Thompson v NSW Land and Housing Corporation

Supreme Court of NSW|2013-09-16|Before: Hislop J, Cole J

Background 1The plaintiff sought damages from the defendant for injuries allegedly sustained when pest control services were provided by Pestkil Pty Limited, (now known as ACN 005 511 062 Pty Limited, ("Pestkil")) at premises rented by the plaintiff from the defendant. 2The plaintiff was unsuccessful in those proceedings. Judgment was entered for the defendant. The plaintiff was ordered to pay the defendant's costs of the principal proceedings. 3The proceedings gave rise to three cross claims: (a) the defendant (cross claimant on first cross claim) v Pestkil (cross defendant on first cross claim) seeking damages, indemnity or contribution in respect of any verdict recovered by the plaintiff from the defendant; (b) Pestkil (cross claimant on second cross claim) v the defendant (first cross defendant on second cross claim) seeking, inter alia, damages for failure to procure effective insurance; (c) Pestkil (cross claimant on second cross claim) v Gerling Australia Pty Limited (now known as HDI-Gerling Australia Insurance Company Pty Limited ("Gerling")) (second cross defendant on second cross claim) seeking, in short, damages for Gerling's failure to indemnify it under a policy of insurance. 4No orders were made in the principal judgment as to the disposal of the cross claims or as to the costs thereof pending agreement by the parties or further submissions. Agreement was not reached. Further submissions were made. 5The insuring provisions relied upon by Pestkil were in the following terms: "Section C: The Insurer hereby agrees, subject to the limitations, exclusions, terms and conditions hereinafter mentioned to: 1. Pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay for in respect of: (a) Personal Injury (as defined) suffered or alleged to have been suffered by any person or persons; (b) ... happening anywhere in the Territorial Limits stated in the schedule during the duration of the policy in connection with the Insured operations, and caused by or contributed to by and/or arising out of an occurrence or occurrences. 2. Defend at their expense (and in addition to the limit of Liability) and in the name of and on behalf of the Insured any claim or suit against the Insured to recover damages in respect of and/or arising out of any Occurrence for which cover is provided by this Insurance... 3(b) Pay, in addition to the limit of Liability expressed in the Schedule: all expenses incurred by the Insured with the permission of the Insurer incidental to the investigation, negotiation, presentation and/or defence of claims and suits or appeals which are the subject of indemnity under this Insurance. 3(c) Pay, in addition to the Limit of Liability, expressed in the Schedule: all costs and expenses awarded against the Insured or agreed to be paid by the Insured with the Insurer's consent in connection with or arising out of any Liabilities covered by this Section." 6On 2 August 2012 the following orders were made in respect of the cross claims (Thompson v NSW Land and Housing Corporation (No 2) [2012] NSWSC 864): (1) Judgment for Pestkil on the first cross-claim; (2) The defendant to pay Pestkil's costs of the first cross-claim; (3) Judgment for the defendant on the second cross-claim; (4) Pestkil to pay the defendant's costs of the second cross-claim; (5) Judgment for Pestkil against Gerling on the second cross-claim for (a) its costs of defending the first cross-claim less credit for such of those costs as are recovered from the defendant on the first cross-claim; (b) the costs payable by it to the defendant on the second cross-claim; and (c) its costs of prosecuting the second cross-claim; (6) the claims for interest made by Pestkil are deferred. 7On 14 November 2012 consent orders were made appointing a referee to "undertake an inquiry and report into the value of the damages for the breach of Section C, cl 2 and Section C, cl 3(b) of the Policy of Insurance" concerning each of: (a) The expense incurred by Pestkil in the defence of the first cross-claim; (b) The expense incurred by Pestkil in the prosecution of the second cross-claim against the defendant. (c) The expense incurred by Pestkil in the prosecution of the second cross claim against Gerling; 8At the same time consent orders were also made that the costs of Pestkil in respect of the reference to the referee be reserved for determination by Hislop J and the claim for interest made by Pestkil be deferred for determination by Hislop J. 9It was noted that Pestkil and Gerling agreed that "costs" in Orders 6(5)(a) and 6(5)(c) above meant "damages in respect of the expense incurred for breach of the contract of insurance." 10In her report dated 6 May 2013 the referee determined the value of damages at $608,852.02. Those damages were calculated up to and including 14 November 2012 being the date of the order for referral. The referee did not assess the damages separately in respect of each of the three categories referred to her. On 28 May 2013 the report was adopted by the court. Pestkil and Gerling acquiesced in this course. Judgment has been entered for the damages assessed by the referee. Those damages have been paid. 11The remaining issues between Pestkil and Gerling, namely, damages from 14 November 2012, Pestkil's expenses in respect of the reference and interest on damages were then stood over for later determination. It is those issues which now fall for determination by the Court, together with an issue between Pestkil and the defendant. These issues are considered hereunder.

Interest on damages claimed by Pestkil from Gerling 12In its written submissions Pestkil claimed interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth) ("ICA") as follows: "(a) For those expenses incurred by Pestkil prior to the Refusal Date, for the period from the Refusal Date to 6 June 2013, being the date of payment; and (b) For the expenses incurred by Pestkil after the Refusal Date for the period commencing on the dates those expenses were incurred (being the date of invoice) to 6 June 2013 being the date of payment." The interest claimed was calculated by reference to s 57(3) of the ICA and r 32 of the Insurance Contracts Regulations 1985 (Cth). The claim for interest was "solely based on s 57 of the Act". The Court's task was to determine if Pestkil was entitled to interest under s 57. 13Section 57 of the ICA provides: "Interest on claims (1) Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section. (2) The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days: (a) the day on which the payment is made; (b) the day on which the payment is sent by post to the person to whom it is payable. (3) The rate at which interest is payable in respect of a day included in the period referred to in subsection (2) is the rate applicable in respect of that day that is prescribed by, or worked out in a manner prescribed by, the regulations. (4) This section applies to the exclusion of any other law that would otherwise apply. (5) In subsection (4): law means: (a) a statutory law of the Commonwealth, a State or a Territory; or (b) a rule of common law or equity." 14Section 57 was included in the ICA following a recommendation of the Law Reform Commission in its report on Insurance Contracts (Law Reform Commission, Insurance Contracts, Report No 20 (1982) 196-200 [319]-[329]). The inclusion of s 57 was in response to delay by insurers in meeting claims, a major source of complaint at the time. As the Commission observed at 197 [320] that "[d]elay in the payment of a claim inconveniences the insured. Inflation during the period of delay may deprive him of full compensation for the loss he has suffered". At 197 [320] the Commission observed: "Another method of protecting the insured against loss caused by delay in payment of claims lies in the payment of interest at a realistic rate from the date of loss or maturity until settlement of the claim. This would also encourage insurers to settle claims quickly. ... a requirement to pay interest would diminish an existing incentive to delay." 15The Commission noted at 199 [324] in response to a submission that it would be inequitable between insurer and insured to require the insurer to pay interest from the date of loss, that if the payment of interest was required not from the date of loss, but only from the time after which further delay by an insurer would be unreasonable there would be little, if any, increase in costs. 16The Explanatory Memorandum to the Insurance Contracts Bill 1984 (Cth) provides the following rationale for s 57: "[190] Failure to pay the person entitled any interest at all can lead to injustice to an insured or, at least, inconvenience. For example, depending on the length of the delay, the insured may, in any event, not receive full compensation for the loss he has suffered due to such factors as inflation and currency fluctuations before the claim is actually paid. Failure to receive interest further depreciates the value of the compensation he receives. [191] Against this, however, it would be inappropriate to expect the insurer to pay interest from the moment the claim arose: (1) some life insurers take the possibility of delay into account when assessing premiums and so set lower premiums; and (2) in many cases, a significant proportion of the money comes from the reinsurer and so the insurer is unable to earn interest on it in any event. [192] The proposed law balances the interests of the insurer and the person entitled to payment. It should lead to little, if any, increase in the cost of insurance." 17Thus the purpose of s 57 is to diminish the incidence of unreasonable delay on the part of insurers in meeting claims and to compensate the insured in the event such delay occurs. 18Factors relevant to deciding what is "unreasonable" were considered in Bankstown Football Club v CIC Insurance Limited (unreported, NSWSC, Cole J, 17 December 1993). That decision was followed in Sayseng v Kellogg Superannuation Pty Ltd [2007] NSWSC 857, [7]; (2007) 213 FLR 174, [7] where Nicholas J held: "In my assessment, the cases to which I have referred establish that the question of reasonableness is to be judged by reference to the true position in respect of the claim with allowance to be made for the insurer to have a reasonable period of time within which to investigate the claim and to consider its position. The discretionary determination is to be made having regard to the particular circumstances of the case, including the probable issues which require investigation. Under the Act the court is not required to evaluate and pronounce upon the opinion or decision making process of the insurer. It is not relevant that the insurer acted bona fide in denying the claim, or when the judgment of the court established the insurer's liability to pay it. In short, the award will be calculated on the basis of what the court finds is a reasonable time for completion of the insurer's investigation of the claim ... Under s 57(2) liability to pay interest is to be calculated with regard to the day on which it was unreasonable for the insurer to withhold payment of the amount after it had become liable to pay it in response to a claim." and at [23]: "... acceptance of the insurer's principal submission would involve the court in an evaluation of the reasonableness and bona fides of the position adopted by it. The cases make plain that this is a task which should not be undertaken." 19Nicholas J's decision has been followed on numerous occasions without dissent. It is appropriate for this court to follow it. 20Thus in order to succeed on a claim for interest under s 57 Pestkil must establish: (a) the true position was that Gerling was liable to pay an amount(s) under the contract of insurance; (b) Gerling withheld payment of the amount(s) after it had become liable to pay in response to a claim by Pestkil; (c) it was unreasonable for Gerling to withhold payment of the amount(s) from a particular date, namely, 13 February 2008. 21On 29 January 2008 Pestkil gave notice to Gerling of its intention to make a claim under the policy in respect of this matter. On 13 February 2008 Gerling responded in an email stating that "cover is extended in respect to 'All construction and contracting activities of the insured proceeding to Tender after 30th June 2000' .... As the tender for [the relevant work] was prior to the 30th June 2000 you will appreciate that the policy will not respond to your claim". Ultimately this defence was not pursued by Gerling. Instead an exclusion clause was unsuccessfully relied upon by it. 22Pestkil submitted that: (a) the true position is that the court has held Gerling was liable to pay an amount or amounts under the contract of insurance; (b) Gerling had withheld payment of the amount (or amounts) after it had become liable to pay the amount(s) in response to Pestkil's claim; (c) it was unreasonable for Gerling to withhold payment of a claim when all the investigations for a decision had been completed Vintix Pty Ltd v Lumley General Insurance Ltd (1991) 24 NSWLR 627 at 650, (affirmed in Lumley General Insurance Ltd v Vintix Pty Ltd (1991) 24 NSWLR 652) and a decision had been made; (d) from the time indemnity was refused by Gerling on 13 February 2008 it had been unreasonable for Gerling to withhold payment of costs and expenses as they were incurred by Pestkil; (e) Pestkil was entitled to interest as claimed under s 57 until the damages were paid; (f) it was conceded that Gerling should obtain a credit to the extent that the damages were recovered as costs from the defendant consistent with the orders made on 14 November 2012. 23Pestkil tendered cost agreements between it and its solicitors and between senior counsel and the solicitors. There was reference to junior counsel also having a costs agreement. The evidence which was tendered established that each of the costs agreements contained an option to claim interest for late payment of costs or fees. Neither counsel had exercised the option. Pestkil's solicitor had given notice of intention to exercise the option by claiming $12,176.87 pursuant to a letter dated 25 July 2013. Counsel for Pestkil observed this evidence was adduced lest it be said by Gerling that it did not "suffer any loss until such time as they paid the invoice, the fact that they were subject to an interest obligation for late payment of the fees of their solicitors and counsel substantiated the proposition that the loss suffered by Pestkil arose prior to payment of the invoices of their solicitor and their counsel."

Gerling's submissions 24Gerling accepted that s 57 of the ICA was applicable and that the interest rates prescribed by the Act and the Insurance Contracts Regulations 1985 (Cth) applied to this claim. 25It submitted that: (a) "1... interest could only accrue on the costs and disbursements which became the subject of the reference from the time of payment by the client, with respect to individual payments, consistent with the principles in Lahoud v Lahoud. 2 Even characterised as damages, no interest would accrue until payment because the client (as opposed to the legal practitioner) has not been kept out of their monies until that time. Interest is to compensate for the practical loss suffered ..." (b) inherent in any claim for interest under s 57 of the ICA was the concept that the insured had suffered a loss. Such loss was a condition precedent to any entitlement to interest whether it be pursuant to s 57 of the ICA or s 101(4) of the Civil Procedure Act 2005 (NSW) ("CPA"); (c) the only loss Pestkil suffered was the deprivation of the use of any money which it paid to its legal advisers during the course of the proceedings in order to fund its case. It would only be from the date of payment of each such sum that entitlement to interest could arise because it was only then that actual loss to Pestkil occurred; (d) the relevant principle was stated in Lahoud v Lahoud [2006] NSWSC 126 at [83] as follows: "To the extent to which the plaintiffs have been out of pocket as a result of having to pay their lawyers costs and disbursements, it is appropriate that the compensation which is recognised in the Courts' order for costs take into account the fact that the plaintiffs have been out of pocket in that way." (e) Ms Piercy deposed (affidavit 4 September 2013): [7] "During the course of these proceedings (the duration of which has been over six years), Pestkil has been invoiced regularly by Carroll & O'Dea and both Michael Jenkins of Counsel and James Mitchell of Counsel, on account of professional costs and disbursements that have been incurred. Payment of these invoices has been made on a regular basis." It was accepted that this "should only be evidence on its face of the fact that payments were received and not evidence that the payments were made by Pestkil". Pestkil commenced to be invoiced by its legal advisers in September 2007. (f) there was no evidence that any of the payments recorded in Ms Piercy's affidavit were made by Pestkil or that Pestkil was out of pocket at any stage by reason of paying legal costs as the matter proceeded. The affidavits of Ms Piercy made no such assertion and in respect of payments went no further than asserting professional fees and disbursements were "invoiced and therefore incurred" by Pestkil; (g) there was insufficient evidence before the Court of payment by Pestkil, the dates of payment, or that Pestkil had at any relevant time sufficient funds to pay its legal advisers invoices. (h) Pestkil had not established it had been out of pocket as a result of its dealings with its legal representatives. The claim for interest under s 57 must fail; (i) alternatively there is no evidence of the dates of payments and it was therefore not possible to calculate any interest. 26In response Pestkil contended the question of whether it had been out-of-pocket or not was irrelevant to a claim under s 57. It was only necessary in such a claim for it to prove the matters referred to in para [20] above and this it had done. 27If contrary to the above submissions it was necessary to establish, by analogy with Lahoud, that Pestkil had made payments from time to time to its legal advisers then: (a) the evidence established that there was an obligation on Pestkil to pay its legal advisers as the matter proceeded; (b) the evidence of Ms Piercy established that payment of the invoices had been made on a regular basis; (c) the threshold for awarding interest under s 101(4) is not high. In Lahoud the claim for interest was upheld notwithstanding the court's observation at [80]: "The evidence in support of that application is quite parsimonious. The plaintiffs provide no evidence of having actually made payments to their lawyers from time to time on account of costs and disbursements, and no evidence of any special arrangements between themselves and their lawyers which might bear upon the exercise of the discretion to award interest on costs." (d) it should be inferred that Pestkil had made payments to its legal advisers on the invoices shortly after the invoices were forwarded to Pestkil.

Discussion and conclusion 28Gerling relied heavily in its submissions upon Lahoud and similar cases. However these cases were concerned with the application of s 94 of the Supreme Court Act 1970 (NSW) (see now s 101(4) of the CPA); not s 57 of the ICA. 29Section 101(4) of the CPA, states: "(4) The court may order that interest is to be paid on any amount payable under an order for the payment of costs. 30Relevant principles as to s 101(4), are (the paragraph references are to Screenco Pty Limited v R L Dew Pty Limited [2003] NSWCA 319; (2003) 58 NSWLR 720): (a) the power to award interest pursuant to s 101(4) is discretionary - [81]; (b) "The function of an award of interest is to compensate a plaintiff for the loss or detriment that he or she has suffered by being kept out of his or her money during the relevant period" - [78]; (c) "... a plaintiff who has been kept out of his or her money between the date of loss and the date of judgment is entitled to be awarded interest on those moneys for that period. On the other hand, if the plaintiff has not been kept out of his or her money for that period, it is not appropriate to make such an award." - [115], [22]; (d) The reasoning that there should be an award of interest for a plaintiff who has been kept out of his money does not apply when the plaintiff: "... has in fact been indemnified by an insurance company. I do not think that the plaintiff should recover interest for himself on the money when he has not been kept out of it. The receipt from the insurance company should go in relief of the defendants." [41] 31The recent decision of the Court of Appeal in Gillfillan v Australian Securities and Investment Commission (No 2) [2013] NSWCA 143, [33]-[36]; (2013) 94 ACSR 543, 549 confirms that such interest may be awarded under s 101(4), that its purpose is to compensate a party having the benefit of a costs order for being out of pocket in respect of the relevant costs it has paid and that the recovery of interest does not require special circumstances to be demonstrated. 32The history and the principles of application of s 57 of the ICA and s 101(4) of the CPA, differ markedly. Section 57(4) of the ICA excludes "any other law that would otherwise apply" and thus prevails over s 101(4) of the CPA. 33Relevant differences include: (a) section 101(4) only operates in the context of litigation but is not limited to insurance claims. Section 57 is available only in relation to insurance claims but applies even if there is no litigation; (b) section 101(4) is compensatory s 57 is primarily "punitive" intended to secure prompt payment of claims by insurers. The compensatory effect is secondary and not determined by considerations peculiar to the insured; (c) section 101(4) requires proof of loss for which compensation by way of interest is sought. Section 57 does not require proof of loss but operates irrespective of whether the insured has sustained loss or not; (d) interest under s 101(4) is limited to interest on an amount payable under an order for the payment of costs. Section 57 interest is payable on the whole of the claim; (e) section 101(4) is subject to an overriding discretion whereas the right to interest under s 57 does not depend upon the exercise of a discretion in favour of an insured: Lomsargis v National Mutual Life Association of Australia Limited [2005] QSC 199, [12]; [2005] 2 Qd R 295 at 299 (McMurdo J). The "discretionary determination" referred to in Sayseng and other cases should be understood to refer to the court's power to choose between alternative findings of fact in relation to determining the "day as from which it was unreasonable for the insurer to have withheld payment" for the purposes of s 57. The reference to "discretionary judgment" in GRE Insurance Limited v Allinghams Removals Pty Limited (1997) 9 ANZ Ins Cas 61-354 should be similarly understood; (f) interest under s 101(4) will usually run from the date of loss. Interest under s 57 will run from the day from which it is unreasonable to withhold payment. 34In my opinion Pestkil was entitled to interest under s 57 of the ICA until the damages were paid. I accept Pestkil submissions at 22-(d) in this regard. 35In my opinion it is unnecessary that a claimant for interest under s 57 of the ICA establish that it has suffered loss as a result of being deprived of the use of money paid by it to its legal advisers. 36I would accept the submission made by Pestkil which is set out in para [27] hereof. 37In cases where the liability of the claimant to his legal advisers increases over time it is appropriate that the insurer's liability in respect of additional expenditure attach on the date the additional expenditure is incurred. 38Accordingly it is appropriate to make the orders sought by Pestkil which are set out at para [12] of this Judgment. I will leave it to the parties to calculate interest and to bring in short minutes as appropriate. The calculation of interest should be made in accordance with the requirements of s 57 of the IGA and r 32 of the Insurance Contracts Regulations 1985 (Cth).

Pestkil - damages and costs from 14 November 2012 39The referee, in her report, quantified the expenses up to 14 November 2012 which were recoverable by Pestkil as damages. These matters are no longer in dispute. 40The only expenses claimed by Pestkil in the present application were Pestkil's expenses in respect of the reference to the referee: see Pestkil's submissions at [13]. Such expenses, together with the fees of the referee (if appropriate) form the "costs of the reference". There were no other expenses incurred by Peskil after 14 November 2012. There was no order as to which party should pay the costs of Pestkil in respect of the reference, that question being reserved, by consent, to the Court. Thus the Court's task was to determine which party should pay the costs of the reference and, if necessary, to quantify those costs. 41Pestkil claimed $70,346.44 for its costs of the reference being the total sum claimed in the affidavit of Ms Piercy sworn 4 September 2013. Pestkil contended the claim was properly categorised as damages for breach of the indemnities in the contract of insurance and was recoverable as such. Counsel for Pestkil stated that the quantification of the claim at $56,716.00 made in Pestkil's written submissions was erroneous and should be disregarded.

Pestkil's submissions 42Pestkil submitted: (a) expenses incurred by it which were incidental to the investigation, negotiation, presentation and/or defence of the cross-claim and/or the second cross-claim were recoverable as damages (subject to questions of reasonableness). This had been accepted by the referee; (b) the Court, by adopting the findings of the referee, accepted that costs incidental to the investigation, negotiation, presentation and/or defence of the claim were the subject of the indemnity and were recoverable as damages; (c) the reference quantified the damages recoverable by Pestkil pursuant to the Court orders and submissions made in respect of the reference thereby forming part of the defence of the first cross-claim and presentation of the second cross-claim; alternatively Pestkil's costs of the reference were incidental to the defence of the first cross-claim and presentation of the second cross-claim; and (d) Pestkil was entitled to be indemnified by Gerling in respect of the costs of the reference. Gerling should be ordered to pay the sum of $70,346.44 to Pestkil within twenty-eight days.

Gerling's submissions 43Gerling submitted that: (a) Pestkil's costs of the reference were not properly characterised as damages for breach of the indemnities in the contract of insurance. What was occurring by the time of the reference was essentially an assessment process, a separate dispute process occurring because Pestkil and Gerling were unable to reach agreement as to the quantification of the damages awarded to Pestkil. The referee's conclusion supported that approach; (b) it is relevant to these considerations that Pestkil claimed $735,395.25 including GST in its application to the referee. Gerling allowed $477,533.42 including GST. The referee assessed the costs at $608,852.02 excluding GST. By letter dated 1 March 2013 Gerling offered to settle for $550,000.00 in full satisfaction of all costs/damages claims. Pestkil did not respond to the offer. If s 369 of the LPA was applicable Pestkil would have been liable for the cost of the reference, see s 369(3)(c); (c) there was no relevant "success" for either side in the reference. The appropriate order was that each party bear its own costs of the reference; and, (d) the referral process involved little more than written submissions. The costs claim appears excessive. In the event Pestkil was successful in its argument the quantum of costs of the reference should be a matter for further costs assessment. Any assessment should be on a party/party basis.

Discussion and conclusion 44The costs of the reference form a separate category to damages and to costs in the proceedings generally. The costs of a reference are to be determined separately from damages and costs generally. 45The costs of the reference are determined separately to the costs in the proceedings generally because there are specific provisions reserving for the Court discretion as to how, when and by whom the fees of a referee appointed under r 20.14 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") are to be paid - UCPR r 20.18 provides: (1) The court: (a) may determine the amount of the fees to be paid to a referee, and (b) may direct how, when and by whom the whole or any part of any such fees are to be payable, and (c) may determine the consequences of failure to comply with a direction under paragraph (b). (2) Subrule (1) does not affect the powers of the court as to costs. 46An analogy may be drawn with s 369 of the LPA which provides: (1) This section applies to the costs of a costs assessment in relation to: (a) costs to which section 317 (Effect of failure to disclose) applies, and (b) costs to which section 364 (Assessment of costs-costs ordered by court or tribunal) applies, and (c) costs that on assessment are reduced by 15% or more. (2) A costs assessor is, subject to this section, to determine the costs of a costs assessment to which this section applies. (2A) Subject to any order of or the rules of the relevant court or tribunal, the costs assessor may determine by whom and to what extent the costs of an assessment referred to in section 364 (Assessment of costs-costs ordered by court or tribunal) are payable and include the determination in the certificate issued under this section in relation to the assessment. (3) The costs of a costs assessment to which this section applies are payable: (a) for a costs assessment in relation to costs to which section 317 (Effect of failure to disclose) applies-by the law practice that provided the legal services concerned, or (b) for a costs assessment in relation to costs to which section 364 (Assessment of costs-costs ordered by court or tribunal) applies-by such persons, and to such extent, as may be determined by the costs assessor, or (c) for a costs assessment in relation to costs that on assessment are reduced by 15% or more-by the law practice that provided the legal services concerned or, if the costs assessor so determines, by such persons, and to such extent, as may be determined by the costs assessor. (4) The costs assessor may refer to the Supreme Court any special circumstances relating to a costs assessment and the Court may make any order it thinks fit concerning the costs of the costs assessment. (5) On making a determination, a costs assessor may issue and forward to each party and the Manager, Costs Assessment a certificate that sets out the costs of the costs assessment. ... (7) The certificate is, on the filing of the certificate in the office or registry of a court having jurisdiction to order the payment of that amount of money, and with no further action, taken to be a judgment of that court for the amount of unpaid costs. (8) The costs of the costs assessor are to be paid to the Manager, Costs Assessment. ... 47Under s 369 the costs of a costs assessment do not form part of the costs of the proceedings. In Attard v James Legal Pty Ltd [2010] NSWCA 311; (2010) 80 ACSR 585 (a decision considered and not overturned in Branson v Tucker [2012] NSWCA 310) it was found that the reference mechanism under Part 20 of the UCPR is available to review legal costs even when the costs assessment mechanism under Part 3.2 of the LPA is not available. As under s 369 of the LPA, the costs of a reference made under Part 20 of the UCPR are a separate category to costs in the proceedings generally, and are to be determined separately. The outcome in Attard bears that out. 48Pestkil contends that the reference formed part of the defence to the first cross claim and presentation of the second cross claim or alternatively, that the reference is incidental to its presentation or defence of a claim. It follows, according to Pestkil, that the costs of the reference are damages owing to it under Sections C cl 3(b) taken together with s C cl 2 of the contract of insurance. The costs of the reference do not form part of the damages. 49The reference mechanism under Pt 20 of the UCPR is merely a procedural tool for assisting the Court in determining an issue and does not affect the substantive right to damages. The costs assessment mechanism under Part 3.2 of the LPA has been recognised as "no more than a means of quantification made available to the billing practitioner and the person billed": Branson v Tucker [2012] NSWCA 310, [127] (Barrett JA). In Coshott v Barry [2012] NSWSC 850, McCallum J found at [41] that the costs assessment mechanism under the Legal Profession Act 1987 (NSW), being the predecessor to the mechanism under the LPA in similar terms, was merely an administrative mechanism for assessing costs and so did not alter the nature of the contractual rights to payment for legal services rendered and billed. Similarly, the reference mechanism under Part 20 of the UCPR is merely procedural - it has no legal effect unless and until the Court adopts it. A mere mechanism or procedure for assessing the quantum of damages should not have the effect of enlarging the substantive right to damages. To find otherwise would require the reference made under Part 20 of the UCPR to do more than merely aide in determining an issue - it would allow a reference made under the UCPR to alter the nature of the substantive right to damages. Accordingly, and for these reasons, the costs of the reference should not be considered damages under the contract of insurance. 50In this case, whether the reference forms part of the presentation or defence of a claim, or is merely incidental to it, the costs of the reference cannot form part of the damages. 51The Court did find in its decision of 2 August 2012 that the contract of insurance did extend to indemnifying Pestkil for its costs of presenting its cross claim against Gerling: at [17]. Naturally enough, Pestkil may recover such expenses in presenting its cross claim as the terms of the contract of insurance admit. The costs of the reference do not fall within the terms of the contract for the reasons outlined below. 52The contract of insurance provides at s C cl 3(b) that the insurer is to be liable for: "all expenses incurred by the Insured with the permission of the Insurer incidental to the investigation, negotiation, presentation and/or defence of claims and suits or appeals which are the subject of indemnity under this Insurance." 53Only costs that are either accrued as part of or as "incidental to" the presentation or defence of a claim may be recovered as damages on an indemnity basis from Gerling. 54The phrase "incidental to" is defined by the Macquarie Dictionary as "liable to happen in connection with; naturally appertaining to". While expenses incurred by an insured that are "incidental to" the "investigation, negotiation, presentation and/or defence of claims and suits or appeals" may cover a range of expenses, the term 'incidental' requires that there be some nexus between the expense incurred and, for example, the presentation of a claim. The expenses incurred by Pestkil in relation to the reference, and the fees of the referee do not have such a nexus - they do not naturally appertain to the presentation of the insured's claim against the insurer; they are an extraordinary mechanism for quantifying the legal expenses incurred by Pestkil. 55In addition, the phrase "incidental to" must, in its application to claims brought under a contract of insurance by an insured against its insurer, have some limit to its scope of application. No party to the contract of insurance could have intended that, in respect of claims brought by an insured against an insurer, the insured would be in a position to unilaterally extend the quantum of costs which the insurer is liable for by conducting its litigation in a manner that is likely to run up costs. 56It is for these reasons also that the reference and the costs of the reference cannot be considered part of the defence of the first cross claim or the presentation of the second. 57For the reasons given in the preceding paragraphs, the costs of the reference are not to be considered as forming part of the costs of the proceedings, nor are they to be considered damages under the contract of insurance. In this case it is appropriate that each party bear their own costs of the reference because neither party can be considered to have achieved success in the reference. Furthermore, if the costs assessment provisions in the LPA did apply, Pestkil would have been liable for the costs of the costs assessment as it achieved a result more than 15 per cent less than the amount claimed. As those provisions do not apply, I order that each party bear their own costs of the reference.

Costs of these applications 58There were two issues between Pestkil and Gerling which required determination on these applications. Pestkil and Gerling each enjoyed success on one issue and not the other. In my opinion Pestkil and Gerling should bear their own costs in respect of these applications.

Pestkil's claim for interest from the defendant 59In its written submissions dated 4 September 2013 Pestkil claimed interest from the defendant in respect of Pestkil's costs of defending the first cross claim. The defendant in its written submissions in reply opposed the orders sought and asserted that in the event that the interest claimed by Pestkil was awarded it would seek a Sanderson order and an order for interest in respect of its costs of defending the second cross claim. 60In oral submissions at the hearing on 16 September 2013 counsel for the defendant said: "As between the [defendant] and Pestkil, the position seems to be that both had cross-claims which they were both unsuccessful in and this is something that occurs each and every day of the week. In the normal course of events, there would be no reason why interest could be ordered to be paid on these cross-claims. If Pestkil was entitled to interest on this there would be no reason why [the defendant] would not be entitled to interest on its costs as well. It seems to me they have two countervailing costs issues though in a practical sense there will be some form of set-off ... At the end of the day there is no benefit to either party." 61Neither Pestkil nor the defendant ultimately pursued a claim for interest against each other. These applications for interest are dismissed. Pestkil and the defendant are to bear their own costs of those applications.

Orders 62I direct Pestkil to bring in agreed Short Minutes of Order in accordance with these reasons by 10.00am on 15 November 2013. The matter will be listed before me at 10.00am on Friday 15 November 2013 to enable the appropriate orders to be made.

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: 14 November 2013

Legal Profession Act 1987(NSW)

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