Mendoca v Tonna

This application is another round in a long-running dispute between Mr and Mrs Tonna (the defendants, and applicants on the motion, to whom I shall refer without disrespect as the Tonnas) and Dr Mendonca (the plaintiff, and respondent to the motion) over the ownership of a property at Galston (the Property).

In an earlier judgment of this Court, Ward CJ in Eq determined that the beneficial interests in the Property were the Tonnas as to 28.87% and Dr Mendonca as to 71.13%.

On 4 June 2021, in these present proceedings in the Real Property List, Darke J made orders under s 66G of the Conveyancing Act 1919 (NSW) for the appointment of trustees for sale of the Property (the Trustees). His Honour also made orders about how the proceeds of any sale were to be applied, including that if one of the parties was the successful purchaser, "the successful purchaser may not apply the benefit of any asserted set-off entitlements or adjustments, against the purchase price". It is that term which is at the heart of the present dispute, which has been brought in the Duty List.

The auction of the Property on the instructions of the Trustees took place on 18 September 2021. The Tonnas were successful with a bid of $4 million, over-bidding Dr Mendonca. However, the Tonnas have only raised $3.5 million to make the purchase. The transaction is now subject to a notice to complete issued by the Trustees which called for the sale to be completed today. However, the Trustees have undertaken to take no action to terminate the contract for sale of the Property (the Contract) up to and including this Wednesday, 8 December 2021.

On 3 December 2021, the Tonnas filed the present notice of motion seeking to vary the orders of Darke J, the effect of which is that they would be entitled to complete the Contract by paying $3,056,596.79 to the Trustees.

For the reasons which follow, the Court will dismiss that motion, with the result that the orders made by Darke J are to remain in place in the form in which his Honour made them.

The Tonnas were represented by Mr P Newton of Senior Counsel with Ms J Gatland of Counsel. Dr Mendonca was represented today by Mr D Robertson of Counsel with Mr N Li of Counsel. Mr J Breene, Solicitor, appeared for the Trustees.

In Tonna v Mendonca (No 2) [2020] NSWSC 306, Ward CJ in Eq made orders including:

By amended summons filed on 4 June 2021, Dr Mendonca sought orders in these proceedings:

In support of her application, by her affidavit of 26 April 2021, Dr Mendonca gave evidence and made submissions which included:

I am informed by the parties that, at the end of the hearing on 4 June 2021, Darke J made these orders without opposition from the Tonnas (emphases added):

As will become apparent, the argument between the parties today focussed on Order 7(b).

The Property went to auction on 18 September 2021. The Tonnas were successful, over-bidding Dr Mendonca with their final bid of $4 million. As is usual, the Contract was entered into between the Trustees and the Tonnas on the same day. The Contract specified a purchase price of $4 million and provided for completion on the 60th day after the date of the Contract (17 November 2021). It also included:

On 19 October 2021, one of the Trustees wrote to the solicitors for the Tonnas giving an estimate of the likely final distribution between the parties on a high and low basis after taking the various steps in Darke J's orders. This was between $1,512,884 and $1,664,177 in favour of Dr Mendonca and between $614,044 and $675,450 in favour of the Tonnas.

The Tonnas have only been able to raise $3.5 million to complete the purchase, comprising $1,300,000 from a finance company, $1,300,000 by way of a personal loan from a long-standing friend, and $900,000 in funds currently deposited with the Tonnas' solicitors.

On 18 November 2021, being the day after the Contract was due to be completed, the Trustees gave a notice to complete to the Tonnas' solicitors including:

On 30 November 2021, the Tonnas obtained a judgment in the District Court of New South Wales against Dr Mendonca for $505,382.64 (the Judgment). The Judgment was entered to give effect to a certificate of costs assessment for their costs of the proceedings before Ward CJ in Eq, this being only one of three separate costs orders which are extant between the parties.

On 2 December 2021, the Tonnas obtained a garnishee order against the Trustees to enforce the Judgment with interest in these terms:

On 3 December 2021, the Tonnas filed the notice of motion the subject of these reasons seeking these orders:

Annexed to the notice of motion was a document which set out a series of calculations which Mr Newton SC characterised as being conservative against the interests of his clients and beneficial towards the interests of Dr Mendonca. The net result of the calculations in that annexure was this:

The Court acknowledges that it had the benefit of concise but nonetheless comprehensive written outlines of submissions from the parties, as supplemented by the oral submissions of counsel. The essential propositions advanced may, without disrespect to those arguments, be summarised as follows.

Mr Newton SC's first proposition was that the process which was proposed in the notice of motion that would result in his clients being able to pay approximately $3 million so as to satisfy their obligations under the Contract did not involve a set-off, or adjustments, for the purposes of Order 7(b) made by Darke J on 4 June 2021. As the submission was beguilingly put, what his clients sought was not a set-off, or adjustments, but simply to be "relieved" of paying certain amounts that would have to be paid back to them in any event, having regard to the working out of the various obligations between the parties. At the forefront of the amounts of which his clients sought to be relieved were the Judgment and the Trustees' obligation under the garnishee order to pay approximately $500,000 in costs to the Tonnas.

In the alternative, if the Court was against him on that point, Mr Newton SC submitted that this was an appropriate case in which the Court should exercise its discretion to the extent necessary to vary the orders made by Darke J. This was because what was proposed in the notice of motion would cause no real prejudice to Dr Mendonca and was occasioned by two new developments or developments that were not reasonably capable of being known at the time of the orders made by Darke J.

Those developments were, first, the fact that the Tonnas have now only been able to raise $3.5 million, and second, that they now have the benefit of the Judgment and garnishee order. The amounts of which they sought to be relieved, Mr Newton SC submitted, were plainly amounts to which the Tonnas were entitled. In fact the calculations, so it was said, had been undertaken on the basis that the Tonnas would receive even less than they might be entitled to pending the final adjustments to be made by the Trustees in accordance with the orders of Darke J.

For Dr Mendonca, Mr Robertson submitted that what was being proposed was plainly a set-off, or adjustments, of the purchase price under the Contract within the meaning of Order 7(b). He submitted that the relief sought by the Tonnas could not possibly fall within the description of the working out of the orders made by Darke J, not least because if what was being sought was in fact a set-off, or adjustments, it would require, as the notice of motion presciently sought, the vacation of Order 7(b).

On the question of what was meant by "working out", the parties drew attention to the analysis of McPherson SPJ in Fylas Pty Ltd v Vynal Pty Ltd [1992] 2 Qd R 593 at 598:

Furthermore, Campbell JA In Australian Hardboards Ltd v Hudson Investment Group Ltd (2007) 70 NSWLR 201; [2007] NSWCA 104 at [54] endorsed the above analysis of McPherson SPJ and further held at [56] that “what can be done under a reservation of liberty to apply depends on what needs to be done, in the particular case, to work out the particular orders that have been made" and at [58], there “is no difficulty about exercising a liberty to apply for the purpose of dealing with facts that have arisen only since the original order was made."

If, contrary to his submissions, the Court was persuaded that what was being sought was not a set-off or adjustments, Mr Robertson submitted that, in the exercise of its discretion the Court would not vary the orders made by Darke J, even if the Court otherwise had jurisdiction to do so. At the forefront of his argument was the submission that the Court has found to be determinative: that to accede to the Tonnas' application would work a serious injustice on Dr Mendonca.

That injustice was that Dr Mendonca had participated in the auction of the Property on the basis that the rules for that auction were that, by reason of Order 7(b), insofar as it was a competition between Dr Mendonca and the Tonnas, they would each have to be in a position to pay the full purchase price. She had attended the auction and bid by reference to what she would be able to pay. As Mr Robertson put it, the Tonnas were now seeking to change the ground rules in a way that would significantly advantage them, and significantly disadvantage Dr Mendonca, who had been over-bid in circumstances where she understood that the level playing field meant that the protagonists each had to be, putting the matter in a colloquial way, fully cashed up and ready to pay the amount which they were ultimately successful in bidding for the Property.

Finally, Mr Robertson put that, contrary to Mr Newton SC's analysis of the annexure to the notice of motion, there were a number of disputed amounts. Because of the view to which the Court has ultimately come, it is unnecessary for me to deal with the detail of the calculations in the annexure to the notice of motion and the disagreement about some of them.

Mr Breene, for the Trustees, took an essentially neutral position as between the protagonists. He did submit that, notwithstanding these were interlocutory proceedings, the Tonnas' notice of motion appeared to seek a final declaration that the notice to complete was invalid. He submitted that was not an issue that was ripe for determination today because the Trustees had said that they would not be taking any action up to and including this Wednesday.

Furthermore, it was possible that the Trustees would issue a fresh notice to complete. Whatever might happen in two days' time, Mr Breene's submission was that the Court did not have to, and that it would be inappropriate for the Court as a matter of discretion to, pass upon the validity of the notice to complete in an urgent interlocutory hearing in the Duty List.

I will next set out the Court's reasons for dismissing the Tonnas' notice of motion.

To begin, I am unable to see how it can sensibly be said that what is being proposed is an application in relation to the working out of the orders made by Darke J. With all due respect to the arguments put by Mr Newton SC, and his candid acknowledgement that the distinction for which he was contending was a fine one, it seems to me that on any view what is being sought to be done here is to give effect to asserted rights of set-off, or adjustments, against the purchase price.

In those circumstances, the relief sought in the notice of motion could not be effected without vacating Order 7(b). That cannot be a working out of the order within the meaning of that expression as set out in the authorities to which I have referred above. That it is plainly a set-off, or adjustments, appears from the annexure to the notice of motion itself. What I have quoted from the annexure in [20] above makes clear that the effect of the notice of motion is to enable the Tonnas to pay less than the contracted purchase price by allowing for certain amounts which they say they are undoubtedly entitled to be paid as part of the ultimate adjustments between the parties contemplated by the orders made by Darke J or otherwise.

Moreover, insofar as what has been sought in the notice of motion relies on the Judgment, it is not a new development. This is because the question of costs entitlements had been raised in evidence before Darke J. If there be any issue about the proper construction of Order 7(b) that requires the Court to go beyond its plain words, then in accordance with the principles relating to the construction of judgments, the Court would first look to any judgment, and then to any circumstances that were before the Court at the time if there was no judgment.

In this case there is no judgment, however the Court does have the amended summons (see, especially, proposed order 6(b)) and the evidence that was put before Darke J. I have quoted in [10] above from Dr Mendonca's affidavit that was before his Honour. Mr Robertson put, and I accept, that the question of how and when adjustments would be effected was a hotly contested issue between these parties as to whether or not an order under s 66G should be made. As appears from Dr Mendonca's affidavit, it was the Tonnas who contended that there could be no such order until, among other things, the various costs assessments had been resolved. By the end of the hearing before Darke J, the Tonnas seem to have resiled from that position by not opposing the making of the s 66G orders. If that is correct, then the Tonnas must be taken to have at least implicitly recognised that all questions of adjustment arising from, among other things, the costs assessments would all be resolved at the end of the process in the way clearly contemplated by the orders made by Darke J.

Accepting that this cannot be an application under the liberty to apply reserved by Darke J to work out the orders, Mr Newton SC's alternative solution was that the Court should vary the order to enable the relief sought in the notice of motion to be given. There was no dispute between the parties that even a final order can be varied (and no one suggested Darke J’s orders were only interlocutory), although the circumstances in which that can be done under the rules or in the inherent jurisdiction are very limited because of the importance of the principle of finality. The usual course is not to vary, but to appeal.

The argument proceeded, correctly in my respectful view, that circumstances which may warrant the exercise of the Court's discretion to vary a final order include when something completely new has happened since the order was made that has a relevant effect on the justice of the order as between the parties, or that something fundamental has emerged which could not have been discovered with reasonable diligence before the order was made.

Mr Newton SC's submission turned, as I have recorded above, on two possibilities. The first was the so-called "new development" of the Tonnas being only able to raise $3.5 million. I cannot see how that is a development that would warrant varying the orders. The orders plainly contemplated that the successful party would pay the purchase price bid at the auction. That was given contractual recognition in cl 42 of the Contract (see [13] above). The fact that the Tonnas have not been able to raise the purchase price is not a circumstance that renders the orders unjust as between the parties. Rather, it is a circumstance that is outside the scope of the orders because they expressly require the purchase price to be paid without adjustment or set off. The Tonnas' present financial incapacity is not a just basis on which to vary those orders today.

Insofar as reliance upon the Judgment and the garnishee order is concerned, I have already recorded that the question of the possibility of set-offs and adjustments for costs orders was before Darke J and, in my respectful view, obviously informed the approach that his Honour took in making the orders which he did. All that has happened since then is that what was a possibility has been crystallised by the entry of the Judgment. It does not meet the description of a new or unforeseeable event warranting a variation in the orders when it is a development of a kind that was within the Court's contemplation, albeit perhaps inchoate insofar as the costs assessment had not been completed when the order was made.

Finally, even if there were both power and circumstances suggesting that Darke J's orders should be varied, the Court would not do so in the exercise of its discretion. This is because I accept the force of Mr Robertson's submission that Dr Mendonca participated in the auction and was over-bid on the basis that, insofar as the auction was a contest between the parties, the competition between them had to be on the level playing field of each of them being able to pay the full purchase price without adjustment or set-off. I again refer to cl 42(a) of the Contract as evidence of that.

Having heard the parties' arguments, and considered the evidence that has been filed by the parties today, it seems to me clear beyond doubt that Darke J understood that the question of set-offs and adjustments was going to be productive of more dispute and delay, continuing a regrettable pattern of implacable argument over the Property that has characterised the various phases of this litigation. In those circumstances, his Honour decided that what had to happen was that if the parties were bidding against each other for the Property, the successful bidder had to be in a position to pay the full purchase price, with all questions of adjustments and set-offs between them deferred until the end: in other words, "complete first, argue later".

Nothing that I have heard today persuades me that the Court ought to interfere with what appears to me, with respect, to have been an entirely sensible solution to the problem with which his Honour was confronted. Furthermore, insofar as it is necessary for me to express my respectful view on that solution, I consider it was entirely in accordance with the just, quick and cheap resolution of what has been a long and difficult dispute between the parties.

Because of the result to which the Court has come, it is not necessary for me to deal with the notice of motion insofar as it seeks a declaration in relation to the notice to complete. As I discussed with Mr Breene during the course of argument, it will be a matter for the Trustees to decide what they will do when their undertaking expires on Wednesday. However I record, for the avoidance of doubt, that if they decide not to issue a fresh notice to complete, and wish to maintain their rights by reference to the present notice, the Court would be strongly inclined, if the Tonnas were to make application to this effect, to restrain any further action in reliance on the current notice to complete until the determination of its validity at what I expect would be a short hearing before me in the Duty List in the next few days.

The Court has now heard the parties' argument in relation to the question of costs. There is no doubt that the Trustees, as such, should have their costs on the indemnity basis. Those costs should be paid by the Tonnas on the indemnity basis.

Insofar as the costs between the Tonnas and Dr Mendonca are concerned, Mr Robertson has submitted that those costs should also be paid on the indemnity basis. However, I accept Mr Newton SC's submission that there is nothing about this application that would engage the Court's discretion to order costs between the real protagonists on the indemnity basis.

Although it has failed, this was not an application which in the Court's view was one that, properly advised, the Tonnas should never have brought. The position advanced by the Tonnas was arguable, albeit unsuccessful in the final outcome. Costs should follow the event in the usual way so that the Court will order that the costs of Dr Mendonca should be paid by the Tonnas on the ordinary basis.

Two other considerations were raised related to costs.

First, Mr Robertson submitted that insofar as the Trustees had incurred professional (as opposed to legal) costs in dealing with the motion, those costs should not be visited on Dr Mendonca when the parties' respective contributions to the professional costs of the Trustees were calculated. I agree. However, the order that I will make to give effect to that conclusion is not under the costs jurisdiction because it relates the Trustees' professional costs. In my respectful view, such an order can be made as part of the working out of Darke J's orders under s 66G. The Court will order that insofar as the Trustees have incurred professional costs in dealing with this notice of motion, those costs should be paid entirely by the Tonnas.

Finally, because the Trustees intend to apply to the Court to increase the amount for which they are entitled to charge above that set out in Order 5 made by Darke J, I will make clear that today's orders are intended to apply in respect of whatever amount the Court ultimately determines the Trustees are entitled to deduct from the proceeds of sale for their professional fees.

The orders of the Court are: