Harris v Morabito Holdings Pty Limited [2018] NSWSC 1353 | Case summary

Supreme Court of NSW|2018-08-30|Before: McDougall J

Solicitors: Kreisson Legal Pty Limited (Plaintiffs) HWL Ebsworth Lawyers (Defendant) File Number(s): 2016/160508

Judgment (EX TEMPORE - REVISED 30 AUGUST 2018)

HIS HONOUR: On 19 June 2018 I gave judgment, deciding that with some relatively minor exceptions the report of a referee, Mr Barry Tozer, be adopted [1] . One of the exceptions related to the referee's conclusions on the cross-claim of the defendant (the builder). The other related to what were said to be some minor omissions and miscalculations. In the result, the parties were able to agree (save as to costs) on the orders to be made to give effect to my reasons. Accordingly, on 28 June 2018, I ordered that the report be adopted with certain specified exceptions and that judgment be entered for the plaintiffs (the owners) against the builder in the sum of, in round figures, $401,000.
There has now been an argument as to costs. The owners say that they should have their costs of the proceedings, including, of course, of the reference. Further, they say, those costs should be assessed on the indemnity basis from 19 August 2015. In support of the application for indemnity costs, the owners rely on a "Calderbank" [2] offer dated 27 October 2015.
There are three fundamental issues. The first is whether the owners should have any costs at all, bearing in mind the provisions of UCPR r 42.34. The second is whether, if the owners should have their costs, they should have the whole of their costs or whether some discount or reduction should be ordered. The third, which logically should arise before the second, is whether the owners should have some part of their costs on the indemnity basis.

First issue: r 42.34

It is convenient to start by looking at the general power of the court to order costs. That follows from s 98 of the Civil Procedure Act 2005 (NSW), under which, subject to the rules and any other legislation, costs are in the discretion of the court.
Then, UCPR Part 42 deals with the question of costs. Where a matter has been litigated to judgment, the general position is set out in r 42.1: costs should follow the event.
That general position is subject to the subsequent rules set out in Part 42. That leads us, finally, to r 42.34. That rule reads as follows: 42.34 Costs order not to be made in proceedings in Supreme Court unless Court satisfied proceedings in appropriate court (1) This rule applies if: (a) in proceedings in the Supreme Court, other than defamation proceedings, a plaintiff has obtained a judgment against the defendant or, if more than one defendant, against all the defendants, in an amount of less than $500,000, and (b) the plaintiff would, apart from this rule, be entitled to an order for costs against the defendant or defendants. (2) An order for costs may be made, but will not ordinarily be made, unless the Supreme Court is satisfied that: (a) for proceedings that could have been commenced in the District Court - the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted, or (b) for proceedings under Part 2 of Chapter 7 of the Industrial Relations Act 1996 - the commencement and continuation of the proceedings in the Supreme Court, rather than the Local Court, was warranted.
It will be noted that the question is whether "the commencement and continuation of the proceedings" in this court rather than the District Court "was warranted". That seems to me necessarily to look at the situation at the time the proceedings were commenced in this court.
In this case, the history of the matter is that the proceedings were commenced initially in the New South Wales Civil and Administrative Tribunal. The proceedings in NCAT were transferred to this court by an order of NCAT once the owners had obtained an expert report that quantified their damages at, in round figures, $1.6 million. That figure was well above the limit of NCAT's monetary jurisdiction, which by s 48K(1) of the Home Building Act 1989 (NSW), was $500,000.
It cannot be said that, at the time the proceedings were "commenced" in this court (that is, upon the transfer from NCAT to this court), the commencement was anything other than "warranted". First of all, it was a "commencement" effected by an order of NCAT, which on any view had power to make that order. Next, the amount of the claim was supported by expert evidence. Although there was substantial criticism of that evidence, and as will be seen from what I have said already the amount allowed in respect of the claim was less than a quarter of the amount that the expert had said was appropriate, there is nonetheless no reason for thinking that the owners should have discounted their claim to the extent necessary to suggest that it was not "warranted" to transfer the proceedings to this court rather than to the District Court.
To look at the question of whether commencement in this court was warranted in the light of what happened, both before the referee and on the adoption hearing, is in my view to misapply the discretion that r 42.34(2) gives. It would amount to judging the question by hindsight rather than, notionally, at the time of commencement in this court.
In all the circumstances I conclude, as I have indicated, that the commencement and continuation of the proceedings in this court was warranted. The continuation of the proceedings was warranted because it was not until the detailed investigation undertaken in the course of the reference that the problems with the owners' expert evidence was exposed thoroughly. The same problems would have been exposed in the same way had the matter continued in the District Court.
Further, and as Mr Bambagiotti of Counsel, who appeared for the owners, submitted, if the proceedings had remained in NCAT (or, for that matter, had been transferred to the District Court), his clients would have obtained some order for costs in their favour given the extent to which they succeeded.

Second issue: reduction in costs

I turn, illogically as I have said, to the question of whether there should be some reduction in costs.
It is necessary to recall at this point that the referee expressed some concerns about the owners' expert evidence as to the extent of defects, and the cost of rectification. Those concerns may be seen at [126] to [133] and [1039] to [1041] of the extremely comprehensive and rational analysis that the referee set out in his report. I referred to those paragraphs in my earlier reasons, and I will not repeat what I said. In substance, the referee concluded that the owners' son, Mr John Harris, had been heavily involved in the preparation of the defects case, and that the owners' expert, Mr Foster, may have allowed his professional independence, and his primary duty to the court as an independent expert, to be swayed by Mr John Harris.
A further point that is worthy of note is that Mr John Harris had been closely involved in all aspects of the building work, and in the preparation of a detailed list of defects, comprising over 400 items, prepared by the architect Mr Rapisarda and sent to the builder on 12 September 2014. The significance of that is that many of the defects that were comprised in Mr Foster's later report, and that were said to be defects for which the builder was liable, were not to be found in the report of 12 September 2014. The obvious inference, as the builder submitted to the referee and the referee appears to have accepted (see at [127] of the report) is that the defects in question may have been caused either by fair wear and tear for which the builder could not be liable or by damage inflicted by the owners themselves (of course, accidentally).
It is I think reasonable to say that the hearing of the reference must have been prolonged to some extent by the extraordinary number of details that Mr Foster said required repair, and by the approach that Mr Foster took to costing. In some ways, the costing approach reflected the owners' case, that the defective items (for example, metal window and door frames) should be replaced rather than repaired. The referee disagreed, and so did I.
Having acknowledged that, it remains the fact, as Mr Bambagiotti submitted, that there were some eight categories of specific defects (including, for example, metal window and door frames to which I have just referred) and a ninth category that the referee called general building defects. The referee found that there were some defects in every category, and that some amount should be allowed for their rectification. This is not a case where, for example, there was a whole class of defects that was found to be non-existent. It is not a case where there was some severable issue, either as to defects or otherwise, that ought be recognised in some apportionment of costs.
There is a well-accepted line of authority to the effect that where a plaintiff is forced to go to court to obtain satisfaction for some legally recognisable wrong done to it, and where the plaintiff is vindicated, it should, as a matter of general principle, have its costs, even though it does not succeed in full.
It is often said that the fact that a plaintiff does not succeed on all of its claim may not of itself be a reason to apportion or reduce costs. I looked at the authorities (as they stood at the time) in A & P Parkes Constructions v Como Hotel Holdings [3] . I do not think that the general position has changed. What has perhaps changed is that the courts have become more willing to recognise that the fundamental purpose of the costs discretion is to do justice between the parties, insofar as an order for costs may achieve that. It follows, I think, that the courts are less inclined to be bound by formulaic pronouncements, and more inclined to look at the particular merits of the claim and how, where there are competing merits, those matters may be reflected in whatever order as to costs is to be made.
In this case, it is clear that the owners did have to go to court to obtain vindication of their rights. It is equally clear that they overstated, to a substantial extent, the extent of vindication required. It must be the case that the builder incurred additional costs both in meeting elements of the overstated case in its own evidence and in the conduct of the reference.
I have little doubt that it would have been necessary for the matter to go to court in any event. That being so, I have little doubt that it would have been referred out. There is no doubt whatsoever that the referee conducted the proceedings under the reference in a way that was as efficient and as expeditious as possible, having regard to the issues and the volume of the evidence. Nonetheless, acknowledging that, it must be the case that the costs would have been less had the claim been advanced on a less ambitious basis.
It is almost impossible to make any scientific assessment of the approach to costs that one should take in those circumstances. The various factors are not rationally commensurable. They involve a degree of speculation, or what might be more kindly called value judgment and analysis, and inevitably the application of a broad brush.
Doing the best I can, and leaving aside for a moment the question of whether any indemnity costs order should be made, I would conclude, subject to that third issue, that the owners should have some 80% of their costs. In reaching that figure I have sought to balance the extra expense occasioned to the builder with the undoubted fact that the owners have vindicated their rights as they were required to do.
I should also note that the builder maintained a cross-claim. The referee concluded that the cross-claim should succeed. That was an aspect of his report that I did not adopt. It follows that the cross-claim should have been dismissed. Unfortunately, that was overlooked in the orders that I made on 28 June 2018. It can be rectified now, and the order for dismissal of the cross-claim should be accompanied by an order that the cross-claimant builder pay the cross-defendant owners' costs.

Third issue: indemnity costs

I turn to the question of indemnity costs. As I have said, it is based on a Calderbank offer. The offer was made on 27 October 2015. That was made shortly after proceedings had been commenced in NCAT, and after there had been a settlement meeting conducted on 21 October 2015. It appears to be common ground that there was at that meeting some discussion of a procedure whereby the owners would provide a substantive list of defects, the builder would respond, the builder would provide details of its cross-claim, and some independent assessment would be made on a non-binding basis.
The Calderbank offer, having referred to those matters and made a number of observations as to the builder's conduct, asserted that it was clear that the owners' claim would amount to $300,000 at least, and that any cross-claim would fail. Accordingly, it offered settlement on the basis that the builder pay $216,306.10, that the owners retain the benefit of the retention sum of $43,693.90, that any cross-claim be "extinguished", and, as I see it, that each party bear its own costs.
That offer was rejected. The bases for rejection included that it was premature given that there had been no points of claim filed, nor, a fortiori, any expert evidence; and that the offer did not take into account in any way the merits of the suggested cross-claim.
The essential question can be put in one of two ways: Was it reasonable for the builder to reject the offer, or alternatively was it unreasonable of the builder not to accept it? Whichever way the question is put, the answer must be, I think, in the builder's favour.
There was really no basis on which the merits of the offer could be assessed. True it was that the defects list had been prepared on 9 September 2014 and sent to the builder on 12 September 2014. True it is that that list comprised some 435 items, described at a level of generality that made it very difficult to make any real assessment of them, either as to whether they were defects at all, or as to whether they were defects for which the builder was liable, and in any event as to the costs of rectification. But the truth of the matter is that until the owners had provided their points of claim and their expert evidence, the builder had no way of knowing what was the "real" claim that the owners pressed. As events showed, it was a claim pressed for a very much greater sum: $1.6 million. Nonetheless, the Calderbank issue must be judged at the time the offer was made, and not by reference to the bright light of hindsight. Subsequent events are relevant in enabling a decision to be made as to whether one side or other has bettered the offer. That is, if I may say so, obvious. But subsequent events ought not to be relied upon to inform an analysis of the question of the reasonable rejection of, or unreasonable refusal to accept, the offer that was made.
My conclusion is that in the circumstances prevailing at the time the Calderbank offer was made, it was both reasonable for the builder not to accept it and not unreasonable for the builder to reject it.

Conclusions and orders

The result then is that the costs orders that I have so far indicated should be made. The owners claimed interest on costs. There were no oral submissions addressed specifically to this [4] . However, it is I think reasonably apparent that the owners must have spent a lot of money in preparing their case. On the assumption that they paid costs as and when they were incurred, they have been out of pocket. This does seem to me to be a case where an order for interest on costs, on the "Lahoud" [5] formula, is appropriate.
At the risk of once again, by outsourcing the work, giving rise to the possibility of oversight, the appropriate course is to direct the parties to bring in agreed orders to give effect to these reasons. In doing so they should remember the need to provide expressly for the fate of the cross-claim and the costs consequences.

Endnotes

Harris v Morabito Holdings [2018] NSWSC 912.
Calderbank v Calderbank [1976] Fam 93.
[2004] NSWSC 792.
It was addressed, briefly, in the owners' written submissions.
Lahoud v Lahoud [2006] NSWSC 126. 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: 31 August 2018

Harris v Morabito Holdings Pty Limited

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