Supreme Court New South Wales Medium Neutral Citation: Quest Rose Hill Pty Ltd v The Owners Strata Plan No 64025 [2016] NSWSC 978 Hearing dates: 24 June 2016 Decision date: 15 July 2016 Jurisdiction: Common Law Before: Sackar J Decision: See paras [31], [39], [42], [49] Catchwords: EQUITY – Adoption of referee report – Proposed modification – Whether referee erred in failing to take into account outstanding levies in determining reasonable Owners Corporation budget – Failure to draw referee's attention to outstanding levies – Costs of proceedings before referee when neither party is successful – Costs of notices of motion – Whether second defendant "surrendered" Legislation Cited: Civil Procedure Act 2005 (NSW) ss 56, 98(1) Strata Management Act 1996 (NSW) s 75 Uniform Civil Procedure Rules 2005 (NSW) r 42.1 Cases Cited: Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 Coulton v Holcombe (1986) 162 CLR 1 Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 89 NSWLR 633; 310 ALR 113 New Price Retail Services Pty Ltd v David Hanna [2014] NSWSC 553 ONE.TEL Ltd v Deputy Commissioner of Taxation [2000] FCA 270; 101 FCR 548 Oshlack v Richmond River Council (1998) 193 CLR 72 P Ward Civil Engineering v Civil & Civic [2003] NSWSC 603 Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 The Owners - Strata Plan 64415 v Vero Insurance Ltd [2014] NSWSC 1500 The Owners of Strata Plan 76888 v Walker Group Constructions Pty Ltd [2016] NSWSC 541 The Owners - Strata Plan No 68372 v Allianz Australia Insurance Limited [2014] NSWSC 180 Water Board v Moustakas (1994) 180 CLR 491 Category: Principal judgment Parties: Quest Rose Hill Pty Ltd (plaintiff) The Owners – Strata Plan 64025 & Anor (defendant) Representation: Counsel: D A J Greinke (plaintiff) R A Parsons (defendant) Solicitors: Lodhia lawyers (plaintiff) Le Page, lawyers (defendant) File Number(s): 2010/342330 Publication restriction: N/A Judgment 1. The primary issue for determination in these proceedings is whether the referee report of Mr Robert Zikmann should be adopted by this Court in full or subject to a proposed qualification. 2. Orders are also sought as to costs in relation to: (1) the proceedings before the referee; (2) notices of motions filed on 30 October 2014 and 3 November 2014 with respect to adoption of the referee report, including the costs of this hearing; and (3) a notice of motion filed by the plaintiff on 30 October 2014 and amended on 26 August 2015 seeking further orders relating to orders for specific performance. Background Facts 1. On 24 April 2013, I made orders that certain questions be referred for expert determination, including the following question: To the extent if any that such contribution was not a reasonable Owners Corporation levy within the meaning of clause 2.2.3 of such leases, what amount for administrative fund contribution would have been a reasonable Owners Corporation levy within the meaning of clause 2.2.3 of such Lease? 1. On the same day, I made orders for the specific performance of certain leases which were to be guaranteed by Mr Paul Constantinou. 2. On 14 October 2014, Mr Zikmann, a Court-appointed expert, provided his determination (the Report) to the referred questions, answering the above question as follows: The answer to this question is that the amount of $77,850.00 (Seventy Seven Thousand, Eight Hundred and Fifty Dollars) would have been a reasonable Owners Corporation Levy. 1. In Appendix B to the Report, Mr Zikmann provided a breakdown of that figure under the heading "Determined Administration Fund Budgets for 2010/2011". 2. On 30 October 2014, the plaintiff filed a notice of motion seeking an order that the Report be adopted subject to one qualification, namely that the Court should determine that the answer to the above question should be nil. 3. On the same day, the plaintiff also filed a notice of motion seeking an order that Mr Spencer Bailey be substituted as the new guarantor of the leases which are the subject of the orders for specific performance made on 24 April 2013 and orders varying the terms of the leases. It appears from the correspondence between the parties that there had been a dispute as to whether the plaintiff was permitted to substitute the guarantor and whether sufficient information was provided to establish that Mr Bailey had the financial capacity to meet the obligations of the guarantor. 4. On 3 November 2014, the second defendant filed a notice of motion seeking an order that the Report be adopted without qualification. 5. On 9 December 2014, further questions were referred for determination by Mr Zikmann regarding whether he took the "Surplus/Deficit Report" of 30 June 2010 (Surplus/Deficit Report) into consideration in his Report and whether, if he did not do so, taking the Surplus/Deficit Report into consideration would have caused him to give a different answer to the question above. The Surplus/Deficit Report shows a budgeted income of $193,963.00 with an actual income of $0.00, and a budgeted expenditure of $15,000.00 with an actual expenditure of $11,129.41. 6. Mr Zikmann's response (the Supplementary Report) was that he did not take the Surplus/Deficit Report into consideration. He emphasised that his instructions were as follows: The Expert should make specific determinations in respect of each of the line items as a basis to determine the general questions referred by the Court. (original emphasis) 1. He stated that he was "not asked to determine" separately whether the total for each of the 58 line items taken together "was "reasonable in all the circumstances, given the existence of any particular document in evidence (such as that annexed to the Notice of Annual General Meeting dated 2 November 2010)". 2. Mr Zikmann indicated that in addition, he did not give the Surplus/Deficit Report "detailed consideration or weight" because the evidence that was provided to him was "voluminous" and, as the parties were legally represented he "expected that any party wanting me to give particular consideration to any particular document in evidence would have drawn my attention to it, and would have made submissions with respect to its claimed relevance". He stated that no explanation as to the possible relevance of the Surplus/Deficit Report under the tab titled "Notice of 2010 Annual General Meeting" was provided. 3. Mr Zikmann further stated that in any event, consideration of the Surplus/Deficit Report would not have caused him to give a different answer because it "is a two page document containing various figures and no explanatory notes" and "appears to make no reference to any of the costs which were paid by the Plaintiff during the period in question". 4. On 3 March 2015, the parties attended a mediation in relation to their dispute with respect to the leases. The second defendant in its written submissions before the event asserted that a conditional settlement was reached at that mediation, however when pressed, Counsel for the second defendant accepted that there was no evidence as to any such settlement. 5. On 14 September 2015, the second defendant indicated that it was no longer contesting the substitution of Mr Bailey as guarantor and therefore the only remaining issue with respect to the leases would be the costs of the motion. Referee report Submissions 1. The plaintiff submits that Mr Zikmann erred by failing properly to consider the Surplus/Deficit Report which showed that as at 30 June 2010, the Owners Corporation had a "surplus" of $182,833.59 (being the difference between the outstanding levies of $193,963 and actual expenditure of $11,129.41). It argues that the "outstanding levies struck in 2009 ($193,963) vastly exceeded the reasonable budget for 2010/2011 as determined by the referee ($77,850)" and that "when setting contribution levies for the administration fund for 2010/2011, a reasonable owners corporation would have regard not only to the reasonable expenditure for the next financial period, but also any surplus carried forward from the previous financial period, including outstanding levies". The crux of the plaintiff's argument is that the referee "confused the concepts of a reasonable budget with a reasonable levy". 2. The plaintiff further argues that the Surplus/Deficit Report was part of an Agreed Bundle of Documents tendered for the purposes of the original Report and that it did not require explanatory notes as its content was "clear". 3. The plaintiff also submits that the Surplus/Deficit Report was "the subject of submissions by the parties". However, it appears that the plaintiff is here referring to submissions made in respect of the further questions. Those submissions reveal an apparent concession on the part of the plaintiff that the parties had not "given consideration to, or … made any submissions, in respect of [the Surplus/Deficit Report]" in relation to the initial questions referred to Mr Zikmann. 4. The second defendant submits that the Report should be accepted without qualification. It submits that the plaintiff's criticisms are "unwarranted" because the Surplus/Deficit report does not evidence any "surplus" money and in fact there was no money available to the Owners Corporation. The second defendant argues that the "actual or expected expenses of the Owners Corporation cannot be met by unpaid levies from a previous year" and emphasises Mr Zikmann's remark in the Supplementary Report to the effect that he would agree with the second defendant's submission that: [T]he actual reserves available to the Owners Corporation at the time of setting of the levies would also have been a relevant consideration. Those issues were however not ventilated before me. 1. The second defendant further argues that the plaintiff failed to make submissions with respect to the Surplus/Deficit Report to Mr Zikmann. It submits that s 56 of the Civil Procedure Act 2005 (NSW) should be given "central significance" in determining whether to adopt the Report in its entirety or subject to the plaintiff's proposed qualification: New Price Retail Services Pty Ltd v David Hanna [2014] NSWSC 553 at [53], [55]. Consideration 1. The principles to be applied by the Court in exercising the discretion conferred by r 20.24 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) to adopt, vary or reject in whole or part the report of a referee were summarised by McDougall J in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [7] and have been approved by this Court on numerous occasions: see e.g. Mainteck Services Pty Ltd v Stein Heurtey SA [2014] NSWCA 184; 89 NSWLR 633; 310 ALR 113 at [24]; The Owners - Strata Plan 64415 v Vero Insurance Ltd [2014] NSWSC 1500 at [14]; The Owners - Strata Plan No 68372 v Allianz Australia Insurance Limited [2014] NSWSC 180 at [8]; The Owners of Strata Plan 76888 v Walker Group Constructions Pty Ltd [2016] NSWSC 541 at [9]. Those principles are as follows: (1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing. (2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised. (3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest. (4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh. (5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report. (6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory". (7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence. (8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based. (9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire. (10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report. (11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise. (12) The right to be heard does not involve the right to be heard twice. (13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The real question is far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence". (14) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence. (15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified. 1. I am of the view that Mr Zikmann did not fall into any relevant "error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding" with respect to the Surplus/Deficit Report. 2. Section 75 of the Strata Management Act 1996 (NSW) requires an owners corporation at each general meeting to estimate how much money it will need to credit to its administrative and sinking funds for actual and expected expenditure. Section 75(3) provides: When estimating amounts needed to be credited to the administrative fund or the sinking fund the owners corporation must have before it, and take into account, a statement of the existing financial situation of the strata scheme and an estimate of receipts and payments. 1. Mr Zikmann acknowledged that provision in his Report and indicated in his Supplementary Report that he would have considered the "actual cash reserves" of the owners corporation at the time of setting the relevant levies but that that was "not ventilated" before him. The S/DR indicates a budgeted income of $193,963.00, none of which is recorded as having actually been received. It does not appear to be in contest that the levies were unpaid and were in dispute. Therefore, the owners corporation did not have a "surplus" of $182,833.59 available to it as at 30 June 2010. In my view, Mr Zikmann was entitled to take the view, and correctly did, that what was relevant was the actual cash reserves and not the unpaid disputed levies. 2. In any event, I am of the view that the plaintiff failed sufficiently to draw Mr Zikmann's attention to the purported significance of the S/DR in its submissions with respect to the original questions posed to the referee. 3. In P Ward Civil Engineering v Civil & Civic [2003] NSWSC 603, McClellan J indicated at [27] that the same principles apply before a referee as would apply if the matter had proceeded in court with respect to a failure to raise an issue that it is later sought to rely upon. 4. In Coulton v Holcombe (1986) 162 CLR 1 at 11, the plurality of the High Court emphasised that the "interests of expedition, finality and justice" dictates that a party must be "bound by the conduct of their case at trial". 5. Similarly, in Water Board v Moustakas (1994) 180 CLR 491, the plurality of the High Court stated at 498 that "the opportunity to assert the new case at another trial should only be granted where the interests of justice require it and such a course can be taken without prejudice to the defendant". The Court also noted that "the imprecision of the relevant particular cannot be the means of attributing to the plaintiff a case which he did not make". 6. In the present case, the plaintiff does not appear to dispute that it had the opportunity to direct Mr Zikmann's attention to the purported relevance of the Surplus/Deficity Report. As noted by Mr Zikmann and seemingly by the plaintiff's own admission (T1), the plaintiff failed to do so in its submissions with respect to the original questions. 7. For these reasons, I am of the view that the Report should be adopted without the qualification proposed by the plaintiff. Costs of proceedings before the referee 1. The plaintiff submits that the lot owners represented by the second defendant should pay the costs of the proceedings as the plaintiff "was substantially successful" in the sense that the plaintiff contended that reasonable budgets were $40,010 and $47,565 for 2009-2010 and 2010-2011 respectively, which is closer to the figures in Mr Zikmann's report than the sums of $193,963 and $273,680 that the second defendant contended were reasonable. In the alternative, the plaintiff contends that the lot owners should pay 80% of the plaintiff's costs "representing the degree of the plaintiff's success before the referee". 2. The second defendant submits that "each party had a measure of success and of failure before the Referee" and should pay its own costs. 3. Section 98(1) of the Civil Procedure Act 2005 (NSW) provides: (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis. 1. The general rule is that costs follow the event: UCPR r 42.1; Oshlack v Richmond River Council (1998) 193 CLR 72. 2. The relevant principles as to the award of costs where there are multiple issues in the proceedings and neither party is wholly successful were summarised by the Court of Appeal in Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38]: Where there are multiple issues in a case the Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed. Unless a particular issue or group of issues is clearly dominant or separable it will ordinarily be appropriate to award the costs of the proceedings to the successful party without attempting to differentiate between those particular issues on which it was successful and those on which it failed: Waters v P C Henderson (Aust) Pty Ltd (Court of Appeal, 6 July 1994, unreported). In relation to trials it has been said that it may be appropriate to deprive a successful party of costs or a portion of the costs if the matters upon which that party was unsuccessful took up a significant part of the trial, either by way of evidence or argument: Sabah Yazgi v Permanent Custodians Limited (No 2) [2007] NSWCA 306 at [24]. A similar approach is adopted on appeal. If the appellant loses on a separate issue argued on the appeal which has increased the time taken in hearing the appeal, then a special order for costs may be appropriate which deprives the appellant of the costs of that issue: Sydney City Council v Geftlick & Ors (No 2) [2006] NSWCA 374 at [27]. Whether an order contrary to the general rule that costs follow the event should be made depends on the circumstances of the case viewed against the wide discretionary powers of the court, which powers should be liberally construed: State of New South Wales v Stanley [2007] NSWCA 330 at [18] per Hislop J (with whom Beazley and Tobias JJA agreed). A separable issue can relate to "any disputed question of fact or law" before a court on which a party fails, notwithstanding that they are otherwise successful in terms of the ultimate outcome of the matter: James v Surf Road Nominees Pty Ltd (No 2) [2005] NSWCA 296 at [34]. Where there is a mixed outcome in proceedings, the question of apportionment is very much a matter of discretion and mathematical precision is illusory. The exercise of the discretion depends upon matters of impression and evaluation: James v Surf Road Nominees Pty Ltd (No 2), citing Dodds Family Investments Pty Ltd v Lane Industries Pty Ltd (1993) 26 IPR 261 at 272. 1. In my view, the outcome of the proceedings before the referee is best described as "mixed". It would not be appropriate to attempt to mathematically dissect the "degree" to which each party has been successful on each of the 58 line items or as to the overall appropriate sum. 2. In any event, as submitted by the second defendant, any greater "degree" of success achieved by the plaintiff should be offset against its failed "attempt to re-agitate a further question, having not agitated it at all in the first reference hearing" (T25). 3. Accordingly, in my opinion, each party should pay its own costs. Costs of notices of motion in respect of referee report 1. Both parties submitted that costs should follow the event with respect to whether the Report should be accepted in full or subject to the plaintiff's proposed qualification. 2. The second defendant, however, also submitted that if the plaintiff were successful, a distinction should be drawn between the costs of the application to adopt the report which "would have been required in any event" and the "costs of the qualification". 3. The plaintiff failed on its motion for the adoption of the Report with the proposed qualification. The second defendant succeeded on its motion for the unqualified adoption of the Report. In my view, in these circumstances the plaintiff should pay the costs of both motions. Costs of notice of motion filed 30 October 2014 and amended 26 August 2015 1. The plaintiff submits that on 14 September 2015, it "received an email, out of the blue, saying that the issues in relation to the leases are no longer pressed" (T19). It submits that because the lot owners represented by the second defendant "surrendered" and agreed to execute the leases in the form required by the plaintiff, the lot owners should pay the plaintiff's costs of and incidental to the notice of motion (as amended) incurred to 14 September 2015. The plaintiff relies on the remarks of Burchett J in ONE.TEL Ltd v Deputy Commissioner of Taxation [2000] FCA 270; 101 FCR 548 at 553: In my opinion, it is important to draw a distinction between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should bear the costs. … 1. The second defendant denies that it "surrendered" and submits that instead each party should pay its own costs in accordance with the remarks of McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622. In that case, McHugh J stated at 624-5: [I]t is first necessary to state the principles which govern an application for costs when a party elects not to pursue an action because he or she has achieved the relief sought in the action either by settlement or by extra-curial means. In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extracurial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. … Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … But such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. 1. I am of the view that there was a genuine controversy between the parties as to whether the plaintiff was entitled to substitute Mr Bailey as the guarantor. 2. The affidavits of Mr Bailey dated 6 November 2014 and 10 December 2014 indicate that the plaintiff was preparing to satisfy the court, if necessary, that Mr Bailey in fact had the financial resources to satisfy the guarantee obligations. 3. The parties then mediated in March 2015, after which it is unclear precisely what transpired between the parties. What can reasonably be inferred I consider is that parties simply put matters on hold. 4. The second defendant indicated it was no longer contesting the motion save as to costs on 14 September 2015, not long after the amended notice of motion was filed on 26 August 2015. On one view, the relative proximity between those dates indicates that the second defendant did not "surrender" as suggested by the plaintiff but rather the circumstances surrounding that event somehow prompted the second defendant to agree to execute the leases. 5. Accordingly I am not satisfied that I can be confident that the plaintiff was "almost certain to have succeeded" if the motion had proceeded or that the second defendant "surrendered". Nor am I satisfied that the second defendant acted unreasonably in contesting the motion. In such circumstances, in accordance with McHugh J's remarks in Lai Qin, in my view each party should pay its own costs. ********** 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: 20 April 2018