Supreme Court New South Wales Medium Neutral Citation: The Owners – Strata Plan 84741 v Nazero Constructions Pty Ltd [2017] NSWSC 1241 Hearing dates: 14 September 2017 Decision date: 15 September 2017 Jurisdiction: Equity - Technology and Construction List Before: Stevenson J Decision: Plaintiff to have indemnity costs from 17 September 2015 Catchwords: COSTS – indemnity costs – offer of compromise – whether plaintiff obtained a result no less favourable than offer – whether component of agreed verdict should be seen as damages in the nature of interest – whether court should otherwise order for purpose of UCPR r 42.14 Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: The Owners – Strata Plan 84741 v Nazero Constructions Pty Ltd [2017] NSWSC 1134 Walker v Harwood [2017] NSWCA 228 Texts Cited: Rawlinsons Australian Construction Handbook 2015 (Rawlinsons 2015 ed 33) Category: Costs Parties: The Owners – Strata Plan 84741 (Plaintiff) Iris Diversified Property Pty Ltd (Second Defendant) Representation: Counsel: R Cheney SC with H Chiu (Plaintiff) A McGrath SC (Second Defendant) Solicitors: DEA Lawyers (Plaintiff) Henry Davis York (Second Defendant) File Number(s): SC 2014/367636 Judgment 1. The background to this matter is set out in my judgment of 29 August 2017: The Owners – Strata Plan 84741 v Nazero Constructions Pty Ltd [2017] NSWSC 1134. 2. These reasons assume familiarity with that judgment. I will adopt the same expressions here as in that judgment. 3. In that judgment, I made findings concerning the quantification of the Owners Corporation's otherwise undisputed claim against Iris concerning defects in the Clovelly building. 4. The parties have conferred and agreed on the arithmetical consequences of that judgment and agree that there should be a verdict and judgment for the Owners Corporation against Iris in the sum of $1,203,345.37. 5. The parties also agree that Iris should pay the Owners Corporation's costs of the proceedings, including costs on an indemnity basis from 18 July 2017, together with interest on those costs. 6. The only matter now dividing the parties is whether the Owners Corporation should have its costs on an indemnity basis from an earlier date, 17 September 2015, by reason of the fact that, on that date, the Owners Corporation served on Iris an Offer of Compromise pursuant to r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) offering to compromise its claim against Iris by accepting a payment from Iris of $1,200,000. 7. As I recorded at [38], at the hearing before me, the Owners Corporation's claim for the reasonable cost of rectifying the admitted defects in the building was $1,173,909. 8. I heard evidence from quantity surveyors retained by the parties; Mr Zakos for the Owners Corporation, and Mr Madden for Iris. 9. In my judgment I recorded that: "41 Each of Mr Zakos and Mr Madden made their estimates by reference to Rawlinsons Australian Construction Handbook 2015. Rawlinsons sets out costings as at 31 December 2014. 42 It is agreed that once a final figure is determined, an allowance must be made to take into account cost increases since 31 December 2014. Mr Zakos and Mr Madden agree those cost increases to be in the order of between 3 per cent and 5 per cent. I propose to adopt the figure of 5 per cent." 1. The agreement to which I referred at [42] arose from the following exchange that I had with Mr Cheney SC, who appeared with Mr Chiu for the Owners Corporation: "CHENEY: No. In our short outline submissions and in our statement of issues that we sent up before the hearing we claimed interest from 25 June 2015, which was the date of the Zakos report. In our closing submissions we've claimed interest from 1 January 2015, being the day after the Rawlinsons' data that the experts agreed as-- HIS HONOUR: Is that the way to do it? That's a very high interest rate, 'best investment in town' et cetera, et cetera. The witnesses agreed yesterday, didn't they, near the end of their evidence that the prices in Rawlinsons would have gone up from 31 December 2014 by, I think they said, something like to 3% to 4% a year. So why wouldn't that be the right - sorry, they both agreed I think that to properly compensate the Owners Corporation some adjustment to that effect would be needed. CHENEY: Yes, they both agreed there was escalation in that period and I rather thought Mr Zakos volunteered that he thought the escalation was closer to 5% to 6% annually but we don't have the transcript and I may have to be corrected. Mr Chiu says it was 3% to 5%. MCGRATH: Yes, if your Honour looks at p 85 at the top. HIS HONOUR: I've got that. Witness Madden, there'd be 3% to 5% more so, it says, or so I think he probably said, and Mr Zakos said at the foot of the previous p 3 to 5 so my preliminary view was I need to adjust whatever the final figure is from Rawlinson 31 December to now by some percentage or other but I had in mind perhaps the upper end of that range, which I think is less than the Court range. CHENEY: Yes, slightly less than the Court, yes your Honour. HIS HONOUR: So that seemed to me to be the fair way to put the Owners Corporation in the position it needs to be because none of this work has been done yet. I presume the idea is to give the Owners Corporation a fund that it can go out and use and effect the repairs. CHENEY: Yes, we wouldn't speak against that approach, your Honour." 1. Thus, the Owners Corporation agreed that, in lieu of pursuing a claim for interest, the approach that I recorded in the judgment should be followed. 2. The agreed verdict amount ($1,203,345.37) comprises the now agreed quantum of the cost (at the Rawlinsons 31 December 2014 rates) of rectifying the defects in accordance with my reasons ($1,062,075.14), together with an allowance of 5% on that figure ($145.49 per day) to reflect the likely increase in those costs since 31 December 2014. 3. Mr McGrath SC, who appeared for Iris, submitted that in the events that have happened, the 5% allowance should be seen as "damages in the nature of interest" and thus a component of the proposed verdict that, by reason of UCPR r 42.16, should be disregarded for the purpose of assessing whether the Owners Corporation will, upon entry of judgment, obtain a result "no less favourable" than the offer for the purposes of UCPR r 42.14(1). 4. On reflection, I do not accept this submission. 5. Although the 5% allowance represents the component of the proposed judgment that, as the case was presented, will be in lieu of the Owners Corporation's previously maintained claim for interest, in substance it represents part of the costs that the Owners Corporation will actually incur in rectifying the defects in the building. Thus, in substance, it is part of the Owners Corporation's damage. 6. Although the 5% allowance was, as Mr McGrath submitted, "taken in direct replacement of an award of interest" it is not, in my opinion, thereby "in the nature of interest". 7. In my opinion the matter is properly characterised in the following passage from the submissions of Mr Cheney as follows: "The escalation thus reflects an update, by the experts, to their evidence of the proper quantification of compensation. It is not an award of interest or of damages in the nature of interest, any moreso than would be the case had the parties, in lieu of cooperating in the 'escalation' approach, served 'refresher' quantification evidence on the eve of trial with adjusted figures taken from the 2017 edition of Rawlinsons. That the parties and the court took a more pragmatic, less costly, approach to derive the figure that best puts the plaintiff in the position to have the defects rectified in the prevailing market does not alter the character of that portion of the judgment sum referable to 'escalation'…". 1. Once judgment is entered, the Owners Corporation will have obtained a result "no less favourable", for the purpose of UCPR r 42.14(1), than the subject of its offer. 2. Accordingly, unless I "otherwise order" under UCPR r 42.14(2), the Owners Corporation is entitled to indemnity costs from the date of the offer. 3. Mr Cheney drew my attention to the very recent observations of Basten JA (with whom Payne JA agreed) in Walker v Harwood [2017] NSWCA 228 that: 1. despite earlier judicial misgivings, "there would seem to be no harm in describing" what must be established to "otherwise order" as being "exceptional circumstances" (at [17]); 2. following an offer of compromise "the event" referred to in UCPR r 42.1 is redefined, by r 42.14 "as whether or not the offeror obtains a better result than that proposed in the offer" (at [19]); and 3. the objects of the rules concerning offers of compromise are best achieved "by maintaining a tight leash on the circumstances in which the court should otherwise order, thereby promoting certainty in the operation of the provisions relating to offers of compromise and discouraging offerees from seeking to 'game the system'" (at [22]). 1. In the circumstances of this case, the only basis upon which I could see that I could "otherwise order" is the fact that the proposed judgment is only very slightly more than the amount of the offer. 2. Neither counsel drew to my attention any case where such a circumstance has been found to be one in which the court should "otherwise order" for these purposes. 3. In those circumstances, and as the fact remains that the judgment that the Owners Corporation will obtain will be "no less favourable" than its offer, and in light of the recent guidance given by the Court of Appeal on the subject, I am not persuaded that I should otherwise order. 4. It follows that the Owners Corporation should have its costs on an indemnity basis from 17 September 2015. 5. As the parties otherwise agree on the judgment and orders that should be made to conclude these proceedings I make the following orders: 1. Verdict and judgment for the plaintiff against the second defendant in the amount of $1,203,345.37. 2. The second defendant is to pay the plaintiff's costs of the proceedings on an ordinary basis up to 16 September 2015 and on an indemnity basis from 17 September 2015. 3. The second defendant is to pay the plaintiff interest on the plaintiff's costs and disbursements as agreed or assessed: 1. at the rate from time to time applicable set out in UCPR r 36.7; 2. on the Allowed Percentage of each amount of costs and disbursements actually paid by the plaintiff; and 3. from the date of payment by the plaintiff of each such amount of costs and disbursements until such time as costs due to the plaintiff under these orders have been paid. Note: X – equals the total amount of costs and disbursements which the plaintiff has paid or is liable to pay in connection with these proceedings. Y – equals the total amount of costs and disbursements allowed to the plaintiff in connection with these proceedings as agreed or assessed. The Allowed Percentage equals (Y/X x 100)%. ********** 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: 15 September 2017