ONE.TEL Ltd v Deputy Commissioner of Taxation

Principles 36The principles applicable in cases such as this where the sole issue left for determination is whether orders for costs should be made are conveniently summarised in ONE.TEL Ltd v Deputy Commissioner of Taxation [2000] FCA 270 by Burchett J: "5 It is accepted that, in a case which terminates before there has been a hearing, the Court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex parte Lai Qin (1997) 186 CLR 622 at 624. But this does not mean that the Court can never make an order for costs. Often, it will be unable to do so; but in other cases an examination of the reasonableness of the conduct of the parties, respectively, may provide the basis of an order, or "a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried", as McHugh J put it in Ex parte Lai Qin at 625. His Honour added: "If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings." Although his Honour thought this would "usually" be so, he made it clear that he was not laying down an invariable rule. At the beginning of his discussion of the applicable principles (at 624), he referred to the discretionary nature of the power to order costs, and to the "general rule [that] the successful party is entitled to his or her costs", and he said: "In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action." As Sackville J pointed out in Rizal v Minister for Immigration and Multicultural Affairs [1999] FCA 334 at para 16, the remarks made by McHugh J evince "a somewhat more flexible approach" than that taken by the Court in Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 at 287, when it suggested that "there will be very few cases where the issues will be sufficiently clear, in the absence of a hearing, for an order for costs to be made in favour of a party." What is well established is that frequently the determining factor will be the reasonableness of the conduct of the parties, a matter which was emphasized in each of the decisions I have cited, and also in Reddy v Hughes (1996) 37 IPR 413; Sun Zhan Qui v Minister for Immigration and Ethnic Affairs [1999] FCA 119; and Australian Securities Commission v Berona Investments Pty Ltd (1995) 18 ACSR 772. In the last case, Cooper J commented (at 774), concerning the principles laid down in Australian Securities Commission v Aust-Home Investments: "These propositions are of assistance in focusing attention upon some of the relevant circumstances which should be considered in the exercise of the discretion to award costs where proceedings do not proceed to a final hearing. However they are not the only circumstances; nor are they intended to limit the discretion." 6 In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. In Ex Parte Lai Qin, McHugh J was careful to state (at 624) that the principles with which he was concerned were those that "govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means"." 37Relevant to the issue of mitigation are the principles explained in Owners - Strata Plan No. 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067 by Ball J: "44 In the case of building contracts, it is also generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. Often, of course, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good: see, eg, Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302; (2010) 26 BCL 335. But, even if it does not, the owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs: see J Bailey, Construction Law, (Vol II, 2011, Informa Law) at [14.109]; Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159 (reversed on other grounds in Cassidy v Engwirda Construction Co (No 2) [1968] QWN 47 (HC); (1968) 42 ALJR 168). That obligation may be an aspect of the duty to mitigate, since it may be less expensive for the builder rather than a third party to rectify the defects, particularly if the builder is still on site. But the obligation is not simply an aspect of the duty to mitigate. The cost to the builder of undertaking the repairs is likely to be less than the amount that a third party would charge the owner for the same work. In that case, the owner is not mitigating its loss, but rather the builder's damages. 45 The question of what is reasonable depends on all the circumstances of the particular case. One relevant factor is what attempts the builder has made to repair the defects in the past and whether, in the light of the builder's conduct, the owner has reasonably lost confidence in the willingness and ability of the builder to do the work: see A Chambers, Hudson's Building and Engineering Contracts, (12th ed, 2010, Sweet & Maxwell) at [4-144]; Eribo v Odinaiya [2010] EWHC 301 (TCC) at [70]. 46 It is for the defendant to prove that the plaintiff has acted unreasonably. It is not for the plaintiff to prove that it acted reasonably: TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd [1963] HCA 57; (1963) 180 CLR 130 at 138; Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 673 per Brennan J; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA (with whom Priestley and Meagher JJA agreed); Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] per Giles JA (with whom Handley and Stein JJA agreed). 47 The obligation not to act unreasonably does not come to an end once court proceedings have commenced. But the existence of court proceedings is relevant to the content of the obligation. Once there is a dispute concerning whether a plaintiff has failed to mitigate its loss, or failed to act reasonably in some other respect, the plaintiff is entitled to have that question tested in court; and the mere fact that it does so is not itself evidence that it has failed to act reasonably. As Oliver J explained in Radford v de Froberville [1978] 1 All ER 33; [1977] 1 WLR 1262 at 1287E-F: [O]nce proceedings have been commenced and are defended, I do not think that the defendant can complain that it is unreasonable for the plaintiff to delay carrying out the work for himself before the damages have been assessed, more particularly where his right to any damages at all is being contested, for he may never recoup the cost. If, therefore, the proceedings are conducted with due expedition, there seems to me to be no injustice if, by reason of the time that it takes for them to come to trial, the result of inflation is to increase the pecuniary amount of the defendant's ultimate liability... " 38Absent clear words in a contract which give the builder the right to remedy the defective work, the owners' failure to give the builder the opportunity to do so would be relevant to an issue of mitigation, to be taken into account in the overall assessment of damages. If the builder proved that the owner had acted unreasonably, the owner may be liable to some reduction in the damages which would ordinarily be awarded (Keating On Construction Contracts: 8th Edition para 10-023). 39The Court's discretion to order the payment of interest on costs is under the Civil Procedure Act (2005) NSW which, relevantly, provides: "101 Interest after judgment (4) The court may order that interest is to be paid on any amount payable under an order for the payment of costs. (5) Interest under subsection (4) is to be calculated, at the prescribed rate or at such other rate as the court may order, as from: (a) the date or dates on which the costs concerned were paid, or (b) such later date as the court may order." 40The approach to be taken on the issue of interest on costs was stated in Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (No.2) [2013] NSWCA 211; [2013] 84 NSW LR 436: "38 A party who contends that there should be an order for interest on costs must do more than point to the fact that the proceedings were protracted and that it had to outlay moneys on its own costs over a long period. The reasons for the protracted nature of the proceedings are of obvious relevance. To take a hypothetical example, one can imagine a case in which one party deliberately seeks to prolong proceedings with an eye to some collateral benefit of its own for which it is quite happy to pay the price of being out of the money it progressively outlays for costs. That hypothetical case can be contrasted with another in which a party has made strenuous effort to expedite matters and to avoid all delay with a view to the earliest possible trial but has been frustrated in those efforts by actions of the other party. A middle course is where each party acts with reasonable diligence and dispatch but the nature of the proceedings and their subject matter is such as to prolong them. A court might well take different attitudes to applications for interest on costs in these hypothetical cases. 39 This litigation was, of its nature, time-consuming and exacting. Building cases often descend into what, to the outside observer, seems to be tedious analysis of a vast myriad of minutiae. In the absence of some sufficiently clear explanation of the reasons why this litigation proceeded as it did, in a timing sense, there would be no sound basis for exercise of the discretion concerning interest on costs, even if it were now exercisable by this Court in relation to the costs in the court below."

The submissions 41For the plaintiffs it was submitted that the settlement evidenced not a compromise of the litigation but the capitulation of Dyldam on the eve of the hearing. It was put that by June 2013 there was no dispute as to the existence of defects, the rectification of which would cost between about $650,000 and $1,050,000, and that the plaintiffs could not be ordered to engage Dyldam to do the work. It was put that the only relevance of Dyldam's proposal to do the work was to the issue of mitigation of damages, as to which it bore the onus. Accordingly, it was put, it was inevitable that the plaintiffs would succeed in obtaining an award of damages at a trial. 42Furthermore, it was put that, in the circumstances, Dyldam's conduct in failing to agree with the proposal that it perform the rectification work under an independent superintendent, at least since 14 June 2013, unreasonably delayed and protracted settlement of the proceedings, with the consequence that the plaintiffs were entitled to an order for the costs of the whole proceedings. Also relevant was Dyldam's failure to protect itself against the risks of a costs order by making a monetary settlement offer, for example, in the form of Calderbank Letter. 43Dyldam's submissions may be encapsulated as follows. 44By reason of the unreasonableness of their conduct after 14 June 2013, the plaintiff should be refused the cost orders they claimed, and any order for costs for the period should be in favour of Dyldam. It was put that the matter should have been settled soon after the receipt of Mr Cass' report of 14 June 2013, when all the relevant experts' reports had been obtained. 45It was put that since about June 2011 Dyldam had repeatedly indicated its willingness to rectify defects for which it was liable, which was confirmed by letter of 26 July 2013 to the plaintiffs' solicitor. It was put that the plaintiffs' requirement for Dyldam to work under the supervision of a superintendent was, in the circumstances, unreasonable and unnecessary having regard to the sufficient safeguards which would apply where no superintendent was appointed. These were said to include the protections and the dispute resolution provisions under the Home Building Act 1989 (NSW), the usual contractual warranties, and the opportunity for the involvement of a Fair Trading building inspector. It was argued that a superintendent was not necessary where the scope and manner of execution of the work was set out in the agreed experts' reports, and the manner of execution was not complex. A further consideration was that Dyldam had the expertise and resources to rectify the defects. 46On the issue of mitigation, Dyldam's position was said to have always been that although it had no entitlement to demand that it be permitted to rectify defects in respect of which it had admitted liability it was, nevertheless, entitled to rely on the plaintiffs' obligation to mitigate its (sic) loss by permitting it to rectify the defects for which it was liable. 47It was also submitted that the settlement was a compromise, not a capitulation, because, with the exception of the provisions in relation to supervision, the terms of settlement were not substantially different to those proposed by Dyldam at the outset. It was said that the decision to agree to a superintendent was for the purpose of avoiding the risk of an award of damages against it in excess of $500,000 more than it would cost Dyldam to rectify the agreed defective work. It was pointed out that the plaintiffs' expert assessed the cost of rectification by another builder in the amount of $1,157,690, whilst Dyldam's expert assessed the cost of rectification by Dyldam in the amount of $649,754. 48In support of its alternative case that there should be no order for the costs of the parties for the period commencing 15 June 2013 the submission, as I understood it, was to the effect that, in the exercise of its judicial discretion, the Court should treat the issue as neutral, in that the conduct of the parties until settlement was reasonable so that no order should be made.

Determination 49Analysis of the correspondence shows that at least since the filing of its List Response on 6 June 2012, Dyldam expressed its willingness to undertake agreed rectification work at its cost. Following delivery of Mr Cass' report of 14 June 2013, the plaintiffs' solicitor in the letter of 2 July 2013 requested Dyldam to rectify the works under a contract, the draft of which included a provision for the appointment of a superintendent. It also advised that, failing rectification after thirty days, the plaintiffs would attend to rectification themselves and rely on the letter in proof of reasonable notice and in mitigation of damages. On 26 July 2013 Mr Batterby advised that Dyldam "...as a gesture of good faith" was willing to rectify any defects for which it was liable, and accepted, with some exceptions, that the scope of the work was as identified in the reports of Mr Harriman, Mr Palmer and Mr Kavanagh, Dr Shestopal and Mr Cass. The plaintiffs' request for a contract was, in effect, left unanswered, and met with a counter-proposal. 50The letter of 1 October 2013 evidenced the plaintiffs' concern at Dyldam's failure to agree to undertake the works under the arrangements proposed on 2 July 2013, and their intention to proceed with their claim in Court. 51On 12 March 2014 Dyldam was reminded of the requirement for a superintendent if it was to do the work. As the letters of 22 May and 10 June 2014 show, Dyldam refused to agree. 52On 12 September 2014 the plaintiffs proposed that in view of the dispute in relation to supervision the matter be set down for hearing. Later that day the matter was set down for hearing on 10 and 11 November 2014. Mr Batterby's letter of 16 September 2014 advised of Dyldam's agreement to the appointment of an independent superintendent to supervise the execution of the work. He submitted a draft deed which included provisions to this effect. The deed was executed by the parties on 6 November 2014. 53The evidence supports the finding that, after receiving Mr Cass' report of 14 June 2013, the parties were in agreement as to the scope of rectification work to be done. It also supports the finding, in my opinion, that from at least that time it was inevitable that the plaintiffs would obtain an award of damages for the cost of the work. Dyldam's acceptance that an award was inevitable if the matter proceeded to trial may be readily inferred from the repeated assertions of its willingness to do the work for which it was liable, at no cost to the plaintiffs. 54Thereafter, as the correspondence shows, the plaintiffs were willing to engage Dyldam to do the work provided it was performed under supervision. Dyldam's refusal to agree to this requirement was maintained until 16 September 2014 when it agreed to settlement under a deed which included terms for the appointment of a superintendent. 55In the circumstances the crucial question for determination is the reasonableness of the conduct of the parties in the conduct and maintenance of these proceedings until settlement. As Dyldam has agreed to pay the plaintiffs' costs to 14 June 2013, it is the conduct of the parties thereafter which is relevant to the issue of costs. 56Dyldam was faced with the prospect that the plaintiffs would recover as damages the reasonable costs, objectively assessed, of the rectification work of an appropriate standard and quality. Nevertheless, its position was that it be allowed to carry out the work free of supervision. In my opinion, there was no reasonable justification for this position which, ultimately, protracted the proceedings and delayed their resolution. 57The plaintiffs were under no obligation to engage Dyldam to perform the work, and the Court would not have required it to do so. The willingness of Dyldam to perform the work, as pleaded in the List Response and stated in the correspondence, would have been relevant only to the issue of mitigation in the assessment of damages at a trial. 58I fail to see that, in the circumstances, it was unreasonable for the plaintiffs to require as a term of agreeing to Dyldam doing the work that a superintendent be appointed to supervise the work. Furthermore, in my opinion, the plaintiffs cannot be criticised for declining Dyldam's counter-proposal that it be permitted to do the work under a different regime. If, at trial, Dyldam raised an issue of mitigation based on the plaintiffs' failure to accept its proposal, it carried the onus of proving that such failure, in all the circumstances then prevailing, was unreasonable. This task probably required Dyldam to prove that it was unreasonable for the plaintiffs to require the appointment of a superintendent, alternatively, that it was unreasonable to decline Dyldam's proposal that the work be done by it free of the superintendent, and under the arrangement proposed in the letter of 26 July 2013. Furthermore, it cannot be said that it was unreasonable for the plaintiffs to proceed to a trial which involved an issue of mitigation for which Dyldam carred the onus (cf:Owners-Strata Plan at No. 76674 v Di Blasio Constructions Pty Ltd paras 46, 47). 59It is difficult to see any rational explanation for the rejection by Dyldam of the plaintiffs' terms until the eve of the hearing. The opportunity for Dyldam to do the work had been offered by the plaintiffs on, and since, 2 July 2013. Had their proposal been accepted it would have resulted in settlement of the proceedings. By this time Dyldam and its legal advisers knew the strength of the case against them. The proposal presented the opportunity for it to do the work at its own cost, doubtless for less than the amount of damages which almost certainly would have been awarded against it. If accepted, settlement would have avoided further legal costs to both parties. 60Ultimately, and as a matter of practical reality, the plaintiffs have achieved by the settlement the relief they sought from the outset. The fixing of the dates for trial obviously focused the corporate mind of Dyldam, and it may be reasonably inferred that it then accepted that the likelihood of a substantial award of damages could no longer be avoided. Alternatively, Dyldam may have accepted the difficulty it faced in establishing its case on the issue of mitigation that the plaintiffs' conduct had been unreasonable. 61My surmise is that Dyldam's stance until the end was simply an exercise in brinkmanship. Its eventual acceptance of a superintendent conclusively undermines its submission that such an appointment was unnecessary and unreasonable in the circumstances. In my opinion, the plaintiffs' submission that settlement represented a capitulation by Dyldam rather than a comprise of the litigation should be accepted. Had the matter gone to trial, the plaintiffs would have succeeded, and the ordinary rule that costs follow the event would have applied. Accordingly, I propose to order Dyldam to pay the plaintiffs' costs for the period commencing 15 June 2013 to date. It follows that Dyldam's claims for costs are rejected. 62As to the issue of interest on costs, in my opinion, the plaintiffs are entitled to interest calculated on their costs incurred for the period commencing 26 July 2013. As the letter of that date to the plaintiffs' solicitor shows, Dyldam had by then accepted liability for substantially all of the work identified in the experts' reports, but did not accept the agreement suggested in the plaintiffs' solicitor's letter of 2 July 2013. The period between these letters was a reasonable one in which to allow Dyldam to consider the plaintiffs' proposal. In my opinion, the failure of Dyldam to take the opportunity to settle the matter then had the effect of unreasonably protracting the proceedings, and justifies the exercise of discretion to order it to pay interest on the plaintiffs' costs thereafter. I am unpersuaded that there is any evidentiary basis for an order for interest on costs prior to 26 July 2013.

Orders 63It is ordered that: (1)The first defendant pay the plaintiffs' costs on and from 15 June 2013. (2)The first defendant pay interest on the plaintiffs' costs on and from 26 July 2013.

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: 15 December 2014