good news is such assessment is now available under the 2004 LPA.

The consequences of the split definition of “associated” and “non-associated” “third party payer” is that, while the costs can be assessed,  the bank is not required to give a costs’ disclosure up front to the farmer under the farm mortgage (S318A LPA). So the bank gets to charge “undisclosed” legal costs to the farmer’s farm mortgage, with impunity.

Under most farm mortgages, the bank is entitled to deduct its solicitor’s costs from the farm mortgage account without notice. So the successful farmer after the Court case may not only find it necessary to pay back the costs awarded and assessed, if they are ever paid, but also necessary to pay the bank’s own solicitor’s costs.  The farmer also has to pay his or her own solicitor’s and barrister’s costs.

Why this works harshly against farmers in remote areas is that they get fixed with a large city mega-law firm’s legal costs charged to banks. There is no free choice in it, because the legal costs are not required to be disclosed up front as farmers are “non-associated”. A city firm’s charge out rate to a bank could be twice or  three times more than what a farmer would pay to his local regional solicitor.

One saving grace is what is “fair and reasonable” to the assessor can vary, between city and country, so the farmer can make that submission to reduce the overall costs in the costs’ assessment.

If you don’t watch the small print, you might think that you have won, but in fact, you probably lost on costs.

Jonathan de Vere Tyndall

Updated 30 January 2015, originally published in The Land on 24 February 2000

Editors note: The articles published contain comment only and not legal advice, for which you should retain a solicitor. No responsibility is accepted for the accuracy of the contents.