Owners Corporation Strata Plan 61288 v Brookfield Multiplex Limited

Judgment (ON INDEMNITY COSTS) 1HIS HONOUR: The plaintiff (the Owners Corporation) sued the defendants to recover damages for alleged defective construction work. In circumstances where it was common ground that the Owners Corporation did not have the benefit of the statutory warranties under the Home Building Act 1989 (NSW) it was necessary for the Owners Corporation to allege (as it did) and show that the defendants owed it a duty of care under the general law. 2The question, of the existence of a duty of care, was argued as a separate question, on agreed facts. 3On 10 October 2012 I gave judgment, concluding that no such duty of care was owed: see Owners Corporation Strata Plan 61288 v Brookfield Multiplex Limited [2012] NSWSC 1219. It followed from that conclusion that there should be judgment for the defendants with costs. 4By Notice of Motion filed on 22 October 2012, the defendants seek to have their costs on the indemnity basis from 24 March 2011 or 16 February 2012. They rely on offers of compromise served on those respective dates. 5There was served with each offer of compromise a Calderbank offer. Mr Breakspear of counsel, for the defendants, accepted that if he did not succeed on the basis of the offers of compromise, he would not succeed on the basis of the Calderbank offers. The Calderbank offers can be put to one side, although they retain some adjectival relevance in relation to the question of reasonableness (or unreasonableness). 6It appears to be accepted, and were it necessary to do so I would find, that each of the offers of compromise offered an outcome for the Owners Corporation that was more favourable than the outcome achieved as a result of my first decision. For example, the offer of compromise of 23 March 2011 offered the sum of $100,000 exclusive of costs. By UCPR r 42.13A, had the Owners Corporation accepted that offer, it would have been entitled to its costs on the ordinary basis, unless the Court otherwise ordered. 7The offer of compromise of 16 February 2012 was in terms that, if not identical, are not materially different (save as to the date of acceptance). 8As I pointed out in my earlier reasons, the building in which the strata scheme is located contains two strata schemes. The other strata scheme comprises residential lots. That owners corporation also sued the defendants. It did have the benefit of the statutory warranties. It was also the recipient of offers of compromise of the two dates in question. Each offer was for $1.4 million exclusive of costs. 9I referred earlier to the Calderbank offers. It is necessary to note only that, on 23 March 2011, a Calderbank offer was made to both defendants in the sum of the combined offers of compromise, $1.5 million. It was made on the basis that the defendant would pay the costs of each plaintiff (by implication, on the ordinary basis). 10Accompanying the offers of 23 March 2011 was a further letter explaining why the defendants took the position that they did. The reasons given included that the claim of the present Owners Corporation was out of time (if the Home Building Act was relevant); but that, more fundamentally, the Home Building Act was not applicable. The reason why it was said not to be not applicable was that the lots were developed to be operated as a hotel for commercial profit, and thus the work was outside the definition of residential building work. 11I mention that only because it was suggested in submissions at one stage that, at the time the first offers were made, it was common ground that the Act did apply. If that were common ground on the "pleadings", the defendants had withdrawn from their acceptance of that position, and had signified that to the present Owners Corporation. 12For completeness, the letter giving reasons in support of the offers made on 23 March 2011 asserted that vulnerability was the necessary condition of the existence of any duty of care, and that the Owners Corporation was not relevantly vulnerable. 13The authorities relating to the consequences, in terms of costs, of non-acceptance of offers of compromise are voluminous. In some respects although not for present purposes, they do not speak with unanimous voice. I take as my starting point the proposition that non-acceptance of the offers triggers a prima facie entitlement to costs on the indemnity basis on the part of the offerors, the defendants: see McColl JA, with whom Mason P and McClellan CJ at CL agreed in Caine v Lumley General Insurance (No 2) [2008] NSWCA 109 at [32]. 14It follows, her Honour said at [32], that it was for the respondent offeree in that case to show why the Court should deprive the offeror of its prima facie entitlement. 15At [35], and having considered relevant authorities, her Honour stated that in general terms, exceptional circumstances were required to justify depriving an offeror of the indemnity costs consequences of non-acceptance of an offer in circumstances where the offeree had not bettered the offer. I do not propose to refer to the decision to which her Honour referred in support of that proposition. It is sufficient to note that it has been said more than once, and at the intermediate appellant level. 16Nonetheless as was pointed out for the Owners Corporation, the discretion to displace the prima facie cost consequences of non-acceptance is a judicial one, which must be exercised on reasonable grounds, bearing in mind the purposes of the rule, and taking into account the facts of the particular case. It is inappropriate that such a discretion should be limited by an invariable requirement to show "exceptional" circumstances. 17Having said that, I do not suggest that McColl JA indicated that there was such an invariable requirement. The fact that her Honour referred to the "general" situation indicates, in my respectful view, that her Honour was fully cognisant of the need to consider the facts of the particular case, and of the inappropriateness of circumscribing the rule by some uniform and general requirement. 18The purpose of the rule is, clearly enough, to encourage the proper compromise of litigation. That takes into account both the private interests of litigants and the public interest in the prompt and economical disposition of litigation. The rule seeks to achieve that purpose by providing significant consequences for non-acceptance of an offer followed by an outcome, to the offeree, more adverse than the terms of the offer. Thus it may be seen that the objective of the rule is to require an offeree to give serious and careful consideration to the terms of the offer and, in particular, to the risks of or following from non-acceptance. 19In the present case, it appears that the Owners Corporation relies on three broad reasons why the prima facie costs consequences should not follow. 20The first proposition, advanced was that the cause of action alleged was novel, and one that requires consideration by courts at the intermediate or ultimate appellate level. It was submitted that there were serious factors present that justified imposing the duty of care in the present case. 21That may be so; but it seemed to me at the time I gave my first judgment, and it still seems to me, that the state of the authorities is entirely against the Owners Corporation on the existence of a duty of care. In those circumstances, I do not regard the novelty of the cause of action as being a reason to deflect the consequences of non-acceptance. 22I note, in addition, that even if the law were to impose the duty of care for which the Owners Corporation contended, that would bind only the first defendant. The basis on which the second defendant might be liable to the Owners Corporation was never explained. 23The second general reason put was that the offer was "derisory". The owners corporation asserts that the damages claimed, by it and the other owners corporation, exceeded $7 million. There are some problems with that submission. 24First, the quotations served on behalf of both owners corporations for repair of defects in both strata schemes were global quotations for repair of all defects alleged by each Owners Corporation. They ranged, in round figures, from $3 million to $6.8 million. There was no basis in the evidence served on which those claimed costs of repair could be apportioned between the two strata schemes. 25The present Owners Corporation did make some attempt to apportion the claims, in a mediation which was conducted shortly prior to 23 March 2011. It was said, without objection, that depending on the quote that one regarded as appropriate, the range of the Owners Corporation's "share" of the overall damages was from about $1.5 million to about $3.3 million. 26Regardless of all that, it is very difficult to see why an offer to pay $100,000 for a claim which on the authorities, was doomed to fail, should be regarded as derisory. It is harder still to see why an offer to pay such an amount, together with at least implied acceptance of the statutory cost consequences of r 42.13A, should be regarded as derisory. 27It is not enough simply to point to the disparity between the amount of the offer and the amount of the claim. What is required is an assessment of the offer having regard to the merits of the claim. In circumstances where, in my view and for the reasons I have given, the claim lacked merit on the authorities as they stand, I simply do not see how the offer could be regarded as derisory. 28The reasons to which I have referred so far were advanced in opposition to the claims based on each of the offers of compromise. The third reason, to which I now turn, related only to the first offer. 29At the time the first offer was made, both owners corporations were represented by one firm of lawyers, to whom I shall refer as "the first lawyers." The Owners Corporation's present lawyers, Grace Lawyers, had not been retained. 30About four days before the first offer of compromise was due to expire (and I should note that the period allowed for acceptance was 28 days, in conformance with the rule), Grace Lawyers, who had not been retained and who were not on the record for the Owners Corporation, wrote to the defendants' lawyers stating that there was some possibility of conflict and asking that the time for consideration and acceptance of the first offer of compromise be extended. 31The response, the following day, denied the possibility of conflict, suggested that in any event if there were a conflict it was one generated by the owners corporations, and declined to extend time. 32There is much force in the submission put by Mr Breakspear, for the defendants, that the circumstances overall do not suggest that the owners corporations involved thought that there was a conflict, and that to the extent there might have been, they were its authors. But it is unnecessary to express a concluded view on that. The offer of compromise made to the present Owners Corporation was independent of the offer of compromise made to the residential owners corporation. The only joint offer at that time was the Calderbank offer also dated 23 March 2011. 33In circumstances where the damages claimed had been assessed as between both owners corporations, and where there was no real basis on the evidence for apportioning damages, there may have been some conflict in relation to the joint Calderbank offer. But that cannot be the case in relation to the separate offers of compromise. 34What was required was that each offer of compromise be assessed on its merits, taking into account the likely quantum of damages, the rough and ready apportionment that had been made for the purposes of mediation and the risks involved in each plaintiff's claim. That the risk factor was very significant, from the defendants' perspective, is shown simply by comparing the quantum of the two offers: $1.4 million (for the residential owners corporation) compared to $100,000 (for the present Owners Corporation). That must reflect the availability to the former, and unavailability to the latter, of the statutory implied warranties. 35In my view, to the extent that there was some conflict, it was not a conflict relevant to consideration of the particular offer of compromise made to the particular Owners Corporation. 36In any event, given that the first lawyers remained on the record for both plaintiffs for some months after 23 March 2011, and it appears felt no embarrassment in making a joint Calderbank offer on 24 May 2011, and given that the change of solicitors did not occur until 27 May 2011, I think that the conflict was more apparent than real. 37That conclusion is to my mind supported by the fact that from 8 December 2011, Grace Lawyers acted not just for the present Owners Corporation but also for the residential owners corporation. 38For those reasons I do not regard the asserted conflict, and what is said to be the necessity for further time to consider the first offer of compromise, to be any reason for diverting the costs consequences of non-acceptance. 39It follows in my view, that the Owners Corporation has not discharged the onus of showing that the costs consequences that flow as a matter of presumption from non-acceptance of the first offer of compromise, in the circumstances that have happened, should be diverted. 40For those reasons I order that the plaintiff pay the first and second defendants' costs on the ordinary basis up until 24 March 2011 and on the indemnity basis thereafter. I order the plaintiff to pay the defendants' costs of this Notice of Motion. [Counsel addressed.] 41The Notice of Motion also sought interest on costs. Although the parties did not direct submissions to this point, the Owners Corporation did not oppose the order. In the circumstances, I will make an order that the defendants have interest on costs in accordance with the Lahoud formula which has been referred to in a number of cases: (See Lahoud v Lahoud [2006] NSWSC). 42I direct the defendants to bring in agreed short minutes of order to give effect to that interest order by 5:00pm tomorrow. I will order that the exhibits on the application be handed out once final orders have been made.