Archonstruct P/L v Karalis (No 2) - [2007] SADC 107

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
ARCHONSTRUCT P/L v KARALIS (NO 2)
[2007] SADC 107
Reasons of His Honour Judge Kitchen
24 October 2007
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS
ARCHONSTRUCT P/L v KARALIS (NO 2)
[2007] SADC 107

Following the trial of these proceedings, and upon the findings made by the court, counsel for each of the parties made submissions concerning orders as to costs, interest and other matters.
The plaintiff, Archonstruct, substantially succeeded upon its contractual claim against the defendants, Mr and Mrs Karalis, for the unpaid balance of Archonstruct’s accounts relating to the construction of a dwelling for the defendants. That claim initiated these proceedings. The defendants, in their Defence, denied liability for the plaintiff’s claim upon various grounds, none of which succeeded; they further alleged that Archonstruct was in breach of the contract for the construction of the dwelling, damages for which the defendants alleged an entitlement to set-off against the plaintiff’s claim or, alternatively, counterclaimed from the plaintiff. The defendants joined as defendants to their counterclaim Carn Byrne and Associates Pty Ltd (the Architect) and Raymond John Carn (Mr Carn), in his capacity as a director and servant or agent of both the plaintiff and the Architect, alleging inter alia breaches of a duty of care, or breaches of the terms of the Architect’s engagement by the defendants concerning the dwelling. The defendants succeeded, in part, upon their claim against the plaintiff, but not against Mr Carn (in either capacity) or against the Architect.
In respect of the claim made against it, the Architect counterclaimed from the defendants’ fees totalling $29,403.45 allegedly owed to it for its services as architect in relation to the dwelling; it succeeded in that claim.
It is convenient to deal first with the submissions on behalf of the Architect, and Mr Carn in his capacity as a director of the Architect, on the one hand and the defendants on the other hand.
The proceedings between the defendants and the Architect (and Mr Carn)
The Architect proved its entitlement to fees totalling $29,403.45. It applied for an award of interest upon that sum to the date of judgment. The amount of $29,403.45 was the sum of three accounts, respectively numbered 9976, 9977 and 9978, each addressed to Mr Karalis and dated 9 December 1999; they are part of Exhibit 87. Each account included the following endorsements: “Terms Nett: 14 days”, and “Interest will be charged at the rate of 1% per month on accounts overdue after the due date for payment”.
There was no formal written agreement in relation to the engagement of the Architect by the defendants but there was oral and other evidence from which the services that the Architect was to perform, and the (hourly) fee for those services could be identified. The findings upon that evidence are incorporated into the reasons already published. There is no evidence in the case, by any party, touching upon the endorsements appearing in the Architect’s accounts, other than the accounts themselves; in particular no witness deposed as to any agreement being made concerning the time for the payment of any account for fees rendered by the Architect or for there to be a liability to pay interest upon an overdue account.
The Architect accepts there is no direct evidence that the defendants agreed to pay interest upon an unpaid fee account rendered to them by the Architect, but submits that because there was no objection by the defendants to the endorsements on the accounts when they were rendered to and received by them, it should be found they acquiesced, and are therefore contractually liable to pay interest accordingly. In my opinion, in the absence of any agreement contemporaneous with the engagement of the Architect for a fee, that the defendants would pay interest in the event of a failure to pay the fee, the Architect could not create such an obligation by some later unilateral stipulation and rely upon the defendants’ lack of protest as constituting an agreement. I find that the endorsements were no more than a proposal by the Architect to claim interest in a certain event (non-payment by the due date), and the defendants’ silence concerning that imposed no contractual liability upon them; Felthouse v Brindley (1862) 11 CBNS 869; 142 ER 1037; Bastard v McCallum (1924) VLR 9.
There had been other work done by the Architect for the defendants concerning a roadhouse in Blanchetown in which they had an interest. Accounts, two in number (part of Exhibit A87), were rendered to them in April and July 1999 for that work and the accounts were paid. Those accounts were endorsed “Terms Nett: 14 days” only, that is there was no endorsement concerning interest. The Architect sought to derive some support from the payment of its earlier accounts in its case for interest at 1% per month in relation to the unpaid accounts. In my opinion, the payment of earlier accounts does not establish that the absence of any protest to the purported demand for interest in respect of accounts unpaid 14 days after the rendering of the later accounts, induced the Architect to reasonably believe its agreement with the defendants included a term for the payment of interest.
The Architect does not claim as damages, for the defendants breach of contract constituted by the failure to pay the Architect’s accounts by the due date, the cost of replacing the withheld monies or the investment cost of being deprived of the opportunity to invest the withheld monies or to use them to reduce an existing indebtedness; Hungerfords v Walker (1989) 84 ALR 119. Therefore, the Architect’s entitlement to pre-judgment interest is to be determined only upon the basis set out in section 39 of the District Court Act. Section 39 provides that “unless good reason is shown to the contrary” the court will, upon application, include an award of interest in accordance with that section, by which interest is to be calculated at the rate and for the period fixed by the court, but in the case of a liquidated claim the period is to be from the date the amount of the claim fell due to the date of judgment.
The purpose of an award of interest pursuant to section 39 is to compensate a party for being kept out of money which should have been paid earlier. The rate of interest should be that which represents, more or less, an average of the prevailing rates for safe investments over the period for which interest is to be allowed; Wheeler v Page (1982) 31 SASR 1 , at 5. On that basis, the Architect submitted interest at the rate prescribed from time to time in the Third Schedule to the Supreme Court Rules for post-judgment rates is an appropriate guide for the court. Counsel for the defendants did not cavil at that submission. I fix a lump sum of $14,624.00 for interest calculated in respect of the period commencing on 1 January 2000 to this date. Upon my finding that there was no agreement the Architect’s accounts would be paid within 14 days, the debt was payable within a reasonable time. The Architect submitted that should be by 1 January 2000. I have adopted that date.
There will be judgment for the Architect upon its counterclaim against the defendants in the sum of $44,027.45.
As I recorded earlier, not only did the Architect succeed in its claim against the defendants for unpaid fees, but also the defendants’ claim against the Architect and Mr Carn (in his capacity as a director of the Architect) failed. The Architect claims its costs of action upon both its claim against the defendants and the defendants’ claim against the Architect; Mr Carn similarly claims his costs. The Architect and Mr Carn seek an order that the defendants pay its and his costs as between solicitor and client from 14 days after the first of three “Calderbank” letters (the letters were dated 28 April 2004, 26 October 2004 and 27 February 2006; they are exhibited to the affidavit of Mr Grant Mitchell sworn on 6 June 2007). The defendants oppose such an order being made. They do not dispute the Architect’s, and Mr Carn’s, entitlement to an order that the defendants pay their costs on a party and party basis up to and including 8 November 2004 but submit the defendants should be indemnified by the plaintiff, by way of a Bullock order, against those costs; and as to the Architect’s and Mr Carn’s costs after that date, the defendants submit that they should be on a party and party basis and should be reduced because, during the trial before me, time was taken up by an issue which the Architect lost. That issue was whether an admitted (after 8 November 2004) failure by the plaintiff to install damp proofing was to be remedied by way of undersetting or chemical treatment.
I will defer the question of a Bullock order until I come to deal with the appropriate judgment or orders as between the plaintiff and the defendants.
A number of engineers were called to give their opinion upon the relative merits of remedying the omitted damp proofing either by undersetting or by chemical treatment, but that was only one topic canvassed in the engineering evidence. I have not scrutinised the transcript of evidence to precisely identify the time occupied, in the trial before me, by the issue of the appropriate remediation works concerning the omitted damp proof course. Counsel for the Architect estimated the time occupied by the issue to have been no more than one day; counsel for the defendants considered that estimate was on the light side. In my opinion, in the context of a trial which extended for approximately fifteen sitting days, a little more or less than one day taken up with the issue is no warrant for reducing the Architect’s entitlement to costs.
The Architect and Mr Carn submit that in relation to the order dismissing the defendants’ counterclaim against them costs against the defendants should be awarded on a solicitor and client basis. They rely, principally, upon a letter dated 28 April 2004 from their solicitors to the defendants solicitors. That letter, materially, includes these passages:
As you know we have had previous discussions about whether your clients intend to continue with their claim against Carn Byrne & Associates Pty Ltd and Ray Carn (insofar as allegations are made against him in his capacity as a director of Carn Byrne).
We have also had discussions about whether your clients intend to persist with the numerous allegations against Carn Byrne and Ray Carn set out in the counterclaim, or whether your clients propose to confine their claim to the “under-floor” issues.
…
For those reasons my client expects that if this matter proceeds to judgment, the counterclaim by your clients against Carn Byrne and Ray Carn will be dismissed. My client expects that it will receive an award of costs in its favour against your clients.
Nevertheless, in the interests of avoiding the need to incur further costs my client is prepared to re-open its offer to bear its own costs provided that your client discontinues the counterclaim against Carn Byrne and Ray Carn in his capacity as a director of Carn Byrne, within 14 days of the date of this letter.
If your clients do not respond to this offer and the matter subsequently proceeds to judgment and your clients counterclaim against Carn Byrne and Ray Carn is dismissed, my client will rely on this letter in support of a claim for indemnity costs against your client.
Although it has been noted that the use of Calderbank letters has been adopted and approved in Australian courts, there is no unanimity as to the effect to be given to them. That observation was made by Debelle J who wrote the principal judgment in Pirrotta v City Bank Limited (1998) 72 SASR 259. The different approaches, as to the effect to be given to Calderbank letters, did not directly arise before the court in Pirrotta. Accordingly, the court determined (at page 267) that in South Australia “… the approach should be that the writing of a Calderbank letter should be one of the factors, albeit a significant factor, to be weighed by the court when considering whether to order indemnity costs. I do not think the complexity of the litigation standing alone should necessarily preclude the operation of the rule”.
In Pirotta, Debelle J (at page 262) wrote:
The principles relating to an award of costs on an indemnity basis or solicitor and client basis (which for convenience I will call “indemnity costs”) were examined by Sheppard J in Colgate Palmolive Pty Ltd v Cussons Pty Ltd (1993) 46 FLR 225. The reasoning has been consistently followed and applied by courts in all jurisdictions in Australia. In Colgate Palmolive (at 233) Sheppard J held that one of the circumstances which may justify an award of indemnity costs was an imprudent refusal of an offer of compromise. This reflects a view common to all jurisdictions in Australia”; and at page 263. “Offers of compromise contained in Calderbank letters are but one instance of how a party might make an offer which might be imprudently refused”.
In McKerlie v New South Wales (No. 2) [2000] NSWC 1159 : BC200007818, the plaintiff claimed damages for a constructive dismissal from his employment by the State. The original statement of claim was struck out; the plaintiff was given leave to re-plead but ordered to pay the defendant’s costs of the application to strike out. The defendant wrote to the plaintiff a “Calderbank” letter offering to settle the proceedings on terms that the plaintiff’s action be dismissed with no order as to costs and that the previous order for costs be vacated. The plaintiff proceeded; he was unsuccessful before a master and his appeal against the master was dismissed with an order that he pay the defendant’s costs. The defendant applied for indemnity costs submitting that the plaintiff’s claim was hopeless from the beginning, and relied on the “Calderbank” letter as being an offer involving a genuine compromise by offering the release of an existing order for costs and giving the plaintiff the chance to avoid possible liability for future costs.
Dunford J determined that orders for indemnity costs should not be made where there is no offer of a real or genuine compromise and that an offer in relation only for costs was not an offer of a genuine compromise; he said “… in my view orders for indemnity costs should not be used to deter persons from bringing proceedings which they may feel they are entitled to bring, even if those proceedings are ultimately unsuccessful”, a view which he had expressed in an earlier case where he refused to order indemnity costs against a wholly unsuccessful plaintiff, in an action for damages for defamation, to whom an offer had been made that he in effect abandon his proceedings to avoid the risk of an anticipated order for costs.
Hill J in ACCC v Universal Music Aust Pty Ltd (2002) 201 ALR 616 referred, inter alia, to McKerlie’s case; he doubted whether the offer, by a successful defendant in the case before him, that the proceedings by the ACCC for alleged contraventions of the Trade Practices Act be dismissed with no order as to costs, could be regarded as, or analogous to, a Calderbank letter, but decided that even if it should be so regarded, the rejection of the offer was not unreasonable because the ACCC’s action against the particular defendant was not manifestly hopeless.
I do not need to decide whether or not a letter offering only that the opponent’s action be withdrawn, discontinued or dismissed (and in my view, for practical purposes, the terms are synonymous) with no order for costs should be treated as, or analogous to, a Calderbank offer, because in my opinion even if it is to be so identified the defendants’ case against the Architect (and Mr Carn) could not be said to have been hopeless and therefore the offer was not imprudently rejected or not accepted. The Architect was named in the contract, exhibit B35, and the works contemplated by the contract were to be executed to the reasonable satisfaction of the Architect. The issue of whether the Architect had agreed with, and been engaged by, the defendants to administer the contract, that is to, inter alia, inspect and supervise the progress of the works, turned ultimately upon the conversations, correspondence and other written material between the Architect and the defendants. If the Architect’s letter should be regarded as a genuine offer of compromise, then, in the exercise of my discretion, the circumstances of the case are such that costs against the defendants ought not to be on a solicitor and client basis, but on the usual basis of party and party.
The proceedings between the defendants and the plaintiff (and Mr Carn)
The plaintiff succeeded to the extent of $242,828 in its claim against the defendants for the balance of the cost to construct the dwelling, and the plaintiff’s fees. By clause 16(b) of the contract (exhibit B35) between the plaintiff and the defendants, the plaintiff is entitled to interest, at the rate of one and one half per centum per month compounding, in default of the payment by the defendants of amounts payable to the plaintiff pursuant to that clause. That rate of interest is equivalent to approximately 19.5% per annum as a flat rate of interest. The defendants submit that the interest rate stipulated in clause 16(b) is “clearly a penalty and should be struck down”, contending there was no evidence led to show it was a genuine pre-estimate of the plaintiff’s loss.
The onus is upon the defendants to prove that the clause for the payment of interest as stipulated is a penalty; Multiplex Constructions Pty Ltd v Abgarus Pty Ltd (1992) 33 NSWLR 504 at 527.
The plaintiff’s evidence, through Mr Carn, was that the plaintiff engaged the various tradesmen and suppliers necessary for the construction of the dwelling and was liable to pay the accounts rendered by them to the plaintiff. Mr Carn’s evidence was to the effect, and in my view it is reasonable to infer, that the plaintiff paid if not all then substantially all of the accounts received by it from tradesmen and suppliers concerning the dwelling.
Exhibit B35 in its printed parts is a proforma agreement. In my opinion the provision in clause 16(b) for the payment of interest was to compensate the builder for the loss it would incur were there to be a significant delay between the time it paid tradesmen and suppliers and the receipt of a payment to which it was entitled from the defendants as building owners. The loss to such a builder would be, I am prepared to find, the cost of borrowing funds to maintain the cash flow necessary for a business, such as a builder, to continue to function. Exhibit P171 comprises letters from ANZ Bank and Commonwealth Bank dated 26 September 2006, and 18 October 2006, respectively, which set out the overdraft rates of interest per annum charged from time to time by each of those banks between dates in 1997 (or 1999) and in 2006; the rates varied between, in the case of ANZ Bank 12.18% and 14.00% per annum and in the case of the Commonwealth Bank 7.45% and 10.15% per annum. Although each letter sets out some information as to the attributes of borrowers to which the interest rate was available, there is not sufficient evidence to indicate with which group the plaintiff would have been identified. There is no evidence from which it can be deduced whether either bank would have charged monthly a proportion of the annual rate of interest, thus effectively compounding the interest rate.

On the evidence before the court the interest prescribed by clause 16(b) of the contract upon overdue payments is greater than the loss the plaintiff may suffer by the defendant’s late payment or non-payment of moneys due under clause 16(b). Although the interest rate upon an overdraft from time to time could not have been precisely known at the date the contract was entered into (and that is the relevant date when determining this issue of penalty, or not), the likely construction period was not contemplated to be extensive, and considerably less than 12 months.
In my view, the provision for the payment of a monthly compounding rate of interest is not a penalty. As Wootten J wrote in CJ Belmore Pty Ltd v AGC (General Finance) Ltd (1976) 1 NSWLR 507, the suggestion that a provision for compound interest is a penalty and void, is without foundation.
It is for the defendants to prove that the interest rate in clause 16(b) of the contract is a penalty and not a genuine pre-estimate of the plaintiff’s loss in the event of late or non-payment. On the evidence before the court, the interest rate is up to 40% greater than the highest of the overdraft interest rates referred to in exhibit P171 at the time the contract was entered into, but that of itself cannot in my view compel a finding that it is a penalty. The rate in clause 16(b) is for the life of the contract between the parties, during the period of which interest rates will likely fluctuate (as appears to have been the case) and so either affect the order of the loss a builder will suffer by reason of a late, or non-payment, of progress claims or conversely result in, notionally, a “profit” to the builder if there is a disparity, advantageous to the builder, between the contract interest rate and a particular bank’s rate. I think it is not inappropriate to observe that in commercial contracts extensive and complicatedly precise provision is sometimes made to specify interest rates as they affect the transaction between the parties to the contract. That has not been done here, but I am not satisfied it has been shown that the interest rate provided for in clause 16(b) is a penalty. The plaintiff, however, informs the court that it does not now seek interest at a compounding rate, but 1.5% per month simple interest.
The sum of $242,828 which I have found the plaintiff is entitled to recover from the defendants, is made up of:
(a)progress claims four and five totalling $192,859;
(b)progress claim six which I assessed at $31,880; and
(c)progress claim seven which I assessed at $18,090.
By clause 16(a) of the contract, and by reason of the facts as I found them to be, the defendants could require the plaintiff to provide documents (including invoices) concerning the cost of materials and labour used in the construction of the house; this was a step in the machinery provided by the contract for the creation and payment of progress claims. The defendants did demand from the plaintiff all invoices and the like relating to the statement of the costs set out in the claims submitted by the plaintiff to the defendants. The defendants specifically requested the originals of such documents. The plaintiff refused to provide them; It was not until in the month of June 2000 that copies were supplied to the defendants by the plaintiff. In my opinion, the plaintiff has no entitlement to interest before copies of the invoices were delivered to the defendants. Accordingly, I find, interest did not begin to accrue until 1 July 2000.
I calculate interest on $242,828 at the contract rate from 1 July 2000 to 13 October 2004 to be $268,300 (approximately); the significance of that latter date is it is the date of a letter which the defendants’ solicitors sent to the plaintiff’s solicitors and which the defendants rely upon as a Calderbank letter in an application for an order that, from the date of the letter, they have their costs of the proceedings between them and the plaintiff on a solicitor and client basis.
In the letter dated 13 October 2004, which was sent in advance of the trial commencing on 8 November 2004, before Judge Bright, the defendants’ offered:
·to pay $125,000 to the plaintiff, inclusive of interest, and
·to pay $50,000 towards the plaintiff’s costs;
that is “$175,000 all inclusive in full and final settlement of all claims arising out of this matter”. The letter stated that the offer was made contemporaneously with and conditional upon the acceptance of an offer to the Architect (the letter states “plaintiff” but all parties accept that it was understood to mean the Architect) set out in an enclosed copy of a letter to the Architect’s solicitors; in the latter letter which is dated 12 October 2004, the defendants made “an offer in resolution of outstanding disputes for both parties to walk bearing their own costs” – that offer was stated to be made contemporaneously with and conditional upon the acceptance of the offer made in the letter to the plaintiff dated 13 October 2004.
I have assessed the defendants’ successful counterclaim against the plaintiff in the sum of $28,000. In addition to that the defendants will be entitled, pursuant to the order of Judge Bright made on 17 November 2004, to an award against the plaintiff equal to the reasonable cost of undersetting the walls of the defendants’ dwelling (an amount to be determined by the court if it is not agreed) and, further, there is a claim by the defendants against the plaintiff for the cost of remedying other alleged defects comprised in the Scott Schedule, the determination of the existence of which, and the quantum for the repair of which, is to be the subject of an arbitration and an award pursuant to s33 of the District Court Act.
The defendants claim that their estimate of the cost of undersetting is $130,000 and the cost of remedying the other alleged defects is $50,000, the sum of which together with the quantum (totalling $28,000) of its claims against the plaintiff already assessed by the court, produces $208,000 which the defendants say they will be entitled to set–off against the plaintiff’s assessed claim. The difference between that figure and the plaintiff’s award of $242,828, before interest, is approximately $35,000. The defendants contend that the plaintiff’s entitlement to interest should be confined to that sum of $35,000; at 1.5 per centum per month compounding, to 14 October 2004, interest on that sum approximates $38,000, producing a total of $73,000 payable by the defendants to the plaintiff, which the defendants contend is considerably less than the sum they offered to pay to the plaintiff to compromise the proceedings on 13 October 2004.
The offer in the letter dated 13 October 2004 stipulated no time within which it might be accepted. It was withdrawn on 3 November 2004, and replaced by a different offer. More significantly the offer on 13 October 2004, was conditional upon the Architect accepting the offer made to it on the same date; in my view that is a serious obstacle to the defendants’ reliance upon the letter to the plaintiff as being a genuine offer of compromise capable of acceptance by the plaintiff. Indeed the Architect, in a letter to the defendants on 26 October 2004, and before the offer was withdrawn, observed that the offer was effectively incapable of acceptance by the Architect and Mr Carn because of the condition attached to the offer. The defendants submit that both the plaintiff and the Architect were under the management and the effective control of the same individual, Mr Carn. However, even if that be the case, it is clear, in my opinion, that the rights, interests and obligations of each corporate entity must be separately considered. In my view, it was not imprudent for the plaintiff to fail to accept the offer. Therefore, the defendants’ costs on their counterclaim against the plaintiff should be on the usual basis of party and party.
The defendants’ application for a Bullock order
In Fennell v Supervision and Engineering Services Holdings Pty Ltd and Santos Ltd (1988) 47 SASR 6, von Doussa J at (page 19) wrote:
In my opinion the principle to be discerned from Gould v Vaggelas ([1985] 157 CLR 215 is that a Bullock order may be made where the costs in question have been reasonably and properly incurred by the plaintiff as between him and the unsuccessful defendant; as between them those costs will be so incurred where the conduct of the unsuccessful defendant in relation to the plaintiff’s claim show that the joinder of the successful defendant was reasonable and proper to ensure recovery.
The Full Court in Glenmont Investments Pty Ltd v O’Loughlin (2001) 70 SASR 288, at 292 accepted the accuracy of that summary of Gould’s case, although cautioning that neither the observations of the High Court in Gould, nor the quoted passage from the judgment of Von Doussa J, are to be treated like a statute.
The defendants’ case on this issue is that the plaintiff in its Statement of Claim pleaded that the Architect was appointed as architect by the terms of the contract (exhibit B35) between the plaintiff and the defendants; that the Architect upon instructions from the defendants provided plans and instructions for the construction of the house; and the plaintiff accordingly commenced construction. Further, the defendants refer to the Scott Schedule (part of their counterclaim) to which the plaintiff, it is said, responded to imply that substantially all of the many defects alleged in that schedule, including the absence of effective damp-proofing, were not the plaintiff’s responsibility. The defendants further say that Mr Carn, (a director of both the plaintiff and the Architect), personally filled the roles of builder, architect and supervisor. It is principally upon these factors that the defendants submit it was reasonable and proper for them to join the Architect, and Mr Carn, as defendants to their counterclaim, particularly when they received a Statement of Claim, prepared by the plaintiff, for a proposed arbitration, in which the plaintiff asserted the defendants had terminated the Architect’s engagement for the purposes of contract administration, an assertion which the defendants submit left open in their minds whether the Architect would still carry out supervision and inspection.
Whilst these several matters may have played some peripheral part in the defendants’ decision to join the Architect and Mr Carn, the defendants had advice that although the Architect had specified a damp-proofing means for critically placed mortar, that specification had not been followed by the plaintiff with the result the house was at risk of attack by salt damp and, further, they had advice that the inadequacy of critical mortar was inconsistent with proper architectural supervision of the plaintiff’s work in constructing the house. I have no doubt that the overriding reason for joining the Architect and Mr Carn was to press a case that the Architect was liable to them for a contractual or tortious failure to supervise, and inspect for, the plaintiff’s compliance with the plans and specifications for the construction of the house; they also relied upon a letter dated 14 October 1999 (exhibit A83), written by the Architect to the defendants’ bankers as follows:
We have prepared the working drawings, details and specifications for the project, but we are not involved in the building process as architects. A licensed general building company, Archonstruct Pty Ltd (G4598), operated by the directors of Carn, Byrne and Associates is constructing the residence with the writer coordinating and supervising the trades.
The letter was signed by Mr Carn.
In my opinion, this is not an appropriate case in which the Bullock order sought by the defendants should be made.
The plaintiff however contends that the defendants should pay the plaintiff’s costs upon both the claim and the counterclaim, on a party and party basis except there should be no order for costs as between the plaintiff and the defendants:
(a)in relation to the hearing before his Honour Judge Bright, and
(b)in relation to two days of the hearing before me.
As to (a) the plaintiff submits that prior to the defendants’ experts, Messrs Liney and Goldfinch, giving evidence before Judge Bright, there was no “documentary evidence” detailing the reasons for the view of each of those experts that chemical injection was inappropriate as a means of remedying the absence of damp proofing in the under floor brickwork, but His Honour, over the objection of the plaintiff, permitted evidence to be led from the two experts concerning this topic indicating that he would consider (I infer the matter of costs) at the end of proceedings. The plaintiff cross examined both the experts and subsequently, upon a review of its position, concluded that it would, and did, announce to His Honour that in effect it admitted liability for omitting the specified damp proofing means and its liability to the defendants for the reasonable cost of remedying the omission by undersetting. In effect, the plaintiff says, as I understand the submission, that the failure of the defendants to provide to the plaintiff, pre-trial, the opinion of experts upon whom the defendants would rely in rejecting chemical injection as an appropriate remedial measure, resulted in the plaintiff being deprived of all the relevant material necessary to make the informed decision it did until during the course of the trial, by which time the costs of the trial upon that issue had been unnecessarily incurred.
I have read the transcript of the proceedings before Judge Bright. At page 50 of the transcript of the evidence given before Judge Bright, one of the experts, (Mr Liney), was taken, in a question by his Honour, to a topic which was not contained in Mr Liney’s previously supplied reports. Counsel for the plaintiff rose to observe that counsel for the defendants had led from the witness matters not included in the witness’ reports; he said,
I do not object to what my learned friend is doing but I simply point out that r38.01(a)(5) does require that leave be sought to do this, but I don’t take the point. I simply say that it may put me in an awkward position in terms of my doing the same thing, so I just rise to note that at this stage.
I have not been able to find passages to the effect referred to by counsel for the plaintiff, although it appears the plaintiff did object to evidence being called by the defendants from a valuer (Mr Brooke) from whom no written report had been obtained, but His Honour decided to permit the evidence to be given on the basis the plaintiff would not be required to cross examine until the plaintiff had had an opportunity to explore with, and be informed by, an expert of its choice.
Mr Liney wrote a report dated 13 May 2004. I presume it was discovered to the plaintiff at some time between that date and the commencement of the trial before Judge Bright on 8 November 2004. The report discusses chemical injection as an alternative to undersetting to remedy the omitted damp proofing means. Mr Goldfinch’s report did not canvass chemical injection, but he was examined about the topic without objection by the plaintiff.
In announcing to the court on 15 November 2004 a change to the position the plaintiff had previously adopted, counsel for the plaintiff said it would consent to an order that the plaintiff rectify the absence of a damp proofing means in the underfloor brickwork by either chemical injection or undersetting at the option of the defendants; counsel said (transcript 365):
I can indicate to your Honour that that concession is made as a result of consideration given over the weekend to evidence from Goldfinch and Liney that was not part of their reports, in part, on consideration of the evidence of Mr Brooke, which your Honour knows took us entirely by surprise.
Mr Brooke’s evidence concerned his opinion as to the likely diminution in value of the building attributable to the lack of damp proofing subsequently remedied by undersetting or chemical injection. Diminution in value had been a component of the defendants’ counterclaim, in relation to which the plaintiff had been supplied, by the defendants, with a copy of a report dated 31 July 2001, by Mr Beaton, a valuer. Mr Beaton was not called by the plaintiff for some reason; it appears Mr Brooke was engaged by the defendants on the day before he gave evidence.
It appears from the transcript that on 11 November 2004, the fourth day of hearing before Judge Bright the plaintiff and defendants were agreed that the omitted damp-proof means should be remedied by either undersetting or chemical injection and the remaining issues between them be dealt with in a manner proposed by counsel for the defendants. They also joined in a request that his Honour determine which was the appropriate remedial work, undersetting or chemical injection, to which his Honour responded that he was diffident about his power to do so, but in any event he would need to hear a great deal more concerning the chemical injection remedial means and some evidence from a valuer about the extent to which the value of the house could likely be affected by the remedial works of the one kind compared with the other. The exchange between counsel and his Honour on these topics appear at pages 270-295.
Mr Brooks gave evidence on 12 November 2004 (a Friday). On the following Monday (15 November 2004) counsel for the plaintiff made the first of his announcements which appear earlier in these reasons.
In his submissions before me, counsel for the plaintiff agreed that one of the issues before his Honour Judge Bright was the liability of the plaintiff for the allegedly defective underfloor brick mortar. It appears to me it continued to remain a live issue until the plaintiff’s change of position on 15 November 2004; counsel for the plaintiff said that the Amdel evidence (as to the lack of, or insufficient, waterproofing agent in the mortar) was never tested. I note that the Amdel reports which included opinions as to the lack of sufficient waterproofing agent were tendered by the defendants without objection from the plaintiff.
In my opinion, there is no proper ground upon which to deprive the defendants of their costs of the hearing before Judge Bright even though some time was taken up with two issues upon which the defendants ultimately failed, namely the absence of a slip joint at the bearing points of the Bondex sheeting on the underfloor walls and ventilation of the underfloor space.
As to (b), there were many issues comprised in the defendants’ set off and counterclaim against the plaintiff upon which the defendants failed in the hearing before me; they were whether the contract between the parties should be set aside, the claims concerning the absence of a slip joint and the complaint of insufficient underfloor ventilation. They succeeded in their claim for damages for diminution in the value of the dwelling and for inconvenience and disruption consequential on the defective sub-floor walls, however, the substantial part of the hearing before me was taken up with matters upon which the defendants ultimately failed.
I consider an appropriate order would be that the defendants pay two thirds of the plaintiff’s costs of the proceedings between them but excluding the costs of and incidental to what has been referred to as the aborted arbitration about which no submission was made to me other than that the question of the costs of those proceedings be referred to a Master for determination.
There would then remain outstanding between the plaintiff and the defendants issues of, inter alia, costs arising in connection with the determination (if the parties cannot agree) of the reasonable cost of undersetting the below floor walls and the cost incurred in the arbitration in relation to the defendants’ outstanding Scott Schedule claims. Of course, the quantum of the reasonable cost of undersetting, and the Scott Schedule claims award, remain to be determined but as I understand the defendants’ submission, those costs will not exceed $180,000.

As to the claim against Mr Carne in his capacity as a director of the plaintiff, the order will be that the defendants pay his costs of action as between party and party to be taxed, if not agreed. I reject the application by counsel for Mr Carne, in that capacity, that those costs should be on a solicitor and client basis; I do not accept the submission that the defendants’ reason for joining Mr Carne in their counterclaim was solely, or partly, motivated by an intention to cause financial harm to Mr Carne.
Conclusion
1.The defendants’ counterclaim against the Architect and Mr Carne in his capacity as a director of both the Architect and the plaintiff is dismissed with an order that their respective costs of and incidental to the counterclaim as between party and party, be paid by the defendants to be taxed if not agreed.
2.There will be judgment for the Architect against the defendants in the sum of $29,403.45 plus $14,624.00 as a lump sum in lieu of interest, a total of $44,027.45 and the defendants are to pay the Architect’s costs as between party and party, of and incidental to its claim against the defendants.
3.By way of an interim order pursuant to s38 of the District Court Act the defendants do pay to the plaintiff $80,675.00 (which sum includes $45,675.00 by way of interest, at 1.5% per month calculated to 1 October 2007, upon the amount of $35,000) on account of the plaintiff’s entitlement to judgment upon its claim, the determination of the balance of which is adjourned to await the final determination of the court:
(a)of the quantum of the defendants’ entitlement pursuant to the order made on 18 November 2004; and
(b)of the award of the arbitrator appointed pursuant to s33 of the District Court Act;
4.I have indicated that the defendants should be ordered to pay two thirds of the plaintiff’s costs of the proceedings between them; however, because of the outstanding issues between them, referred to in (a) and (b) of paragraph 3, which will also involve questions of costs, an order for costs is deferred until those issues are determined.
5.I refer to a Master for hearing and decision the question of which party if either of them should bear the costs of the other of them in relation to the abandoned arbitration proceedings.