Did the primary judge's discretion miscarry with respect to his refusal to order that costs should follow the event?
66 The relationship between the District Court Act 1973 and the Arbitration Act was stated by Mason P, with whom Sheller JA and, relevantly, Powell JA agreed, in Morgan at 582 E-F in the following terms:
"Pursuant to the combined operation of s63A of the District Court Act 1973, the Arbitration (Civil Actions) Act 1983, proceedings may be referred for determination by an arbitrator. The arbitrator must give reasons (as s15(1)). Absent and application for re-hearing, the award is declared 'final and conclusive' (s18(1)) with certain presently relevant exceptions. However, s18(2) permits a person agreed to by the award of an arbitrator to obtain an order for a re-hearing of the action, providing certain requirements are complied with. The court that hears and determines an action by way of re-hearing may make an order for the payment of costs in respect of the hearing before the arbitrator in addition to the costs of the action itself (s18(4))."
67 Judicial application of the general costs discretion and its interaction with the rules dealing with settlement offers had been the subject of three earlier decisions of this Court: Quach v Mustafa (Court of Appeal, 15 June 1995, unreported); Houatchanthara v Bednarczyk (Court of Appeal, 14 October 1996, unreported); and MacDougall. They were reconsidered by the President in Morgan, who summarised the relevant principles in the following terms (at 597-598):
"Before us the defendant submitted that there is a significant difference between the situation of a defendant who makes a deliberate tactical decision not to call available evidence at an arbitration (as in Quach and MacDougall ) and the situation in the present case where the importance of the additional evidence, or the need to call additional evidence, was not appreciated until during the hearing of the arbitration and after it had concluded. This is said to be quite a different situation to a party deliberately holding back evidence which it knows to be important in such a way as to render the arbitration 'a form of litigious charade': Quach (at 10), per Kirby P. I agree that there is a distinction, although ultimately it is a matter of degree. In any event it would be wrong to treat Quach and MacDougall as establishing that the relevant rule must invariably be displaced whenever available evidence was not used.
It is certainly true that the parties are entitled to conduct the re-hearing in such manner as they think fit but, as Quach and MacDougall point out, there may be costs consequences. If a party tenders evidence at an arbitration that is wholly unexpected then the other party can scarcely be criticised for not anticipating it or responding to it at the arbitration. Nor can the party necessarily be criticised for not seeking an adjournment at the arbitration, given that arbitrations are usually expected to finish in one day. But in the present case the issue of the plaintiff's prospects of promotion was at all times a live one, and there is no reason other than the apparent inefficiency of the defendant or his legal advisers for the matter not being dealt with vigorously at the arbitration. Due diligence would have seen the calling of some at least of the ultimately critical witnesses.
In saying this I would not preclude taking into account, in a proper case, evidence that there was an actual consensus between the parties to the arbitration that they would contest in the arbitration on some limited basis. But this was not such a case.
It can therefore be seen that the ultimately critical evidence was not at hand at the time of the arbitration, but could with reasonable diligence have been available and called. This distinguishes the present case from Quach ".
68 Morgan was considered by this Court in Howard v Telstra Corporation Ltd [2003] NSWCA 188. In that case the appellant injured his shoulder in May 1998 when he tripped over a cable that had been laid across his driveway by an employee of the respondent. His claim for damages was referred to arbitration under the Arbitration Act. The only witness as to liability called in the arbitration was the appellant. The arbitrator found that the appellant's case needed corroboration or supplementary evidence. Accordingly, he dismissed his claim.
69 The matter was subsequently reheard in the District Court. At the rehearing the appellant called two additional witnesses. The trial judge believed the appellant and his witnesses and gave judgment in favour of the appellant. The trial judge ordered the defendant to pay the costs of the appellant up and to including the day before the arbitration but thereafter the appellant was to pay the costs of the defendant including the costs of the arbitration. The trial judge relied on MacDougall and Morgan.
70 Davies AJA, with whom Santow JA and Young CJ in Eq agreed, held that MacDougall was distinguishable because the defendant in that case had decided for forensic purposes not call available evidence at the arbitration but to reserve such evidence for use at the trial if a rehearing was requested. In the present case it was simply considered unnecessary to call the additional witnesses. The facts did not suggest that there was any deliberate holding back of evidence for a strategic purpose.
71 Morgan was also distinguishable because in that case there was the additional element of a settlement offer made by the defendant and rejected by the plaintiff whereas in the present case no such offer had been made. As the effect of the trial judge's order was to deprive the appellant (as the successful plaintiff) of the costs of any hearing of his action and, indeed, to order him pay the costs of both the arbitration and the rehearing, the mere failure to call witnesses at the arbitration who were later called at the rehearing could not justify that result. It was therefore held that the trial judge's order was perverse in the sense that it was unreasonable and plainly unjust so that his discretion miscarried: Australian Coal & Shale Employees' Federation v The Commonwealth (1953) 94 CLR 621 at 626-628; House v The King (1936) 55 CLR 499 at 504-505.
72 After citing the passage from the judgment of Mason P in Morgan v Johnson (to which I have referred in [67] above), his Honour observed that on the facts as found by the trial judge, and applying the principles enunciated in McDougall and Morgan, it was appropriate for a costs order to be made which reflected the Court's disapproval of the failure of the appellant to call evidence from the two witnesses in the arbitration, evidence which was necessary to support his claim but not one which was as draconian as that of the trial judge. His Honour thus concluded:
"27. There are many differing orders which could have been made, but two costs orders which readily present themselves for consideration in a situation such as this are firstly, that the plaintiff pay the costs of the unsuccessful arbitration and the defendant pay the costs otherwise incurred in the action and, secondly, that the defendant pay the costs up to the order of the arbitrator and the plaintiff pay the costs thereafter.
28. Had his Honour made either order, I would have considered that no error of principle in his Honour's approach to the issue was demonstrated. His Honour dealt with the matter on the basis of the facts before him. He exercised his discretion. He did not apply what he considered to be an inflexible rule.
29. However, his Honour's order was that the defendant pay the costs up to and including 19 November 2001, the day before the arbitration and the plaintiff pay the defendant's costs thereafter. The effect of this order was to deprive Mr Howard, a successful plaintiff, of the costs of any hearing of his action, indeed to make him pay the costs of both the arbitration and the trial. The mere failure to call witnesses at the arbitration who were later called at the trial cannot justify this result. In my opinion, his Honour's order was perverse, that is to say, unreasonable and plainly unjust. In the present case, there was no deliberate decision to withhold evidence for forensic purposes, as justified the severe order in MacDougall v Kolevski ."
73 It is to be noted that in MacDougall the trial judge was informed that the witnesses' evidence he had regarded as decisive, had not been called to give evidence before the arbitrator by the defendants who had argued that they had taken a forensic decision not to call any witnesses on their behalf so as not to show their hand if the matter was to be reheard by a judge. In those circumstances, the trial judge ordered that the plaintiff should pay the defendant's costs up to and including the day before the commencement of the arbitration and that the defendant should pay the plaintiff's costs from that day onwards on an indemnity basis. The appeal from that decision was dismissed.
74 The primary judge, purporting to follow the decision of this Court in Morgan, found that Ms Apostolakos was a crucial witness whose evidence changed the whole complexion of the case as it had been presented before the Arbitrator as she confirmed a system of inspection of the relevant part of the footpath even though she was Ronali's employee. As her evidence would have "turned the case", his Honour found that had that evidence been called before the Arbitrator his decision would have been quite different and the need for a rehearing would have been avoided.
75 In the foregoing circumstances the primary judge, in the exercise of his discretion, determined that the Council should pay the plaintiff's and Ronali's costs of the action and those of Ronali and Edremo with respect to the cross-claims. As I understand it, his Honour's reasoning was that those cross-claims had been kept alive as a consequence of the Council's application for a full rehearing. If the Arbitrator had determined the issue of liability in favour of the Council and Ronali, as a consequence of Ms Apostolakos' evidence that was called in conjunction with that of Mr Bell, the action and the cross-claims would have been dismissed and the plaintiff ordered to pay the costs of the Council and Ronali in the action. All the cross-claims would also have been dismissed and the Council ordered to pay Ronali's costs of the first cross-claim and those of Edremo in the second cross-claim with no order as to the costs of the third and fourth cross-claims. In fact, those were the orders that the Arbitrator made.
76 The matter should have ended there. However, as a consequence of the rehearing, each of Ronali and Edremo were required to incur the costs of defending the position that they had already successfully defended before the Arbitrator.
77 Although the bona fide of Mr McDiarmid is not in question, in my opinion there is no doubt that with due diligence he could have ascertained the identity of Ms Apostolakos prior to the arbitration as in fact he did without apparent difficulty in early 2005. He would have then become aware of the evidence that she would have given if called. Furthermore, even he did not think it was necessary to call Ms Apostolakos in the Council's case, prudence dictated that he ought to have ascertained with certainty whether she would be called in Ronali's case.
78 If not, and knowing first that her evidence would corroborate that of Mr Bell and second, that the law required a party to an arbitration such as the present to call all available evidence in support of that party's case, it follows that in those circumstances it was open to the primary judge to exercise his discretion to order the Council to pay some of the other parties' costs. This may have been done on the ground that, at least to a degree, the Council had been delinquent in failing to call Ms Apostolakos to give evidence before the Arbitrator.
79 It was a relevant factor to the exercise of the primary judge's discretion that Mr McDiarmid did not make a deliberate tactical decision not to call all available evidence in the arbitration when he failed to exercise diligence in ascertaining the identity of, and then calling, Ms Apostolakos in the Council's case. Yet, on the face of his judgment his Honour did not take it into account. As Mason P pointed in Morgan at 597G, it is ultimately a matter of degree as to the circumstances which would justify the exercise of a trial judge's discretion to make an order which departed from the usual order that costs follow the event.
80 In my opinion, the fundamental flaws in the primary judge's exercise of his discretion were twofold. First, he went too far in ordering the Council to pay the plaintiff's, Ronali's and Edremo's costs of the action and the cross-claims both in the arbitration and the rehearing. Second, he ordered that those costs be paid on an indemnity basis.
81 As to the first flaw, it is apparent, as the primary judge held, that there would have been a verdict not only for Ronali but also for the Council had Ms Apostolakos' evidence been called before the Arbitrator. In these circumstances of the arbitration any order for costs would have followed the event. Accordingly, the plaintiff would have been ordered to pay the Council's and Ronali's costs of the action and, possibly, an order would have been made that the plaintiff pay the costs of the parties to the cross-claims other than the fourth.
82 On the other hand, it would have been well within his Honour's discretion to have ordered the Council pay the plaintiff's, Ronali's and Edremo's costs with respect to the action and of the first, second and third cross-claims as and from the date upon which the Council sought a rehearing, namely, 7 November 2004. But because there was no basis upon which the principles adumbrated in Morgan could, in the circumstances of the present case, have justified the primary judge's order so far as it related to the costs of the arbitration, the exercise of his discretion in ordering that those costs be paid by the Council miscarried.
83 So far as the second flaw is concerned, the Court was informed that before the primary judge only the plaintiff and Edremo sought an order for indemnity costs against the Council. The basis for such an order advanced by the plaintiff was that the Council treated the arbitration "as a futile proceedings, thereby escalated (sic) the costs", presumably because it sought a rehearing. The basis advanced by Edremo related to some Calderbank offers it had made.
84 His Honour ordered that the costs payable by the Council to the plaintiff but also to Ronali and Edremo should be on an indemnity basis but gave no reasons for coming to this conclusion. In particular he made no reference to the reasons advanced by the plaintiff and Edremo for the making of such an order. On that ground alone, that order cannot stand. It is to be noted that there is nothing in Morgan or any of the other authorities which deal with a Court's discretion to depart from the principle that costs should normally follow the event where the unsuccessful party in an arbitration has done nothing more than called an otherwise available and essential witness only at a rehearing, where costs have been ordered to be paid by that ultimately successful party on an indemnity basis.
85 In Oshlak, Gaudron and Gummow JJ at 89 [44], when considering the proposition that the sole purpose of a costs order is to compensate one party at the expense of another, observed:
"It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstances of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a 'solicitor and client' basis or an indemnity basis. The result is to more fully or adequately compensation the successful party for the disadvantage of what would otherwise have been the position of the unsuccessful party in the absence of such delinquency on its part."
86 In the same case, McHugh J, who dissented in the result, referred to a passage in the judgment of Devlin J in Anglo Cyprian Trade Agency Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874 to the effect that a plaintiff who has been successful ought not to be deprived of his costs or, at any rate, made to pay the costs of the other side unless he has been guilty of some sort of misconduct. His Honour then observed (at 97-98 [69], omitting citations) that:
" 'Misconduct' in this context means misconduct relating to litigation, or the circumstances leading up to the litigation. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party has already offered in settlement of the dispute."
87 However, it is clear that his Honour was referring to these examples of "misconduct" as possibly justifying depriving a successful party of his costs or, perhaps, ordering that party to pay the costs of the other parties, but only on a party/party or ordinary basis.
88 This issue was also referred to by this Court in Arian v Nguyen [2001] 33 MVR 37; NSWCA 5 where Ipp AJA, with whom Foster AJA agreed, observed at [38] (omitting citations):
"It is rare for a successful party who is guilty of misconduct in the litigation to be ordered to pay the unsuccessful opponent's costs where the misconduct does not lengthen the proceedings unnecessarily, cause unnecessary issues to be canvassed or otherwise cause the cost of the litigation to be increased. Indeed, the court's entitlement to depart from the usual order that costs follow the event has sometimes been said, in effect, to be subject to the qualification that the misconduct in question occasioned unnecessary litigation and expense. In other cases, however, this qualification has not been mentioned. On balance, it seems to me that while delay and increased expense brought about by improper conduct in the course of litigation are highly relevant factors in the discretion to depart from the usual order as to costs, they are not essential to the exercise of that discretion. It would, in any event, be very unusual for misconduct of that kind not to cause unnecessary delay and expense."
89 It is clear from the foregoing that Ipp AJA accepted that misconduct or improper conduct of the type that he exemplified was a relevant factor in the exercise by a court of its discretion to depart from the usual orders as to costs. It was not suggested that such a departure without more would justify an order that the successful party pay the other parties' costs on other than the ordinary basis.
90 Finally, in LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74, Young CJ in Eq, with whom Meagher and Hodgson JJA agreed (the latter adding some observations of his own), observed (at [108]) that the trial judge in that case had considered the decision of this Court in Nobrega v Trustees of the Roman Catholic Church of the Archdiocese of Sydney (No 2) [1999] NSWCA 133 where it was held that the test to be applied (in determining whether costs should be paid on an indemnity basis) was that the ordinary rule that costs on a party/party basis should only be departed from where the conduct of the party against whom the order is sought is "plainly unreasonable". At [119] his Honour concluded that he could see no reason why the Court should not continue to follow Nobrega on the issue of indemnity costs. So should this Court in the present case.
91 The question which should therefore be asked is whether the failure of the Council to call Ms Apostolakos in its case before the Arbitrator was, relevantly, "plainly unreasonable". In my opinion, Mr McDiarmid's conduct could not be so characterised. Although he was in error in failing to ascertain the identity of "Kelly" and the nature of the evidence that she could have given if called, matters which he could have easily discovered by the exercise of due diligence, he made a judgment (wrongly as it turned out) that the Council's case would succeed on Mr Bell's evidence alone and that, in any event, he expected that Ronali would call her in its case to corroborate Mr Bell's evidence.
92 That exercise of judgment, although bona fide, was misplaced for two reasons. First, Mr McDiarmid should have been aware of the decision in Morgan to the effect that it was incumbent upon a party to an arbitration to call all available and relevant witnesses whose identity and evidence could be discovered by the exercise of due diligence. Second, to the extent that Mr McDiarmid anticipated that Ronali would call Ms Apostolakos, he took no steps to ascertain from its solicitors whether it would in fact do so. That conduct might be described in all the circumstances as imprudent but it was certainly not "plainly unreasonable" as to justify an order that the Council pay costs on an indemnity basis. In holding to the contrary, the primary judge's discretion miscarried.
93 For the sake of completeness I should note that the Council challenged the primary judge's order pursuant to s198G of the Legal Profession Act which exempted the litigation from the provisions of Div 5B and in particular, from the cap on the plaintiff's costs of $10,000 imposed by s189D(1). As the plaintiff ultimately failed in the proceedings and was unsuccessful in her claim for personal injury damages, there was no "amount recovered" within the meaning of s198D(1). Accordingly, the costs cap in that provision had no application in respect of the costs which the plaintiff was otherwise entitled to recover pursuant to the orders which I shall propose but which are not dependant upon the plaintiff having succeeded on her claim: see Boylan Nominees Pty Ltd v Williams Refrigeration Australia Pty Ltd [2006] NSWCA 100 at [70]-[76]. It is therefore unnecessary to determine whether his Honour was justified in making the order he did pursuant to s198G.