Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd [2021] NSWSC 336 | Case summary

Costs

There was no dispute that there should be a costs order in favour of SOR against HA, and HG should be jointly and severally liable for part of those costs. The main issue was the extent of HG's liability.
That issue was resolved by agreement for the costs of two interlocutory applications. These were SOR's application for expedition (see J1 [94]) and for freezing orders against HA (J1 [99]). The parties agreed that HA, but not HG, should be ordered to pay SOR's costs of those applications.
Apart from these costs, SOR sought an order that HG be jointly and severally liable for all costs of the proceedings. This was resisted by HG. HG also contended that the costs order in favour of SOR (as against both itself and HA) should be reduced so as to reflect SOR's lack of success on aspects of its case.
In evaluating these contentions, it is necessary to distinguish between the claims of the parties for relief and the issues which arose on those claims.
In the present case, SOR made four independent claims for relief: 1. judgment for repayment of its capital expenditure (mainly the amount payable on termination, but also including two unpaid monthly instalments) (J1 [21]-[22]); 2. judgment for outstanding tolling fees (J1 [19]); 3. an order that HA remove the Hydrotreater and the other items owned by it, including the contaminated receiving tanks, or judgment for damages for failure to do so (J1 [24]-[25]); and 4. an order that HA remove the contaminated oil in the receiving tanks (J1 [30]).
HG was sued as surety for HA's liabilities under claims (1) and (2). HG relied on HA's defences to those claims and also advanced separate defences of its own (see J1 [34]-[36]). All of HA's and HG's defences failed.
In the end there was no real contest about removal of the Hydrotreater, as this was what HA itself wanted. Removal of the other assets covered by claim (3), and in particular the contaminated receiving tanks, was resisted by HA. Claim (4), for the removal of the contaminated oil, was abandoned shortly before the hearing when SOR made alternative arrangements.
HA's cross-claim consisted of three claims for relief: 1. judgment for repayment of tolling fees during the period when the Hydrotreater was shut down, allegedly due to SOR's breach of its maintenance obligations (J1 [20]); 2. damages for conversion of the Hydrotreater, or for breach of contract, constituted by SOR's alleged interference with its removal (J1 [27]); 3. damages for mixing PCB-contaminated oil with other oil in the receiving tanks (J1 [31]-[32]).
Cross-claims (1) and (3) failed. As already noted, on cross-claim (2) HA would ultimately have been satisfied by an order permitting it to remove the Hydrotreater. I concluded instead that SOR had an entitlement to have the Hydrotreater removed.
The issues on claim (2) and cross-claim (1) were essentially identical. The claim and the cross-claim mirrored each other. There was also some overlap of issues between claim (3) and cross-claim (2). I discuss this in more detail below.
Counsel for HG acknowledged that HG had an interest in HA's defences to claims (1) and (2) and that HG should be jointly and severally liable at least for a substantial proportion of SOR's costs of those claims. Counsel submitted, however, that HG should not have to pay for SOR's costs of its claims for removal of HA's assets from the site (claims (3) and (4)). Nor should HG have to pay for SOR's costs of defending HA's claims for conversion of the Hydrotreater and contamination of the oil in the receiving tanks (cross-claims (2) and (3)). HG was not party to any of those claims.
HG's argument on costs particularly focussed on the allegation that SOR resisted, and then attempted to sabotage, HA's attempts to remove the Hydrotreater from the site in accordance with its contractual entitlement to do so. That allegation failed on the facts (see J1 [575]). It was a significant issue at trial. Counsel for HG contended that the resulting costs should be borne by HA alone.
It is true that the sabotage allegation arose on the pleadings as between HA and SOR. It formed part of HA's contention of breach of contract (or conversion) on the part of SOR with respect to the Hydrotreater. That contention was pleaded by HA in answer to SOR's claim (3). It was also pleaded in more detail and at greater length in support of HA's cross-claim (2).
But the sabotage allegation also featured in HG's case. HG pleaded the allegation in its defence to SOR's claim in substantially the same terms as were pleaded by HA. HG relied upon SOR's alleged conduct as justification for the purported termination by HG of its obligations as a surety (J1 [646]).
The point was also raised by way of causation. Counsel for HG submitted: So [HG] says that this is a matter of causation. If SOR has engaged in conduct against [HA], that is either tortious of a breach of the agreements that says prevented [HA] from having the funds to satisfy its obligations to [SOR] then any breach by [HG] of the guarantee is not a proper cause of SOR's loss because the proper cause of SOR's loss is the tortious conduct that diminished the resources of [HA] as so as to prevent it from having the resources to pay it from its own resources and the specific matter that it's then referring to here is the conduct that [HA] says prevented it from removing the hydrotreater so the conversion claim.
By contrast, the allegations concerning the contamination of the feedstock were pleaded only in HA's cross-claim against SOR. They did not form any part of HG's pleadings. Having said that, the contamination issues were factually closely linked to the issues arising on SOR's claim for the removal of the receiving tanks and the Hydrotreater itself. The evidence on the contamination claim involved only some limited documentary supplementation of the general evidence going to removal issues.
Thus the allegations of delay and sabotage against SOR were an integral part of HG's case as well as HA's. Nevertheless it is true that the case between SOR and HA was wider in some respects (in particular because of the cross-claim for contaminating the feedstock) than the case between SOR and HG. The question is what, if any, allowance should be made for that.
In Medway Oil & Storage Co Ltd v Continental Contractors Ltd [1929] AC 88 the plaintiff agreed to sell the defendant a large quantity of kerosene. The kerosene was never delivered, with each party blaming the other. The plaintiff sued for damages, alleging wrongful repudiation. The defendant cross-claimed for damages for wrongful repudiation on the part of the plaintiff.
The plaintiff's claim failed on the merits. The defendant succeeded in establishing wrongful repudiation by the plaintiff, but failed to prove damage, so its cross-claim was also dismissed. The plaintiff was ordered by the judge at first instance (MacKinnon J) to pay the defendant's costs of the action and the defendant was ordered to pay the plaintiff's costs of the cross-action.
Because of the way in which the issues arose, the defendant's costs of establishing repudiation by the plaintiff could be seen as costs of the successful defence of the claim or as costs of the ultimately unsuccessful cross-claim, and vice versa for the plaintiff's costs. The English Court of Appeal apportioned the parties' costs by allocating a share of them to the claim and a share to the cross-claim. The resulting costs ratio was about 60:40 in favour of the defendant. This was overturned by the House of Lords as too favourable to the plaintiff.
The House held that the usual rule in such a case was that the successful defendant should recover all of its costs except additional costs occasioned by the cross-action. The unsuccessful plaintiff should recover only its additional costs referable to the defence of the cross-action. MacKinnon J might, in the exercise of his discretion, have made a special order providing for apportionment. But that was not what his Lordship had contemplated and the order he had made was treated by the House as reflecting the usual rule.
In some cases, for instance where the action is a defensive one which is instituted to forestall an inevitable cross-action, a different approach might be justified. But that is not the case here. The case came to court because of SOR's claims. HA's cross-claim was responsive.
The Medway decision was applied and illuminated by Dixon J, sitting at first instance in the High Court, in Smith v Madden (1946) 73 CLR 129 at 132-137. As his Honour explained, part of the problem lay in the vagueness and inconsistency of the terms used in some of the earlier judgments. Adopting the terminology used by O'Connor LJ in James Crean & Son Ltd v M'Millan [1922] 2 IR 105, Dixon J separated items of cost into three classes.
The first class (at 136-137) consisted of "mixed" items: which cover without discrimination work referable to the action and work referable to the counterclaim …. An example of such a mixed item is a fee of a pleader for drawing the defence and counterclaim or drawing a reply that includes a defence to a counterclaim. Such a fee covers work that belongs to the claim and severable work that belongs to the counterclaim.
The second class (at 137) consisted of "common" items: that serve as much the purpose of the claim as the counterclaim. …. Thus the costs of witnesses whose evidence relates to an issue arising both on the claim and on the counterclaim would be a common item and so would be an attendance to enter the cause, to obtain an adjournment, to hear judgment and so on.
Dixon J did not give a name to the third class of cost items. I will refer to them as "specific" items. His Honour said (at 137) that they were: items, notably costs incurred in steps in the proceedings before the filing of the counterclaim, which are not common but are incurred only in bringing and maintaining or, in the case of the defendant, in defending the action. Writ, appearance and statement of claim are examples of this class of item.
Under the Medway rule, where costs of the action are awarded, they consist of all of the common costs and all of the costs specific to the plaintiff's claim; costs specific to the cross-action are excluded. It is necessary to divide the mixed items between the other classes of cost. But it needs to be emphasised that this is quite different from the "apportionment" rejected by the House of Lords in Medway. In particular, no "apportionment" of the common costs is possible: see in particular per Dixon J at 136, and per Lord Haldane in the Medway case [1929] AC at 100.
It appears from the Victorian Court of Appeal in Dimos v Willetts (2000) 2 VR 170 that an analogous general rule applies where a plaintiff brings an action against two or more defendants. In that case the plaintiff, P, sued two defendants, D1 and D2. The plaintiff succeeded against D1 and P was ordered to pay D1's costs. P however failed against D2 and was ordered to pay D2's costs.
The relevant issue arose on the taxation of P's costs order against D1. The order had been that D1 pay P's costs of the proceedings. It was contended for P that the order covered the costs he had been ordered to pay D2. This was rejected by the Court.
Ormiston JA, who gave the leading judgment on this point, stated that all costs orders had to be read in the light of the general rule that costs "follow the event" (see, in this State, Uniform Civil Procedure Rules 2005 (NSW), r 42.1). He continued (at 186-187 [44], footnotes omitted): Of course, in any proceeding the "event" may not be confined to a single event, for the rules now permit joinder of defendants and of causes of action and the making of claims between parties other than the plaintiff. Thus the outcome of a counterclaim is a separate "event" [referring to the "careful explanation" by Dixon J in Smith v Madden]. Where causes of action are joined, as in the present case, they likewise produce separate events in respect of which a trial judge is entitled to exercise his discretion.
The first and third sentences of this passage are significant. The first sentence points out that modern rules of court allow the joinder, not only of claims against different defendants, but of claims based on different causes of action against the same defendant. It would follow from the third sentence that each claim based on a distinct cause of action can be regarded as giving rise to a separate "event".
His Honour then continued (at 187 [45]): Where, as in the present case, the court dismisses a claim against a second or other defendant with costs, that should be construed as dealing with the costs of that claim, if no contrary order is made. Likewise, again as in the present case, an order for costs against an unsuccessful defendant should be construed upon the basis that the court was dealing with the claim or claims made against that defendant, so that, in the absence of any contrary order, it should be construed as dealing with only the costs necessarily and properly incurred by the plaintiff in prosecuting that claim or those claims.
In the second sentence Ormiston JA made it clear that it was not just a case of P being unable to recover from D1 the costs awarded against him in favour of D2. P was also unable to recover P's own costs of his claim against D2.
Bringing these principles together, I start from the position that HG should pay SOR's costs of the proceedings, except to the extent that those costs have been increased by HA's cross-claim (or by the bringing of claims by SOR solely against HA). In other words, costs solely attributable to the cross-claim and costs solely attributable to claims by SOR against HA alone should be excluded.
Counsel for SOR submitted that I should not take this approach. Counsel relied on the decision of the Court of Appeal in Tsu v Nemeth [2012] NSWCA 29. The leading judgment was given by Handley AJA. At [69] his Honour said (citations omitted): The general practice of the Court is to make joint and several orders for costs against defendants where their liability depends on a common substratum of fact.
Counsel submitted that all of the claims by SOR against HA and HG, and all of the claims by HA on its cross-claim, arose out of the same substratum of fact. Accordingly, counsel submitted, on the principle in Tsu v Nemeth the costs order in favour of SOR should cover all of its costs of the proceedings. Counsel submitted that this was further supported by a practical consideration, namely the expense and difficulty involved in separating out costs associated with the claims as between SOR and HA.
I do not understand Tsu v Nemeth as laying down any hard and fast rule, or at least any hard and fast rule which would apply here. The plaintiffs made a negligence claim against three defendants which succeeded, with liability being apportioned between them under the Civil Liability Act 2002 (NSW). Although there were ultimately separate judgments against each defendant, the plaintiffs' claims against each of them involved the same issues. As Handley AJA said at [70], in truth the claims against the defendants were not separate.
Counsel for SOR submitted that an order that HG pay the whole of the costs of the proceedings was supported by two general considerations of principle. The first was that costs are compensatory and entitlement to costs should in general be approached from the point of view of the successful party: Mahenthirasa v State Rail Authority of NSW (No 2) (2008) 72 NSWLR 273 at [8]-[9]. The second was that where a costs order is made against two or more defendants, their liability is usually joint and several: Rushcutters Bay Smash Repairs v H McKenna Netmakers Pty Ltd [2003] NSWSC 670 at [2], [16]. But in my view neither of these general principles mandates the conclusion that HG should have to pay costs which were incurred solely as a result of SOR suing HA.
I turn now to practical considerations. On the approach which I have deduced from Smith v Madden and Dimos v Willetts, to quantify the costs order against HG it would be necessary on assessment to analyse SOR's costs so as to separate them (and, in the case of mixed items, divide them) into two categories: costs common to the claims against HG and HA and costs specific to the claims against HG on the one hand, and costs specific to the claims against HA on the other.
Quantifying costs in this way would involve some extra work. But this must be seen in context. An assessment will require the preparation of an itemised bill, and scrutiny of each disputed item, anyway. SOR accepts that the costs of the two interlocutory applications to which I have referred should in any event be excluded from the costs order in its favour. Inevitably, the assessment will therefore require some analysis of some of the costs, if only to separate costs of the interlocutory applications from the general costs of the proceedings.
In practice, allocation of non-mixed cost items to the relevant categories is unlikely to be troublesome. Most if not all of the costs associated with the cross-claim and the relevant interlocutory applications would probably be captured by this process. The extra work would appear to lie in separating out any costs specific to the claims between SOR and HA which may be mixed with common costs.
It seems to me unlikely that this would be a disproportionately difficult or expensive task. The focus would probably be on SOR's costs of preparing the evidence, and conducting the hearing (and perhaps also of discovery). The question would be whether SOR's costs were increased, and if so by how much, by the inclusion of evidence or submissions (or documents, in the case of discovery) relevant only to SOR's claims (3) and (4), or to HA's cross-claim (3).
In ordinary circumstances, common costs liabilities would ultimately be shared by means of contribution between HA and HG. On the approach I have deduced from Smith v Madden and Dimos v Willetts, HG would end up paying half the common costs together with the HG-specific costs. This would only be less favourable to HG than an order that both defendants pay the whole of SOR's costs if the HA-specific costs were to exceed the HG-specific costs. The exercise of quantifying the costs liabilities separately might not be worthwhile.
But given HA's liquidation, HG's right of contribution against HA for a half share of the common costs is unlikely to be of any value. As a matter of principle I think that HG is entitled to ask for the exclusion from the costs payable by it of costs specific to claims between SOR and HA. In a lengthy and hard-fought case such as the present the overall costs are likely to be substantial. Even if the exclusion is marginal, it may still be significant in absolute terms.
I turn to HG's next argument. This was based on findings which I made against SOR in my judgment. Counsel for HG contended that the costs order in SOR's favour should be reduced to a percentage of its total costs of the proceedings to take account of its failure on these points. The suggested reduction was thirty per cent.
The adverse findings of substance were: 1. I found that SOR breached its maintenance obligations by failing to identify the need for repair or replacement of various components of the Hydrotreater (J1 [273]-[275], [280]); 2. I found, contrary to SOR's contention, that the parties never produced the Plant and Equipment Schedule required under the Agreement (J1 [501]-[506]).
Neither of these findings affected the result. As to (1), although I found that SOR's breach of its maintenance obligations was the initial cause of the August 2018 shutdown, SOR was not to blame for HA's failure to obtain the necessary replacement parts, and in any event HA did not attempt to prove loss as a result of the shutdown (see J1 [561]-[570]). As to (2), the non-existence of the Plant and Equipment Schedule did not prevent SOR from recovering the capital payment to which it was entitled (see J1 [512]).
These findings determined subordinate issues rather than claims for relief. In accordance with what Ormiston JA said in Dimos v Willetts, only a claim for relief could be equated to an "event". So far as the costs of a subordinate issue are concerned, the Court of Appeal has approved, at least in general terms, the following statement of principle in Waters v P C Henderson (Aust) Pty Ltd [1994] NSWCA 338 at p 3; James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [32]: Where the proceedings involve multiple issues the application of the rule that costs follow the event may involve hardship where a party succeeds on some issues and yet fails on others. Particularly is this so where, for example, a defendant succeeds on issues that occupied the bulk of the time taken by the proceedings. Nevertheless unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed.
In my view, neither of the issues on which I found against SOR was clearly dominant or separable. I do not propose to reduce SOR's costs entitlement on account of those findings.
I therefore propose to order that HG pay all of SOR's costs of the proceedings, excluding only costs which would not have been incurred if the case had been confined to SOR's claims (1) and (2), and HG's defences to those claims. Any costs solely referable to SOR's claims (3) and (4), or to HA's cross-claim, will be excluded.
There was no submission from HA on these points. But having reached the conclusion that the costs order against HG should be limited to the successful claims against it, I will make a corresponding limitation in the costs order against HA. The order will also exclude costs solely referable to SOR's claim (4), reflecting the fact that it was not pursued to trial.
Finally, I come to SOR's submissions about indemnity costs. SOR's primary contention was that indemnity costs of the whole proceedings should be awarded against HG (and HA) because the defence had a factually false basis which should never have been advanced. Alternatively SOR sought indemnity costs from 13 November 2020, which was when SOR's solicitors sent a letter to Hydrodec's solicitors arguing that its case was hopeless and foreshadowing an application for indemnity costs. Counsel submitted that the defence and cross-claim should not have been pursued beyond that point.
In support of its first contention counsel for SOR pointed to three aspects of Hydrodec's defence which were based on evidence found to be incorrect. These were: 1. Ms Baker's affidavit evidence that the 2015 audit was never completed and (implicitly) that HA and HG never agreed to a figure for the capital expenditure (J1 [152]-[156]); 2. Mr Ellis' affidavit evidence denying responsibility for the rear access driveway (J1 [177]-[178], [181]-[182], [190]); 3. Mr Davies' affidavit evidence which sought to blame SOR for difficulties with the removal of the Hydrotreater (J1 [393]-[397]).
In each instance, the misleading nature of the affidavit evidence was demonstrated by contemporaneous documents, and was effectively conceded by the witness. It appeared that the affidavits had been prepared in an inaccurate and incomplete form and then had been sworn by the witnesses without proper consideration. Counsel characterised Hydrodec's defence as having involved a wilful disregard of known facts.
Counsel for SOR also pointed to my observation at J1 [581] that the conduct of Hydrodec in the lead-up to the purported termination by HG in November 2019 appeared to have more to do with setting up SOR than any genuine effort to remove the Hydrotreater. I made a similar comment about the position Hydrodec took on the preparation of the Plant and Equipment Schedule (J1 [528]).
These criticisms have considerable force. I think Hydrodec should have propounded a narrower defence. On any view, Hydrodec should have run a narrower defence at trial. But had that happened, there were still defences to SOR's claims which were reasonably arguable. Indeed, as already noted, SOR failed on some subordinate issues although that did not affect the result on any claim for relief.
While I regard the case as close to the line I do not think that the unjustified parts of the defence were so dominant as to justify an indemnity costs order, either for SOR's whole costs of the proceedings, or for the costs incurred after 13 November 2020. I reject SOR's application for indemnity costs.

Southern Oil Refining Pty Ltd v Hydrodec Australia Pty Ltd

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