The Owners - Strata Plan 30791 v Southern Cross Constructions

Judgment

1. I gave judgment in this matter on 18 April 2019: The Owners - Strata Plan 30791 v Southern Cross Constructions (ACT) Pty Ltd (in liq) (No 2) [2019] NSWSC 440.
2. These reasons deal with the costs of the proceedings.
3. I will use the same abbreviations here as in my judgment of 18 April 2019.
4. Prior to the commencement of the hearing before me, the Owners Corporation settled with Pile & Bucket, Jeffery and Katauskas, and Northwood. During the proceedings, the Owners Corporation foreshadowed discontinuing the proceedings against NMK and QBE, and subsequently discontinued against those parties. I dealt with the question of costs as between the Owners Corporation and NME and QBE in my judgment of 21 March 2019: The Owners - Strata Plan 30791 v Southern Cross Constructions (ACT) Pty Ltd (in liq) [2019] NSWSC 299.
5. In my judgment of 18 April 2019 I concluded that the Owners Corporation's claim against the remaining defendants, Southern Cross, its insurer Allianz and Hughes Trueman, should be dismissed.
6. The Owners Corporation accepts it must pay Southern Cross', Allianz's and Hughes Trueman's costs of the proceedings.
7. Four questions arise: 1. What orders should be made in relation to the costs of the reference to which I referred at [10] of my 18 April 2019 judgment? 2. Should the costs order made by Ball J on 13 April 2018 on the adoption of the referee's report be adopted be varied? 3. Should Southern Cross and Hughes Trueman have an order for indemnity costs by reason of offers made by them during the course of the proceedings? 4. Should Southern Cross and Hughes Trueman have interest on their costs?

Decision

1. My conclusions are that: 1. The costs of the reference, apart from the costs of the motion to adopt the referee's report, should be treated as costs in the cause and included as part of the costs payable to Southern Cross. 2. Ball J's order should not be varied. 3. Southern Cross should have its costs on an indemnity basis from 1 August 2018. 4. Southern Cross and Hughes Trueman should have interest on their costs.

The reference

1. Unusually, the question of quantum in these proceedings was determined before liability.
2. On 3 August 2016, the solicitors for Jeffery and Katauskas proposed that the reasonable scope of rectification of the works necessary to rectify the Building, and the costs of those works be determined by a referee.
3. Each of the Owners Corporation, Southern Cross and Hughes Trueman supported Jeffery and Katauskas' proposal, although there was disagreement as to the scope of the reference, and as to the identity of the referee.
4. Those matters were resolved on 9 September 2016 when Hammerschlag J ordered pursuant to r 20.14 of the Uniform Civil Procedure Rules 2005 (NSW) that the following questions be referred to Mr Nicholas Ferrara for enquiry and report: "All questions of quantum as measured on the cost of reinstatement basis (not the diminution in value of land basis), including, without limitation, the scope of rectification works, the costs of rectification works and any question of quantum relevant to the contention that damages be reduced by any allowance for betterment…".
5. The reference concluded on 19 March 2018.
6. Hughes Trueman did not participate in the reference and thus did not incur any costs in relation to it.
7. As I set out at [10] of my judgment of 18 April 2019, Mr Ferrara determined that the cost of rectifying the damage caused to the Building was some $5 million and that the necessary work would take 66 weeks.
8. During argument I was informed that the referee accepted the opinion of the Owners Corporation's quantity surveyor over those of the defendants' building experts and that, in that sense, the Owners Corporation "won" the reference. I will return to this.
9. Southern Cross, Allianz, Pile & Bucket, Jeffery and Katauskas, and Northwood opposed adoption of the referee's report.
10. On 13 April 2018 Ball J ordered that the referee's report be adopted and that Southern Cross, Allianz, Pile & Bucket, Jeffery and Katauskas, and Northwood pay the Owners Corporation's costs of the reference adoption application.
11. The Owners Corporation seeks an order that Southern Cross, but not Hughes Trueman, pays its costs of the reference.
12. Alternatively, the Owners Corporation seeks an order that the costs order in favour of Southern Cross not include its costs of the reference.
13. I see no basis to make either order.
14. Although the Owners Corporation "won" the reference in the sense that its contentions as to the means and costs of repairing the defects in the Building were accepted by the referee, costs of the reference should be seen as being part of the costs of the cause.
15. As Mr Cavanagh SC, who appeared for Southern Cross and Allianz submitted: "A determination of damages was one of the issues in the proceedings. If the matter had not been referred out for determination by a referee, exactly the same process would have been undertaken by the Court. The costs of determining the damages issues, whether by way of a reference or by the Court, would be costs of the proceedings. The [Owners Corporation has] been unsuccessful in the proceedings".
16. Subject to what I say at [31] below, Southern Cross should have the costs it incurred on the reference as part of its costs of the proceedings. As I have mentioned, Hughes Trueman did not participate in the reference and thus has not incurred any costs referrable to the reference.
17. Presumably, the settlement between the Owners Corporation, Pile & Bucket, Jeffery and Katauskas and Northwood took account of all costs orders affecting them and included a release which would prevent the Owners Corporation from, now, seeking to enforce Ball J's costs order of 13 April 2018 against those parties.
18. The Owners Corporation remains free to enforce the costs order against Southern Cross and Allianz alone.
19. In those circumstances, Mr Cavanagh sought an order varying Ball J's costs order of 13 April 2018 so that Southern Cross was only liable for two-fifths of the costs of the reference adoption application.
20. I doubt that I have power to vary Ball J's order as UCPR r 36.16 provides: "(3A) If notice of motion for the setting aside or variation of a judgment or order is filed within 14 days after the judgment or order is entered, the court may determine the matter, and (if appropriate) set aside or vary the judgment or order under subrule (1), as if the judgment or order had not been entered. (3B) Within 14 days after a judgment or order is entered, the court may of its own motion set aside or vary the judgment or order as if the judgment or order had not been entered. (3C) Despite rule 1.12, the court may not extend the time limited by subrule (3A) or (3B)."
21. In any event, as a matter of discretion, I would not vary the order made by Ball J.
22. The evidence before me on this application suggests that Southern Cross assumed conduct of the relevant defendants' resistance to the adoption of the referee's report. The settlement between the Owners Corporation and the other defendants could not affect whatever arrangements existed between Southern Cross and the relevant defendants concerning their joint opposition to the adoption of the referee's report. If the Owners Corporation seeks to enforce the costs order made by Ball J against Southern Cross, Southern Cross could no doubt seek indemnity from the other defendants who, vis-à-vis Southern Cross, remain jointly and severally liable for those costs.
23. As Southern Cross was unsuccessful on the reference adoption application, its costs of resisting adoption of Mr Ferrara's report will be excluded from the costs order I propose to make in Southern Cross' favour.

Southern Cross

1. Southern Cross made offers to compromise these proceedings on 10 August 2016, 4 July 2018 and 11 January 2019.
2. Each was expressed to be a Calderbank offer.
3. The 10 August 2016 offer was also expressed to be an offer under UCPR r 20.26. However, as it was expressed to be for judgment in favour of the Owners Corporation against Southern Cross "in a single sum of $650,000" it in effect included "an amount for costs" and was thus not a valid offer under the Rule: see UCPR r 20.26(2)(c).
4. The three Calderbank offers were: 1. $650,000 (effectively) inclusive of costs on 10 August 2016; 2. $1,128,090 plus $200,000 for costs on 4 July 2018; and 3. $1,354,708.30 plus $400,000 for costs on 11 January 2019.
5. A Calderbank offer may attract an order for indemnity costs from the time that such an offer is rejected or not accepted if the offeree achieves a result no more favourable than the offer: Calderbank v Calderbank [1976] Fam 93 at 106; [1975] 3 All ER 333 at 342.
6. Here the Owners Corporation has failed altogether against Southern Cross.
7. However an order for indemnity costs does not necessarily follow. The relevant principles were summarised by the Court of Appeal in Ku-ring-gai Council v Chan (No 2) [2018] NSWCA 73 at [6]: "An offeree who does not accept an informal Calderbank offer and thereafter obtains a judgment less favourable than the offer will not necessarily be required to pay indemnity costs from the date of the offer. Such a requirement usually depends on two central considerations, namely, whether there has been a genuine offer of compromise and whether in all the circumstances it was unreasonable for the offeree not to accept it: Jones v Bradley (No 2) [2003] NSWCA 258 at [6]-[9]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8] (Basten JA, McColl and Campbell JJA agreeing)."
8. Mr Gorczyca for the Owners Corporation did not dispute that each offer made by Southern Cross involved a genuine compromise.
9. Debate before me focused on the question of whether it was unreasonable for the Owners Corporations to reject the offers, but particularly the first offer.
10. Mr Gorczyca accepted that the Owners Corporation's failure to accept Southern Cross' final offer for $1,354,708.30 plus $400,000 was relevantly unreasonable and that Southern Cross should have its costs on an indemnity basis from 11 January 2019.
11. Mr Gorczyca also accepted there was a strong argument that the Owners Corporation's failure to accept the second offer warranted a like conclusion in relation to Southern Cross' costs from 4 July 2018.
12. Mr Gorczyca's submissions focused on the question of whether the Owners Corporation's failure to accept the first offer, that made on 10 August 2016, was unreasonable.
13. Mr Gorczyca put the argument this way: "In circumstances where: (a) Southern Cross' own expert, Andrew Shirley concludes that: 'SX Projects contributed to the damage to the building', allocates at 18% responsibility to Southern Cross and on 18 December 2018 (just prior to the final hearing), assessed Southern Cross to be 15% responsible; (b) [Pile & Bucket's] expert Donald Macleod assesses the contribution of responsibility by Southern Cross to the [Owners Corporation's] Damage of 23%; and (c) Hughes Trueman's expert, John Alden also concludes that Southern Cross was partially responsible for the damage in his 7 April 2016 report, though he does not attribute a percentage; each of the above are features of the proceedings which provide a rational basis for the Court to depart from the usual operation of UCPR 42.1 and additionally demonstrate that, absent the benefit of hindsight it was not unreasonable for the [Owners Corporation] not to accept the Offer of Compromise and Calderbank Offer made by Southern Cross."
14. The offer of $650,000 was, in effect, inclusive of costs.
15. There is no evidence before me as to what the Owners Corporation's costs then were. As it is common ground that most of the parties' evidence was by then adduced, it must have been a significant proportion of the $650,000.
16. It is now known that the referee determined that the cost of rectifying the damage to the Building is in the order of $5 million.
17. But there is no evidence before me as to what evidence the Owners Corporation had adduced by August 2016 as to the likely cost of rectifying the damage of the Building.
18. Southern Cross' solicitor's letter, under cover of which the 10 August 2016 offer was put, stated that two of the experts retained by the defendants had opined that such costs were in the order of $500,000.
19. That letter also identified a matter, said to warrant acceptance of the $650,000 offer, which I found in my decision of 18 April 2019; namely the role that Northwood's design of the Retaining Wall played in causing damage to the Building.
20. However, it is important that I not look at the parties' position through the judicial "retrospectoscope" represented by my reasons for judgment.
21. The Owners Corporation drew my attention to the recent observations of the Full Court of the Federal Court of Australia in Erskine as liquidator of North Shore Property Developments Pty Ltd (in liq) v 72-74 Gordon Crescent Lane Cove Pty Ltd (No 2) [2019] FCAFC 73: "…the question of the unreasonableness of the rejection of the offer is to be made without the benefit of hindsight, and thus without the benefit of our reasons for judgment…". (At [7] (Jagot, Gleeson and Markovic JJ).)
22. Their Honours were dealing with a provision in Pt 25 of the Federal Court Rules 2011 (Cth) that, unlike the corresponding provisions in the UCPR, makes specific reference to the unreasonableness of failing to accept an offer where an applicant's proceedings have been dismissed: FCR r 25.14.
23. It is nonetheless congruent with the approach adopted in this Court to offers of compromise. Similar observations have been made by this Court in the oft-cited Miwa Pty Ltd v Siantan Properties at [11] and the recent decision in Automotive Holdings Group Ltd v Prime Constructions Australia Pty Ltd (No 2) [2019] NSWSC 315 at [25] (Slattery J). The Court of Appeal has also previously affirmed this approach in Regency Media Pty Ltd v AAV Australia Pty Ltd [2009] NSWCA 368 at [33] and SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 at [101].
24. Despite what is now known about the progress and outcome of these proceedings, I am not persuaded that it was unreasonable for the Owners Corporation not to accept Southern Cross' 10 August 2016 offer.
25. After all, as Mr Gorczyca pointed out, Southern Cross' own expert, Mr Shirley, had opined that Southern Cross bore 15% responsibility for the damage to the Building. Although Mr Shirley's opinion was no doubt not directed to the legal issues that I considered in my 18 April 2019 judgment, that opinion must have encouraged the Owners Corporation and its legal representatives to think that there was some prospect of recovery from Southern Cross.
26. And the offer, being in effect inclusive of costs, would if accepted have resulted in a relatively modest contribution from Southern Cross to the costs of rectifying the damage.
27. For those reasons I am not persuaded that I should order that the Owners Corporation pay Southern Cross' costs on an indemnity basis from 10 August 2016.
28. However, I have concluded that the same cannot be said in respect of the second offer, let alone the third offer.
29. By the time the second offer was made on 4 July 2018, the referee's report had been adopted. The offer of $1,128,090 represented something in the order of 22% of the costs of rectification as determined by the referee.
30. That was well within the range of the opinions expressed by the defendants' experts concerning Southern Cross' share of responsibility for the damage to the Building.
31. I propose to order that the Owners Corporation pay Southern Cross' costs on an indemnity basis from 1 August 2018, being the deadline specified by Southern Cross for acceptance of its 4 July 2018 offer.

Hughes Trueman

1. On 25 October 2018 Hughes Trueman made an offer of compromise pursuant to UCPR r 20.26 that the proceedings against it be dismissed on the basis that the Owners Corporation and Hughes Trueman bear their own costs of the proceedings.
2. Hughes Trueman has achieved a result "no less favourable" than that offer, as I propose to order that the proceedings against it be dismissed with costs.
3. According "unless the court otherwise orders" Hughes Trueman is entitled to indemnity costs from "the day following the day on which the offer was made", namely 26 October 2018: UCPR r 42.15A(2)(b).
4. Hughes Trueman's offer was a "walk-away" offer, namely one "where the offeror expresses its willingness to settle on the ground that each party bears its own costs" (Dal Pont, Law of Costs (3rd ed, 2013, LexisNexis) at [13.9]).
5. It is true, as Mr Hand submitted on behalf of Hughes Trueman, that Hughes Trueman's "walk-away" offer was made late in the proceedings, and at a point where a hearing date had been set and significant costs had no doubt been incurred by Hughes Trueman.
6. Thus it seems to me that the offer was "a genuine attempt to reach a negotiated settlement, rather than merely to trigger any costs sanctions": see Leichhardt Municipal Council v Green [2004] NSWCA 341 at [39] (Santow JA); Commonwealth of Australia v Gretton [2008] NSWCA 117 at [105] (Beazley JA, Mason P agreeing).
7. However, as McColl JA (with whom Gleeson JA and Sackville AJA agreed) said in Leach v The Nominal Defendant (QBE (Australia) Ltd) (No 2) [2014] NSWCA 391: "A walk-away offer can successfully trigger the indemnity costs mechanisms under the rules, however 'the claim or defence would have to approach something of the character of being frivolous or vexatious for that to be the case': Regency Media Pty Ltd v AAV Australia Pty Ltd (at [31]) per Spigelman CJ; Beazley and McColl JJA." (At [51].)
8. The Court of Appeal recently referred to these observations in NRMA Insurance for the Nominal Defendant v Al-Bayati (No 2) [2019] NSWCA 14. After referring to the passages in Regency Media, Macfarlan JA and Barrett AJA observed (at [5]): "The overriding question goes to the reasonableness of the conduct of the recipient in not accepting the offer. Rejection or non-acceptance of an offer to capitulate cannot, in general, be unreasonable if the case sought to be advanced by the rejecting (or non-accepting) party has some colour of substance to it."
9. The Owners Corporation's claim against Hughes Trueman could not be characterised as being "frivolous or vexatious". It had "some colour of substance to it".
10. Hughes Trueman's offer invited the Owners Corporation to surrender.
11. In the circumstances, it was not unreasonable for the Owners Corporation not to accept the offer made by Hughes Trueman. Accordingly I am persuaded that Hughes Trueman should not be entitled to indemnity costs.
12. I propose to otherwise order for the purposes of UCPR 45.15A(2) that the Owners Corporation pay Hughes Trueman's costs of the proceedings on the ordinary basis.

Interest on costs

1. Each of Southern Cross and Hughes Trueman seek an order that they be paid interest on costs from the date of payment of those costs until such time as the Owners Corporation pays costs pursuant to the orders I propose to make.
2. It is common ground that as these proceedings were commenced prior to the amendments made to subss 101(4) and (5) of the Civil Procedure Act 2005 (NSW), those provisions do not apply with the consequence that there is no entitlement to interest on costs by reason of those subsections.
3. However, as Mr Gorczyca accepted, the Court retains a discretion to order interest on costs.
4. Each of the solicitors for Southern Cross and Hughes Trueman has deposed that those parties have paid costs progressively during the course of these proceedings. Neither solicitor has given evidence as to precisely when those costs were paid. I do not see that as a reason to deny Southern Cross and Hughes Trueman an order for interest on costs.
5. In order to obtain an order for interests on costs, it is not necessary for Southern Cross or Hughes Trueman to show that the circumstances of this case are "out of the ordinary": see the cases cited by Campbell J in Lahoud v Lahoud [2006] NSWSC 126 at [82]-[83], cited in Drummond & Rosen Pty Ltd v Easey (No 2) [2009] NSWCA 331 at [4] (Macfarlan JA, Tobias JA agreeing) and Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158 at [403] (Gleeson JA, Ward JA agreeing).
6. These proceedings have been on foot for many years. Each of Southern Cross and Hughes Trueman has been paying legal costs progressively during that period. I am satisfied that it is appropriate to order that the Owners Corporation pay them interest on those costs.

Orders

1. I enter the following judgment and make the following orders: 1. Judgment for the first, third and sixth defendants against the plaintiffs. 2. Order that the plaintiffs pay the first and third defendants' costs of the proceedings: 1. up to and including 31 July 2018 on the ordinary basis; 2. from 1 August 2018 onwards on an indemnity basis, but excluding the first and third defendants' costs of the plaintiffs' notice of motion seeking adoption of the referee's report. 1. Order that the plaintiffs to pay the first and third defendants interest on the first and third defendants' costs: 1. at the rates set out in UCPR r 36.7; 2. on the Allowed Percentage of each amount of costs actually paid by the first and third defendants; 3. from the date of payment by the first and third defendants of each such amount of costs until such time as the plaintiffs have paid the costs due to the first and third defendants under these orders. Note: The Allowed Percentage equals ((y/x) x 100)% X - equals the total amount of costs which the first and third defendants have paid or are liable to pay in connection with these proceedings. Y - equals the total amount of costs allowed to the first and third defendants in connection with these proceedings, either by agreement or on assessment. 1. Order that the plaintiffs pay the sixth defendant's costs of the proceedings on the ordinary basis. 2. Order that the plaintiffs to pay the sixth defendant interest on the sixth defendant's costs: 1. at the rates set out in UCPR r 36.7; 2. on the Allowed Percentage of each amount of costs actually paid by the sixth defendant; 3. from the date of payment by the sixth defendant of each such amount of costs until such time as the plaintiffs have paid the costs due to the sixth defendant under these orders. Note: The Allowed Percentage equals ((y/x) x 100)% X - equals the total amount of costs which the sixth defendant has paid or are liable to pay in connection with these proceedings. Y - equals the total amount of costs allowed to the sixth defendant in connection with these proceedings, either by agreement or on assessment. 1. Grant the parties liberty to apply on short notice in relation to the terms of these orders, such liberty to be exercised by 5.00 pm on 17 May 2019.

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