Supreme Court New South Wales Medium Neutral Citation: The Owners – Strata Plan No 68372 v Allianz Australia Insurance Limited (No 2) [2015] NSWSC 729 Hearing dates: On the papers Decision date: 12 June 2015 Jurisdiction: Equity Division - Technology and Construction List Before: Ball J Decision: (1) The first, second and third defendants pay the plaintiff's costs of and incidental to the hearing concerned with the adoption of the Referee's report dated 14 June 2014. (2) The first defendant pay 50 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. (3) The second defendant pay 20 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. (4) The third defendant pay 90 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. Catchwords: PRACTICE AND PROCEDURE – Costs – Departing from the general rule – Late joinder of a defendant – Plaintiff's delay in conduct of proceedings – Claims that failed or were abandoned – Expert reports prepared but not relied on – Costs as between the defendants PRACTICE AND PROCEDURE – Costs – Interest on costs – Where plaintiff guilty of unexplained delays – Whether reasons for delay are relevant to question of whether interest on costs should be awarded Legislation Cited: Civil Liability Act 2002 (NSW) s 3 Civil Procedure Act 2005 (NSW) Home Building Act 1989 (NSW) Legal Profession Act 2004 (NSW) Uniform Civil Procedure Rules 2005 (NSW) r 42.1 Cases Cited: Chen v Chan [2009] VSCA 233 Commonwealth of Australia v Gretton [2008] NSWCA 117 Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158 DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (No 2) [2014] NSWCA 142 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 Grace v Grace (No 9) [2014] NSWSC 1239 Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (No 2) [2013] NSWCA 211; (2013) 84 NSWLR 436 JR Consulting & Drafting Pty Ltd v Cummings [2015] NSWSC 10 McMahon v John Fairfax Publications Pty Ltd (No 9) [2014] NSWSC 936 Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 Probiotec Ltd v University of Melbourne [2008] FCAFC 5; (2008) 166 FCR 30 Shang v Zhang (No 2) [2007] NSWSC 1355 Stumm v Dixon & Co (1889) 22 QBD 529 Sze Tu v Lowe (No 2) [2015] NSWCA 91 The Owners – Strata Plan 61162 v Lipman [2014] NSWSC 622 Turkmani v Visvalingam (No 2) [2009] NSWCA 279 Waterman v Gerling Australia Insurance Co Pty Ltd (No 2) [2005] NSWSC 1111 Waters v PC Henderson (Australia) Pty Ltd [1994] NSWCA 338; (1994) 254 ALR 328 Zepinic v Chateau Constructions (Aust) Ltd (No 2) [2014] NSWCA 99 Texts Cited: G E Dal Pont, Law of Costs (3rd ed, 2013, LexisNexis Butterworths) Category: Costs Parties: The Owners – Strata Plan No 68372 (Plaintiff) Allianz Australia Insurance Limited ACN 000 122 850 (First Defendant) Vero Insurance Limited ACN 005 297 807 (Second Defendant) GEO Developments Pty Limited ACN 010 621 226 (Third Defendant) Representation: Counsel: GP McNally SC with Ms A Knox (Plaintiff) HJA Neal (First Defendant) R O'Keefe (Second Defendant) M Henry SC with D A Hughes (Third Defendant) Solicitors: ITC Law (Plaintiff) Moray & Agnew (First Defendant) Vardanega Roberts (Second Defendant) Arnold Bloch Leibler (Third Defendant) File Number(s): 2007/266664 Publication restriction: N/A Judgment 1. This judgment concerns the costs of these proceedings. Background 1. The proceedings concern a six stage strata development comprising 128 two and three storey townhouses and associated facilities in Thornleigh known as "Wild Ash Grove". 2. The plaintiff (the Owners Corporation), which is the owners corporation in respect of the development, commenced the proceedings on 6 March 2007 originally against only the first defendant, Allianz Australia Limited (Allianz), claiming indemnity in respect of a number of defects in the development. Allianz had provided statutory home owner warranty insurance in respect of stages 1 to 4. 3. On 1 March 2010, the Owners Corporation filed and served an Amended Technology and Construction List Statement joining the second defendant, Vero Insurance Limited (Vero), and the third defendant, GEO Developments Pty Limited (GEO). Vero had provided statutory home owner warranty insurance in respect of stages 5 and 6. GEO was alleged, and has been found in these proceedings, to be the developer of the project within the meaning of s 3A of the Home Building Act 1989 (NSW), with the result that it is liable to the Owners Corporation for breaches of statutory warranties implied by s 18B of that Act. 4. After some delays, the Owners Corporation served its evidence in chief including a Scott Schedule listing in excess of 1500 alleged defects and evidence estimating that the cost of rectifying those defects would be $7,010,000 excluding GST. 5. On 11 November 2011, the plaintiff filed a Further Amended Technology and Construction List Statement including a claim against the fourth defendant, Geotech Testing Pty Limited. On 18 June 2012, McDougall J dismissed the proceedings against Geotech with costs on the basis that it was statute barred. 6. On 28 June 2013, the court made an order that the entire proceedings be referred to Ms Janet Grey (the Referee) for enquiry and report. During the course of the reference, the Owners Corporation served a motion filed on 29 November 2013 seeking leave to amend its claim to include the costs of rectifying alleged defects in respect of lots 48 and 56. On 19 December 2013, McDougall J referred that application to the Referee, who concluded that the amendment should be allowed and that the Owners Corporation should pay GEO's costs occasioned by the amendment. 7. The Referee delivered her report on 14 June 2014. She concluded that GEO was liable as the developer of the project for all of the defects she found to exist in stages 1 to 6 and concluded that the total cost of rectifying those defects was $2,687,938.56. She also concluded that Allianz was liable for defects in stages 1 to 4 totalling $1,240,056 and that Vero was liable for defects in stages 5 and 6 totalling $420,757.05. It is noteworthy that some categories of defects were only relevant to particular stages – for example, defects relating to footings and underpinning were only relevant to stage 3. Moreover, in relation to a number of defects the insurers had defences that were not available to GEO – in particular, that the defect was non-structural and out of time or was excluded by an exclusion in the relevant policy in respect of defective design. 8. In addition, the Referee was required to deal with a number of legal issues, most of which were raised by GEO. Those issues included whether the Owners Corporation was the successor in title to the common property (GEO contended that it was not the successor in title to stages 2 to 6), whether all the contracted-for work was residential building work within the meaning of the Home Building Act (GEO contended that work on the roads within the complex and grass around the swimming pool was not) and whether the claims made under the Home Building Act were apportionable under Part 4 of the Civil Liability Act 2002 (NSW) (GEO contended that they were). 9. By a notice of motion filed on 17 July 2014, the Owners Corporation sought orders adopting the Referee's report save for the findings made by her in relation to the rectification of defects with the laundry floor wastes in a number of the townhouses. Each of the defendants took issue with a number of findings of the Referee. 10. On 18 December 2014, I delivered judgment in this matter in which I concluded the whole of the Referee's report should be adopted save for her findings in relation to the cost of rectifying floor wastes. I accepted the Owners Corporation's submissions on that issue. As a result, judgment before interest was entered in favour of the Owner's Corporation against GEO for $3,494,621.75, against Allianz for $1,301,822.75 and against Vero for $420,757.04. 11. Relevantly, two cross-claims were filed in the proceedings. First, GEO filed a cross-claim against Allianz and Vero claiming equitable contribution. In the alternative, GEO claimed that it was entitled to an indemnity from Allianz in respect of defects for which it was liable in stages 1 to 4. That cross-claim failed before the Referee and a challenge to the Referee's finding that GEO was not entitled to be indemnified by Allianz failed before me. Second, Allianz filed a cross-claim against GEO claiming to be subrogated to the Owners Corporation's rights against GEO in respect of the defects for which Allianz was held to be liable. That cross-claim succeeded and I made a declaration reflecting Allianz's rights. Following adoption of the Referee's report, Vero sought a similar declaration. Ultimately, however, it did not pursue that claim in these proceedings. 12. One other point should be mentioned by way of background. Although there was a substantial amount of material before the court relating to the reference, including the Referee's report and Scott Schedules completed by the Referee, a transcript of evidence and some relevant documents, there was no evidence before the court concerning the time taken to deal with particular issues or category of defect or the extent of the material prepared in relation to each issue. Nor was it practical (and probably not possible) from the material before the court to reach conclusions on those matters. The parties, instead, sought to analyse the question of costs in a broad-brush way. That is not intended to be a criticism. However, necessarily where the matter was the subject of a reference, any question of apportionment must depend on the evidence directed to that question rather than any impression formed by the court that was gained from the hearing. Relevant legal principles 1. The principles relating to costs are not in dispute. 2. Subject to the rules of court, costs are in the discretion of the court and the court has full power to determine by whom, to whom and to what extent costs are to be paid: Civil Procedure Act 2005 (NSW), s 98(1). The general principle is that costs follow the event unless it appears to the court that some other order should be made as to the whole or part of the costs: Uniform Civil Procedure Rules 2005 (NSW), r 42.1. 3. The "event" is the "practical result of a particular claim": see Sze Tu v Lowe (No 2) [2015] NSWCA 91 at [39]. 4. Whether the court should exercise its discretion to depart from the general principle in any particular case depends on whether it is in the interests of justice and fairness to do so: Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121] per Hodgson JA; Turkmani v Visvalingam (No 2) [2009] NSWCA 279 at [13] per Hodgson JA (with whom Beazley and McColl JJA agreed). 5. The general approach is to order costs in accordance with the outcome of the proceedings as a whole, without attempting to differentiate between particular issues in which the party may not have succeeded: see Sze Tu at [40]. Normally, a court will only depart from that general approach where the issues on which a party was unsuccessful were clearly dominant or separable: Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 at [63]-[66]; Waters v PC Henderson (Australia) Pty Ltd [1994] NSWCA 338; (1994) 254 ALR 328; see also Sze Tu at [40]. 6. Where a court decides to apportion costs, it does so primarily as "a matter of impression and evaluation", rather than with arithmetical precision, taking into account the importance of the matters on which the parties have been successful and unsuccessful, the time occupied in dealing with them and any other relevant matter: JR Consulting & Drafting Pty Ltd v Cummings [2015] NSWSC 10 at [28]-[29] per Black J, citing Chen v Chan [2009] VSCA 233 at [10] and Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 at 22. One other relevant matter is the practicality of giving effect to the court's order: Chen v Chan [2009] VSCA 233 at [10]. In general, the court should avoid apportioning costs in a way that would make assessment unduly complicated or expensive. 7. A successful party may be deprived of costs if it engages in "misconduct" in relation to the litigation or the circumstances leading up to the litigation. Conduct that unnecessarily protracts the proceedings may amount to relevant misconduct: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 at [73] per McHugh J. 8. The onus lies on the losing party to establish the basis for any departure from the usual rule: Waterman v Gerling Australia Insurance Co Pty Ltd (No 2) [2005] NSWSC 1111 at [10]. 9. Where proceedings are successfully brought against more than one defendant, and the issues against each defendant are the same, the court will normally order that the defendants pay the plaintiff's costs; and in that case, the liability of each defendant will be joint and several: Shang v Zhang (No 2) [2007] NSWSC 1355 at [13], [18] per Young CJ in Eq. However, the court may depart from that principle where the issues raised against each defendant are different or where the defendants rely on different defences, or one defendant does not defend the case at all: see, eg, Shang v Zhang (No 2), Stumm v Dixon & Co (1889) 22 QBD 529 at 531; Probiotec Ltd v University of Melbourne [2008] FCAFC 5; (2008) 166 FCR 30. The question in each case is what is just having regard to the circumstances of the case. For discussion, see G E Dal Pont, Law of Costs, (3rd ed, 2013, LexisNexis Butterworths, 3rd ed, 2013) at [11.2]ff. 10. With one qualification (discussed later), it is not disputed that in this case, any costs should be recoverable on the ordinary basis. "Ordinary basis" is defined in s 3 of the Civil Procedure Act 2005 (NSW) to mean the basis of assessing costs set out in s 364(1) and (2) of the Legal Profession Act 2004 (NSW). Section 364(1) of that Act relevantly provides: In conducting an assessment of legal costs payable as a result of an order made by a court or tribunal, the costs assessor must consider: (a) whether or not it was reasonable to carry out the work to which the costs relate, and (b) whether or not the work was carried out in a reasonable manner, and (c) what is a fair and reasonable amount of costs for the work concerned. The Owners Corporation's costs Costs against GEO 1. GEO accepts that it should pay the Owners Corporation's costs of the motion to adopt the Referee's report. 2. GEO submits that the court should depart from the normal rule that costs follow the event and instead should order that it pay two-thirds of the Owners Corporation's costs of the proceedings against GEO that were incurred on and after 1 March 2010 on a party/party basis. It advances a number of reasons. First, it points to the fact that it was only joined as a defendant three years after the proceedings were commenced. For that reason, it submits that GEO should not be ordered to pay the costs incurred by the Owners Corporation prior to the date on which it was joined (1 March 2010). Second, it submits that the Owners Corporation changed legal representation on 26 February 2010, which in a matter such as this would have involved significant duplication of costs. Third, it points out that the Owners Corporation failed in respect of a substantial number of its claims. Up until 25 March 2014, it maintained claims totalling $7,010,000 (excluding GST). At that time, it abandoned its claims in respect of 203 defects and ultimately it was successful in recovering only slightly less than half the amount it had claimed. Fourth, GEO claims that the Owners Corporation failed to conduct the proceedings expeditiously. It took three years to join GEO and another one and a half years to produce its Scott Schedule, despite repeated directions that it do so at earlier times. Fifth, GEO claims that it should not have to bear the Owners Corporation's failed attempt to join Geotech as a defendant. Sixth, GEO submits that the Referee's determination of the costs of the Owners Corporation's amendment application filed on 29 November 2013 should not be disturbed. Seventh, GEO submits that the Owners Corporation served six expert reports (five before GEO was joined) that it did not ultimately rely on. GEO incurred costs in considering those reports. 3. The Owners Corporation accepts that it should bear its own costs of the failed attempt to join Geotech and that the costs determination of the Referee in relation to its amendment application filed on 29 November 2013 should not be disturbed. 4. The Owners Corporation submits that the first and second points are matters for the costs assessor. 5. I accept the Owners Corporation's submission in relation to the second point. The question whether there has been unreasonable duplication of work is relevant to each of the defendants. Whether there has been duplication in work and whether, as a result, the costs that are claimed were reasonable are matters for the costs assessor. 6. The position in relation to the first point is more complicated. Costs incurred before proceedings are commenced against an unsuccessful defendant may be recoverable against that defendant: see G E Dal Pont, Law of Costs, (3rd ed, 2013, LexisNexis Butterworths) at [17.3]ff. That is particularly so where the proceedings are already on foot and the claim against the defendant that has been joined raises issues that are already issues in the proceedings. In accordance with the Legal Profession Act s 364(1), the question must be whether, as between the party claiming costs and the party from whom the costs are claimed, it was reasonable to carry out the work to which the costs relate. If it was, then those costs are recoverable, even if they were incurred before the party was joined. 7. In the present case, the Owners Corporation seeks an order that "the 3rd defendant pay the plaintiff's costs of the proceedings assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference". If an order were made in that form the costs assessor would not need to deal with the question whether costs incurred before GEO was joined were reasonably incurred in connection with the claim against GEO. The costs assessor would simply need to determine whether the costs were recoverable in accordance with s 364(1) of the Legal Profession Act. If they were, then GEO would be liable to pay them, whether or not they had anything to do with the claim against GEO. In other words, the order sought by the Owners Corporation would make GEO responsible for all reasonably incurred costs in the proceedings from the time that they were commenced against Allianz. 8. On the other hand, the order sought by GEO is relevant to costs incurred before 1 March 2010 in two ways. First, it specifically provides that the Owners Corporation is not entitled to recover those costs from GEO at all. For the reasons I have given, I do not think that that is an appropriate limitation. Many of the costs incurred before GEO was joined would be relevant to the claim against GEO because they would have been concerned with the evidence to establish the existence of defects and the quantification of the Owners Corporation's claim in respect of those defects. GEO was ultimately held liable for those defects. There is no reason, then, why it should not bear the Owners Corporation's costs of proving those defects. 9. However, even assuming that the specific limitation in respect of pre-1 March 2010 costs were removed, the order sought by GEO would still have an effect on the recoverability of those costs from GEO because GEO seeks an order that "the third defendant is to pay two-thirds of the plaintiff's costs of the proceedings against the third defendant … on a party/party basis" (emphasis added). The effect of the highlighted words is that GEO would not be liable for costs incurred by the Owners Corporation in relation to issues that only affected the other defendants. That limitation would apply to costs incurred before 1 March 2010 as well as costs incurred after that date. Relevantly, it would require the costs assessor to determine which costs that were incurred prior to 1 March 2010 were reasonably recoverable in respect of the claim against GEO. However, the order does more than that, since it applies to all costs. The order assumes that the court should depart from the principle adopted in Shang v Zhang (No 2) [2007] NSWSC 1355. Moreover, it would make the assessment of costs much more difficult. In relation to each item of work, it would require the costs assessor to determine whether it was reasonable to carry out the work in relation to the claim against each defendant. That seems to me to be impractical. It would place a substantial burden on the costs assessor and, no doubt, increase substantially the costs of assessment. It seems to me far preferable for the costs assessor simply to assess the Owners Corporation's total recoverable costs and for those costs to be recoverable from each defendant in proportions fixed by the court. 10. That leaves the question whether there should be any proportionate reduction in the costs recoverable from GEO because of its late joinder. In my opinion, there should not. The amount of the costs incurred before 1 March 2010 is not in evidence. However, the likelihood is that a large proportion of the Owners Corporation's costs were incurred after 1 March 2010. Moreover, although some costs incurred prior to 1 March 2010 would have concerned issues that were only relevant to the claim against Allianz, as I have said, the principal issues in the case concerned the identification and quantification of defects. Most of the work done by the Owners Corporation before 1 March 2010 is likely to have concerned those issues. That work was relevant to the case against GEO. As will become apparent, I have concluded that the Owners Corporation should not be entitled to recover all of its costs and should not be entitled to interest on its costs. In addition, the Owners Corporation accepts that it should not be entitled to recover the costs of expert reports before GEO was joined on which it did not rely, and the order I propose to make reflects that concession. I do not think that it is appropriate to make any further reduction to take account of the fact that a proportion of the costs incurred prior to 1 March 2010 (which is likely to be small) may not have related to the claim against GEO. 11. As to GEO's fourth point, in my opinion there is no basis for a special costs order based on the Owners Corporation's delay. I accept that the Owners Corporation was guilty of some delay. The proceedings were commenced in March 2007. It took the Owners Corporation four and a half years to serve a Scott Schedule and in excess of six years before the matter was ready to be referred to the Referee. It may be accepted that the process of compiling the Scott Schedule was a time consuming and complicated one. But why it took as long as it did remains unclear. However, I do not think that the delay was so great that it could be regarded as misconduct disentitling the Owners Corporation to costs to which it is otherwise entitled. It is worth bearing in mind that the reference itself took approximately a year to complete, that 5 separate conclaves of expert witnesses dealing with different subject matters had to be organised involving a total of 13 experts. The Referee herself described the original timetable for the completion of joint reports as "hopelessly ambitious" (Referee's report, para 17). The Owners Corporation's conduct must be seen in that light. 12. I accept that the likelihood is that GEO's costs would have increased as a consequence of the delay in accordance with normal increases brought about by inflation. However, as a result of the delay, the likelihood is that GEO incurred costs later than it otherwise would have and had the benefit of the money in the meantime. In the absence of evidence, there is no reason to think that the additional costs outweighed that benefit. 13. It is possible that GEO incurred costs as a consequence of the Owners Corporation's failure to comply with timetables set by the court. But if that is the case, the time to seek those costs was when the court granted extensions to that timetable. If the Owners Corporation is entitled to interest on its own costs, GEO may be worse off as a consequence of the delay than it otherwise would have been. That may be relevant to the question whether interest on costs should be awarded. It is not relevant to the question whether some special costs order should be made. I return to the question of interest on costs below. 14. As to the seventh point, the Owners Corporation accepts that it should not recover the costs of the six reports on which it did not ultimately rely. So much is likely to have been the conclusion of the costs assessor in any event. GEO submits that it was also necessary for its legal advisors to consider the six reports. There is no evidence before me of how much time they spent in doing so. The likelihood is that it was minimal in the context of the proceedings as a whole. The time they spent does not justify a special costs order. 15. That leaves GEO's third point. GEO bears the onus of establishing that the court should depart from the general rule. It seeks to discharge that onus in three ways. First, it points to the number of defects abandoned by the Owners Corporation (that is, 203 out of 1526, or 13 percent). Second, it points to the amount recovered compared to the total amount claimed (slightly less than 50 percent). Third, it points to particular issues on which the Owners Corporation failed. One was that the Owners Corporation claimed in its Scott Schedule that it was necessary to replace 31 balconies at a cost of $40,018, whereas the Referee found that only four balconies needed to be partially demolished and rebuilt at a cost of $22,800 (others needed to be repaired for a total cost of $666,040). A second was that the Owners Corporation claimed $96,500 as the cost of rectifying cracks in internal roads within the complex which was abandoned (a claim for the costs of rectifying cracks in driveways and footpaths succeeded). A third was a claim of $85,500 for rectifying 38 defective garage floors, in respect of which the Referee only allowed $44,500. A fourth was that the Owners Corporation abandoned a claim of $762,892 for underpinning the northern walls of a number of lots following further investigations by its expert (a claim for the costs of underpinning the southern walls succeeded). 16. The evidence that GEO points to indicates that the Owners Corporation failed on some issues. However, it is less clear to what extent those issues were clearly separable from the issues on which the Owners Corporation succeeded and how much time was spent on those separable issues. There is, for example, no material before the court concerning the extent to which the expert evidence related to particular issues. Nor is it clear whether there were experts who gave evidence only in relation to issues on which the Owners Corporation failed. In my opinion, the amount recovered compared to the total amount claimed is a poor proxy for determining the amount of time spent on separable claims that failed. It is apparent that much of the reduction in the Owners Corporation's claim came about because it recovered less than it claimed in respect of defects that were found to exist. No reduction should be made in the costs recoverable by the Owners Corporation to take account of that fact. The Owners Corporation still succeeded in respect of the claims it made. Those claims were resisted by GEO. Consequently, the Owners Corporation should be entitled to the costs of pursuing those claims. If GEO thought the claims were over-valued, it could have admitted liability or served an offer of compromise. It did not do so. 17. A somewhat more reliable proxy for the value of the separable claims that failed is the number of defects abandoned compared to the total number of defects. However, that only provides a rough guide. It is still unclear what work would have been avoided if the abandoned defects had not been pursued. Moreover, as the Owners Corporation points out, there were a substantial number of issues in the case not directly related to defects on which the Owners Corporation succeeded. Those issues included whether GEO was a developer, whether the Owners Corporation was the successor in title to the common property in stages 2 to 6 of the development, whether all of the contract work was residential building work, whether claims under the Home Building Act were apportionable claims and whether certain claims were out of time. On the other hand, claims in respect of some defects that were not abandoned failed. 18. Despite that, it is apparent that the defects that were abandoned by the Owners Corporation or on which it failed were separable claims in the sense that they were separate defects in respect of which identifiable sums were claimed: cf The Owners – Strata Plan 61162 v Lipman [2014] NSWSC 622 at [242]-[243] per McDougall J. The likelihood is that it took some additional time, both on the part of the experts, and during the course of the reference, to deal with those defects, with the result that costs were incurred in relation to them that would not otherwise have been incurred. I think it is appropriate to make some allowance for that fact. Taking account of all the factors I have referred to, in my opinion it is appropriate that the Owners Corporation's claim for costs be reduced by 10 percent to take account of the defects on which it failed. 19. It follows from what I have said there should be an order that the third defendant pay 90 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. Costs against Allianz 1. Allianz was unsuccessful in relation to the arguments it put concerning the adoption of the Referee's report. It should bear the Owners Corporation's costs of and incidental to that hearing. 2. It is accepted that the Owners Corporation should only recover a proportion of its costs from Allianz to reflect the fact that it was not liable for all the defects for which GEO was found to be liable. The issue is what proportion. Allianz contends that an appropriate proportion is 15 percent. The Owners Corporation contends that it should be 65 percent. 3. Allianz advances a number of reasons for the reduction that it claims. 4. First, it points out that it only insured the Owners Corporation for stages 1 to 4, which it says justifies a reduction of a third. Second, it claims that the quantum of the defects claims against Allianz was $4,180,813. The amount that was recovered from it was $1,301,822.75 ($845,150 before the Referee – the figure was increased as a result of my findings in relation to the recovery of costs for rectification of the floor wastes). Third, the Owners Corporation ultimately abandoned its claim against Allianz totalling $1,140,142 in respect of footings on the basis that the design exclusion applied. According to Allianz, they were the most significant defects from a quantum perspective and in respect of time occupied at the reference hearing). Fourth, Allianz points to a number of other claims which were reduced substantially or on which the Owners Corporation failed. In particular, the Owners Corporation claimed the sum of $1,035,164 in respect of faulty balcony waterproofing but only recovered $433,200 (approximately 42 percent). It claimed $257,400 for laundry wastes but only recovered $44,100 (approximately 17 percent). It claimed $156,000 in respect of a defective termite barrier, which again failed because of the design exclusion. 5. I have already explained that, in my opinion, the percentage recovery is a poor proxy for the costs incurred in relation to separable issues that failed. Allianz's position needs to be compared with the position of GEO. It only insured defects in respect of stages 1 to 4. It succeeded on some defects where GEO failed, largely because of the design exclusion. On the other hand, it is clearly liable for costs in respect of the period before 1 March 2010. Taking those matters into account, in my opinion, Allianz should pay half of the Owners Corporation's costs. There should be an order that the first defendant pay 50 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. Vero 1. Like GEO and Allianz, Vero opposed the adoption of some parts of the Referee's report. It failed. As a result, it should pay the Owners Corporation's costs of and incidental to the adoption hearing. 2. The Owners Corporation claims that Vero should be ordered to pay 50 percent of its costs. Vero's primary position is that there should be no order for costs against it. Alternatively, it claims that it should be ordered to pay 12 percent of the Owners Corporation's costs in the proceedings in respect of defects in stages 5 and 6. 3. In my opinion, the Owners Corporation is entitled to recover some costs from Vero. It obtained judgment against Vero for a substantial sum. It is appropriate in those circumstances that it recover part of its costs. I do not accept that the Owners Corporation engaged in conduct that disentitles it from claiming costs from Vero. I accept that it was guilty of some delay. However, I am not satisfied that the delay was sufficient to justify depriving it of costs to which it is otherwise entitled. 4. For the reasons I have given, I do not accept that the costs order should distinguish between the costs incurred in respect of different parts of the case. Rather, the total costs of the Owners Corporation should be assessed and each defendant should be ordered to pay a proportion of those costs. The proportion should take into account the fact that not all defects were claimed against all defendants. 5. Vero points to the fact that it was only liable in respect of stages 5 and 6. It submits that the Owners Corporation delayed in commencing proceedings and in giving proper particulars of its claim. It also points to a number of claims against it that were only partially successful or that failed. In particular, the Owners Corporation made a claim in respect of all 38 balconies in stages 5 and 6. Following the joint report from the experts, the claim was confined to 9 balconies. That claim only succeeded partially ($22,500 per balcony, not the claimed $40,018). It is apparent that the claim in respect of the balconies alone represented a substantial proportion of the successful claims against Vero. A number of claims failed because of the design exclusion or because they were non-structural and not brought within a two year limitation period that applied in respect of claims of that type. They included the claim in respect of the termite management system, the claim for laundry floor wastes and the claim for paving defects. Vero submits that these submissions are supported by evidence given by the building consultants that they spent 1 to 2 days out of 35 in dealing with defects related to stages 5 and 6. In addition, Vero was only joined to the proceedings on 1 March 2010. Vero also points out that the amount recovered from it represents only approximately 12 percent of the total amount awarded against GEO. 6. Vero should clearly pay substantially less costs that Allianz. Once again, however, the amount recovered compared to the total amount claimed is not a good proxy for costs incurred in relation to separable issues that failed. The amount spent by the building consultants in conclave on defects concerning stages 5 and 6 is only one small item in the overall costs of the case. There were obviously significant issues between the Owners Corporation and Vero. Taking those matters into account, I think a fair proportion of the costs that should be borne by Vero is 20 percent. There should be an order that the second defendant pay 20 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. Costs as between the defendants Allianz's claim for costs against GEO 1. Allianz claims to be entitled to a costs order against GEO on three bases. First, Allianz claims to be entitled to an order that GEO pay its costs of the cross claim that GEO filed against it (and which failed) and that GEO pay its costs of the cross claim it filed (which succeeded). Second, Allianz claims that, upon payment of the costs order against it, it is entitled to be subrogated to the Owners Corporation's right to recover costs from GEO. Third, Allianz submits that the costs of its cross claim against GEO should include Allianz's costs of the proceedings incurred after 13 August 2013 on an indemnity or, alternatively, a party/party basis, relying on an offer that Allianz made that was rejected. 2. On 18 February 2015, the court made orders that GEO pay Allianz's and Vero's costs of GEO's cross claim (order 7) and that GEO pay Allianz's costs of Allianz's cross claim (order 8). No further costs orders in relation to the cross claims are necessary. 3. As to Allianz's second claim, it relies on express subrogation clauses in its policies of insurance. The following clause is typical of the one contained in each policy: The Insurer shall be entitled to be subrogated to the rights of the Building Owner and may for the Insurer's own benefit prosecute any claim for indemnity or damages to recover amounts paid by the Insurer to the Building Owner or any other party (including any expenses incurred by the Insurer in relation to determining the claim) or otherwise against the Contractor or any other person. 1. Allianz submits that any costs that it pays to the Owners Corporation are "amounts paid by the Insurer to the Building Owner" and are recoverable by the exercise of a contractual right of subrogation. 2. In my opinion, Allianz's claim is misconceived. The reference in the subrogation clause to "amounts paid by the Insurer to the Building Owner or any other party" must be read as a reference to amounts paid under the policy. The parties could not have intended the clause to apply to any amount paid by Allianz to anyone. Any costs paid to the Owners Corporation by Allianz are not costs paid to indemnify the Owners Corporation under the relevant policies. They are costs paid in discharge of an order that the Owners Corporation obtained against Allianz in proceedings between them. As a result of the costs order, Allianz has a coordinate liability with GEO (and Vero) to pay the Owners Corporation's costs of the proceedings. Obviously, the Owners Corporation cannot recover more than its entitlement. Consequently, once the Owners Corporation is paid its entitlement, the party or parties who have discharged the coordinate liability may be entitled to contribution from those who have not. But that right is quite different from the one contended for by Allianz. 3. Allianz submits that the costs of its cross claim should include costs of the proceedings. In support of that submission, it relies on a letter dated 13 August 2013 sent by its solicitors, Moray & Agnew, to the solicitors for GEO, Arnold Bloch Leibler. In that letter, Moray & Agnew contended (correctly) that GEO would ultimately be liable for the Owners Corporation's losses arising from breaches of the statutory warranties. In those circumstances, it invited GEO to indemnify Allianz in respect of the Owners Corporation's claim and take over the conduct of Allianz's defence. The letter said that if GEO did not do so and Allianz was ultimately successful for the reasons it gave (which it was), it would make an application that GEO pay Allianz's costs of the proceedings on an indemnity basis. That offer was rejected and on 29 August 2013 Allianz filed an Amended Cross Summons and Cross Claim Statement claiming, among other things, an order that GEO pay its costs of the proceedings and interest on costs on an indemnity basis from 13 August 2013. Allianz submits that, had GEO accepted Allianz's offer, the whole of Allianz's costs after 13 August 2013 would have been avoided. 4. Allianz accepts that there is no authority directly on point. However, it says the case is analogous to one in which a homeowner engages a builder to do work and obtains a contractual indemnity in respect of that work. Assume that the builder negligently causes a fire which spreads to a neighbour's property. Assume also that the neighbour sues both the owner and the builder. In that case, the homeowner would be entitled to recover the costs of defending the proceedings under the contractual indemnity, even without inviting the builder to take over the defence of the claim. Allianz says that it is in a stronger position in this case than the homeowner in the example because it did issue such an invitation. 5. I do not accept these submissions. 6. In my opinion, the letter can have no effect on the question of costs. As GEO points out in its submissions, the letter invited capitulation by it. A failure to capitulate in the face of an invitation to do so cannot have cost consequences: see Dean v Stockland Property Management Pty Ltd (No 2) [2010] NSWCA 141 at [14]; Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [8]-[9]. 7. Moreover, there are difficulties with Allianz's analogy. Here, GEO has not indemnified Allianz. Rather, the position is that the claim against GEO is not an apportionable one and, on payment of Allianz's liability to the Owners Corporation, Allianz is subrogated to the Owners Corporation's rights. Those rights cannot be greater than those of the Owners Corporation. The Owners Corporation has no right to recover Allianz's legal costs from GEO. 8. It follows that no additional orders need to be made in relation to costs as between GEO and Allianz. Vero's claim for costs against GEO 1. Vero claims to be entitled to an order that GEO pay its costs of the cross claim that GEO filed against it (and which failed). That order has already been made (para 7 of the orders made on 18 February 2015). No further orders need to be made. Interest on costs 1. The Owners Corporation claims interest on its costs. A similar claim is made by Allianz. However, costs orders have already been made in Allianz's favour in relation to the cross claims. For the reasons I have given, those orders do not include Allianz's costs of the proceedings. The costs on the cross claims are not likely to be substantial compared to the costs of the proceedings. In my opinion, it is not open to Allianz to claim interest on those costs now. 2. That leaves the question whether the Owners Corporation is entitled to interest on its costs. There appears to be conflicting authority relevant to that question. The conflict was discussed in some detail by McCallum J in McMahon v John Fairfax Publications Pty Ltd (No 9) [2014] NSWSC 936 at [10]-[26]. It is illustrated by comparing passages from the decisions of the Court of Appeal in Illawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd (No 2) [2013] NSWCA 211; (2013) 84 NSWLR 436 and Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158. In the former case Meagher, Barrett and Ward JJA said (at [38]): A party who contends that there should be an order for interest on costs must do more than point to the fact that the proceedings were protracted and that it had to outlay moneys on its own costs over a long period. The reasons for the protracted nature of the proceedings are of obvious relevance. To take a hypothetical example, one can imagine a case in which one party deliberately seeks to prolong proceedings with an eye to some collateral benefit of its own for which it is quite happy to pay the price of being out of the money it progressively outlays for costs. That hypothetical case can be contrasted with another in which a party has made strenuous effort to expedite matters and to avoid all delay with a view to the earliest possible trial but has been frustrated in those efforts by actions of the other party. A middle course is where each party acts with reasonable diligence and dispatch but the nature of the proceedings and their subject matter is such as to prolong them. A court might well take different attitudes to applications for interest on costs in these hypothetical cases. 1. In the latter case, Gleeson JA (with whom Ward and Emmett JJA agreed) said (at [403]): The payment of interest is intended to be compensatory, on the basis that the person entitled to costs has been wrongly required to spend money on litigation to enforce established rights: Robb Evans of Robb Evans & Associates v European Bank Ltd (No 2) [2009] NSWCA 170 as [44] per Basten JA (Campbell JA agreeing). Thus in the absence of any countervailing discretionary factor, it is appropriate that an order for interest on costs be made to compensate the party having the benefit of a costs order for being out of pocket in respect of relevant costs which it had paid. There is no requirement to establish that the circumstances of the case are out of the ordinary … 1. The Court of Appeal has remarked on the apparent conflict in subsequent cases but found it unnecessary to resolve it: DSG Holdings Australia Pty Ltd v Helenic Pty Ltd (No 2) [2014] NSWCA 142 at [5]; Zepinic v Chateau Constructions (Aust) Ltd (No 2) [2014] NSWCA 99 at [43]-[45]. 2. It may be that the conflict can be explained on the basis that Doppstadt was concerned with a case that appears to have proceeded in the normal course of events, whereas Illawarra Hotel Company was concerned with a case where there had been substantial delay. In any event, it is not necessary to resolve the conflict in this case. I say that for two reasons. 3. First, in this case, it has been necessary to apportion costs because the Owners Corporation was not successful on all issues. In my opinion, the percentage recovery that I have allowed fairly compensates the Owners Corporation for the costs that it has incurred in relation to the issues on which it has been successful without an additional award of interest. 4. Secondly, in my opinion, it is not appropriate to award interest having regard to the Owners Corporation's unexplained delays. There are cases which suggest that delay and the reasons for it are irrelevant. An award of interest is compensatory. Consequently, it is said that the reasons and length of the delay should not matter because all an award of interest does is compensate the successful party for being out of pocket: see, in particular, Grace v Grace (No 9) [2014] NSWSC 1239 at [64] per Brereton J. However, in this case, the delay, at least so far as Vero and GEO are concerned, was delay in commencing the proceedings and not simply in prosecuting them. In the particular circumstances of this case, I have held that the Owners Corporation should recover costs in respect of the period before the proceedings were commenced. I do not see why it should also be entitled to interest on those costs. 5. Moreover, whatever the precise status of the comments of the Court of Appeal in Doppstadt, it seems to me that those comments stand for the proposition that the reasons for delay are relevant to the question whether interest on costs should be awarded. Even though the comments were obiter, I think that I should follow them. The power to award interest on costs is a discretion conferred by s 101(4) of the Civil Procedure Act 2005 (NSW). Section 56(2) of the Act requires the court to have regard to the overriding purpose set out in subs (1) (to facilitate "the just, quick and cheap resolution of the real issues in the proceedings") when it exercises any power given to it by the Act and subs (3) imposes on each party a duty to assist the court to further that purpose and to comply with directions and orders given by the court. A successful party guilty of reprehensible delay may be deprived of costs altogether. It is not clear to me why in those circumstances a party who is guilty of unexplained delay should not be deprived of interest on costs as a penalty for failing to give effect to the overriding purpose of the Act and rules in the way it conducts its case. That seems to me to be the position here. 6. For those reasons, I have concluded that the Owners Corporation is not entitled to interest on its costs. Orders 1. The orders of the court are: 1. The first, second and third defendants are to pay the plaintiff's costs of and incidental to the hearing concerned with the adoption of the Referee's report dated 14 June 2014. 2. The first defendant is to pay 50 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. 3. The second defendant is to pay 20 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. 4. The third defendant is to pay 90 percent of the plaintiff's costs of the proceedings (other than costs the subject of a specific order) assessed on the ordinary basis, save that the plaintiff is not to have the costs of reports served but not relied upon in the reference. ********** 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: 12 June 2015