The Owners - Strata Plan No 55682 v W. R. Berkley Insurance

INTEREST AND QUANTUM OF MONETARY JUDGMENT

1. The plaintiff obtained an order for damages constituting two components, concerning indemnity for the replacement costs for the repair of the buildings ($463,347.41) and the loss of rent for individual tenants ($75,000) in accordance with the limit in the policy. The plaintiff has calculated that, up to 22 January 2021, being the date of its submissions in relation to the matter, interest on the former component is $180,110.12 and interest on the latter component is $19,786.85. According to my calculations, up to and including 10 February 2021, the interest on the damages for the repair of the building and interest on damages for lost rent are $181,099.02 and $19,947.52, being in total $201,046.54.
2. None of HIHA, Mr Hines or the Licensee dispute the calculations as the plaintiff submitted them to be up to 22 January 2021, or the methodology by which they are calculated. I accept the plaintiff's submissions on this issue.
3. If there is any issue taken as to the calculations on interest on the plaintiff's damages claim up to today's date, a further brief opportunity will be accorded to the Brokers and Licensee to raise it.
4. When interest is added to the monetary judgment, I calculate the judgment sum should be $739,393.95.

COSTS

1. The costs issues arise from the circumstance of a multiplicity of parties in this proceeding.

Liability for the Insurer's costs

1. The general rule would indicate that the plaintiff should pay the Insurer's costs. However, the plaintiff submits that a Sanderson order for costs should be made, which would see HIHA, Mr Hines and the Licensee, being the 'unsuccessful defendants', pay the Insurer's costs.
2. The usual conditions for the making such order are that: (a) it was reasonable for the plaintiff to sue the successful defendant; and (b) there was conduct on the part of the unsuccessful defendant which makes it appropriate to impose liability for costs on the unsuccessful defendant [1] .
3. It is to be recalled that in the way that, after the fire, the 'insurable event', when the Insurer justified denial indemnity on the basis of non-disclosure of the NMC Occupancy, HIHA, Mr Hines and the Licensee adopted the common position that this fact had been disclosed to the Agent, such that the Insurer was not justified in declining to indemnify the plaintiff. Those positions were irreconcilable, with the plaintiff caught in the middle, and the conflict could only be resolved by judicial determination. The position of HIHA, Mr Hines and the Licensee contributed to the plaintiff's decision to sue the Insurer. Put another way, but for the unsuccessful defendants asserting and thereafter maintaining that disclosure had been made to the Agent, it must have been doubtful that the plaintiff would have challenged the Insurer's decision to decline indemnity by bringing suit against it.
4. Further, it was reasonable for the plaintiff to join the Insurer and the Brokers and Licensee in the same proceeding so as to avoid the undesirable outcome of a multiplicity of proceedings involving, separately, the Brokers and Licensee in one and the Insurer in another. In this way, the two conditions for the making of a Sanderson costs order are apparently satisfied.
5. Against this, HIHA and Mr Hynes, and the Licensee (as the unsuccessful defendants) argue three things against a Sanderson (or Bullock) order, the first two being virtually the same: (a) the Brokers' liability to the plaintiff was not the same, in quantum, to the prospective liability of the Insurer had it been found liable; (b) even if the Brokers had admitted breach of duty, the plaintiff would likely have pursued to judgment the claim against the Insurer for the higher amount; and (c) nothing was done by the Brokers after the events giving rise to their liability which encouraged the plaintiff to sue the Insurer, as well as the Brokers.
6. These arguments are not persuasive. It does not matter, for present purposes, that the plaintiffs recovered a lesser monetary sum than if they had established the claim against the Insurer. The Brokers' conduct, in the broadest sense of the word, effectively necessitated the plaintiff bringing claim against the Brokers in the alternative to the Insurer, each generating significant expense in proof and time. As to the last point, the argument is unduly narrow, focussing as it does only on what the unsuccessful defendant did after the events giving rise to the proceeding. That would read down the effect of the two conditions referred to in Gould v Vaggelas. To reiterate, in the light of the conduct that occurred after the fire, and after the Insurer declined liability, when the Brokers and Licensee undertook to demonstrate to the plaintiff that the Insurer's position was unjustified, that undertaking was apt to induce the plaintiff to commence its suit against the Insurer. Whether that occurred after the Brokers had formally indicated their position in their Defence to the claim brought against them or, as occurred here, whether the claim against the Insurer was brought in at the same time as the claim commenced against the Brokers, is immaterial. Contrary to what the Brokers and Licensee submit, it is inappropriate to consider hypothetical circumstances as to what stance any of the parties would have been taken if the circumstances of the constitution of the proceeding were different.
7. The positions of the HIHA, Mr Hynes and the Licensee are indistinguishable. They should be jointly and severally liable for the Insurer's costs.

Liability for Ms Honeychurch's costs

1. Ms Honeychurch succeeded in her defence of the plaintiff's claim following the pivotal finding that she owed no personal duty of care. Again, the general rule would suggest that the plaintiff should pay her costs. But the plaintiff argues against this 'rule of thumb'. The plaintiff argues that, in reality, her position was no different to the other Brokers (ie HIHA and Mr Hines). She received the same representation as the other Brokers. Her pleaded defence was in materially the same terms as the other Brokers. Reference was made to some authority in which a successful defendant director received no special costs order who was active in the affairs of an unsuccessful corporate defendant. She was intimately involved in some of the factual events, such as the inquiries which the Brokers undertook after the fire.
2. The plaintiff's submissions are not persuasive. It was the plaintiff's choice to select the defendants to sue. It was required to do so upon the basis of its awareness of the relevant facts pertaining to each defendant it chose to sue. It knew, or would be taken to know, of the usual consequences for costs if its claim failed. Without being able to assert the facts necessary to sustain a duty of care owed by Ms Honeychurch, the plaintiff could not get to first base in being able to make out a case of negligence against her. A careful consideration of the facts available to the plaintiff before it commenced its suit would have shown, contrary to the plaintiff's submission, that it was Mr Hines who was involved in the events which led to the Broker's arranging of the cover. A bare assertion that Ms Honeychurch was merely 'involved', in some unspecified way, in the provision of broking services, was a necessary, but insufficient basis for her joinder.
3. Further, there was no obvious necessity to join Ms Honeychurch in circumstances where the Licensee would have been vicariously liable for her conduct in any event. To bring a suit against an individual defendant in a professional negligence suit is inherently apt to occasion a certain amount of distress and inconvenience in the professional, whatever the strengths or weaknesses of such claim. Finally, the aspect of common representation of Ms Honeychurch and the other unsuccessful defendants points against, rather than towards, the applicability of any exception to the general rule as it will be up to a costs assessor (in the absence of agreement) to identify any costs incurred attributable to her peculiar position.
4. The plaintiff should pay Ms Honeychurch's costs.

Should any order be made at all?

1. The cross-claimant submits that there be should be no order as to the cross-claim, or an order dismissing it. It was only a 'contingent' claim and the factual premise sustaining it - that the NMC Occupancy was in fact disclosed to the Agent - was not the subject of a finding. To the contrary, the Court found that the NMC Occupancy was not disclosed.
2. The cross-defendant submits that it should have judgment and verdict on the cross-claim. It contends that just because a cross-claimant files a 'contingent' claim does not immunise a cross-claimant from an adverse costs order should it fail with the claim. Cross-claims ordinarily are filed to meet the contingency that a defendant may lose in the principal proceedings. The cross-claim was also fully litigated.
3. The cross-defendant's submission should be accepted. The Insurer's position effectively seeks to treat the cross-claim as if it was never brought at all. But it was brought and it was defended, forcing the Agent to incur expense and occupying the Court's time and resources to determine it. Whether or not it was brought 'contingently' or not is immaterial. The cross-claimant invoked the Court's jurisdiction to determine the cross-claim. Having done so, prior to the Court's determination, the cross-claimant did not apply to withdraw it. The cross-claim was contested. On the hypothesis that a critical fact existed, the claim was determined on its merits. Whilst a proceeding may, of course, be 'dismissed' by a court order on procedural grounds, this particular proceeding was not. A 'dismissal' of the cross-claim would not accurately represent the result of the Court's determination.
4. Judgment is to be entered for the cross-defendant against the cross-claimant.

Liability to pay the Agent's costs

1. The Insurer's next submission is that by positively asserting disclosure of the NMC Occupancy in their Defence, HIHA, Mr Hynes and the Licensee contributed to the decision of the Insurer to bring the cross-claim, and therefore fairness indicates that they should not only pay the Insurer's costs of defending the proceeding, but also the Insurer's costs of bringing the contingent cross-claim against the Agent. Those unsuccessful defendants, it was said, induced the Insurer to contingently cross-claim against the Agent by reason of their unsuccessful contention that the NMC Occupancy was disclosed.
2. Further, the cross-claim was also justified since HIHA, Mr Hynes and the Licensee, in their defence to the plaintiff's claim, invoked a defence (or limitation) of proportionate liability and identified the Agent as a concurrent wrongdoer. Without the Agent being brought into the proceeding by the cross-claim, it would not be bound by any finding made against it. Further, the circumstance that I made certain findings about the Agent's liability upon the hypothesis that the NMC Occupancy was disclosed may be put to one side. They were only hypothetical and the issue is the reasonableness of the bringing of the cross-claim prospectively, rather than retrospectively.
3. The Brokers and Licensee submit that they should not be treated as 'insurer' for the Insurer's costs in the event that the Insurer's 'conditional' cross-claim failed. In its statement of claim through which the Brokers and Licensee were joined, the plaintiff did not join the Agent as another defendant. The cross-claim against the Agent was entirely for the Insurer's benefit; not the plaintiff's; and if the plaintiff should not be presumptively liable for the Agent's costs of the cross-claim, nor should the Brokers and Licensee.
4. The Agent also argues against the Brokers and Licensee paying its costs. Sanderson principles generally made by successful parties to a proceeding - in this particular case, illustrated by my determination that the plaintiff succeed with its application that the Brokers and Licensee pay the Insurer's costs of the principal proceeding. In respect to the cross-claim, the Insurer did not succeed and it should not be permitted to avoid responsibility for the costs of the cross-defendant.
5. It is difficult to understand the Insurer's point that the Agent needed to be joined as a party in order for it to be bound by any prospective finding that the NMC Occupancy was disclosed, by Mr Hines to Ms Holmes. True it was that part of the defence for the Brokers and Licensee was that on the predicate fact that the NMC Occupancy was disclosed to the Agent, the Agent was a concurrent wrongdoer. But in that circumstance, the Brokers and Licensee might reduce their liability and the plaintiff would have a forensic decision as to whether or not to add the Agent as another defendant so it could obtain a judgment against it to help it recover judgments to compensate it fully (or more fully) for its loss. These forensic considerations had nothing to say, however, about the Agent's own liability to the Insurer. From the moment that the Brokers (and the Licensee) articulated a factual argument that the NMC Occupancy was disclosed to Ms Holmes in April 2013, the Insurer was on notice that if that argument was sustained, it might involve the Agent in some level of breach of its duties to the Insurer. The possibility that the Brokers (and Licensee) might run that argument was, or should, have been apparent even before the plaintiff commenced the proceeding. The Insurer did not need to wait until after the Brokers and Licensee filed their Defence to anticipate that a contentious factual issue was likely to arise whether Mr Hines disclosed the NMC's Occupancy to Ms Holmes.
6. I also accept the submissions of the Brokers and Licensee and the Agent, respectively, on this question.
7. The Insurer has not persuaded me that the usual order for costs should be displaced. The cross-claimant should pay the cross-defendant's costs of the cross-claim.

Application for partial order for indemnity costs

1. The Agent applies for its costs to be partly payable on an indemnity basis following the Insurer's non-acceptance of a Calderbank offer made by the Agent on 5 August 2020. The timing of the service of that offer was such that it occurred in the period between the date when the Insurer filed its application to rely upon the cross-claim, being 15 July 2020, and the date when the cross-claim was filed (with leave), being 12 August 2020.
2. As I have earlier alluded to, the Agent submits that even before the cross-claim was filed, on 4 August 2020, it drew to the Insurer attention to its position that even if the NMC Occupancy had been disclosed as the Brokers and Licensee asserted that it had, the prospective causes of action the Insurer contemplated running against the Agent were statute-barred and effectively invited the Insurer to demonstrate why that should not be so. In response to that, amongst other things, the Insurer asserted, as it subsequently did at the hearing, that its claim for indemnity or contribution against the Agent did not accrue until the 'underlying claim' against the Agent was 'established by judgment or award'.
3. At 7:27pm on 5 August 2020, the Agent's lawyers corresponded with the Insurer's lawyers to indicate that it would accede to the Insurer's application to bring a cross-claim, but that this was expressly subject to its ability to assert limitation defence in response. The correspondence indicated the Agent's lawyer's view that it would be inutile for the Agent to contest the application on the basis of a contention that a limitation defence would be successful.
4. At 7:28pm on 5 August 2020, a Calderbank offer was served, 'without prejudice save as to costs'. The letter contained a cross-reference to the statement of the Agent's position in its letter of 4 August 2020, but this was also supplemented by assertions that any reliance by the Insurer upon the operation of ss 26 and 55 of the Limitation Act 1969 (NSW).
5. The Calderbank offer was a 'walk away' offer: that the cross-claim be dismissed with no order as to costs. The offer was expressed to be open for 14 days. The letter indicated that reliance would be placed upon Calderbank principles to support an application for indemnity costs.
6. At 1:38pm on 21 August 2020, after the offer had expired, the Insurer's lawyers corresponded with the Agent's lawyers for the purpose of explaining the Insurer's rejection of the offer. The email contained the strong assertion that the limitation defence was "so manifestly unarguable" that, if pursued, the Insurer would seek its own special order for indemnity costs. A long series of (16) points were made in support of the Insurer's position, reiterated in point 17 of the email, that the limitations defence was 'manifestly hopeless'.
7. The findings that the Court made on 17 December 2020 make it plainly apparent that the limitations defence, so far from being manifestly hopeless, or unarguable, as the Insurer would have it, would have succeeded in the hypothetical event that the Court found that the NMC Occupancy was disclosed to the Agent, by Ms Holmes.
8. As the Agent points out, the Insurer argued its position on the limitations defence in detail in its Reply to the Agent's defence to the cross-claim.
9. With this background, the Agent submits that the two conditions typically enlivening an order for indemnity costs on the basis of refusal of a Calderbank offer, even a 'walk away' offer, are enlivened. First, the offer was a genuine offer to compromise. No monetary offer could be made, but the Agent offered to forego its costs incurred at that point and into the future. Even if the costs incurred to that point were modest, that did not derogate from the proposition that the offer was genuine.
10. Secondly, the Insurer's commence the cross-claim and then pursue it to final judicial adjudication, in the light of the Agent's warnings about the likelihood of the actions in the claim being statute-barred, was so unreasonable as to justify an order for indemnity costs. The Insurer never seriously resisted the conclusion that the actions were statute-barred. It argues that whatever be the sincerity of the Insurer's belief, whether it was apparent at the time that the cross-claim was notified that it could be defended simply on the basis of a limitations defence is a purely objective question. Given that, objectively, the Agent was right, and the limitations defence would have been sustained, for that reason alone, even if the hypothetical premise - that the NMC Occupancy was disclosed to the Agent - was established in the principal proceeding, it was unreasonable for the Insurer to bring the cross-claim since, on the basis of the causes of action set out in the cross-claim, there was a futility in its doing so; as all were statute-barred.
11. The Insurer submits, in response, firstly, that the offer made did not disclose any element of compromise and therefore could not be said to be a genuine offer. Made, as it was before the trial, when it was not even a party, the offer was derisory; and simply invited the Insurer's capitulation. Secondly, it was not unreasonable for the Insurer to reject it. It gave it reasonable thought. The Insurer could not have filed the cross-claim earlier than it did since it could not certify it on the basis of provable facts and a reasoned view of the law. That its cross-claim ultimately failed does not establish the lack of reasonableness in its conduct at the time of rejection of the offer. It was not shown that the Insurer acted delinquently or with an absence of good faith.
12. In reply, the Agent submits that a 'walk away' offer can amount to a genuine offer of compromise and in this case did, particularly in circumstances where it was accompanied by a detailed statement, from the offeror's perspective, of the weakness of the offeree's case. It should not be viewed as an attempt to trigger costs sanctions. Further, although it is debateable whether a cross-claim could have been filed within the limitation period, it could not be said to be reasonable to file it after the cross-claim has expired. Finally, even if findings that I made about the merits of the cross-claim (on the premise that the NMC Occupancy was disclosed) did not turn out to be dispositive, and in assessing the reasonableness of the rejection of the offer, they nonetheless remained reasons which could be taken into account in determining that particular question.

Consideration

1. There is no clear demarcation when considering the two issues of whether the offer was genuine and whether it was reasonable for the Insurer to reject it.
2. I am inclined to the view however, that notwithstanding apparent weaknesses in the Insurer's case and, in particular, whether its proposed actions were already statute-barred, expeditiously pointed out by the Agent, its offer did not provide a genuine compromise. At the point it was made, only a modest amount of expense had been incurred by the Agent. What it was offering to forego was not of high value, in a monetary sense (Loulach Developments Pty Ltd v RMS (No.2) [2019] NSWSC 601 per Leeming JA at [10].
3. The Insurer's claim, viewed prospectively, although weak, was not so hopeless as to be characterised as frivolous or vexatious (Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 per Basten JA at [20]). In particular, to the extent that concerns were reasonably raised by the Agent about a prospective limitations problem for the Insurer should it proceed with the cross-claim, as is fairly notorious, the outcome of limitations defences are not readily predictable until the evidence at trial is complete. Even in its submissions in reply, the Agent accepted that it remained 'debateable' whether the cross-claim could have been filed within the limitation period. The circumstance that the Agent supplied reasons why the offer should be accepted is a commonplace which enlivens the discretion to order indemnity costs but does not, of itself, point to the genuineness of the compromise.
4. Further, it was open to the Agent, once the cross-claim had been filed, to serve a rules offer to protect its interests, if it was confident that its position about the prospective limitations defences would ultimately prevail. That would have yielded a presumptive entitlement to an order for costs on an indemnity basis. I am not persuaded that the Court should exercise its discretion in the way the cross-claimant submits it should.
5. The Agent's application for a partial order for indemnity costs order is refused.

ORDERS

1. Following my reasons of 17 December 2020, I make the following orders: 1. Subject to order (8), Judgment and verdict for the plaintiff against the second, third and fifth defendants for the sum of $739,393.95. 2. Judgment for the first defendant against the plaintiff. 3. The second, third and fifth defendants are to pay the first defendant's costs of its defence of the proceeding, as agreed or assessed. 4. Judgment for the fourth defendant against the plaintiff. 5. The plaintiff is to pay the fourth defendant's costs of the proceeding. 6. Judgment for the cross-defendant on the Cross-Claim. 7. The cross-claimant is to pay the cross-defendant's costs, as agreed or assessed. 8. Liberty to apply is granted to the second, third and fifth defendants to apply in relation to the interest on the order for damages on 3 days' notice, failing which order 1 will become effective. 9. Exhibits be returned after 28 days.

Endnote

1. Gould v Vaggelas (1985) 157 CLR 215 at 229-30

Amendments 10 February 2021 - Date of order and decision amended to correct date DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 February 2021