Haniotis v The Owners Corporation Strata Plan 64915

Clause 14 of the Management Agreement 6Clause 14 of the Management Agreement provides: "14. Arbitration (a) The parties must use their best endeavours to resolve any dispute which arises between them regarding this agreement by meeting regularly and at the meetings stating the facts and producing the documents upon which they rely to attempt to negotiate a resolution of any dispute. (b) If the parties fail to resolve any dispute, the parties shall approach the President of the Law Society of New South Wales to appoint an arbitrator, who shall act as an expert and not an arbitrator. (c) The costs of the arbitrator shall be borne by the party against whom the decision is made." 7The relevant provisions for the resolution of such a dispute are agreed by the parties to be the Law Society's Rules for Expert Determination (Exhibits XA and XB). The solicitor for the plaintiff provided these Rules to the solicitor for the defendant in the course of correspondence concerning the breach, in which correspondence the solicitor for the plaintiff confirmed that the plaintiff proposed this method of resolution of the dispute, in accordance with the provisions of Clause 14 of the management agreement.

The Law Society's Rules for Expert Determination 8Exhibit XB, the New South Wales Law Society's "Rules for Expert Determination", provides in its opening paragraph the following explanation for this service: "Expert determination is an alternative dispute resolution (ADR) process whereby an independent third party, with recognised expertise in the subject matter in dispute between the parties, assists the parties to find a resolution to their dispute. This process avoids the parties having to go to a Court or Arbitration, to have the dispute resolved. Under the Expert Determination process, the Expert conducts the procedure under the Rules and makes a determination which is binding on the parties to the dispute." 9The first question is whether this is an agreement for arbitration or alternate dispute resolution, a question determined from the language of the contract: Age Old Builders Pty Ltd v Swintons Ltd [2003] VSC 307; Northbuild Constructions Pty Ltd v Discovery Beach Project Pty Ltd [2010] QSC 97. The language could not be clearer; alternate dispute resolution is proposed not only to avoid the costs of court proceedings, but also of arbitration. The parties clearly intended to avoid the application of commercial arbitration legislation, and the provisions of the Commercial Arbitration Act 2010 (NSW) do not therefore apply. It is an agreement for alternate dispute resolution, in a structure not unlike that of mediation, but with the essential difference that the expert must produce, within three months (rule 4.1) a determination in writing, containing "a statement of reasons for the determination in such a form determined to be appropriate by the Expert" (rule 4.2). 10Rules 2.1, 2.3 and 2.5 set out the procedure for nomination of the Expert. The parties may agree upon an expert, or ask for one to be nominated, and provide the following additional information: "2.1 Unless an Expert is agreed between the parties, a party to an Agreement must request in writing the President to nominate an expert. With such request, the party must provide the following: 2.1.1 the names, addresses and other contact details of the parties, including their authorised representatives (if any); 2.1.2 a copy of the Agreement; 2.1.3 a description of the Dispute; 2.1.4 the applicable application fee payable under Rule 6.5 ... 2.3 Within seven days of the Nominee being notified of their nomination, the Nominee must give written notice to the parties (or their authorised representatives) of a proposed preliminary conference and the Nominee's conditions with respect to any Expert Determination process (including the Nominee's fees and security deposit requirements). 2.4 The parties (or their authorised representatives) must attend any preliminary conference convened. At the preliminary conference the Nominee must inform the parties if the Nominee accepts the nomination to act as Expert. If so, the parties and the Expert must then enter into the Expert Determination Agreement. If the Nominee does not accept the nomination, the Nominee must inform the parties and the President." 11The costs of this procedure are, significantly, borne by the parties, unlike the "loser pays" basis for the costs of court proceedings: "RULE SIX - FEES, SECURITY AND COSTS OF PROCESS 6.1 The parties shall bear their own costs associated with the Expert Determination Process. 6.2 The parties shall share equally the costs of the Expert and any other costs associated with the process, including room hire expenses, transcript expenses and the like. 6.3 The Expert may from time to time make directions with respect to the lodgement of security deposits for the Expert's fee and if so the parties must lodge such security deposits as directed. If the parties do not comply with a direction to lodge security deposits, the Expert may suspend the Expert Determination Process until the parties comply with such directions. 6.4 The Expert may from time to time submit invoices to the parties and may draw down from any security deposit with respect to the payment of such invoices. 6.5 The Society may from time to time charge an application fee for its services in making the nomination. The application fee will be shown on the Society's website, or available through making enquiries directly with the Society. The parties shall share equally the costs of the Society's application fee. The application fee as at February 2010 is $550 (inclusive of GST) to be split equally between the parties." 12The successful party in these proceedings would, however, be additionally entitled to seek an order that the unsuccessful party pay the costs of the Expert, this being specifically set out in clause 14(c) of the management agreement between the plaintiff and defendant. 13The following clause enables a party to raise issues of jurisdiction: "8.2 Subject to any rule of law or equity or the Agreement to the contrary, if a party: 8.2.1 knows of any provision or requirement under these Rules, including any directions given by the Expert, which has not been complied with, or some other irregularity affecting the Expert Determination Process; 8.2.2 considers the Expert lacks substantive jurisdiction; 8.2.3 considers that the Expert Determination Process has been improperly conducted, then that party shall be deemed to have waived any rights to make such objection or claim later, whether before a Court or otherwise, unless that party can show that at the time it took part or continued to participate in the Expert Determination Process, that it did not know, or could not have known upon making of reasonable enquiries, the grounds of such objection." 14Clause 14 uses the word "shall", but no argument was put that alternate dispute resolution, like arbitration, was the only possibility, and that the proceedings should have been stayed (cf Rinehart v Welker [2011] NSWCA 403 at [51]; A v B [2007] All E R (Comm) 633 and s 8 Commercial Arbitration Act 2010 (NSW). Nor, surprisingly, did the plaintiff proceed with the alternative method of enforcement of Clause 14, namely her pleaded claim for damages for breach of the agreement to go to arbitration ("Expert Determination and the Enforceability of ADR Generally", Tomas Kennedy-Grant QC, 5 August 2010, http://www.kennedygrant.com/docs/enforceability-ADR.pdf , at [47] - [48]). 15It should be noted that stays have been granted where there is breach of an alternate dispute resolution clause. In Cessnock City Council v Aviation and Leisure Corporation Pty Ltd [2012] NSWSC 221 Hammerschlag J granted a stay of proceedings commenced in breach of a clause requiring the parties to refer the dispute to an expert (either of their choosing, or by the President of the Law Society of New South Wales), who was to "act as an expert and not as an arbitrator and must give a written decision including reasons." The provisions for costs sharing were the same as the agreement in these proceedings. Hammerschlag J noted at [31] that the court had a wide discretionary power to stay legal proceedings where the parties have, by contract, agreed to have their disputes determined by an expert. His Honour also noted that the construction of the dispute resolution clause should be approached liberally and not narrowly, and the parties should be held to their bargain; it is for the party opposing the stay to show good reason why the action should proceed, and the onus is a heavy one. However, as no stay was sought, these principles need only be noted. 16The next issue for consideration is the basis upon which the defendant refused to participate in the expert determination process.

The solicitors' correspondence 17The solicitor for the plaintiff wrote to the solicitor for the defendant as soon as the notice of termination had been complied with, advising he intended to engage in the necessary steps to engage the Law Society's Expert process. However, the solicitor for the defendant's reply to that letter was not in the form of consent to that process, but a claim that the Law Society's Expert Determination process lacked jurisdiction. 18The first letter is the response of the plaintiff's solicitor concerning termination of the agreement: "I refer to your letter dated 13 August 2012. I am instructed that the notice of termination contained in the letter is a repudiation of the management agreement and that my client accepts the repudiation, reserving her right to damages. I refer to clause 14 of the management agreement. In my view, there is a twofold dispute within the meaning of clause 14(b), namely whether your client has repudiated the agreement and if yes, the damages if any to which my client is entitled. I attach a copy of the Law Society's Rules for Expert Determination. Please confirm within 14 days that (a) your client disputes any repudiation; (b) your client (therefore) denies any liability in damages; and (c) that your client accepts that there is a dispute within the meaning of clause 14(b). Upon the confirmation and upon receipt of your client's cheque in the amount of $275 made out to the President, I shall make a request in accordance with clause 2.1 of the Rules. If no confirmation and cheque is received, I expect to be instructed to commence proceedings without further notice. The proceedings will be for two breaches, namely the repudiation and the breach of the promise to approach the President. Thank you. YOURS FAITHFULLYJOE WELLER" 19On 8 October 2012 Robinson & Davies Pty Ltd replied to this letter stating that: "Clause 14 of the Management Agreement has no application. Your client, in alleging repudiation, is limited to a claim for common law damages. This does not appear to us to fall within the scope of Clause 14." 20Following receipt of this letter, the plaintiff commenced proceedings in this court. Paragraphs 17 and 18 of the statement of claim filed on 14 November 2012 plead the following: "17. In breach of its obligation, the Defendant has failed to engage in alternative dispute resolution. 18. As a result of the breach referred to in paragraph 17, the Plaintiff has suffered loss and damage, being the difference between the likely minimal costs of mediation and the substantial costs necessarily occasioned by litigation, the Plaintiff acknowledging that she cannot also receive an award of costs to the extent that the award fairly represents that difference." 21The Amended Defence relied upon by the defendant in these proceedings denies paragraphs 17 and 18, but otherwise does not plead to them. 22As is set out in the judgment on liability, the plaintiff has not pursued any claim for damages for the breach of the arbitration clause, and restricts her claim to the issue of her liability to pay the successful defendant's costs. 23I shall first set out the bases upon which the defendant submits that it should have its costs, and that the plaintiff's submissions based upon Clause 14 are misconceived.

The defendant's submissions 24The defendant's arguments may be summarized as follows: (a)The plaintiff elected not to be bound by clause 14 by not invoking that procedure when the 11 April 2012 notice was served upon her. Her failure to invoke the arbitration system at this earlier stage of the dispute meant that the arbitration clause had been waived. (b)The defendant, by informing the plaintiff that in its view clause 14 did not apply to the dispute, may have been incorrect, but was nevertheless acting consistently with clause 8.2 of the NSW Law Society's Rules for Expert Determination, namely advising of a challenge to jurisdiction. (c)These Rules permitted the plaintiff to unilaterally commence the expert determination process even without the defendant's consent. Instead, she chose to commence these proceedings, and to raise these issues only at the end of the proceedings, in relation to costs. She should not now be permitted to raise this issue to avoid costs, and for this and the above two reasons, costs should follow the event. (d)Alternatively, if some adjustment is to be made for costs, assuming the matter was determined with the same result, the plaintiff would be liable for the expert's fees and some consideration of these fees and other expenses should be taken into account. Those fees would be substantial. (e)As to court management and "proportionality" principles, s 56 Civil Procedure Act 2005 (NSW) has a limited role to play, as a person cannot be a "party" to civil proceedings before they are commenced. Section 56 relates only to the conduct of proceedings once these are commenced. Further, s 56(5) limits the degree to which the court may take into account the costs discretion to those circumstances identified in s 56(3), a submission to which further force should be given by reason of the repeal of s 56(3A). As the plaintiff did not seek to invoke the dispute resolution procedure in clause 14 after the commencement of proceedings, s 56 does not expand the operation of the costs discretion beyond the existing common law.

The plaintiff's submissions 25The plaintiff makes no criticism of the defendant's conduct of the litigation. The conduct which occasioned unnecessary litigation is the defendant's refusal to accede to the engagement of the Law Society's Expert Determination process, which obliged the plaintiff to commence proceedings in this court. The plaintiff argues, by analogy to the principles applicable to refusal to negotiate, that a costs order should be made reflective of the defendant's refusal to use the cheaper and quicker resolution method set out in clause 14 the management agreement. 26The plaintiff's answers to the four arguments put to the contrary by the defendant are as follows: (a)Firstly, the principles in Commonwealth v Verwayen (1990) 170 CLR 394 per Brennan J at 421-422 have no application, as her failure to answer a notice was not a choice between rights, or a positive exercise of some asserted right not to be bound to an agreement; further, there was no inconsistency and no overt conduct. (b)Secondly, Clause 8.2 has no application as it is premised upon the parties entering into the Expert Determination Agreement, which the plaintiff says the defendant wrongly refused to do. (c)Thirdly, the plaintiff could not have unilaterally commenced the Expert Determination, because the commencement of the process is predicated upon the parties agreeing to do so (for example, it is not possible for only one applicant to comply with rule 2.1). (d)Fourthly, the plaintiff agrees that if the matter had been resolved by expert determination, the plaintiff would have been liable for the expert's fees, and these would have been considerable. However, this entitles the defendant only to a discount, which the plaintiff submits should be 15 - 20% (e)As to the s 56 argument, the plaintiff points out that by including the reference to the breach of the arbitration clause in the statement of claim, the issue of what should be done is squarely before the court, whether s 56 is engaged or not. 27I shall deal with each of these arguments in turn. 28The waiver argument in (a) is based on the submission that clause 14 is a two-tiered dispute resolution clause. It first requires the parties are to use their best endeavours to negotiate a resolution to any dispute, and if such negotiation fails (clause 14(a)), to engage an expert to determine the parties' entitlements (clause 14(b)). In other words, the Law Society should be approached on more than one occasion: first, in relation to negotiating a resolution of the dispute, and secondly for the purpose of determining liability and damages issues. 29The plaintiff failed to respond to the offer in the final paragraph of the 11 April 2012 letter to contact the managing agent if she required "any assistance or further information". The defendant was, it is submitted, complying with its s 14(a) obligations by making this statement, and it was the plaintiff, who failed to make any such contact, who was in breach of clause 14. In so doing, she waived any requirement for the defendant to comply with clause 14 (Commonwealth v Verwayen, supra, per Brennan J at 421-422). In those circumstances, the defendant argues that the plaintiff could not later insist on a strict performance of clause 14(b), and cannot now rely on the fact that the dispute was not referred to expert determination to justify an order that each party pay their own costs. 30Clause 14 of the management agreement requires the parties to use their best endeavours to resolve the dispute by regular meetings and provision of documents. The 11 April 2012 letter, despite the contents of the last paragraph, did not amount to the entering into of any such procedure. It was the first stage of a proposed termination of the agreement, which is in fact what occurred. The plaintiff considered she was not in breach and elected not to respond. I accept the Mr Ash's submissions that the plaintiff was not waiving her rights to a Clause 14 alternate dispute resolution process in the manner envisaged in Verwayen by not replying to this letter at the first stage of the two-tier process. 31In addition, in practical terms, if the matter had been referred to the Law Society Expert Determination scheme at that time, the defendant would have raised the same issues and provided the same evidence. 32The plaintiff did use the court process herself in 2011, when she brought proceedings in the Supreme Court in 2011 for a declaration in relation to her exercise of the option (as opposed to using the Law Society scheme). I do not consider that this amounted to a waiver, ever afterwards, of any entitlement to arbitrate a dispute under the management contract. It could be argued, in addition, that the question of exercise of the option may be a matter falling outside the jurisdiction of the arbitration agreement, as was the case for part of the claim in Mio Art Pty Ltd v Mango Boulevard Pty Ltd (No 3) [2013] QSC 95, a case further discussed below. 33The second submission (see (b) above) is that the defendant did not refuse outright to participate in expert determination. It is conceded that the solicitor for the defendant stated, mistakenly (see Cessnock City Council v Aviation and Leisure Corporation Pty Ltd, supra, at [39] - [45]), that the dispute did not fall within the scope of clause 14, and for that reason only, it would not participate in an Expert Determination where the expert did not have jurisdiction to determine the matter. He was entitled to draw the attention of the plaintiff's solicitor to this objection because of clause 8.2 which provided that, if he did not do so, he would have waived his right to make any such claim later. 34The language of the solicitor's letter is clear. It is a refusal to attend arbitration at all, not a reservation of position. 35The third submission, that the plaintiff did have an alternative to commencing proceedings in this court, namely to commence the Expert Determination process notwithstanding the defendant's challenge to jurisdiction, is also misconceived. While the Expert Determination Rules provide for "a party" to contact the President of the Law Society and provide contact details of the other parties, the whole system is predicated upon both parties participating in the procedure. There is no provision for the expert to rule on jurisdictional issues; there is simply the entitlement of a party to warn in advance if jurisdiction is to be challenged, so as to preserve the position if the expert determination goes ahead. Nor is it the case that the provisions for nomination of an expert are of a unilateral nature. If the parties have not nominated an expert by agreement, the President nominates an expert, who contacts the parties to convene a preliminary conference that they must both attend. In addition, this points to an implied duty to cooperate (State of New South Wales v Banabelle Electrical Pty Ltd [2002] NSWSC 178 at [54] - [69]). 36As to the fourth issue, namely the experts' fees, I agree that allowance should be made for this, and that those fees could be of a substantial nature. 37The submission that s 56 relates only to proceedings in court, after the parties have commenced proceedings, overlooks the fact that the claim for breach of the arbitration agreement is squarely before the court, as it has been pleaded in the statement of claim. Nothing in s 56 can assist the successful defendant in avoiding the making of orders in relation to this part of the claim. 38I am satisfied that the defendant's correspondence refusing to participate in the Law Society arbitration, despite being invited to do so by the plaintiff, is "conduct which induced the plaintiff to bring the action, and without which it probably would not have been brought" (Ritter v Godfrey, supra, at 53 per Lord Sterndale. However, the correspondence in Ritter v Godfrey, supra, led the unsuccessful party to believe that he had a good cause of action (see also Bostock v Ramsey Urban Council [1900] 2 KB 625. That is not the case here; the successful party's conduct has instead occasioned unnecessary litigation and expense, in that it has mistakenly refused to go to arbitration. It should not be forgotten that in Ritter v Godfrey, supra, the court ultimately found that the relevant correspondence did not in fact mislead the plaintiff into commencing the action. 39Having noted these findings, I now set out how the courts have dealt with applications that costs should not follow the event where one party has commenced proceedings in a court in breach of an alternate dispute resolution or arbitration clause. There are few decisions dealing with the consequences of refusal to arbitrate, and still fewer concerning alternate dispute resolution ("ADR"), and they tend to turn on their own facts. Nevertheless the course adopted by the court in such cases, and the discussion of the resolution of the competing principles of success in court proceedings versus failure to use contracted alternatives, is of considerable assistance.

Costs consequences of refusal to arbitrate or use ADR 40There is uncertainty as to the costs consequences even where there has been a stay of proceedings due to breach of an arbitration clause. McMurdo J noted a conflict between British and Australian authorities on this issue in Mio Art Pty Ltd v Mango Boulevard Pty Ltd (No 3), supra, at [12] - [13]: "[12] The plaintiff also seeks to liken this case to a decision of Colman J, sitting in the Commercial Court in the Queen's Bench Division, in 2007. In that case, proceedings which were brought in the court in breach of an arbitration agreement were stayed. Colman J accepted that there should be an award of indemnity costs to compensate for the damage flowing from the breach of the agreement to go to arbitration, because: The conduct of a party who deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court. In the ordinary way it can therefore normally be characterized as so serious a departure from 'the norm' as to require judicial discouragement by more stringent means than an order for costs on the standard basis. [13] In Ansett Australia Ltd v Malaysian Airlines System Berhad, Hollingworth J doubted whether that statement represented the law in Victoria. For present purposes, it is sufficient to say that this case is of quite a different kind. There is, of course, an arbitration agreement here. But the overall question was whether events had occurred which, on the proper construction of the parties' contract, obliged the parties to go to mediation and, failing that, to arbitration. Those questions had to be decided by a court. This was not a general provision requiring any dispute between the parties, upon any matter in relation to their contract, to be decided by arbitration." (footnotes omitted) 41The failure of the defendant to participate in the cheaper and probably quicker procedure of Law Society Expert Determination clearly is a significant factor to take into account when exercising the discretion as to costs. However, it is not sufficient reason, of itself, for entirely depriving an otherwise successful party of costs. 42Variations of the rule that costs follow the event (see Dal Pont, Law of Costs, 3rd ed., (LexisNexis 2013) at [8.38] - [8.54] ("Professor Dal Pont")) may include unreasonable refusals to mediate a dispute. However, a successful party is generally deprived of costs only in exceptional cases. This is not a case where there has been misconduct, destruction of evidence or improper conduct of any kind. 43The defendant's solicitor explained, in correspondence, the basis upon which the defendant did not wish to engage in the Law Society Expert Determination arbitration. It is conceded to have been a mistaken belief, but is it so unreasonable in terms of conduct as to warrant an entire displacement of the entitlement for costs to follow the event? 44The costs "event" must be approached distributively (Interchase Corporation Ltd (in liq) v Grosvenor Hill (Queensland) Pty Ltd (No 3) [2003] 1 Qd R 26 at 60 - 1. The defendant has succeeded on all grounds, save the choice of the court rather than the alternate dispute resolution process. The strength of the "costs follow the event' rule has been repeatedly stressed: see the cases collected by Professor Dal Pont at [8.25]. As Professor Dal Pont points out at [8.51], unreasonable refusals to mediate a dispute, whether pursuant to a court direction or to a contractual obligation, may, and does, generate costs consequences. However, that refusal must be considered "against the strength of that party's case" (at [8.53]). While Professor Dal Pont is not referring to contractually based agreements but to offers to mediate, I consider that some degree of weight should be given to the strength of the defendant's case, rather than regarding the terms of Clause 14 as depriving the defendant of any entitlement to costs beyond the costs of the Expert (about which I have no information). 45I propose to follow the same course as was adopted in Mio Art Pty Ltd v Mango Boulevard Pty Ltd (No 3), supra, and to order the defendant to pay to the plaintiff a percentage of the costs notwithstanding the refusal to participate in the Law Society Expert Determination process. The percentage in that case was two-thirds of the costs of the determination. However, the agreement in those proceedings was not a general provision requiring the parties to use the dispute resolution system agreed to, unlike the case here; only certain parts of the issues in dispute had to be determined by arbitration, and there were certain issues which had to be decided by the court in any event. 46The amount of the discount is very much a question of impression, having regard not only to the considerable costs of the expert, but also giving some weight to the success of the defendant on all issues, the nature of the dispute between the parties, and the unsatisfactory evidence (including completely inadequate affidavit evidence) of the plaintiff. The plaintiff proposes that the appropriate proportion should be 15 - 20%. 47I consider this figure to be too low. Some additional allowance should be made for the strength of the plaintiff's case and the unsatisfactory way that the plaintiff conducted the proceedings in this court. I propose to order that the plaintiff pay one-third of the defendant's costs of these proceedings.

Concluding remarks and orders 48For the sake of completeness, although not a submission made by the parties, I note the interesting question of whether this dispute about costs in these proceedings should be heard by me, or by the Law Society of New South Wales' Expert, and the discussion of this point by the Full Court of the Federal Court in Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc (1997) 150 ALR 345 and Ansett Australia Ltd (subject to a deed of company arrangement) v Malaysian Airline System Berhad [2008] VSC 156 at [29].

Orders (1)The plaintiff pay to the defendant one-third of its costs of these proceedings.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 22 April 2014