Supreme Court New South Wales Medium Neutral Citation: Hu v Kim [2019] NSWSC 448 Hearing dates: 27 March 2019; further written submissions 3, 9 and 15 April 2019 Date of orders: 27 March 2019 Decision date: 23 April 2019 Jurisdiction: Equity - Real Property List Before: Kunc J Decision: Defendants to pay plaintiffs' costs; Cross-claim to be dismissed Catchwords: COSTS — Party/Party — General rule that costs follow the event — Application of the rule and discretion — Defendants conduct of proceedings unreasonable notwithstanding settlement at hearing GUARANTEE AND INDEMNITY — Indemnities — Construction — Whether liability "as a result of" specified contract Legislation Cited: Civil Procedure Act 2005 (NSW) Supreme Court Act 1970 (NSW) Cases Cited: Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28; (2004) 217 CLR 424 Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604 Re The Minister for Immigration and Ethnic Affairs for the Commonwealth of Australia; ex parte Lai Quin [1997] HCA 6; (1997) 186 CLR 622 Samways v Workcover Queensland [2010] QSC 127 Westina Corp Pty Ltd v BGC Contracting Pty Ltd [2009] WASCA 213; (2009) 41 WAR 263 Category: Principal judgment Parties: Jing Hu (First Plaintiff) Linda Yao (Second Plaintiff) Johghee Kim (First Defendant/First Cross Defendant) Stephen James Morton (Second Defendant/First Cross Claimant) Representation: Counsel: M.A. Ashhurst SC; L.D. Corbett (Plaintiffs) J.R. Young (First Defendant) S. Briggs (Solicitor) (Second Defendant) Solicitors: Juris Cor Legal (Plaintiffs) Kim & Associates (First Defendant/Cross Defendant) SMB Law (Second Defendant/Cross Claimant) File Number(s): 2017/314005 Publication restriction: No Judgment Summary 1. These proceedings were listed for hearing before me on 27 and 28 March 2019. The claim of the plaintiffs (Mr Hu and Ms Yao) against the defendants was settled on the first morning of the hearing. The settlement did not extend to costs. After hearing the parties, the Court ordered the defendants to pay the plaintiffs' costs. The Court also heard brief argument on the cross-claim by the second defendant, Mr Morton, against the first defendant, Ms Kim, for indemnity in respect of Mr Morton's costs. At the conclusion of that argument, further written submissions were ordered in relation to the indemnity dispute. 2. This judgment provides the reasons for the costs order which I made. The fundamental reason I did so was that, notwithstanding the parties had compromised their differences, costs should follow the event because the defendants were unable to demonstrate that they had acted reasonably in resisting the plaintiffs' claims. 3. Insofar as the cross-claim is concerned, the Court has concluded that on its proper construction the indemnity relied upon by Mr Morton does not extend to any liability he may have to pay the plaintiffs' costs or his own, because such liability did not arise "as a result of" the contract referred to in the indemnity. 4. Mr M Ashhurst of Senior Counsel appeared with Mr L Corbett of Counsel for the plaintiffs. Mr J R Young of Counsel appeared for Ms Kim. Mr S Briggs, solicitor, appeared for Mr Morton. Background 1. These proceedings concern a set of circumstances very similar to those considered by the High Court in Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604. 2. Mr Morton owned a property in Greenwich (the "Property"), being Lot B in DP XXX. A copy of the deposited plan is Schedule "A" to these reasons. It had a large house on it. Mr Morton wanted to subdivide the Property into two lots, which would require the partial demolition of the house. 3. On 12 July 2016 proceedings between Mr Morton and Lane Cove Council were resolved by the NSW Land and Environment Court making orders pursuant to what was referred to as a "Section 34 Agreement" which included: "Development application number XXX2015 as amended, for the demolition of part of the existing dual occupancy dwelling located on proposed lot 1 and the retention of a single dwelling on that lot, and a two lot subdivision and two equal lots of 550 metres squared, on the land at lot B in deposited plan XXX, X XXX Street, Greenwich, is approved subject to the conditions set out in Annexure "A" hereto." 1. On 16 July 2016, Mr Morton entered into a contract (the "First Contract") to sell to the plaintiffs lot 2 in the unregistered plan which was part of Lot B in DPXXX. The plan attached to the First Contract was the proposed plan of subdivision which had been the subject of the orders of the Land and Environment Court. 2. As might be expected, the First Contract contained special conditions requiring Mr Morton to register the deposited plan to create the subdivision: "32. CONDITIONAL CONTRACT This Contract is subject to and conditional upon: (a) each Relevant Authority giving its approval to the Plan; (b) the registration by the Land and Property Information of the Plan as a Deposited Plan; and (c) the registration by the Land and Property Information of the Instrument … 34. REGISTRATION OF THE PLAN AND INSTRUMENT 34.1 The Vendor shall take all reasonable steps to procure approval for the registration of the Plan and Instrument as referred to in Special Condition 32 of this Contract as soon as practicable after the Contract Date. 34.2 If the Plan and Instrument are not so approved and registration on or before the date which is twelve (12) calendar months after the Contract Date, either the Vendor or the Purchaser may, prior to the registration of the Plan and Instrument, rescind this contract by notice in writing to the other party whereupon the provisions of Condition 19 shall apply." 1. Special condition 30 of the First Contract contained these definitions: ""Instrument" means (except in Special Condition 33 of this Contract) the proposed Instrument setting out the terms of easements, positive covenants and/or restrictions on the use of land intended to be created pursuant to section 88B of the Conveyancing Act 1919 upon registration of the Plan and in the event of modification of the proposed instrument pursuant to Special Condition 33 of this Contract shall mean that instrument as so modified "Plan" means the proposed plan of subdivision of land and if the proposed plan is modified pursuant to Special Condition 33 of this Contract, shall mean that plan as so modified" 1. There was no dispute that clause 32.(a) of the First Contract had been satisfied by the Land and Environment Court making the orders referred to in paragraph [7] above. 2. On 12 November 2016, Mr Morton entered into a contract (the "Second Contract") to sell the entire Property to the first defendant ("Ms Kim") which expressly contemplated that Ms Kim would, in effect, take over Mr Morton's obligations to the plaintiffs under the First Contract. This was done by these special conditions in the Second Contract: "32. CONDITIONAL CONTRACT 32.1 This Contract Is (sic) subject to and conditional upon the novation of the Contract for Sale dated 16 July 2016 between the vendor, as vendor, and Jing Hu, as purchaser, of part of the property, a copy of which is annexed hereto and marked "Annexure A" (the Contract). 32.2 Despite Special Condition 32.1, the Purchaser acknowledges that on signing this contract they are immediately bound by the terms of the Contract annexed at Annexure A and agree to undertake all necessary works and actions to complete the sale the subject of the Contract, at their own cost, even if a formal novation of the Contract is not executed. 32.3 The Purchaser shall indemnify and shall keep indemnified the Vendor against any and all claims, actions, proceedings or demands that arIse (sic) or may arise as a result of the Contract referred to in this Special Condition 32. 32.4 This Special Condition 32 shall not merge on completion. … 34. REGISTRATION OF SETTLEMENT DOCUMENTS 34.1 Following the completion of the Contract, the Purchaser shall use his best endeavours to ensure that the transfer from the Vendor to the Purchaser will be promptly lodged for registration at the Land and Property Information. 34.2 The Purchaser further undertakes to enter into a Deed of novation of contract relating to the Contract annexed as "Annexure A" having the effect of rescinding the existing contract and replacing it with a contract between the Purchaser, as vendor, and Jing Hu as, purchaser. 34.3 This Special Condition 34 shall not merge on completion." 1. The "Contract" annexed as "Annexure A" referred to in special conditions 32 and 34 was the First Contract. 2. On 30 January 2017, Ms Kim's solicitors forwarded a deed of novation to the plaintiffs' solicitors. The plaintiffs signed the deed of novation on 13 February 2017. 3. On 17 February 2017, the plaintiffs' solicitors inquired of Ms Kim's solicitors when the sale of the Property to Ms Kim would settle and when the deed of novation could be exchanged. 4. Mr Morton's sale of the Property to Ms Kim pursuant to the Second Contract settled on 24 February 2017. 5. Further inquiries were made of Ms Kim's solicitors by the plaintiffs' solicitors on 7 March and 14 March 2017, with the response being given on 15 March 2017 that the deed of novation had been sent to Mr Morton's solicitors that day. A further inquiry was made by the plaintiffs' solicitors on 20 April 2017. 6. On 27 April 2017, the plaintiffs' solicitors requested access to the Property for the purposes of a valuation. Ms Kim's solicitors replied that they did not know if they continued to hold instructions from their client. 7. On 24 May 2017, the plaintiffs' solicitors made a further inquiry of Ms Kim's solicitors, only to receive the response that Ms Kim's solicitors did not consider that they still held instructions to act on behalf of Ms Kim. 8. These proceedings were commenced on 17 October 2017. 9. On 19 October 2018 the proceedings were set down for hearing before me to commence on 27 March 2017. 10. The plaintiffs have paid the deposit under the First Contract and, on the evidence filed before me, are ready, willing and able to complete that contract. They had signed the deed of novation. In an affidavit sworn on 25 May 2018, Ms Kim said "I deny that I refused to complete the Deed of novation. To the contrary I had it prepared at my own expense and had caused it to be sent to both the plaintiffs and the second defendant neither of whom has executed it or raised any objection to the form of it". There was no suggestion from Ms Kim that she would not sign the deed of novation. In an affidavit affirmed on 25 September 2018, Mr Morton had said "I was at all material times and remain, ready, willing and able to execute and perform my obligations under the Deed of novation". 11. Having noted all the matters set out in the preceding paragraph, at the start of the hearing I raised with the parties that it was not entirely apparent to me what the parties were really at issue about. It appeared that everybody was willing to sign the deed of novation but that matters had fallen into an inexplicable stalemate where everybody was expecting somebody else to make the first move. 12. After an extended morning tea adjournment the parties returned to Court to inform me that they had settled the proceedings as between the plaintiffs and the defendants. Costs were not agreed and, after hearing argument, I ordered the defendants to pay the plaintiffs' costs of the proceedings. I then heard, but did not determine, Mr Morton's cross-claim against Ms Kim for indemnity in respect of the costs that Mr Morton had incurred in these proceedings. I ordered further written submissions in relation to the cross-claim. 13. The consent orders which I made as between the plaintiffs and the defendants were: 1. Orders that the first and second defendants execute the deed of novation that appears at pages 619 to 657 of the Court Book in these proceedings, in respect of the contract for sale dated 16 July 2016 (Contract) within 5 days of these orders. 2. Orders that, upon novation of the Contract, the first defendant comply with clause 28.2 of the Contract (except insofar as the reference in that clause to "6 months" be read as 12 months). 2A. Orders, that for a period of 12 months the first defendant is restrained from purporting to rescind the Contract in accordance with clause 28.3. 3. Orders that, upon the novation of the Contract, the first defendant promptly do all things necessary to be done to procure registration of the plan of subdivision in accordance with that contract, including but not limited to complying with the conditions contained in Annexure A to the 'Section 34 Agreement' (a copy of which appears at Pages 202 – 208 of the Court Book), in particular by: (a) engaging a certifier to apply for a construction certificate for construction works on the Property; (b) engaging a licensed and qualified builder who meets the requirements of Part 6 of the Home Building Act to carry out building works in accordance with the Building Code of Australia; (c) submitting the approved plans to Sydney Water; (d) doing all necessary things and take all necessary steps to obtain a construction certificate; (e) doing all necessary things and take all necessary steps to obtain an Occupation Certificate from the Principal Certifying Authority; (f) submitting a check survey certificate to the Principal Certifying Authority at the completion of works on the Property, including all construction and demolition works; (g) submitting a compliant instrument under s 88B of the Conveyancing Act 1919 (NSW) plus two copies to the Lane Cove Council; (h) submitting a compliant Linen Plan of Subdivision plus 5 copies to Lane Cove Council (Condition 36 of the s 34 Agreement). 4. Liberty to apply on seven days' notice in relation to the working out of these orders." 1. It is clear that orders 1, 2 and 3 in the preceding paragraph are a more worked out version of, but nevertheless to the same effect as, the orders sought by the plaintiffs in their Amended Statement of Claim ("ASOC"): "2. An order that the First and Second Defendants specifically perform and carry into execution the agreement to novate the Contract for Sale of Lot 2 in an unregistered plan of subdivision of the land situated at and known as X XX Street, Greenwich, New South Wales, being the land contained in Lot B, folio identifier XXX; 3. An order that the First Defendant do all things reasonably necessary to procure approval for the registration of the draft plan of subdivision of the land situated at and known as X XX Street, Greenwich, New South Wales, being the land contained in Lot B, folio identifier XXX; 4. In the alternative, damages in lieu of specific performance. Costs as against Ms Kim – the parties' submissions 1. Mr Ashhurst SC submitted that there had been a complete capitulation by Ms Kim. Costs should, therefore, follow the event. Ms Kim's defence of the proceedings had not been reasonable, so the oft-cited decision of McHugh J in Re The Minister for Immigration and Ethnic Affairs for the Commonwealth of Australia; ex parte Lai Quin [1997] HCA 6; (1997) 186 CLR 622 had no application, notwithstanding that the parties had compromised their differences. 2. It will be recalled that in that case McHugh J said (at 624-625) (emphasis added): "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 (l). 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 (2). 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. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. 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. Mr Young submitted that Ms Kim's defence of the proceedings had been reasonable because the primary allegation against her was always bound to fail. This was the allegation in ASOC paragraph 12 that "The First and Second Defendants have refused to complete the Novation Agreement". This allegation, it was said, was traversed in paragraph 7 of Ms Kim's defence that "The First Defendant denies paragraph 12 of the Amended Statement of Claim and further says that the pleading is inconsistent with the Plaintiffs' own pleading at paragraph 10 above". The reference to "paragraph 10 above" was to the allegation in the ASOC that "On 30 January 2017, the First Defendant sent the Plaintiff a draft deed of novation". 2. Mr Young's essential submission was that the case alleged against his client in paragraph 12 of the ASOC could never succeed because Ms Kim had never refused to execute the deed of novation. The submission was (T17:35-45): "The first defendant never refused to execute the deed of novation. What happened was that for whatever reason firstly the plaintiffs did not return to the first defendant an executed deed of novation. Secondly, the plaintiffs knew that the reason for the delay was that for whatever reason the second defendant had not executed the document. The central allegation in relation to the, even leaving aside the issues of the difficulties of the particular cl 42 and the reference to one of the plaintiffs only, but the first defendant had sent to the plaintiffs what was a deed of novation which overcame that problem. It was open to the plaintiffs to return that, they didn't. For whatever reason, they didn't, and the second defendant needed to execute that as well. That had not occurred, so that the central allegation on which this whole litigation is based that the first defendant had refused to complete the novation agreement at the time that the proceedings were commenced [must fail]." 1. Mr Young submitted that what Ms Kim had now done was to enter into a sensible, commercial resolution of the proceedings and that, given her reasonable defence of them, there should be no order as to costs. 2. In reply, Mr Ashhurst SC submitted: 1. None of Ms Kim's submissions explained why it was reasonable for her to resist the relief sought in ASOC paragraph 3 in relation to registration of the deposited plan to give effect to the sub-division (see paragraph [26] above). Ms Kim had always been bound to do that under clause 32.2 of the Second Contract irrespective of whether the deed of novation was ever executed. 2. In relation to the deed of novation, her purported explanation was irrelevant because Ms Kim could have signed the deed of novation without waiting for the plaintiffs to return it and whether or not Mr Morton ever signed it. Costs as against Ms Kim – resolution 1. The Court accepts Mr Ashhurst SC's submissions. 2. It should have been clear beyond doubt to Ms Kim that, irrespective of whether or not the deed of novation had been completed, she had the obligation under clause 32.2 of the Second Contract to take the requisite steps, including registration of the deposited plan, to enable the First Contract to be completed. Nothing put on her behalf by Mr Young gave any satisfactory, or any, explanation of why she had resisted the relief sought in ASOC paragraph 3. 3. Nor is the Court satisfied that Ms Kim is assisted by her denial of the allegation that she had refused to execute the deed of novation. That denial may be correct as far as it goes. However, Ms Kim was meeting a claim for an order that she carry into effect her agreement to novate the First Contract. If, as it was now put, she had always been willing to execute the deed of novation, then that position should have been made clear at the pleading stage for at least two reasons. 4. First, as a matter of pleading the mere denial is insufficient. On this premise the denial was a negative pregnant, concealing a positive allegation, being her willingness to execute the deed of novation. Second, if the first point is thought to be unnecessarily antique or technical, then Ms Kim's obligation under s 56 of the Civil Procedure Act 2005 (NSW) to do everything to ensure the just, quick and cheap resolution of the real matters in issue required her to expose her willingness to execute the deed of novation and to have gone ahead and done so. 5. Stripped of the legal technicalities, nothing put on behalf of Ms Kim explains or excuses the fundamental difficulty with her position as to costs, which was that if she was always ready, willing and able to execute the deed of novation, then she should simply have got on and done so when confronted with a pleading which sought an order to that effect. 6. Costs are in the discretion of the Court, albeit that the discretion must be exercised judicially. Under UCPR Part 42, r 42.1, "the Court is to order that the costs follow the event unless it appears to the Court that some other order should be made". Ms Kim has failed to demonstrate that the maintenance of her defence to these proceedings was reasonable at any time up until she consented to the orders which I made. Therefore, the prima facie position as to costs must apply and for these reasons I ordered Ms Kim to pay the plaintiffs' costs. Costs as against Mr Morton – the parties' submissions 1. The costs argument between the plaintiffs and Mr Morton proceeded on similar lines to that with Ms Kim. Mr Ashhurst SC submitted that costs should follow the event given Mr Morton's capitulation. Mr Briggs contended that his client's conduct throughout the proceedings had been reasonable so that there should be no order as to costs. 2. Mr Ashhurst SC sought to demonstrate why Mr Morton's defence of the proceedings could not be seen as reasonable. 3. First, Mr Morton had simply denied the allegation in ASOC paragraph 12 that he had refused to complete the novation agreement. More significantly, Mr Morton's defence expressly did not plead to the claim in ASOC paragraph 14 that the plaintiffs were "entitled to an order as against the first and second defendants that the novation agreement be specifically performed and carried into execution". The basis for not pleading to that allegation was recited in the defence as being that it did not raise any allegation of fact against him. Mr Ashhurst's SC submission was that, in those circumstances, Mr Morton had given absolutely no indication that he was prepared to execute the deed of novation until he had said so in his affidavit of 25 September 2018. If that was the case, then why had he not done so and otherwise entered a submitting appearance? 4. Next, Mr Ashhurst SC drew attention to a settlement offer made on behalf of Mr Morton by a letter from his solicitors dated 28 February 2018. That letter included: "RE: Stephen Morton & Anor ats Hu & Yao Supreme Court Proceedings No. 2017/314005 X, XX Street, suburb NSW (Property) … The current directions of the Court require our client to file a defence to the Statement of Claim and any Cross-Claim by 9 March 2018. We are currently in the process of preparing those pleadings. In the process of doing so it apparent (sic) that the interests of our client and the plaintiff largely align. We say this because: 1. The Statement of Claim does not make any allegation against our client. Nor does it seek any relief against our client beyond an order for specific performance of the agreement to novate the contract of sale of the Property. It is our client's position that he has done all he can do to perform that agreement and that he wishes to see your clients become the registered proprietors of that section of the Property covered by the novation agreement, being Lot 2 in the unregistered plan subdivision. … Accordingly, our client proposes that a Deed be entered into containing clauses to the following effect: A. That the proceedings as against our client be discontinued with no orders as to costs and a release is provided to our client; B. That our client provides reasonable assistance to your client including in the manner proposed in paragraph number 3 above; C. That our client's reasonable legal costs and expenses incurred in providing the proposed assistance be met by your client. The reasonable expense incurred would include reasonable compensation for our client's time spent providing the assistance. We note that if our client is converted to a witness in your clients' case, your clients' reimbursement of our client should be claimable against the first defendant as costs if your clients are successful in their claim." 1. Mr Ashhurst SC submitted there were a number of difficulties with the approach proposed by Mr Morton. The paragraph numbered 1 was wrong in two important respects. First, it was wrong to suggest that there was no allegation made against Mr Morton. There was, namely that he had refused to complete the novation agreement. While the paragraph then correctly noted that only an order for specific performance of the novation agreement was sought against Mr Morton (a point subsequently overlooked by the plaintiffs' solicitors – see paragraph [55] below), it was wrong to suggest that Mr Morton had "done all he can do to perform that agreement". That could not be right because he had not signed the deed of novation, notwithstanding that at all material times he was apparently ready, willing and able to do so. 2. It also does not assist Mr Morton that his solicitor's letter does not anywhere actually offer to execute the deed of novation. However, this would have been the outcome if Mr Morton had accepted the draft deed of settlement proposed by the plaintiffs in response to his solicitor's letter of 28 February 2018, which draft included: "2. Arrangements 2.1 The Plaintiffs agree to release and discharge the Second Defendant from the claim of damages made in the Proceedings against the Second Defendant. 2.2 The Second Defendant agrees to submit to all Claims made by the Plaintiffs in the proceedings (except for the claim of damages) in consideration for the release provided by the Plaintiffs in Clause 2.1. 2.3 The Second Defendant shall file a submitting notice of appearance in the form annexed to this Deed within 5 working days of the date of this Deed. 2.4 The Second Defendant shall from time to time render assistance to the Plaintiffs in relation to the Proceedings as requested by them, including but not limited to the provision of documents or evidence to them. 2.5 The arrangements stated in Clauses 2.1 to 2.4 above do not constitute the making of any admission by the Parties in relation to the allegations of Claims made in the Proceedings." 1. Mr Ashhurst SC explained that the final difficulty in resolving the proceedings between Mr Morton and the plaintiffs was that after the plaintiffs had propounded the draft deed reflecting paragraphs A, B and C in the letter of 28 February 2018 (including the term set out in the preceding paragraph), Mr Morton insisted upon a payment of $6,500 being made to him in respect of costs that he had incurred. That proposal was not acceptable to the plaintiffs. 2. Mr Briggs made three arguments in support of his submission that there should be no order as to costs. 3. First, he submitted that by expressly not pleading to the allegation of an entitlement to an order for specific performance of the novation agreement Mr Morton had, in effect, admitted that his client would sign the deed of novation. He submitted that was his (Mr Briggs') understanding of what "does not plead" means in that context. 4. Second, contrary to the submission put by Mr Ashhurst SC, it was not open to Mr Morton simply to sign the deed of novation and enter a submitting appearance. This was because ASOC prayer 4 sought "in the alternative, damages in lieu of specific performance". His client was not prepared to be put in a position where he was open to an order for damages. 5. Third, whatever else may have been the case, at no time after his solicitor's letter of 28 February 2018 had anyone asked Mr Morton specifically to sign and return the deed of novation. Costs against Mr Morton – resolution 1. Again, the Court accepts Mr Ashhurst SC's submissions. I will deal with Mr Briggs' submissions in the order in which I have recorded them above. 2. As to the argument set out in paragraph [47] above, I do not agree that the express "not pleading" to the allegation of entitlement to specific performance was an indication that his client was prepared to execute the deed of novation. As a matter of pleading (see UCPR Part 14, r 14.26), Mr Morton's defence was correct not to plead to ASOC paragraph 14, because that paragraph only made an allegation of law rather than an allegation of fact. It did not have to be specifically traversed. 3. However, Mr Briggs' submission confuses what was the case with an allegation of law as opposed to an allegation of fact. Not pleading to (failing to traverse) an allegation of fact will mean it is taken to be admitted (UCPR Part 14, r 14.26(1)). On any view, not pleading to the allegation that the plaintiffs were entitled to an order for specific performance of the novation agreement cannot be seen as some kind of indication that they were willing to sign the deed of novation. 4. Furthermore, insofar as Mr Morton may have sought to rely on his denial of ASOC paragraph 12, that submission suffers from the same defect that I have already discussed in relation to Ms Kim's defence (see paragraph [36] above). 5. Turning to the submission in paragraph [48] above, I do not accept that the presence of the alternative allegation for damages was a reason not to execute the deed of novation and, if necessary, otherwise enter a submitting appearance. There are two reasons for this conclusion. 6. First, ASOC paragraph 17 makes it clear that the alternative claim for damages was only made against Ms Kim: "In the alternative, the Plaintiffs are entitled to damages from the First Defendant for breach of the First Contract for Sale and an order that the deposit be returned". The prayer for damages in lieu of specific performance was a claim for Lord Cairns' Act damages (now found in s 68 of the Supreme Court Act, 1970 (NSW)) being damages ordered in addition to or in substitution for the decree for specific performance. The pleader recognised, in my respectful view correctly, that because clause 32.2 of the Second Contract bound Ms Kim to carry out the First Contract whether or not the deed of novation was executed, there was no claim for damages against Mr Morton even if he was not ordered to execute the deed of novation. I should note that this point seems to have been overlooked by the draftsperson of the proposed settlement deed (see paragraph [44] above) which, contrary to ASOC paragraph 17, assumes in proposed clause 2.1 that there was a claim for damages pressed against Mr Morton. 7. Second, even if contrary to ASOC paragraph 17 an alternative claim for damages was pressed against Mr Morton, the practical reality is overwhelmingly against his submission. It is inconceivable that an indication from his solicitors to the plaintiffs' solicitors that he was willing to execute the deed of novation provided it was made clear that the alternative claim for damages would not be pressed would have been met with anything other than agreement from the plaintiffs. I make that finding not only as a matter of common sense, but because that is exactly what they were prepared to do as is evidenced by clause 2 of their proposed deed of settlement set out in paragraph [44] above. 8. Finally, it cannot avail Mr Morton to rely on the submission recorded in paragraph [49] above that he was simply never asked to sign and complete the deed of novation. If, as he deposes in his affidavit of 25 September 2018 he was always ready, willing and able to complete the deed of novation, then he should just have done so. 9. The legal analysis set out in paragraph [38] above in relation to Ms Kim applies equally to Mr Morton. He has failed to demonstrate that the maintenance of his defence to these proceedings was reasonable at any time up until he consented to the orders which I made. Therefore, the prima facie position as to costs must apply and for these reasons I also ordered Mr Morton to pay the plaintiffs' costs. The cross-claim – introduction 1. Mr Morton sues Ms Kim for indemnity pursuant to clause 32.3 of the Second Contract. It will be recalled that clause 32.3 provides that "[Ms Kim] shall indemnify and shall keep indemnified [Mr Morton] against any and all claims, actions, proceedings or demands that arise or may arise as a result of the Contract referred to in this Special Condition 32." 2. The essential pleading is the allegation in paragraph 4 of Mr Morton's cross-claim that "these proceedings have arisen as a result of the First Contract of Sale". Paragraph 5 of Ms Kim's defence responds "[Ms Kim] does not admit paragraph 4 of the Cross-Claim and says that the Amended Statement of Claim filed on 17 November 2017 speaks for itself in relation to the claims of the Plaintiff in the proceedings". 3. Mr Morton claims indemnity both in respect of the costs he has been ordered to pay to the plaintiffs and in relation to his own legal costs. The cross-claim – submissions 1. Mr Briggs' submissions as to why Ms Kim should indemnify Mr Morton can be summarised as follows (omitting reference to authority): 1. The Contract referred to in Special Condition 32.1 is the First Contract. This is despite the failure of the condition expressly to mention Ms Yao as the other purchaser. 2. The phrase "as a result" should be interpreted broadly so to include the novation of the First Contract, because the novation arises by reason of the existence of the First Contract. Moreover, the relief sought by the Plaintiff was specific performance of the First Contract, and had the hearing continued, any damages would have been calculated by reference to the First Contract. As such, the proceedings were brought "as a result" of the First Contract. 3. Inclusion of the phrase "or may arise" shows the intention that Ms Kim should indemnify Mr Morton for any claims which could arise in the future, namely after entry into the Second Contract. 4. The validity or otherwise of the costs agreement between Mr Morton and his solicitors did not have any effect on the construction question of whether Mr Morton was entitled to the benefit of the indemnity in relation to whatever liability he may have to his solicitors for costs. 1. Ms Kim's submissions can be summarised as follows: 1. The Second Contract was drafted to be conditional upon the completion of the Deed of Novation. The Second Contract was specifically drafted to confine the indemnity to proceedings which arise or may arise from the First Contract. If the indemnity was to be applied more broadly, so as to also include the failure to novate the First Contract, it would have been drafted accordingly. The omission to draft the clause more broadly is significant, because it shows the intent of the parties was to confine the indemnity to liability under the First Contract only. Because Mr Morton's liability arises under the Second Contract, the claim is not "as a result of" the First Contract and therefore is beyond the scope of the indemnity. 2. The correct approach when interpreting an indemnity is to construe it against the party seeking to enforce it: Andar Transport Pty Ltd v Brambles Limited [2004] HCA 28; (2004) 217 CLR 424 at 433. 3. Limiting the indemnity to the First Contract makes commercial sense. At the time Mr Morton entered into the Second Contract, he was already in breach of his obligations under the First Contract. As such, Mr Morton was intending to be indemnified in relation to any claims that might be made against him by the plaintiffs in relation to his failure to perform his obligations to them under the First Contract. It would not be within ordinary contemplation that Ms Kim intended to indemnify Mr Morton for his own failure to novate, and this is reflected in the language that the Second Contract was "subject to and conditional upon the novation of" the First Contract. 4. To suggest the proceedings arise as a result of the First Contract would be to construe "as a result of" to mean preceding in time, as opposed to a causal link. This would be a mere connecting link, regardless of how tenuous that link would be. The correct interpretation is that any proceedings that would attract the operation of the indemnity must be pursuant to obligations under a contract (the First Contract), rather than just by reference to the contract (the Second Contract) itself. 5. The existence of a contract anterior to the creation of a contractual obligation does not mean the contractual obligation arises as a result of that contract. While the First Contract is the object of the requirement to novate, the obligation arises wholly under the Second Contract. Therefore the indemnity only protects the Second Defendant for claims under the Second Contract. 6. It was conceded that "may arise" contemplates claims arising in the future. However, those words are in relation to the First Contract and relate to any claims whenever they are made in the future. The phrase "may arise" does not add to the indemnity clause references to contracts other than that described in clause 32.1. 7. The cost agreement between Mr Morton and his solicitor was contrary to the provisions relating to conditional costs agreements, in particular s 181 of the Legal Profession Uniform Law (NSW). In any event, the indemnity only applied to claims made against Mr Morton, and not to his own legal fees. The cross-claim – resolution 1. For the following reasons the Court has concluded that the cross-claim fails. 2. It is helpful to start with four propositions that are clear beyond argument. 3. First, the contract referred to in clause 32.1, and therefore the "Contract" referred to in clause 32.3, is the First Contract. Despite failing to include Ms Yao as one of the purchasers, the remainder of the clause says "a copy of which is annexed hereto and marked "Annexure A" (the Contract)." The contract which was annexed to the Second Contract was the First Contract. 4. Second, Mr Morton's obligation to novate the First Contract is an obligation imposed by the Second Contract. Although not expressed in terms, that obligation is clear by implication or upon the proper construction of clauses 32.1 and 34.2 of the Second Contract. 5. Third, insofar as Mr Morton is liable to pay the plaintiffs' costs and to the extent he may have a liability to pay to pay his own costs to his solicitors (which is not a matter I need to decide, and I refrain from doing so, because it is irrelevant to the question of construction), those liabilities either now, or upon demand being made, will fall within the description of "claims, actions, proceedings or demands" for the purpose of clause 32.1. In what follows I shall refer to them as the "Liabilities". 6. Fourth, "may arise" clearly includes future liabilities, thereby comprehending a future demand of the kind referred to in the preceding paragraph. 7. Against that background, I have reached these conclusions, each of which will be considered in turn: 1. There is no ambiguity. On the plain meaning of "as a result of" in the context of clause 32.1 of the Second Contract, neither of the Liabilities arises "as a result of" the First Contract. 2. If there is any ambiguity, then the same result follows because the indemnity should be construed against Mr Morton as opposed to a broader interpretation of "as a result of". 1. These conclusions are based upon an application of the principles in relation to the construction of indemnities, conveniently summarised by Applegath J in Samways v Workcover Queensland [2010] QSC 127 ("Samways") in a passage which I gratefully adopt (citations omitted): "[66] Such an indemnity clause falls to be constructed strictly, and any doubt as to the construction should be resolved in favour of the indemnified. The doubt may arise not only from the uncertain meaning of a particular expression but from its apparent width of possible application. [67] The authorities that require ambiguity to be resolved in favour of the indemnifier do not require that ambiguity be detected where the natural and ordinary meaning of the language, taken in its contractual context, requires no such conclusion. Absent statutory authority, a court has no mandate to rewrite a provision to avoid what is retrospectively perceives as commercial unfairness or lack of balance. [68] The clause should be construed in its contractual context which allocates risks of different kinds between the parties, and, relevantly in this case, provides that the operator shall be under the control of the Hirer. Effect should be given to the ordinary meaning of the language used (absent use of technical expressions or terms of art) so as to provide certainty as to where responsibility may lie, against which insurance may be obtained. The fact that the contract requires a party to take out insurance against the indemnified liability may be taken into account in concluding that the indemnity applies to that liability, whether or not insurance is in fact taken out. The absence of a provision for insurance against the liability may also be taken into account. However, the fact that the indemnifier is not required by the contract to take out insurance, and chooses not to take out insurance should not affect the construction of an indemnity that unambiguously allocated responsibility for the liability against the indemnifier. [69] The outcomes of other cases involving different contractual arrangements and different clauses do not dictate the outcome of this case. However, the principles of construction established in those cases should be followed. [70] One line of authority construes contracts of the present kind on the assumption that it is inherently improbable that a party would contract to absolve the other party against claims based on the other party's own negligence. The competing view is that at least a principal purpose for obtaining such an indemnity is to protect a party against liability for its own fault. [71] The interpretation of phrases such as "arising out of" and "in connection with" in different contexts, including compulsory third party insurance, does not determine its meaning in the present context. However, guidance can be derived from authorities in which such phrases are used in comparable cases involving indemnity clauses." "as a result of" – No ambiguity 1. The indemnity in this case protects Mr Morton from claims which arise "as a result of the Contract referred to in this Special Condition 32." The contract referred to in Special Condition 32 is the First Contract. Therefore the indemnity provided is in relation to any claim arising "as a result of" the First Contract. 2. The relief claimed against Mr Morton in these proceedings is for an order that he specifically perform his obligation under the Second Contract to novate the First Contract. The allegation was that he was in breach of his obligation under the Second Contract. As a matter of the ordinary meaning of the words "as a result of" I do not consider that the Liabilities arise "as a result of" the First Contract. 3. The phrase "as a result" connotes more than a remote causal link. The online Oxford English Dictionary defines "result" as "to arise as a consequence, effect or outcome of some action, process or design." Similarly, the online Macquarie Dictionary defines "result" as "to spring, arise or proceed as a consequence of actions, circumstances, premises etc." These definitions suggest a clear nexus is required between the liability which may arise, and the First Contract. 4. Furthermore, as Ipp JA, with whom McColl JA agreed, said in F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193; 63 NSWLR 502: [90] Further, in my view, while the phrase "arising as a result of", in cl 12, is a particularly broad expression of the notion of causation, it is not open ended. The clause plainly does not connote "proximate cause" or "direct cause", but it could not be construed so as to import an unlimited concept of causation. The clause does involve some causal or consequential relationship (cf Dickinson v Motor Vehicle Insurance Trust (1987) 163 CLR 500 at 505). Remoteness must form an element of the meaning of "arising as a result of"; more is required than the mere existence of connecting links between an act, neglect or default of the sub-contractor and the liability incurred by the Joint Venture. 1. In this case the relationship between Mr Morton's obligation under the Second Contract and the First Contract is no more than the anterior existence of the First Contract. In other words, the obligation in the Second Contract to novate the First Contract would not have been contracted if the First Contract did not exist. So understood, any liability which Mr Morton may have arising from his failure to novate the First Contract does not arise "as a result of" the First Contract because there is not a sufficiently causal or consequential relationship and, further and alternatively, it is too remote. 2. This conclusion is fortified by considering the commercial purpose of the indemnity as part of the Second Contract. In this regard, I accept Ms Kim's submission recorded in paragraph [63(3)] above. "as a result of" – If there were ambiguity 1. If there were ambiguity, then the principle of construction referred to in paragraph [66] of Samways and relied on by Ms Kim (see paragraph 63[2] above – and which, in any event, does not depend upon ambiguity being found) a fortiori requires "as a result of" to be construed in favour of Ms Kim, i.e. narrowly. This yields the same construction as I have already reached in paragraphs [72] to [77] above. Conclusion 1. Mr Morton's cross-claim will be dismissed. Prima facie costs should follow the event. I will give the parties an opportunity to bring in short minutes or make any costs application they may be advised if agreement on costs cannot be reached. Annexure A Hu v Kim_2019_04_23_10_36_34_650 (47.4 KB, pdf) Annexure A Hu v Kim_2019_04_23_10_36_34_650 (47.4 KB, pdf) ********** 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: 08 May 2019