Connections Total Fitness for the Family Pty Limited v Selkirk Pastoral Co Pty Limited

EX TEMPORE Judgment 1This is the Court's third judgment in these proceedings. The Court's principal judgment found the plaintiffs had the benefit of an indemnity for certain residual financial obligations after the sale of a gym business, Connections Total Fitness for the Family Pty Limited v Selkirk Pastoral Co Pty Limited [2014] NSWSC 184. In the Court's second judgment the Court refused to allow an amendment to the statement of claim in anticipation of the damages and costs hearing in the proceedings: Connections Total Fitness for the Family Pty Limited v Selkirk Pastoral Co Pty Limited (No. 2) [2014] NSWSC 471. This judgment should be read with the Court's two earlier judgments. 2Today the Court is involved in that damages and costs hearing. The parties have narrowed the issues on damages, sufficiently for counsel on both sides to seek some time to see if a negotiated consensus can be reached today. The matter has been stood down. 3But one question will not be resolved: the residual costs issue raised at [160] of my principal judgment: "160. A previously unseen costs question may arise as a result of the Court's findings. The Court has upheld an indemnity, at least for Connections' directors. The question may arise as to whether or not an indemnity cost order should also be made against the defendant in favour of the directors and possibly in Connections' favour." 4The parties present the following contest on this issue. The plaintiffs seek an indemnity costs order based on the indemnity on which they succeeded in the proceedings. The defendant resists the making of an indemnity costs order. But there is no issue that the defendant should ay the plaintiffs' costs on the ordinary basis. There is no express entitlement to a costs order on an indemnity basis in the contract that the parties made. So that the matter becomes under Uniform Civil Procedure Rule (UCPR), r 42.5, a matter in the Court's discretion. 5Ordinarily indemnity costs can be awarded under the UCPR, r 42.5 either if the plaintiff makes out a special entitlement to such costs or the defendant is guilty of unreasonable or delinquent conduct. This is not a case of unreasonable or delinquent conduct. Rather the plaintiffs submit that the nature of the contract which has been found in their favour gives them an entitlement to indemnity costs. 6First, the nature of the indemnity found is described in [136] and [137] of the principal judgment, as follows: "136. Connections had the benefit of Selkirk's promise to pay its past and future debts. That promise was not contained in the 15 May Memorandum but it was nevertheless in the partly written and partly oral 15 May Agreement. In the oral part Mr Wright and Mr Sheehy received on behalf of Connections the benefit of a promise that Connections' past and future debts would be paid. Mr Ovenden agreed to take over these liabilities of Connections. But the 15 May Memorandum is expressed in the form of an indemnity, so that it would be clear that the two directors were also benefited by the promise and that any secondary liability they had in respect of Connections' debts would also be covered. The word "indemnity" was an apt use of language by Mr Ovenden. It referred to the major kinds of liability that Mr Wright and Mr Sheehy might have in respect of Connections' debts: as guarantors of financial leases for equipment used in the business, for their statutory obligations to the Australian Taxation Office in respect of the tax debts of Connections, and for their obligations under company law to creditors for allowing Connections to trade whilst perhaps insolvent. 137. When the written and oral parts of the 15 May Agreement are put together the position makes full sense: Selkirk was promising (orally) to pay Connections' debts, past and future and would also indemnify Messrs Wright and Sheehy (via the 15 May Memorandum) in respect of any liability they had in respect of those debts." 7It is convenient to start with the plaintiffs' contentions. The plaintiffs contend on two broad bases that they should be entitled to an order for indemnity costs in these proceedings in the Court's discretion. First, they rely on the nature of the indemnity the Court has already found: "(2) A declaration that the defendant is liable to indemnify the plaintiffs in respect of the debt obligations owed by the first plaintiff, other than the first plaintiff's debt obligations owed to the second and third plaintiffs." 8The plaintiffs submit that the costs order is a debt obligation caught by the indemnity. In my view the defendant's submissions are persuasive: it is not a debt obligation caught by the indemnity. It is an obligation which only arises by reason of the exercise of the Court's discretion under UCPR, r 42. 9But the plaintiffs also argue that within the declaration that the costs order is nevertheless an obligation "in respect of the debt obligations [of Connections]" and one caught by the indemnity. The plaintiffs' point to the well-known authorities such as Smith v Federal Commissioner of Taxation (1987) 164 CLR 513, and Technical Products Pty Ltd v State Government Insurance Office (1989) 167 CLR 45 as to the width of the phrase "in respect of" in the Court's declaration of the indemnity. But if one were either construing the indemnity to which the parties agreed as found by the Court in [136] and [137], the words "in respect of the debt obligations [of Connections]" would, in my view, be quite apt to describe legal costs incurred in defending proceedings brought by creditors of Connections. But the words are not so obviously apt to describe the obligations imposed by the Court to pay costs in these proceedings. 10Added to this is the defendant's further analysis, which I accept. The agreement which the Court has found does not contain an express term that the plaintiffs be indemnified for costs of proceedings such as the present, where the plaintiffs were seeking to establish that an indemnity existed. Indemnities are to be construed strictly in favour of the indemnifier, Andar Transport Pty Ltd v Brambles (2004) 217 CLR 424. Here, the words "in respect of the debt obligations [of Connections]" can apply to a class of debt obligations other than the obligations that are created by the costs orders in these proceedings. So a strict construction of the indemnity will apply it to the defence costs the indemnified parties would incur in defending themselves against the claims of Connections' creditors, rather than to the costs of these proceedings. 11No term is ordinarily implied at law into an unsecured indemnity to the effect that the costs of seeking to establish the existence of the indemnity will be indemnified. This is distinct from the situation with a mortgage or charge, a legal incident of which in law is that the mortgagee is entitled to add to the mortgage debt the costs of enforcing it: Inglis v the Commonwealth Trading Bank (1973) 47 ALJR 234, and Waco Kwikform Ltd v Jabbour [2011] NSWSC 1328. Nor is this a case where such a term should be implied in fact: it is not necessary to give business efficacy to the contract these parties made. 12In response to these arguments, the plaintiffs say that the Court can infer the result for which they contend from two things: (1) it was not a contract drawn by lawyers; and, (2) the substance of the wider agreement made between the parties was that the plaintiffs would be able to walk away from the gym business without any further residual liabilities. 13But, in my view, that is not an answer to the defendant's submissions. Without the assistance of lawyers the parties agreed upon an indemnity which was not sufficiently clear to ensure, in accordance with conventional principles of construction that it covered the plaintiffs' costs of these proceedings. This is yet another consequence of the failure of the parties in these proceedings to engage lawyers to draft their contract. 14For those reasons the plaintiffs' claim for indemnity costs does not succeed. But that the defendant should pay the plaintiffs' costs of the principal hearing and this hearing on the ordinary basis is not in dispute. The Court will make that order. 15The parties have asked the Court to reserve consideration of the implications of any extant Calderbank letters and this judgment is not designed to preclude further argument about such issues.