Owners Strata Plan No.64622 v Australand Constructions Pty Limited

LEGISLATION CITED : Uniform Civil Procedure Rules 2005 Strata Schemes Management Act 1996 (NSW

The Owners Strata Plan No 64622 v Australand Constructions Pty Ltd [2009] Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 CASES CITED : Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No. 2) [1999] NSWCA 133 Sanko Steamship Co Ltd and Grandslam Enterprises Corporation v Sumitomo Australia Ltd [1996] FCA 1219 South Eastern Sydney Area Health Service v King [2006] NSWCA 2 Morgan v Johnson (1998) 44 NSWLR 578

The Owners Strata Plan No. 64622 - Plaintiff PARTIES : Australand Constructions Pty Limited ACN 002 061 332 - First Defendant Australand Corporation (NSW) Pty Limited ACN 001 022 117 - Second Defendant

COUNSEL : D.E. Grieve QC [Plaintiff] S.A. Kerr SC with J.P. Muir [Defendants]

SOLICITORS : Dibbs Abbott Stillman [Plaintiff] Mallesons Stephens Jaques [Defendants]

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CONSTRUCTION AND TECHNOLOGY LIST

55015/2006 THE OWNERS STRATA PLAN NO. 64622 -V- AUSTRALAND CONSTRUCTIONS PTY LIMITED & ANOR JUDGMENT 1 This judgment should be read in conjunction with the principal judgment in the proceedings given on 9 October 2009: The Owners Strata Plan No 64622 v Australand Constructions Pty Ltd [2009] NSWSC 1083. 2 There is only one outstanding issue, which concerns the costs of the proceedings from 20 September 2008. 3 The parties are agreed that the plaintiff is entitled to an order that the defendants pay its costs of the proceedings until that date, and that the defendants are entitled to an order that the plaintiff pay their costs thereafter. The dispute is whether the defendants' costs should be assessed on the ordinary basis or on the indemnity basis. 4 On 19 September 2008 the defendants offered to compromise the whole of the plaintiff's claim by making a payment of $2,050,000 plus costs as agreed or assessed ("the offer"). 5 Rule 20.26(1) and (2) of the Uniform Civil Procedure Rules 2005 ("UCPR") provide as follows: (1) In any proceedings, any party may, by notice in writing, make an offer to any other party to compromise any claim in the proceedings, either in whole or in part, on specified terms. (2) An offer must be exclusive of costs, except where it states that it is a verdict for the defendant and that the parties are to bear their own costs. 6 UCPR r 42.13 provides as follows: This Division applies to proceedings in respect of which an offer of compromise (the offer concerned ) is made under rule 20.26 with respect to a plaintiff's claim (the claim concerned ). 7 UCPR r 42.15 provides as follows: (1) This rule applies if the offer concerned is made by the defendant, but not accepted by the plaintiff, and the plaintiff obtains an order or judgment on the claim concerned as favourable to the plaintiff, or less favourable to the plaintiff, than the terms of the offer. (2) Unless the court orders otherwise: (a) the plaintiff is entitled to an order against the defendant for the plaintiff's costs in respect of the claim, to be assessed on the ordinary basis, up to the time from which the defendant becomes entitled to costs under paragraph (b), and (b) the defendant is entitled to an order against the plaintiff for the defendant's costs in respect of the claim, assessed on an indemnity basis: (i) if the offer was made before the first day of the trial, as from the beginning of the day following the day on which the offer was made, and (ii) if the offer was made on or after the first day of the trial, as from 11 am on the day following the day on which the offer was made. 8 Counsel for both the plaintiff and the defendants were agreed that: a the offer is an "offer concerned" within the meaning of UCPR r 42.13 (as having been made under r 20.26) and that UCPR r 42.15(2)(b)(i) applies to it (although it included an offer to pay costs: cf Trustee for the Salvation Army (NSW) Property Trust v Becker (No 2) [2007] NSWCA 194 at [25]); b the plaintiff has obtained judgment significantly less favourable than the terms offered; and c the defendants are, unless the Court otherwise orders, entitled to an order for costs assessed on an indemnity basis from 20 september 2008. 9 Submissions were directed solely to the question whether the Court should exercise its discretion to order otherwise, as contemplated by UCPR r 42.15(2), by awarding the defendants party and party costs from 20 September 2008 rather than indemnity costs. 10 Mr D.E Grieve QC, who appeared for the plaintiff, put that the Court should order otherwise because the plaintiff's decision not to accept the offer was "not plainly unreasonable" having regard to the following circumstances:

a the plaintiff is a statutory corporation which under s 62 of the Strata Schemes Management Act 1996 (NSW) must properly maintain and keep in a state of good and serviceable repair the common property vested in it; b the plaintiff had a legitimate expectation of achieving an outcome in the proceedings more favourable than what the defendants offered; c the case was an unusual one because it was complex in respect of liability and quantum; and d the plaintiff had no reason or basis to anticipate that the evidence of Mr Palmer would be rejected, or that, as he put it, he would collapse in cross-examination. 11 The plaintiff put that its "not plainly unreasonable" non-acceptance of the defendants' offer was a basis for, and warranted the displacement of, the presumption in UCPR r 42.15(2) that the defendants are entitled to indemnity costs from 20 September 2008.

12 It was put that the presumption should only be displaced to the extent that the defendants should get their costs on the ordinary basis rather than on the indemnity basis. 13 The plaintiff relied on an affidavit of its solicitor, Ms Beth McIntyre, sworn 14 October 2009. In it Ms McIntyre deposed to the fact that before 11 June 2008 tenders had been received for the defect rectification works from Sydney Building Services Pty Ltd for $3,885,000 plus GST and Quasar Pty Ltd for $3,253,939 plus GST. Ms McIntyre also deposed to the fact that Mr Palmer spoke competently to his report on 1 July 2009 during the conclave on costing with the referee. 14 It was put that support for the plaintiff's approach was to be found in what the Court of Appeal held in Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No. 2) [1999] NSWCA 133 in following what Sheppard J had said in Sanko Steamship Co Ltd and Grandslam Enterprises Corporation v Sumitomo Australia Ltd [1996] FCA 1219. At [21] and [22] Powell JA with whom Priestly JA and Sheppard AJA agreed, said: "In Sanko Steamship Co. Limited v. Sumitomo Australia Limited supra Sheppard J, having earlier referred to the decision in the Federal Court of Australia of Olney J in WCW Pty. Limited v. Charthill Limited 7 July 1992 (unreported) and Hill J in John S. Hayes & Associates Pty. Limited v. Kimberley-Clarke Australia (1994) 52 FCR 201 to the effect that there was no authority supporting the proposition that the mere writing of "a Calderbank letter" would justify an order for costs in favour of a successful party being taxed on a solicitor and client or an indemnity basis, an observation with which his Honour agreed, later wrote (inter alia):

"In all those circumstances it seemed to me to be difficult for the defendant to maintain that this case was an appropriate one for an order for payment of costs on an indemnity basis. At the relevant time its offer was to accept more than it would have been entitled to recover if the action had been determined by a judgment entered then. Apart from this matter though, it seems to me that one needs to be careful about making orders based on perceived unreasonable conduct in refusing to accept offers. It is in the public interest, as well as in the interest of the parties to litigation, for negotiations to settle cases to take place and for settlements to be achieved if they possibly can be. It has been said that the fact that the law does not provide a full indemnity for costs may be an important spur to settlement; see the judgments of Devlin LJ in Berry v. British Transport Commission (1962) 1 QB 306 at 323 and Handley JA in Cachia v. Hanes (1991) 23 NSWLR 304 at 318 referred to in the Judgment in Cussons at 227-8. In some cases the so called Calderbank approach may place a weapon in the hands of parties to litigation which ought not to be allowed to be abused. The ordinary rule is that costs when ordered in adversary litigation are to be recovered on the party and party basis. Any attempt to disturb that situation needs to be carefully considered. It should only be departed from where the conduct of the party against whom the order is sought is plainly unreasonable. This was a difficult case involving a myriad of issues both of fact and of law … My own reasons for judgment reflect the difficult contractual and other issues which had to be considered. In the Judgment I have also alluded to the difficulties that arose because of the need to sift and weigh evidence from a multiplicity of witnesses who gave evidence through interpreters. The case was certainly not clear cut and was hard fought. In those circumstances it seems to me very difficult to reach the conclusion that either party was acting at all unreasonably. It was for those reasons that I considered that the appropriate order for costs was the usual order which would involve the payment by the plaintiffs of the defendant's costs on the party and party basis."

Although, in the end, the Court dismissed the appeal, it could not be said that the Appellant clearly acted unreasonably in seeking to prosecute the appeal - as the reasons delivered by Sheppard AJA at the time demonstrate, the case which the Appellant sought to advance on the appeal could not be said to be lacking in substance." 15 For the reasons which follow I do not accept the plaintiff's submissions. 16 The Court of Appeal in Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No. 2) and Sheppard J in Sanko Steamship v Sumitomo Australia were dealing with Calderbank letters not offers of compromise under the rules. As Mason P pointed out in South Eastern Sydney Area Health Service v King [2006] NSWCA 2 at [89] and [90]: "A letter written by one party to another (which may be endorsed "without prejudice except as to costs") offering to settle the litigation for a specified sum exclusive of costs, which has not been accepted by the other party, is relevant to the order for costs to be made where the judgment entered is more favourable to the party making the offer than the settlement offered if the Court is satisfied that the offer ought to have been accepted by the party to whom the offer was made: Calderbank v Calderbank [1976] Fam 93 at 106. However, a Calderbank letter from a plaintiff to a defendant offering to settle the litigation for a specified amount is not an offer of compromise pursuant to Part 22. There is no presumption that indemnity costs will be ordered in favour of the plaintiff where the amount awarded is greater than the amount nominated in the letter. That factor is only one of the factors to which the court may have regard. The discretion to award indemnity costs following a Calderbank letter must be considered having regard to all of the circumstances of the case, including the relevant strengths and weaknesses of each party's case as they may have been apparent to the parties at the time the offer was made. See, generally, Flemington Properties Pty Ltd v Raine & Horne Commercial Pty Ltd , Federal Court (Lehane J), 2 February 1998, at 3; SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [37]; Jones v Bradley [No 2] [2003] NSWCA 258 at [8]-[9], [16]; Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19]; Brymount Pty Ltd v Cummins [No 2] [2005] NSWCA 69 at [13]." 17 Even if it be the case that it was "not plainly unreasonable" for the plaintiff not to accept the offer, that is not sufficient to displace the presumption which arises in the defendants favour under UCPR r 42.15. In relation to the predecessor to the presently relevant rule (which was no different to the present one) Mason P said at [83]: "Part 52 rule 22 provides that, where a plaintiff who has made an offer of compromise in accordance with Part 22 (Division I) which is not accepted by the defendant, and where the plaintiff obtains a judgment no less favourable than the terms of the offer, then, unless the Court otherwise orders, the plaintiff will be entitled to an order against the defendant for costs on an indemnity basis in relation to his costs incurred from the day after the offer was made. The onus is on the defendant to persuade the Court that indemnity costs should not be ordered. He must demonstrate the basis on which an order should be made denying the plaintiff's entitlement to indemnity costs. He must establish that he had given serious thought to the risk involved in non-acceptance of the offer, and that he had assessed the plaintiff's case properly and in the context of the rule and the achievement of its purpose - to encourage the proper compromise of litigation, in the private interests of the litigants and in the public interest of the prompt and economical disposal of litigation. Generally, exceptional circumstances are required to justify such an order denying the plaintiff's entitlement. See, generally, Fowdl v Fowdl , Court of Appeal, 4 November 1993, unreported, per Kirby P at 12, 16; Hillier v Sheather (1995) 36 NSWLR 414 at 422-423; Morgan v Johnson (1998) 44 NSWLR 578 at 581-582." 18 The plaintiff has not demonstrated exceptional circumstances justifying denying the defendants their entitlement. A not plainly unreasonable refusal of an offer is not generally, and certainly is not in this case, fairly to be equated with exceptional circumstances sufficient to displace the usual operation of the rule. 19 In Morgan v Johnson (1998) 44 NSWLR 578 at 582 Mason P, with whom Sheller JA agreed, said of the predecessor of the present rule: "Lying behind the rule is the common knowledge that "litigation is inescapably chancy": Maitland Hospital (at 725). For this reason, the ordinary provision is expected to apply in the ordinary case: ibid NSW Insurance Ministerial Corporation v Reeve (at 102-103). The mere fact that it wasreasonable for the litigant to take the view that he or she did in rejecting theoffer is not enough to displace the rule: NSW Insurance Ministerial Corporation v Reeve (at 102). As Clarke JA expressed it in Houatchanthara (at 2-3):

"The rule lays down the general principle that should be applied, and the order provided for in that rule should only be departed from for proper reasons which, in general, only arise in an exceptional case. It is clear that if the rule operates, the plaintiff will be significantly disadvantaged, but that disadvantage flows naturally from the risks of litigation. The idea behind the rule is to encourage settlement or compromise of proceedings, and more specifically, to encourage litigants to give serious consideration to the settlement of proceedings. Where an offer is made by a defendant to a plaintiff, the latter is put on notice that unless he or she accepts that offer, there is a significant risk that the order provided for by the rule may follow. In declining to accept the offer, the plaintiff undertakes the risk and the consequences that flow naturally from that risk."" 20 That the plaintiff is a statutory corporation with an obligation to serve the owners by maintaining the common property and that the litigation may have been complex, are both factors which ought to have heightened the necessity for the plaintiff to give serious and anxious consideration to the risk of failure once the offer had been made. 21 The plaintiff may have had quotations from other builders but it was evident that its quantum case was being contested. 22 The plaintiff did not adduce any admissible evidence of any assessment, let alone proper assessment, by it during the period the offer was open of: a its quantum case; b the terms of the offer; or c the risk involved in non-acceptance of the offer. 23 So far as Mr Palmer's evidence is concerned, his report came into existence more than five months after the offer expired. The plaintiff's view of his evidence cannot therefore play any part in the assessment of the plaintiff's non-acceptance of the offer. But, in any event, the risk of rejection of an expert's evidence in heavily contested litigation is self-evident and it regularly eventuates. It did so here. 24 In response to a submission by the defendants that the plaintiff took no steps to cure the deficiencies in Mr Palmer's evidence (by seeking to adduce evidence from him which would have enabled the Referee to make a rational assessment of damages) it was put on behalf of the plaintiff that this was not possible as Mr Palmer's evidence could not be "fixed up". That this was undoubtedly so also cannot play a part in assessing the plaintiff's non-acceptance of the offer, but it does demonstrate the risk of failure in litigation where expert evidence sought to be adduced falls short. 25 Given the parties' agreement that UCPR r 42.15 applies, it is not necessary to consider the offer as if it were a Calderbank letter and whether indemnity costs would be warranted by reason of its non-acceptance on that footing. 26 In my view the plaintiff has failed to demonstrate circumstances which warrant departure from the usual operation of UCPR r 42.15. 27 Accordingly, the final orders of the Court will be:

1. Pursuant to UCPR r 20.24 the reports of Mr Barry Tozer dated 12 November 2007, 17 December 2007 (with the exception of paragraphs 80 to 83), 5 April 2008 and 3 August 2009 are adopted.

The plaintiff's motion dated 21 August 2009 is otherwise dismissed.

The defendants are to pay the plaintiff's costs of the proceedings up to and including 19 September 2008.

The plaintiff is to pay the defendants' costs of the proceedings from 20 September 2008 on the indemnity basis.

These orders do not effect any other orders for costs previously made.

The defendants have leave to discontinue the first cross-claim and the second cross-claim on the basis that there shall be no orders as to costs with respect to those cross claims. 28 The parties are to bring in Short Minutes and Notices of Discontinuance of the cross-claims may be filed on that occasion. 29 The exhibits are to be returned. **********

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