The contractual arrangements between the parties were complex. The projects in question were typically undertaken by PHI and SCN pursuant to a partnership or joint venture agreement. In some cases, there were separate borrowing agreements between the joint venture parties and PHI, and, in at least two cases, there was a separate construction contract with Manotik.
Four development projects played a part in these proceedings. These projects involved developments, or proposed developments, of:
1. four adjacent properties at Avon Road Dee Why;
2. a property at Old Pittwater Road Dee Why;
3. two adjacent properties at Clyde Road Dee Why; and
4. a property at Pacific Parade Dee Why.
The Clyde Road project was undertaken pursuant to a partnership agreement dated 10 April 2017 between PHI and SCN, although there is also reference in the evidence to a joint venture agreement ("JVA"). Manotik undertook the building work pursuant to a separate contract with PHI (on behalf of the partnership). The properties being redeveloped were purchased by PHI and treated as a capital contribution by PHI to the partnership, with the units in the development likewise being registered in PHI's name when they were completed. PHI also paid the expenses of the development in the first instance.
The Pacific Parade project was a three-way partnership or joint venture between PHI, SCN and an external party, Omid International Pty Ltd ("Omid"). Finance for the project was provided by PHI under a loan agreement known as the "HNH Loan".
The proceedings were commenced by PHI as plaintiff in May 2020. SCN was named as the first defendant, Manotik as the second defendant and Mr Nicola as the third defendant.
The claims for relief made by PHI in the action may be summarised as follows.
1. Avon Road project: PHI sought orders for the transfer of SCN's shares in two of the Avon Road properties (pursuant to a 2019 deed between the parties) and for the appointment of trustees for sale of the other two properties.
2. Old Pittwater Road project: PHI sought judgment for outstanding interest under a loan agreement used to finance the Old Pittwater Road project. Judgment was sought against SCN as borrower and Mr Nicola as guarantor.
3. Clyde Road project: The construction work on the Clyde Road project had been completed by the time proceedings had begun. Some of the units in the development had been sold and the proceeds applied to expenses of the development, and the remainder were held by PHI. SCN alleged that an agreement had been reached between the parties for SCN to receive two of the retained units as its share of the profit in the project. Caveats had been lodged on the two units by SCN. PHI denied that any such agreement had been reached; its position was that the parties' capital contributions and profit shares had not been finally determined. PHI sought orders removing the caveats and referring out "the taking of accounts under the Clyde Road JVA" to a "suitably qualified forensic accountant". For the purposes of the accounting, PHI acknowledged that it was obliged to pay specified sums to SCN by way of return of SCN's capital contribution ($77,000, or, alternatively, $410,000) and profit share ($116,000).
4. Pacific Parade project: PHI sought judgment against SCN for "the outstanding principal and interest owing" under the HNH loan and orders that the proceeds of sale of two of the two units in the Pacific Parade development were charged with repayment of the judgment debt and interest. No claim was made against Omid, whose obligations under the HNH Loan had, PHI alleged, been repaid from other sources.
In September 2020 a cross-claim was filed for SCN. Relief was sought concerning the Avon Road project, the Clyde Road project and the Pacific Road project. The first cross-defendant was PHI. The second cross-defendant was Omid.
So far as the Clyde Road project was concerned, the claims made on behalf of SCN can be summarised as follows.
1. Specific performance was sought of the alleged agreement for transfer of two of the remaining units to SCN (see [11(3)] above), together with a partnership account between PHI and SCN.
2. SCN claimed damages from PHI for alleged breaches of the partnership agreement. Alternatively, SCN claimed compensation or an account of profits from PHI for breach of fiduciary duty.
So far as the Pacific Parade project was concerned, SCN claimed a declaration that the parties' rights, entitlements and obligations under the partnership were as recorded in the partnership financial statements for the year ending 30 June 2020. Alternatively, an account was sought of the parties' respective partnership rights and entitlements.
At the same time as SCN's cross-claim was filed, a further cross-claim was filed on behalf of Manotik. The claim concerned the building contracts for the Avon Road and Clyde Road projects. PHI and SCN were named as the first and second cross-defendants. For the Clyde Road project, judgment was sought against PHI and SCN in the sum of $105,000 for amounts allegedly owing under the relevant building contract.
SCN, which was commonly represented with Manotik in the proceedings, did not defend Manotik's cross-action. This was left for PHI to do on behalf of the relevant partnerships.
In March 2021, PHI, SCN and Manotik reached an agreement to settle the disputes concerning the Avon Road and Old Pittwater Road projects. The agreement provided for all the parties' claims for relief with respect to those projects in PHI's action, SCN's cross-action and Manotik's cross-action to be dismissed. The parties were to bear their own costs of those claims. As the only personal claim against Mr Nicola had been settled, he effectively dropped out of the proceedings.
The March 2021 settlement did not extend to the claims with respect to the Clyde Road and Pacific Parade projects. Affidavits were filed by the parties and the hearing was fixed before Sackar J in September 2021 with an estimate of four days.
In written submissions filed shortly before the hearing was due to begin, SCN's claim against PHI for breach of contract and fiduciary duty with respect to the Clyde Road project (see [13] above) was abandoned. Then, in the course of their openings on the first day of the hearing (6 September), counsel for both parties indicated that the parties had agreed that there should be an accounting reference and they were in discussions to try to narrow the scope of the hearing.
Those discussions continued through the rest of the day and into the following day, 7 September, when the parties reached a further settlement agreement. This agreement resolved the claim by SCN to the two disputed units in the Clyde Road development (see [11(3)] above) and provided for an accounting reference to determine the parties' monetary entitlements with respect to the Clyde Road and Pacific Parade projects (including the HNH Loan). The agreement thus obviated the need for a trial.
The parties were however agreed that one issue of interpretation should be determined by the Court. This issue concerned a provision of the partnership agreement which entitled PHI to interest on its contributions to the partnership. The question was whether this interest liability was a liability of the partnership or of SCN alone. Directions were made for the parties to lodge written submissions. There was a brief hearing the following day (8 September) at which Sackar J raised some preliminary questions about the parties' positions on the issue.
His Honour's judgment on 15 September (see [5] above) set out his conclusion on the interest issue. He decided that the interest liability was a liability of SCN, not a liability of the partnership. On 20 September, he made consent orders in a form agreed by the parties. The orders consisted of declarations reflecting his decision and orders for reference in the form which had been agreed by the parties on 7 September. They also provided for the costs of the proceedings to be reserved.
Under the consent orders, an accountant, Mr Tony Samuel, was appointed as the referee. The orders required him to undertake three tasks.
1. Determination of the entitlements of the partners in the Clyde Road project (PHI and SCN) inter se. This, in turn, had two elements: determining the parties' capital contributions to the partnership account (which were to be repaid to the parties); and determining the profit or loss, which was to be equally shared between them. Separately (although the outcome would affect the profit and loss), the referee was required to determine Manotik's entitlements against the partners under the building contract.
2. Determination of the balance owing (if any) from SCN to PHI under the HNH Loan.
3. Determining the entitlements of the partners in the Pacific Parade project (PHI, SCN and Omid) inter se. Again, this involved determining both the capital contributions to the partnership and the profit (or loss) to be shared among the parties.
The orders provided for the sale of the two disputed units in the development to SCN at agreed prices. The properties were to be transferred on the completion of the Clyde Road account, with SCN's share of funds from the partnership to be applied against the amount due.
Following SCN's appeal to the Court of Appeal (see [5] above), the Court of Appeal (by majority) overturned Sackar J's decision on the interest issue. The Court decided that the interest liability was a liability of the partnership and made a direction to the referee accordingly.
PHI was ordered to pay SCN's costs of the appeal. But the Court declined to make any order about the costs at first instance. Macfarlan JA stated (CA [20]):
It is inappropriate and unnecessary that this Court make any order relating to the costs of the parties at first instance because there were before the primary judge a number of issues in addition to that dealt with above and the primary judge has reserved determination of the question of costs. In making his determination he will be able to take this judgment into account.
For the purposes of the reference, PHI claimed that its capital contribution to the Clyde Road project was $10.3 million and SCN's was nil. SCN claimed that PHI's capital contribution was $8.1 million, and it had made a capital contribution of $582,000. Mr Samuel completed his report in April 2022. He upheld PHI's contentions on both sides of the ledger, finding that PHI's capital contribution was $10.3 million and SCN's was nil.
Before the referee, Manotik claimed that it was entitled to $155,000 under the building contract. PHI contended that the amount was only $54,000. Mr Samuel determined that the correct amount was $106,000.
PHI contented that the profit on the Clyde Road project was $1.6 million. SCN contended the figure was $2.7 million. Mr Samuel's figure (before interest) was $2.1 million.
As to the HNH Loan, PHI contended that the amount outstanding was $273,000. SCN submitted that the amount payable was nil. Mr Samuel found substantially in PHI's favour, concluding that the amount payable was $270,000.
In August 2022 the proceedings came to me for consideration of Mr Samuel's report. Various issues were debated concerning the Clyde Road project and the HNH Loan. It was common ground between the parties that the reference had miscarried so far as the account for the Pacific Parade project was concerned, and the account needed to be redone.
The hearing took place before me on 18 August. I announced my conclusions on those issues, and, on the following day, 19 August, made consent orders in a form agreed by the parties as giving effect to those conclusions. My formal reasons for judgment (see [5] above) were delivered about a month later.
The issues raised, and my decision on those issues, may be summarised as follows.
1. Mr Samuel found Manotik was entitled to reimbursement under the building contract for the cost of its home owners' warranty insurance ($52,000) and its contract works insurance ($17,000). Initially, counsel for PHI challenged both of these inclusions but ultimately confined the challenge to the contract works insurance. I upheld that challenge: J2 [38]-[47].
2. For the purpose of calculating the profit on the project, Mr Samuel did not include income received by PHI ($73,000) from renting out units which had been completed. I upheld a submission by SCN that this was a mistake and that the rental income should be included: J2 [48]-[55].
3. PHI contended that a payment of $100,000 from PHI to SCN should have been included by Mr Samuel when calculating the balance of the HNH loan. But I declined to interfere with Mr Samuel's decision, on the ground that there was no sufficient reason on the evidence to conclude that the payment was necessarily a payment made on account of the HNH loan (as opposed to a payment made on account for some other dealing between PHI and SCN): J2 [56]-[63]).
4. A dispute arose about how a credit of $77,000 resulting from a payment from SCN to PHI was to be allocated. I concluded that it should be allocated to the HNH loan account: J2 [64]-[66].
In summary, the consent orders provided for:
1. PHI to pay Manotik $84,000 under the Clyde Road building contract;
2. PHI to pay SCN $476,000 as its share of the profit on the Clyde Road project, after adjustment for interest as calculated in accordance with the decision of the Court of Appeal (nothing was payable by way of capital contribution, having regard to Mr Samuel's finding that SCN had not made any capital contribution);
3. SCN to pay PHI $209,000 under the HNH Loan;
4. Mr Samuel's report so far as it concerned the Clyde Road project, subject to the amendments reflected in (1) and (2), to be adopted;
5. the liabilities in (2) and (3) to set off against each other, such that PHI was to be liable to pay SCN $267,000; and
6. that liability to be credited against the purchase price payable by SCN for the two units in the Clyde Road project pursuant to the terms of the September 2021 settlement ([20] above).
Following the delivery of my judgment, the parties agreed on further directions to Mr Samuel for completing the accounts required for the Pacific Parade project. Those accounts were to be taken in two stages. First, he was to determine the amount due to Manotik under the building contract. Then he was to determine the parties' capital contributions and shares of the profit on the project.
Mr Samuel delivered a report in March last year dealing with the building contract. Mr Samuel determined that Manotik had been overpaid by $70,000. But he retired before completing the second stage of the reference and was replaced by another member of his firm, Ms Rebecca Conoulty. Ms Conoulty duly delivered her report in August last year.
For the purposes of determining the parties' capital contributions to the project, it appears to have been common ground that the HNH loan had to be taken into account. Without any objection from the parties, Ms Conoulty reconsidered the question of what the balance of the loan was. In doing so, she was satisfied that, in fact, the additional $100,000 the subject of one of the arguments before me in 2022 ([33(3)] above) in fact remained owing by PHI to SCN.
Ms Conoulty also considered the building costs payable to Manotik under the building contract. Applying my decision concerning the Clyde Road project, she found that Manotik had been overpaid $20,000 for contract works insurance.
Following protracted negotiations between the parties, consent orders were agreed to reflect the findings in the reports. The orders were made in December last year. In summary, they provided for:
1. the adoption of the whole of Mr Samuel's and Ms Conoulty's reports;
2. Manotik to repay the partners (PHI, SCN and Omid) $90,000;
3. partnership monies totalling $1.348 million held in trust by solicitors to be distributed between PHI ($704,000), Omid ($376,000) and SCN ($268,000) in accordance with Ms Conoulty's calculations; and
4. each party to "pay its own legal costs with respect to the referral to [Mr Samuel and Ms Conoulty] for the taking of partnership accounts".
Following the making of these orders, all substantive claims for relief in the proceedings had been determined. I invited the parties to identify in their submissions any further orders to be made, and they proposed that I now make orders formally dismissing the plaintiff's claims and the cross-claims. Having reflected on it, however, I think that making orders in that form at this stage might be more confusing than anything else.
The question of Omid's costs of the proceedings has now been resolved by consent orders. What remains to be decided is what costs orders should be made as between PHI, SCN and Manotik.
[2]
Costs
For convenience, in advance of the costs argument, I referred the parties to earlier decisions of mine concerning the costs of multi-claim proceedings involving mixed success between the parties on the claims, or issues arising in those claims: Akierman Holdings Pty Limited v Akerman (No 3); In the matter of Akierman Holdings Pty Limited (No 2) [2021] NSWSC 869 at [54]-[86]; at Trentelman v The Owners - Strata Plan 76700 (No 3); The Owners - Strata Plan 76700 v Trentelman (No 3) [2021] NSWSC 578 at [38]-[39]; see also Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd (No 2) [2021] NSWSC 336 at [30]-[45]. I also referred the parties to my decision in Shazbot Pty Ltd v Warner Capital Pty Ltd (No 6) [2024] NSWSC 81, which concerned the costs of partnership proceedings.
These decisions were expressly adopted by counsel for PHI as the foundation for his submissions. Counsel for SCN and Manotik did not question the decisions or their application in the present case. I will therefore use them as my starting point.
Counsel for PHI began with the rule that costs should follow the event (Uniform Civil Procedure Rules 2005, r 42.1) but subject to the proposition that, in a case involving a multiplicity of claims, such as the present case, the rule should be applied distributively, by reference to the different claims: see Akierman Holdings at [81]-[86]. On this footing, it was contended that SCN and Manotik should pay PHI's costs of:
1. defending SCN's specific performance claim with respect to the two units in the Clyde Road project ([13(1)] above), up until the settlement on 7 September 2021;
2. defending SCN's claim for breach of contractual, fiduciary and statutory duties with respect to the Clyde Road project ([13(2)] above), again, up to the settlement on 7 September 2021;
3. prosecuting its claim with respect to the Clyde Road project ([11 (3)] above);
4. defending Manotik's claim under the Clyde Road building contract ([15] above), and with costs to be assessed on an indemnity basis;
5. pursuing its claim for recovery for the HNH Loan ([11(4)] above), and, again, with costs to be assessed on an indemnity basis; and
6. defending SCN's claim with respect to the Pacific Parade project ([14] above).
I did not find it clear from PHI's submissions how these orders would apply to costs which were referable to the general conduct of the proceedings, or more than one claim. I will return to this question below. The submissions did, however, make it clear that PHI was also claiming the costs of the cost's argument. PHI conceded costs claims (1) and (5), provided that they were limited to costs solely referable to the relevant claim, but on ordinary basis only. The other claims were opposed.
SCN and Manotik also made costs claims of their own. They sought orders against PHI for payment of their costs of the hearing before Sackar J from 6-8 September 2021, and 85% of their costs of the hearing which resulted in my September 2022 judgment. This was resisted by PHI.
On Manotik's behalf, a further claim was made with respect to some of the costs incurred in earlier proceedings in which PHI and Manotik had been involved. Those proceedings, which I will describe in more detail later in this judgment, were settled and a consent order was made that, as between PHI and Manotik, the costs were to be costs in the cause in these proceedings. It was contended for Manotik that, having regard to the result of these proceedings, it should receive its costs of the earlier proceedings. The opposite contention was made for PHI.
[3]
Clyde Road breach of duty claims by SCN
SCN's liability to pay PHI's costs of these claims is not disputed.
[4]
Clyde Road specific performance claim by SCN
The immediate difficulty faced by PHI in its application for costs of defending this claim is that the claim was settled as part of the September 2021 settlement agreement and was not ultimately determined. Usually, where proceedings are settled or otherwise resolved in circumstances where it is unnecessary for the Court to decide the proceedings, costs will be left to lie where they fall. This is because the Court will not be drawn into trying the case for the purpose of determining costs: Re Minister for Immigration; Ex parte Lai Qin (1997) 186 CLR 622 at 624-625.
Counsel sought to meet this problem by arguing that, as part of the settlement, SCN had effectively capitulated on this claim. Counsel referred me to PHI's submissions which had been lodged prior to the hearing and which pointed out what was said to be fundamental difficulties with SCN's claim. Counsel also submitted that the consent orders dealing with the two units in question made pursuant to the settlement agreement effectively reflected, or at least where much closer, to the position which had been taken by PHI.
I do not find these submissions sufficiently persuasive to depart from the usual rule laid down in Lai Qin. In my view, the contrast with the breach of duty claims is instructive. Those claims were formally abandoned in submissions before the beginning of the hearing: that was a clear capitulation. The specific performance claim was not abandoned and was ultimately compromised. The compromise was one which dealt with other issues in the proceedings as well, in particular the terms on which the accounts for the Clyde Road and Pacific Parade projects where to be undertaken. It would defeat the purpose of the Lai Qin rule if the Court were now required to unravel the negotiations and trade-offs between the parties for the purpose of determining whether the terms agreed by SCN represented a "capitulation" in the relevant sense. In the light of the settlement, the costs of this claim should lie where they fell.
[5]
Clyde Road project claim by PHI
The main thrust of PHI's claim was to obtain the taking of accounts and to determine the amount owing, if any, by PHI as the accounting party. Counsel for PHI submitted that, having regard to the result before the referee ([27]-[30] above) and the 2022 hearing before me ([33] above), PHI had been the successful party overall. In particular, on the capital contribution issue there had been a difference between the parties before Mr Samuel of $2.6 million and PHI had wholly succeeded.
In evaluating counsel's submission, it is necessary to take account of the nature of the proceedings. In another part of the argument, counsel quoted and relied upon the following statement by me in Shazbot at [66]-[67]:
Both parties agreed that the traditional rule in partnership actions was that, generally, the costs of proceedings for the winding up of a partnership were paid out of the partnership assets. But that general rule did not apply in all cases. In Meekin v Gersbach (Supreme Court of New South Wales, 6 August 1997, unrep), McLelland CJ in Eq stated, at 2:
The distinction to be drawn is between proceedings which are necessary for the administration of partnership assets where there is no relevant fault on either side, on the one hand, and proceedings which are rendered necessary by reason of the default of one of the partners, on the other. When the proceedings are caused by such default there is normally good reason not to order payment of costs out of the partnership assets, but rather to order costs against the partner in default, at least up to the conclusion of the hearing …
His Honour went on to quote from the 16th edition of Lindley & Banks on Partnership (R I'Anson Banks, Lindley & Banks on Partnership (16th ed, 1990, Sweet & Maxwell) at [23-112]:
... it has long been an established rule that all the costs of dissolution proceedings should be paid out of the partnership assets, unless there is a good reason for making some other order. Where, however, such proceedings are, in reality, commenced in order to obtain an adjudication on some disputed claim between the partners, the unsuccessful litigant will normally be ordered to pay the costs up to the date of trial.
Accounting proceedings are an ordinary incident of the winding up of a partnership by the Court. The general rule that the costs of the proceedings are ordinarily paid out of the partnership assets unless the need for the accounting results from some default on the part of one of the partners, therefore applies to such proceedings.
In my view, there is nothing exceptional about the proceedings insofar as they involved a partnership account being taken for the Clyde Road project. SCN did not resist the taking of accounts; in fact, SCN's cross-claim sought an order for accounts to be taken: see [13(1)] above. The accounting proceedings which then took place involved consideration of numerous individual items and the outcome cannot be seen as success by PHI on some particular "event". Indeed, the result was that SCN obtained judgment against PHI as the accounting party for a substantial sum.
The general rule as outlined above opened the possibility of PHI seeking an order for payment out of the partnership assets (which would have in effect required SCN to pay half). But had such a claim been made it would have given rise to further questions. One question would have been weather such a claim should have been in the accounting proceedings themselves. Another would have been whether SCN had a similar entitlement to recover a share of its costs. As no claim was made on this basis, it is not necessary to take this any further.
PHI did also claim a declaration which would have resolved the specific performance claim by SCN with respect to the two units in the development in its favour. But that appears to have been a very minor aspect of PHI's claim with respect to the Clyde Road project. Furthermore, for reasons already given, no costs order should now be made concerning the costs of the specific performance claim in light of the September 2021 settlement.
[6]
Clyde Road building contract claim by Manotik
To understand PHI's application for costs for defending the costs of this claim, it is necessary to refer to a further part of the background. In October 2019, Mr Stuart Latham, PHI's solicitor, wrote to SCN and Manotik about the four projects which later became the subject of these proceedings. So far as the Clyde Road project was concerned, the letter enclosed a report (described in the letter as the Compilation Report) prepared by a firm of accountants described as "the accountants for" the project (by which I assume Mr Latham meant that the firm had been instructed by PHI to prepare the accounts). The letter pointed out that the report calculated the amount owing to SCN as $462,520 and, to Manotik, as $124,040. The letter proposed a settlement which would involve these payments being made to SCN and Manotik and a formal settlement agreement being prepared.
The directors of SCN and Manotik were invited to appoint legal advisors to reply to the letter. There was no evidence about what response was made to the letter, but plainly, if any discussions did take place they did not result in an agreement, and the proceedings were commenced in the following year. The amount eventually claimed under the Clyde Road building contract in Manotik's cross-action was $105,000.
In his submissions, counsel for PHI contrasted the $124,040 payment proposed in the October 2019 letter with the $84,000 judgment ultimately obtained by Manotik ([34(1)] above). His submission was that this meant that Manotik had "failed" in its claim. In support of the application for indemnity costs, counsel characterised the October 2019 letter as an "open offer" to pay Manotik $124,040, which Manotik had unreasonably rejected.
I do not agree that the mere fact that Manotik obtained judgment for less than the figure claimed in its initiating statement of cross-claim means that Manotik failed in the proceedings, and is prima facie liable to pay PHI's costs. The fact is that Manotik obtained a judgment in its favour. The amount obtained by Manotik was less than that initially claimed, but it was more than the amount which PHI was prepared to concede for the purposes of the reference (see [28] above) and, although not large in the context of the dispute, it was still a significant amount. If anything, Manotik was successful in the proceedings, but as no claim has been made for costs on Manotik's behalf it is not necessary to take this further.
Nor do I think that the October 2019 letter helps PHI. In the first place, the letter did not take the form of a Calderbank offer. It was not expressed to be made on the basis that it was "without prejudice except as to costs" and did not refer to costs of the proceedings (which, of course, at that time had not been commenced) at all.
Furthermore, the so called "open offer" in the letter was not one which was capable of immediate acceptance by Manotik. The letter stated:
…
If you have any queries or comments regard [sic] the above, please ask your legal advisers to contact us.
Otherwise, if you agree with the position as stated, please ask your legal advisers to let us know. In that case, we will draw a deed of agreement terminating the JVA and providing for the payments to [SCN] and Manotik as discussed above.
However, for the avoidance of any misunderstanding, [PHI] will also require a satisfactory resolution of the issues regarding [the Avon Road project] (discussed below) before finalising the JVA and before paying any monies to [SCN] or Manotik.
…
Finally, even if the letter had satisfied the requirements for a valid Calderbank offer, it would be necessary for PHI to demonstrate affirmatively that rejection of the offer, in the context in which it was made, was unreasonable. The evidence before me fell far short of establishing that, and counsel's assertion of unreasonableness lacked any explanation.
As earlier noted, the cross-claim related to a partnership liability for which, as between itself and PHI, SCN was responsible for half. Costs incurred in defending the cross-claim, if any could be separately identified, might therefore have been claimed by PHI out of partnership assets with the eventual result that half of them would be borne by SCN. But again, no such claim was made on this basis, and it is not necessary to consider the matter further.
[7]
HNH loan claim by PHI
PHI obtained a judgment in its favour. There is no dispute that SCN is liable for PHI's costs of the claim.
In support of the application for indemnity costs, counsel for PHI relied upon an offer made by letter in November 2020. The offer proposed the making of declarations fixing SCN's liability under the HNH Loan at $205,000.
The letter took the form of a Calderbank offer. Although it contained various offers to do with different aspects of the proceedings, it was framed in such a way as to permit the HNH Loan offer to be separately accepted.
But I am not satisfied that the judgment obtained by PHI was clearly more favourable to SCN than accepting the offer would have been. Based on the figure in Mr Samuel's April 2022 report, and adjusting for interest, the amount owing as at August 2022 was $285,409. But I concluded that the $76,667 owing from PHI to SCN should be credited against the HNH account, thus reducing the ultimate judgment to $208,742. Counsel pointed out that in my judgment I described the question of which account the $76,667 was to be credited to as a "minor issue" and so it was in the scheme of things. But that does not alter the fact that the eventual judgment obtained for the balance owing on the HNH Loan was less than $5,000 more than the amount which had been offered almost two years before, and in that time interest had accrued. The ultimate outcome appears to have been, in real terms, very close to, if not slightly below the amount offered.
In any event, the application for indemnity costs faces a further hurdle. As with the "open offer" of October 2019, it is necessary to demonstrate that the rejection of the offer was unreasonable. Again, counsel for PHI asserted that this was so, but did not present any evidence of submissions demonstrating it to be so by reference to the circumstances at the time the offer was made. Certainly, a mere comparison between the offer sum and the ultimate judgment does not demonstrate reasonableness.
[8]
Pacific Parade project claim by SCN
In his argument, counsel for PHI pointed out the difference between the amount initially claimed by SCN ($1.135 million, based on the accounts relied on by SCN (see [14] above) with the amount ultimately paid out to SCN under the consent orders made last year ($321,000). Counsel submitted that PHI was "completely successful" in defending SCN's cross-claim.
Again, however, it must be borne in mind that the proceedings involved a claim for an account. That was not resisted by PHI. Counsel's submissions did not attempt to explain where the difference between the amount initially claimed by SCN and the amount ultimately paid out had come from. Again, I assume that there would have been multiple issues considered in the reference before Ms Conoulty.
In these circumstances, I am not satisfied that the outcome of the proceedings reflects PHI's success on an "event", and I see no reason to depart from the usual rule applicable to partnership account proceedings.
[9]
Scope of liability for PHI's costs
I have concluded that PHI is entitled to its costs of defending the breach of duty claims made against it by SCN and prosecuting its claim against SCN for recovery of the HNH Loan. There remains a question of how far that liability should extend.
The breach of duty claim was abandoned before the accounting reference took place but the HNH Loan claim was part of the reference and was not finalised until the consent orders which were made following the end of the reference in December last year. The parties, however, agreed as part of those consent orders that there would be no orders as to costs of the reference proceedings. The costs order in favour of PHI on the HNH Loan claim must therefore be confined to costs of the court proceedings.
There is a further issue about the scope of the liability. PHI is clearly entitled to the costs solely referable to the claims on which it succeeded. For instance, if an affidavit was prepared solely for the purpose of one of those claims, PHI will be entitled to the costs of preparing that affidavit. In the case of pleadings, affidavits or submissions dealing with more than one claim it may be possible, in the assessment, to make an appropriate division of the costs: Smith v Madden (1946) 73 CLR 129 at 136-137. But costs generally referable to the proceedings, such as a filing fee or the costs of attending a directions hearing, cannot be dealt with in this way and can only be recovered under an order for payment of the general costs of the proceedings.
The breach of duty claim on which PHI succeeded was made by SCN as part of its cross-action. In proceedings involving an action and a cross-action, where the cross-action is dismissed with costs, an order that the defendant/cross-claimant pay the costs of the cross-action is interpreted as being limited to the costs solely referable to the cross-action; costs referable to both the action and the cross-action follow the action. But this is only a rule of interpretation. The Court has full power in a proper case to order that the costs referable to both action and cross-action follow the result of the cross-action, or to apportion such costs between the parties: Medway Oil & Storage Co Ltd v Continental Contractors Ltd [1929] AC 88, 95, 98; Southern Oil, at [30]-[45].
In the present case, the situation is more complex still because the breach claim was only one of the claims advanced in SCN's cross-action and there has been no order in favour of PHI as to the costs of the other claims. A similar situation exists with respect to the HNH claim, which was only one of the claims advanced by PHI in its action.
Where a plaintiff succeeds on one of two claims in an action and abandons or settles the other, the general costs commonly follow the event of the successful claim: see Southern Oil at [40]-[45]. A similar order can be made in favour of a successful defendant. But it is not an automatic outcome. The incidence of general costs in a case where a party enjoys mixed success is a matter for the Court to consider in every case and the relative importance of the successful and unsuccessful claim, or defence may be a relevant factor.
Counsel for PHI did not address these allocation issues in his submissions. PHI has established an entitlement to costs of only one out of numerous claims brought in its action and has obtained an entitlement to the costs of the successful defence of only one of the claims in the cross-actions brought against it.
In the absence of argument, I think it would be unrealistic to assume that these claims were sufficiently significant to justify PHI's success in them carrying an entitlement to all of the general costs of the proceedings. The orders in PHI's favour will therefore be limited to the costs solely referable to the two claims in question.
[10]
September 2021 hearing
The application for costs by counsel for SCN focused on the argument concerning interest which was the subject of Sackar J's judgment. Counsel pointed out that ultimately this was the only issue debated before his Honour, and SCN ultimately succeeded on the issue on appeal. Counsel also pointed out that the issue was a commercially significant one on its own right, resulting in the re-allocation from SCN to PHI of half of the interest sum of $1.169 million.
In these circumstances, counsel contended that SCN was entitled to its costs of the issue, on the basis of the rule that costs generally follow the event. Counsel submitted that the best way to give effect to this entitlement would be to order that PHI pay the costs of SCN (and presumably Manotik) of the hearing before Sackar J. Rather than pick through the costs of the earlier stages of the hearing when there had been multiple issues in play, the just quick and cheap solution was, so the submission ran, simply to award PHI the whole costs of the hearing.
Even if I were persuaded that SCN had a prime facie entitlement under the rules to the costs of the issue, I think that counsel's solution would have been excessive. As Macfarlan JA noted, there were other issues debated at the hearing before Sackar J. Having read the transcript of the three days, the only part of the hearing which seems to me to have been concerned with the interest issue was the mention on 8 September. The hearings on 6 and 7 September (and the hearing on 20 September concerning the orders) were concerned with the proceedings generally. Apart from the costs on the mention on 8 September, the only other expense clearly referable to the interest issue would have been the preparation of the short submissions requested by his Honour (see [21] above).
But I think there is a more fundamental objection to counsel's submission. The interest issue was only one of the questions which arose in the taking of the accounts for the Clyde Road project. In the ordinary course, the issue would have been dealt with as part of the reference, and any question of construction involved in it would have been addressed, if necessary, as part of the adoption of the referee's report. Sackar J only undertook to consider the issue and deliver a judgment on it as a matter of convenience for the parties.
In these circumstances, I see the costs of the issue as having been, in effect, part of the costs of the reference. The parties agreed that there was to be no order as between them concerning those costs, understandably so given the swings and roundabouts involved in the reference proceedings. In my view, the costs of the interest issues should not be now singled out and made the subject of a separate order. There will be no order as to the costs of the September 2021 hearing.
[11]
August 2022 proceedings
Counsel for SCN and Manotik contented that they had had the better of the August 2022 hearing before me. Counsel pointed out that PHI succeeded on only one issue (the contract works insurance issue, and even then, only to the extent of about $20,000). On all the other issues, counsel submitted, SCN and Manotik prevailed. Counsel submitted that, in these circumstances, PHI should be ordered to pay 4/5 of the costs of SCN and Manotik of the hearing.
Again, this submission glosses over some of the complexities associated with the different claims which were the subject of the reference and the proceedings. The claim by Manotik under the building contract was quite distinct conceptually from the claims as between PHI and SCN concerning the partnership entitlements under the Clyde Road project and the HNH Loan. Furthermore, PHI defended Manotik's claim on behalf of SCN, as well as on its own behalf, and should in principle have been entitled to contribution from SCN for the costs of doing so: Morgan Equipment Company v Rodgers (No 2) (1993) 32 NSWLR 467, at 481D-485B. Moreover, although PHI failed before me in recovering the $100,000 payment from SCN, PHI ultimately succeeded on this issue in the reference before Ms Conoulty.
Again, however, I think that the context provides a more fundamental answer to the claim for the costs of the hearing. Even more clearly than the hearing before Sackar J in September 2021, the hearing before me in August 2022 was part of the reference proceedings. The issues involved in it were relatively small by comparison with the amounts at stake in the reference. Again, it would be artificial to award costs when there has been no order as to the costs of the reference.
[12]
Earlier proceedings
The earlier proceedings arose out of a dispute concerning yet another property development, this one at Howard Avenue Dee Why. The partners in the development were PHI, Manotik, and a third party, Tadros Holdings Pty Ltd ("Tadros").
The earlier proceedings consisted of two separate matters in this Court, one of which was commenced in 2016 and the other in 2020. Neither of the files was before me for the purposes of the cost's argument. My information about the proceedings came from submissions by counsel for SCN and Manotik and an affidavit in reply from Mr Latham, PHI's solicitor.
The 2016 proceedings were brought by PHI and Manotik as plaintiffs against Tadros as the defendant. Mr Elee Georges, a solicitor of G&S Law Group ("G&S"), acted for PHI and Manotik.
In September 2019, the parties agreed to settle the proceedings, on terms which included Tadros paying $450,000 to PHI. The monies were paid into G&S's trust account and in February 2020 consent orders were made disposing of the proceedings.
After the deduction of costs, the monies remaining in G&S's trust account totalled $391,000. Mr Latham instructed Mr Georges to pay this sum out to PHI, but Mr Nicola objected. He claimed $52,000 for Manotik (pursuant to separate dealings between PHI and Manotik) and $184,000 for SCN (apparently as a reimbursement of monies contributed by PHI to the Howard Avenue project out of the bank account for the Clyde Road project). Given the dispute, the monies remained in the G&S trust account.
A notice of motion was then filed in the 2016 proceedings on behalf of PHI, in May 2020, seeking orders that G&S account to PHI for the monies held in the trust account. The motion sought to invoke the Court's power under s 73 of the Civil Procedure Act 2005 to make orders enforcing agreements to compromise proceedings in the Court. Mr Georges caused G&S to commence separate interpleader proceedings, and paid the trusts monies into Court.
In August 2020, the motion proceedings and the interpleader proceedings were settled. The disputed sum of $184,000 was paid back into PHI's Clyde Road project account. The consent orders provided that the costs of the motion and of the interpleader proceedings "be costs in the cause in" the present proceedings.
According to the submission by counsel for SCN and Manotik (which was based on the description of the earlier proceedings in those submissions, before the affidavit was filed from Mr Latham) it was "not possible to draw any direct connection between the subject of the work done in the earlier proceedings and the matter decided by the Court in the present proceedings". Counsel submitted that the parties probably did not expect these proceedings to take the course they did. But the agreement, in counsel's submission, nevertheless tied the parties' entitlement to costs of the earlier proceedings to the outcome of the present proceedings.
As already noted, counsel submitted that SCN and Manotik had substantially succeeded in the proceedings before Sackar J and myself. Counsel submitted that "the only matters which were decided by the Court were decided almost entirely in a manner favourable to Manotik and SCN" and they should therefore receive the cost of the earlier proceedings.
This interpretation of the earlier proceedings was contested in Mr Latham's affidavit. As already noted, the $184,000, which was the subject of the claim by SCN, resulted from PHI's withdrawal of monies from the Clyde Road project bank account. Mr Latham stated that the substance of the parties' dispute concerning this sum "was directly referable" to SCN's breach of duty claims against PHI ([13(2)] above). It was also "generally referable" to SCN's claims concerning the Clyde Road project ([13(1)] above). Mr Latham noted that Ms Conoulty ultimately found that the monies in the bank account belonged exclusively to PHI (I assume, on the basis that PHI was responsible for financing the development and no capital contribution was made by SCN: see [27] above).
Counsel for PHI pointed out that the breach of duty claim had been abandoned. Counsel's submission was that PHI had succeeded on the relevant issue and should receive the benefit of the consent order concerning the costs of the earlier proceedings.
Where, as in the present case, a costs order is made that the costs of proceedings are to be costs in the cause in later proceedings, and there is uncertainty, given the outcome of the later proceedings, about what the effect of the order is, or ought to be, procedural questions arise about the nature of the original "costs in the cause" order. Does it attract the principle in Woods v Sheriff of Queensland (1895) 6 QLJ 163, so that, once made, it cannot be altered without the consent of the parties? On this view, the Court's role is confined to interpreting the original order. The alternative view is that such an order does not render the Court functus officio and the Court may, as a matter of discretion, make a replacement order dealing with the incidence of costs in the light of the actual outcome of the subsequent proceedings.
I discussed this question in Akierman at [159]-[164]. In that case, however, it was not necessary to reach a final conclusion, because the parties agreed that the original "costs in the cause" order should be replaced by a fresh order.
The issue was not addressed before me in the present case and I was not asked to re-open the files from the earlier proceedings. In these circumstances, I think it best to proceed on the basis that I am only being asked to interpret the earlier consent order, and not to make a fresh exercise of the Court's power to award costs of those earlier proceedings. This seems to me to accord with the way in which the submissions were presented for both parties.
Accordingly, the question before me is whether, as a matter of interpretation, and in the light of the outcome of the present proceedings, the consent order for "costs in the cause" allocates liability for the costs of the earlier proceedings to one or other of the present parties.
The consent order was made shortly after PHI had filed its statement of claim. PHI's action, at that point, contained various claims concerning four different development projects. The parties would however have contemplated that the claims might be amended or that cross-claims might be brought concerning one or more of those projects. To my mind, the most natural reading of the reference to the "cause" is to the outcome of the proceedings (that is, the action together with the cross-actions), taken as a whole.
I have refused the applications by counsel for SCN and Manotik for orders for costs of the hearings before Sackar J and myself. As a result, the basis for the claim for the costs of the earlier proceedings falls away. On no view have SCN and Manotik succeeded in the "cause", so understood.
But nor has PHI. PHI has obtained two orders in its favour for the costs solely referable to two specific claims raised in the proceedings. It has not obtained an order for the general costs of the whole, or any party, of the proceedings.
It is true that PHI has obtained an order in its favour for costs solely referable to the defence of the breach of duty claims. But at the time the consent order was made, the particular claims in question had not yet been propounded (SCN's cross-claim was only filed several weeks later). At that point, any such claims would have been seen as part of PHI's claim concerning the Clyde Road project, and PHI did not obtain a costs order in its favour on that claim either (see [52]-[57] above). I do not think that, on any view, the "cause" for the purpose of the consent orders can be identified with the outcome of the breach claims on their own.
[13]
Costs argument
Counsel for PHI sought to have the costs of the costs argument specifically included in the orders for costs which were claimed against SCN and Manotik. Most of those claims for costs failed, and overall, PHI has not enjoyed a great deal of success in the costs argument. Nor have SCN and Manotik. There will be no order as to the costs of the costs argument.
[14]
Orders
The orders of the Court are:
1. Order that the first defendant pay the costs of the plaintiff solely referable to the plaintiff's claims for recovery of the "HNH loan" the subject of prayers 16-19 in the statement of claim (but not including any such costs incurred in proceedings before the referees).
2. The first defendant/cross-claimant pay the costs of the plaintiff/first cross-defendant solely referable to the claims for breach of duty contained in prayers 4-5 of the first cross-claim.
3. Otherwise no order as to costs as between the plaintiff, the first defendant and the second defendant in the action or the cross-actions.
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Decision last updated: 07 August 2024
Parties
Applicant/Plaintiff:
Peter Holmes Investments Pty Ltd
Respondent/Defendant:
S&C Nicola Pty Ltd
Cases Cited (10)
JUDGMENT
These are complex commercial proceedings where all of the parties' substantive claims for relief have now been determined. This judgment deals with the outstanding costs dispute between the plaintiff, the first defendant and the second defendant.
The plaintiff company, Peter Holmes Investments Pty Limited ("PHI"), has had a long history of involvement in property investment and development. The first defendant, S&C Nicola Pty Limited ("SCN"), and the second defendant, Manotik Pty Limited ("Manotik"), were also involved in property development, including construction work. Both SCN and Manotik were controlled by Mr Sobhy Jean ("John") Nicola.
For many years prior to the disputes which were the subject of the proceedings, the parties had collaborated on the development of properties into residential units, mainly in Sydney's Northern Beaches. Typically, they conducted their arrangements on the basis that PHI would fund the development, SCN would identify the properties and coordinate the construction, and Manotik would carry out the building work.
The proceedings arose out of disputes between the parties concerning the finances of several different development ventures which I will describe in somewhat more detail below. Some of the disputes were settled along the way and the remaining substantive claims were finalised in December last year following an accounting reference.
In the course of the proceedings, there have been two judgments delivered at first instance. The first was a judgment of Sackar J in September 2021: Peter Holmes Investments Pty Ltd v S&C Nicola Pty Ltd [2021] NSWSC 1174 ("J1"). That judgment was the subject of an appeal to the Court of Appeal which was decided in May 2022: S&C Nicola Pty Ltd v Peter Holmes Investments Pty Ltd [2022] NSWCA 72 ("CA"). The second judgment at first instance was delivered by me in September 2022: Peter Holmes Investments Pty Ltd v S&C Nicola Pty Ltd (No 2) [2022] NSWSC 1215 ("J2").