Total & Universal Pty Ltd v Kingsway Property Investments

CATCHWORDS : COSTS - order as to costs - where plaintiff unsuccessful in proceedings - where defendant initiated cross-claim against third party - where cross-claim unsuccessful due to failure of original proceedings - whether departure from default rule that costs follow the event warranted - whether indemnity costs warranted - COSTS - order as to costs - Calderbank letters - where letter was invitation to surrender cast in the form of an offer of compromise - invitation to surrender does not trigger an entitlement to indemnity costs - COSTS - order as to costs - whether successful defendant should be denied costs - conduct constituting alleged cause of action irrelevant in determining whether successful defendant should be denied costs - COSTS - order as to costs - costs of successful cross-defendant - where plaintiff unsuccessful in proceedings - whether costs of successful cross-defendant should be borne by plaintiff or by defendant - whether plaintiff rather than defendant ought to have joined cross-defendant to proceedings

Trade Practices Act 1974 (Cth) LEGISLATION CITED : Uniform Civil Procedure Rules Valuation of Land Act 1916

Igloo Homes v Sammut Constructions [2005] NSWSC 85 Knight v Clifton [1971] Ch 700 Manly Council v Byrne & Anor (No. 2) [2004] NSWCA 227 CASES CITED : Mitropoulos v Greek Orthodox Church (1993) 10 ACSR 134 Ritter v Godfrey [1920] 2 KB 47 Rowland v Portus (1906) 6 SR (NSW) 74 Tickell v Trifleska Pty Ltd & Anor (1990) 25 NSWLR 353 Total & Universal Pty Ltd v Kingsway Property Investments (No. 2) Pty Ltd [2006] NSWSC 1388

Total & Universal Pty Ltd - Plaintiff PARTIES : Kingsway Property Investments (No. 2) Pty Ltd - Defendant/Cross-Claimant Rail Corporation New South Wales - Cross-Defendant

K Andronos - Plaintiff COUNSEL : J S Hilton SC; M R Tyson - Defendant/Cross-Claimant F Lever SC - Cross-Defendant

Makinson & d'Apice - Plaintiff SOLICITORS : Corrs Chambers Westgarth - Defendant/Cross-Claimant Dibbs Abbott Stillman - Cross-Defendant

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

5947/03 TOTAL & UNIVERSAL PTY LTD v KINGSWAY PROPERTY INVESTMENTS (NO. 2) PTY LTD JUDGMENT 1 HIS HONOUR: On 15 December 2006 I delivered judgment in this matter: Total & Universal Pty Ltd v Kingsway Property Investments (No. 2) Pty Ltd [2006] NSWSC 1388. 2 The plaintiff was the assignee of the lessee's interest under a very long lease granted by a predecessor of RailCorp. The plaintiff acquired that leasehold interest from the defendant. The question at issue between the plaintiff and the defendant concerned the construction of the provision that determined the price in the Contract for Sale of the leasehold. The lease in question was one that permitted rent reviews by a particular procedure. The Contract for Sale made the price one that varied depending on whether there had been a particular type of rent review under the lease - broadly, the higher the rent that had been validly determined, the lower the price. The parties had settled the transaction on the basis that the defendant would pay the plaintiff the amount that would be the purchase price if the valuation of the property under that procedure was $3,050,000 and pay the plaintiff an additional amount if a rent review resulted in the valuation being less than $3,050,000. I held there had not been a valid exercise of the rent review clause. Hence the occasion for the defendant to pay more money to the plaintiff had not arisen. 3 The defendant joined RailCorp to the proceedings by a Cross-Claim. The defendant had, from 1 December 2002, been paying rental at the rate appropriate if there had been a valuation of the property at $3,050,000. The cross-claim current at the time of trial, the Third Amended Cross-Claim, sought, in broad terms:

(1) A declaration that the value of $3,050,000 was not a valuation pursuant to the Valuation of Land Act 1916 of the current Unimproved Value of the land;

(2) A declaration that the cross-claimant was entitled to have the question of the Unimproved Value of the property as at 1 December 2002 referred to arbitration; and

(3) An order for repayment of any rent it had overpaid since 1 December 2002. One basis on which it was alleged the rent should be refunded was that the rent had been overpaid by reason of a negligent misrepresentation, or alternatively misleading and deceptive conduct, of RailCorp. That conduct was said to have occurred on 31 October 2002, by Mr Jansen writing to Mr Tanevski in the terms I have set out at para [64] of my earlier judgment, or alternatively by the later issuing of invoices for the rental in the sum that would be appropriate if the value of the land had been validly determined at $3,050,000. Another basis on which the claim was put was that it was a payment under mistake, the mistake being that the amount of $3,050,000 was an assessment by the Valuer-General of the Unimproved Value within the meaning of the lease. 4 The cross-claim failed, because that cross-claim was dependent upon the plaintiff having a valid claim against the defendant, and also because in any event there was no dispute to refer to arbitration. 5 Each party recognised that the starting point for a decision concerning costs was the default rule that costs should follow the event. Each party submitted that there should be a departure, in its favour, from that starting point. 6 I propose to approach the matter by considering first the costs position between the plaintiff and the defendant alone, then the defendant and the cross-defendant alone, and finally to return if necessary to how the order between the plaintiff and the defendant ought be modified, if at all, to take account of the order made between the defendant and the cross-defendant. Costs Between Plaintiff and Defendant 7 One modification of the default rule that the plaintiff seeks is that the defendant pay fifty percent of its costs of the principal claim from 4 July 2006. 4 July 2006 was the date of filing of a Defence of the defendant. Paragraph 25 of the Amended Statement of Claim alleged a document purporting to be a Valuation Certificate that the Valuer-General issued on 11 February 2003 was not a valuation of the Unimproved Value of the property as at 1 July 2002. The defendant's defence did not admit that allegation, and alleged that the defendant and RailCorp agreed that the valuation of $3.05m shown in that valuation certificate should be the Unimproved Value of the property and that thereby there was an effective rental review. 8 By the time that defence was filed, written submissions of the parties had already made clear that neither the plaintiff nor the defendant contended that any valuation by the Valuer-General of the land value of the property was, of itself, a valuation of the Unimproved Value of the property, within the meaning of the rent review clause. In my view the failure to admit paragraph 25 of the Amended Statement of Claim did not expand the issues litigated in a way that should be reflected in a costs order. 9 The defendant contends that, not only should it receive an order for costs against the plaintiff, but as well it should receive a proportion of its costs (it suggests fifty percent, but is not firmly wedded to that particular percentage) after 24 February 2006 on an indemnity basis. 10 The event that occurred on 24 February 2006 that the defendant relies upon as the foundation for its claim for indemnity costs, was that on that day counsel for the plaintiff brought to the attention of lawyers acting for the other parties the line of authorities, referred to at para [149] of my earlier judgment, that show the difference between the notions of "unimproved value" and "land value". 11 The defendant contends that, once the plaintiff was aware of that line of authorities, it should not have persisted in the case it had previously pleaded based upon declarations about the valuation of the land, implied terms, unconscionability, and rectification as matters which would have led to a $2.3m valuation of the land. 12 That the claims failed is not enough to warrant an indemnity costs order. I am not persuaded that continuing to rely on those matters was so unreasonable as to warrant, even in part, an indemnity costs order, rather than an order that costs be paid on the usual basis. There was no partial strikeout application made. The conduct of the plaintiff in persisting with these allegations also needs to be seen in the context that the defendant had not admitted paragraph 25 of the Amended Statement of Claim. 13 In the result, leaving aside any consideration of the effect of the joinder of the cross-defendant, and subject to one exception I am about to mention, the appropriate order for costs as between the plaintiff and the defendant would be that the plaintiff pay the defendant's costs of the proceedings. 14 Such an order would ordinarily carry with it the costs of procedural motions, such as the motions concerning costs that I am now determining. However, there is one aspect of the defendant's motion that requires separate consideration. 15 One order that the defendant's Notice of Motion for costs sought was an order that Mr Richard Heseltine, the sole director and secretary of the plaintiff, be jointly and severally liable with the plaintiff to meet any costs ordered to be paid by the plaintiff to the defendant. Some steps were taken, including the preparation and filing of affidavits, in preparation for an argument about whether such an order should be made. However, at the end of the last working day before the hearing on costs was due to take place, the defendant's solicitors notified the plaintiff's solicitors that that order would not be sought. There would have been significant obstacles in the way of obtaining any such order, given the constraints on making a costs order against a person who is not a party to litigation that are contained in Part 42 rule 42.3 Uniform Civil Procedure Rules. 16 Directions were given for the notification of Mr Heseltine of the order sought against him. The evidence does not disclose whether he incurred any separate costs. Even so, it is appropriate to order that the defendant pay the costs of the plaintiff, and of Mr Heseltine, relating to the order sought in paragraph 3 of the Notice of Motion filed by the defendant on 5 April 2007. Costs as Between Defendant/Cross-Claimant and Cross-Defendant 17 The defendant submits that the cross-defendant should pay its costs of the cross-claim up to and including 27 February 2006. Further, or in the alternative, it seeks that there be no order for the costs of the cross-claim in respect of the period after 27 February 2006. 18 The cross-defendant seeks orders that the defendant pay its costs on a party/party basis from the date of service of the cross-claim to 21 October 2004, and on an indemnity basis after 21 October 2004. Indemnity Costs for Cross-Defendant? 19 I will deal with the cross-defendant's application for indemnity costs first. On 21 October 2004 the solicitors for the cross-defendant wrote to the then solicitors for the defendant. By that stage, the cross-claim had been filed, but was not in pleaded form. The letter asserted that there were some difficulties in the way of the defendant obtaining the orders it sought in the cross-claim, and requested provision of a pleaded cross-claim. 20 One of the contentions in that letter was that Clause 36 of the lease provided a method for determining a valuation of the freehold, and that it was pursuant to Clause 36 that the rent had been fixed. I have set out the text of Clause 36 at para [10] of my earlier judgment. Clause 36 applies only when a rent review takes place under the first of the provisos to the rental clause in the lease. The provisos to the rental clause in the lease are set out at para [8] of my earlier judgment. It is a consequence of my reasons for judgment that the rent has not been determined pursuant to Clause 36, or indeed pursuant to any mechanism for adjustment of the rent that is contained in the lease. Thus, the contention of the solicitors for the cross-defendant that the rent had been determined under Clause 36 was erroneous. The request for a pleaded cross-claim was eventually complied with, and in any event is not the sort of request that, if denied, triggers an entitlement to indemnity costs for the whole proceedings thereafter. I see nothing in the conduct of the defendant, in persisting with the cross-claim after receipt of the letter of 21 October 2004, that could have the effect of elevating any entitlement to costs that the cross-defendant might have from a party/party basis to an indemnity basis. 21 A fallback position of the cross-defendant is that it should receive indemnity costs from 17 February 2006. On that day its solicitors wrote to the solicitors for the defendant, inviting the discontinuance of the cross-claim, and offering to consent to the discontinuance on the basis that its costs are paid on a party/party basis. 22 Such a letter is not a Calderbank letter: it is an invitation for the recipient of the letter to surrender. An invitation to surrender cast in the form of an offer of compromise under the rules of court does not trigger an entitlement to indemnity costs, even if the party issuing the invitation to surrender is totally successful in the litigation: Tickell v Trifleska Pty Ltd & Anor (1990) 25 NSWLR 353; Manly Council v Byrne & Anor (No. 2) [2004] NSWCA 227. The rationale for that view is that before an offer of compromise can trigger any consequences so far as the costs payable are concerned, it is necessary for it to be a genuine compromise, not merely a token one. That same policy applies to Calderbank offers: Igloo Homes v Sammut Constructions [2005] NSWSC 85. Writing the letter of 17 February 2006 cannot advance any entitlement that the cross-defendant might have to be paid costs from an entitlement to costs on a party/party basis to an entitlement to costs on an indemnity basis. Need the Defendant Pay the Cross-Defendant's Costs? 23 The defendant submits that, even though its claim against the cross-defendant has failed, the principles recognised in Ritter v Godfrey [1920] 2 KB 47 justify either an order for costs in its favour, or at least no order for costs being made against it. 24 Ritter v Godfrey involved an action for medical negligence, which the defendant doctor won. The trial judge had disallowed the defendant costs of the action, on the ground that "… there is ground for serious criticism of Dr Godfrey, even though the facts may not establish negligence" (at 51-2), and that a letter that the defendant wrote to the plaintiff before action was "not only unjustifiable, but deplorable from every point of view" (at 52). That decision was overturned in the Court of Appeal. Atkin LJ, at 60, said: "In the case of a wholly successful defendant, in my opinion the judge must give the defendant his costs unless there is evidence that the defendant (1) brought about the litigation, or (2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation and expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains." 25 His Lordship went on, at 60-61, to explain what he meant: "By (1) is meant - has so conducted himself as to lead the plaintiff reasonably to believe that he had a good cause of action against the defendant, and so induce him to bring the action … (2) and (3) may possibly overlap. (2), I think, would include proper conduct in or connected with the litigation calculated to defeat or delay justice. Such conduct would also be included in (3), which, I think, further extends to cases where the facts complained of, though they do not give the plaintiff a cause of action, disclose a wrong to the public: King v Gillard [1905] 2 Ch 11, by which I understand some criminal or quasi criminal misconduct, eg, a fraud or crime or preparation for a fraud or crime, or possibly some act of serious oppression. Such conduct must, however, be in the course of the transaction complained of." 26 Eve J, at 66, said that in exercising the judicial discretion to deny a successful defendant his costs: "… the judge must eliminate from consideration the conduct constituting the alleged cause of action, and must then inquire whether the defendant has so conducted himself ante litem motum (1) as to induce in the plaintiff's mind the reasonable belief that there is no valid defence to the claim, or (2) has so misconducted himself as to have goaded the plaintiff into a litigation on which he would never have embarked but for such misconduct." 27 Principles like these have been applied in Mitropoulos v Greek Orthodox Church (1993) 10 ACSR 134 at 139; Knight v Clifton [1971] Ch 700 at 718; and Rowland v Portus (1906) 6 SR (NSW) 74 at 76. 28 Mr Hilton SC, for the defendant, submits that in the present case Mr Jansen was (as I have found at para [20] of my earlier judgment) the only person involved in this case who realised, prior to February 2006, that the concept of Unimproved Value had disappeared from the Valuation of Land Act 1916. Mr Hilton submits that my findings at para [161] and [162] amount to findings of misconduct by Mr Jansen. The thrust of Mr Hilton's submission is that Mr Jansen was not candid about the inapplicability of the Valuer-General's valuation to the formula for calculation of rent under the first proviso to the rent clause in the lease. Rather, Mr Jansen trickily sought to create the impression that the valuation enclosed with his letter was the type of valuation that the first proviso was triggered by, hoping thereby to induce the defendant to accept that it was a proper valuation, and agree to pay rent at the amount that would be appropriate if that valuation had been a valid valuation. 29 Further, Mr Hilton submits, Mr Jansen kept even from his own lawyers his knowledge that the concept of Unimproved Value no longer had any statutory operation. If the assiduousness of counsel for the plaintiff had not turned up the line of authority referred to at para [149] of my earlier judgment, it is likely, Mr Hilton submits, that Mr Jansen would have permitted all the lawyers in the case, and the Court, to blunder on, running, and perhaps eventually deciding, the case on a false basis. 30 I need not decide whether these submissions of Mr Hilton are fully made out. That is because, even if they were true, they would be in substance re-stating the allegation of negligent misrepresentation, or alternatively misleading and deceptive conduct, that was made against RailCorp in the cross-claim. As Eve J said in Ritter v Godfrey [1920] 2 KB 47, in deciding whether a successful defendant should be denied his costs, the conduct constituting the alleged cause of action should be left out of account. Were the principle otherwise, in an action for damages for breach of section 52 Trade Practices Act 1974 (Cth) if the plaintiff established that there was misleading and deceptive conduct, and perhaps also if it established that it had relied upon that misleading and deceptive conduct, that plaintiff could be excused paying the defendant's costs even if the plaintiff did not establish that it had suffered loss in consequence of the misleading and deceptive conduct. In the present case the defendant has not established, if one leaves aside the costs involved in running the proceedings, that it has suffered any loss in consequence of the negligent misrepresentation or misleading and deceptive conduct. 31 An additional difficulty with Mr Hilton's submission on this point is that after 27 February 2006 the difference between Unimproved Value and Land Value was known to all parties, yet the defendant continued to press its cross-claim. 32 In my view, no reason has been shown to deny the successful cross-defendant an order for its costs. Ought the Plaintiff, Not the Defendant, Pay the Cross-Defendant's Costs? 33 Mr Hilton submits that the plaintiff ought to have made RailCorp a defendant in the proceedings. If that had happened, it would be the plaintiff that was required to pay the cross-defendant's costs of the proceedings. The defendant submits that it ought not be any worse off when it has itself joined the cross-defendant to the proceedings, thereby remedying the defective state of the proceedings as the plaintiff had constituted them. 34 Considering that submission requires some attention to be paid to the relief that the plaintiff claimed in its Amended Statement of Claim. It was as follows: "1. A declaration that on the proper construction of the Contract for Sale of Land entered into by the parties on 6 May 2002 as varied by the Deed of Variation dated 6 September 2002 (the Contract ) and in the events which have happened: (a) the annual rent under the Lease for the purpose of Special Condition 13.2 is not more than $140,000; (b) (i) Certificate No. 0000300 purporting to value the relevant land as at 1 July 2002 in the amount of $3,050,000 does not constitute the current unimproved value applicable to calculation of the purchase price pursuant to clause 13 of the Contract; alternatively (ii) Certificate No. 0000300 was not a valuation of the land the subject of the Contract; (c) the defendant is indebted to the plaintiff in the sum of $668,571.39 plus GST being the balance of the purchase price payable pursuant to the Contract plus interest at the rate prescribed in the Contract as and from the date upon which such moneys ought to have been paid. 2. In the alternative, a declaration that on the proper construction of the Contract and in the events which have happened. (a) the annual rent under the Lease to be used for the purpose of calculating the purchase price pursuant to clause 13 of the Contract is 8 per cent of $2,300,000, being a value equivalent to, or substitutable for, the unimproved value of the land determined by the Valuer-General on 16 May 2003 as at the base date of 1 July 2002; (b) for the purpose of calculating the purchase price pursuant to clause 13 of the Contract, the relevant figure to be used as the current unimproved value of the land under the lease is a value equivalent to, or substitutable for, the unimproved value as at the base date of 1 July 2002 which would be arrived at after all reasonable steps had been taken by the defendant to appeal from any relevant certification of the value of the land; alternatively (c) there was an implied term of the Contract and/or a duty of good faith that the defendant was obliged to bring all available appeals and/or objections in respect of any valuation of the land as at the base date if there was a reasonable prospect that such an appeal may bring about a revaluation of the land and an amended certificate being issued in a lower amount or alternatively that the purchase price for the purpose of clause 13 of the Contact should be calculated by reference to the minimum rental as could be negotiated as between the lessor and lessee under the lease, namely a rental figure based upon a value equivalent to, or substitutable for, the final unimproved value of the land as the base date of 1 July 2002, being the sum of $2,300,000; (d) it would be unconscionable and/or a breach of the defendant's duty of good faith for the defendant to refrain from recognising and using for the purpose of the calculation of the adjustment to the purchase price under the Contract the final land value of $2,300,000 as certified and applied by the Valuer-General of the land as at the base date of 1 July 2002. (e) The defendant is indebted to the plaintiff in the sum of $403,674.69 plus GST being the balance of the purchase price payable pursuant to the Contract plus interest at the rate prescribed in the Contract as and from the date upon which such monies ought to have been paid." 35 Each of those claims relates to the construction or manner of operation of the Contact for Sale of Land. Though the case as pleaded did not actually seek an order that the defendant pay money to the plaintiff, the making of the declarations sought would establish the existence of a legal liability for the defendant to pay money to the plaintiff. Making the declarations sought would not, however, establish any right or liability of RailCorp in a way that bound RailCorp. Deciding whether it is appropriate to grant to the plaintiff the relief it claimed would necessarily involve deciding what rental was correctly payable under the lease. That is a question that relates to the rights of RailCorp - it involves deciding what is the amount of rental that RailCorp is entitled to receive under the lease. It also involves deciding questions about the value of the land that RailCorp owns that is the subject of the lease. Neither of those matters, however, made it necessary that RailCorp be a party to the proceedings. When RailCorp was not a party to the proceedings, any decision in the proceedings about these matters would not be binding on RailCorp. I do not accept that effective constitution of the proceedings required RailCorp to be a defendant. 36 Rather, it was a matter for the defendant whether it wished to run the risk that the plaintiff's contentions might be correct, and that the defendant would thereby have overpaid rental, and perhaps have an ongoing obligation to pay a larger amount of rental than was necessary, or whether it wanted to have RailCorp bound to the result of the proceedings between the plaintiff and the defendant, and to avail itself of the third party procedure to facilitate argument and proof of any claim it might have against RailCorp in the event that the plaintiff's claim against the defendant proved correct. In making that choice, the defendant undertook the usual risk of any party that commences litigation against another, of possibly being ordered to pay that party's costs in the event that the litigation fails. 37 Further, even if the plaintiff had joined RailCorp as a defendant to the proceedings, it would still be necessary for the defendant to have brought its own cross-claim against RailCorp if it wanted to recover the overpaid rental, or escape from the agreement it had made to pay rental at the rate that would have been appropriate if $3,050,000 had been the Unimproved Value of the land. In that situation, if both the claim and the cross-claim were to fail, the likely costs outcome would be that the plaintiff pay RailCorp's costs of the claim, and the defendant pay RailCorp's costs of the cross-claim. It is not as though the defendant would escape liability for RailCorp's costs completely. 38 I gather that the enthusiasm of the defendant for making the plaintiff directly liable for RailCorp's costs stems from a concern that the defendant has about the ability of the plaintiff to meet a substantial costs order. I am in no position to form a view about whether there is any substance in those concerns. However, if there were, that would merely emphasise the injustice of permitting the defendant to escape the ordinary consequences of having joined a party to litigation, and would leave RailCorp in a situation where, having been successful, it had an enforceable costs order against no one. 39 In my view it is not appropriate to order that the plaintiff, rather than the defendant, pay the costs of RailCorp. Modification of Order Between Plaintiff and Defendant in Light of Orders Between Defendant and Cross-Defendant 40 It was totally predictable that, once the plaintiff had sued the defendant, the defendant would wish, for its own purposes, to join RailCorp as a cross-defendant. The subject matter of the claim and cross-claim are closely related. In those circumstances, it is appropriate that the order for costs made against the plaintiff in favour of the defendant ought also extend to the costs that the defendant is obliged to pay to the cross-claimant. Orders

1. Defendant to pay the costs of the Plaintiff, and of Mr Richard Heseltine, relating to the order sought in paragraph 3 of the Notice of Motion filed by the Defendant on 5 April 2007.

2. Defendant/Cross-Claimant to pay costs of the Cross-Defendant of the Cross-Claim.

3. Subject to Order 1, Plaintiff to pay costs of the Defendant, those costs to include the costs the Defendant is liable to pay to the Cross-Defendant. **********

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