Archonstruct Pty Ltd v Karalis (No 4)
[2012] SADC 5
•1 February 2012
DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
ARCHONSTRUCT PTY LTD v KARALIS & ORS (No 4)
[2012] SADC 5
Judgment of His Honour Judge Nicholson
1 February 2012
PROCEDURE - JUDGMENTS AND ORDERS - EFFECT OF JUDGMENTS
PROCEDURE - JUDGMENTS AND ORDERS - SATISFACTION AND SET-OFF OF JUDGMENTS
INTEREST - RECOVERABILITY OF INTEREST - IN GENERAL
The plaintiff and the defendants have been engaged in lengthy litigation arising out of a domestic building contract. The plaintiff commenced proceedings in this court in December 1999. Numerous trial judgments were delivered and following an, in part, successful appeal by the defendants to the Full Court of the Supreme Court, the matter was remitted to the District Court for the determination of a discrete substantive issue and “for the purpose of making such consequential orders as may be necessary and appropriate in the light of the further findings and orders of the District Court.” The discrete substantive issue was resolved by consent. The subject of the present judgment is the determination of the plaintiff’s entitlement to pre-judgment interest in the context of the undisturbed findings and orders previously made by the court including an order in the defendants’ favour for equitable set-off.
Held: The plaintiff is entitled to final judgment against the defendants in the amount of $224,406.34 inclusive of interest.
District Court Act 1991 s39, s42; English Statutes of Set-Off 1729 and 1735 generally; Judicature Act 1973 generally; Australian Courts Act 1828 (9 Geo.4, C85) s24; Supreme Court Rules 1987 generally; Bankruptcy Act 1966 s86, referred to.
Archonstruct Pty Ltd v Karalis & Ors [2007] SADC 34; Archonstruct Pty Ltd v Karalis & Ors (No. 3) [2008] SADC 70; Karalis & Anor v Archonstruct Pty Ltd & Ors [2008] SASC 368; Gathercole v Smith (1881) 7 QBD 626; Calderbank v Calderbank [1976] Fam 93; Radford v De Froberville (1978) 1 All ER 33; Johnson v Perez (1988) 166 CLR 351; D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10; Davies v Gertig (No 2) (2002) 83 SASR 521; [2002] SASC 257; AWA Ltd v Exicom Aust Pty Ltd (1990) 19 NSWLR 705; Gilsan v Optus (No 3) [2005] NSWSC 518; Lord v Direct Acceptance Corporation Ltd (Rec and Man Appointed)(In Liq) (1993) 32 NSWLR 362; Murphy v Zamonex (1993) 31 NSWLR 439; Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Rec and Man Appointed (1997) 42 NSWLR 462; Gertig v Davies (2003) 85 SASR 226; Rawson v Samuel 41 ER 451; Chakravarti v Advertiser Newspapers Ltd (1998) 72 SASR 361; Rory Derham, The Law of Set-Off 3rd ed; Meagher, Gummow and Lehane, Equity, Doctrines and Remedies 4th ed, considered.
ARCHONSTRUCT PTY LTD v KARALIS & ORS (No 4)
[2012] SADC 5Introduction
This matter has a lengthy history. Its genesis is a domestic building contract dispute between the plaintiff, as builder, and the defendants, as owners. It commenced with the filing of a claim by the plaintiff in this court in December 1999. Since then the matter has been the subject of a consent judgment by his Honour Judge Bright, a now retired judge of this court, three further judgments following a trial of issues by his Honour Judge Kitchen, a now retired judge of this court and a judgment by the Full Court of the Supreme Court following an appeal against the final orders of his Honour Judge Kitchen. The defendants’ appeal to the Full Court was successful in very limited respects. However, as a result of the Full Court judgment delivered on 23 December 2008,[1] the matter was remitted to the District Court for the determination of a discreet matter “and for the purpose of making such consequential orders as may be necessary and appropriate in the light of the further findings and orders of the District Court.”[2]
[1] [2008] SASC 368; formal orders were entered on 4 February 2009.
[2] The quoted words are part of order No. 3 made by and entered in the Supreme Court on 4 February 2009. The wording of order No. 3, in this respect, is slightly at variance to the conclusion expressed by Kourakis J (with whose reasons and proposed orders White and Layton JJ agreed) at paragraph [177]. In paragraph [177] Kourakis J proposed an order or orders to the effect that the matter would be remitted for the purpose of determining the discreet issue “and making such consequential orders as may be necessary consistently with the remaining findings of the judge”.
As it has transpired, all outstanding matters of substance, following the defendants’ successful (in part) appeal, have now been resolved by the parties. The only (consequential) matters between the parties still to be resolved or determined are those of interest and costs. The matter came before me to determine, in the first instance, the question of interest. Once this has been determined the court will be in a position to enter final orders and to hear the parties on the question of costs.
Oral submissions by Senior Counsel for the plaintiff and by Senior Counsel for the defendants were made on Friday 9 December 2011. In addition, the court has been assisted by the provision of the following materials.
(i)A tender bundle (FDN 133) filed by the plaintiff;
(ii)A supplementary tender book (FDN 136) filed by the defendants;
(iii)Three additional pages of transcript provided by counsel for the plaintiff during submissions, being T845-847 before his Honour Judge Kitchen;
(iv)Plaintiff’s list of authorities (FDN 137);
(v)Plaintiff’s written submissions (FDN 134);
(vi)Defendant’s written submissions (FDN 135); and
(vii)Plaintiff’s supplementary written submissions provided undercover of email to my chambers dated 13 December 2011.
Procedural History
The procedural history is lengthy and complicated. A summary can be found in the judgment of Kourakis J in the Full Court.[3] For present purposes it will be sufficient if I briefly summarise the position reached as a result of the various hearings on the merits that have been conducted in this matter. However, I will focus on those matters that may be of significance to the resolution of the outstanding issue of interest.
November 2004: Bright DCJ
[3] At paragraphs [3] – [46].
The matter first came to trial before his Honour Judge Bright in November 2004. The plaintiff’s principal claim was for a liquidated sum said to be due for a series of monthly progress payments for work done and which remained unpaid by the defendants. The defendants had counter-claimed, seeking damages for various alleged defects in the work, and had also pleaded a defence of set-off. The defendants pleaded that they were not liable to meet the progress payments claimed by the plaintiff but, to the extent that they were to be found so liable, they would be entitled to set-off the damages due to them pursuant to the counter-claim. In addition, the defendants counter-claimed against other parties, related to the plaintiff, who had performed various tasks in an architectural capacity. The dispute between the plaintiff and the defendants raised issues concerning the terms of the building contract, alleged breach of contract and repudiation on both sides and an alleged entitlement by the defendants to terminate the contract. All of the issues between the defendants and the other parties, relating to the architectural type services, were resolved early in the litigation and do not need to be referred to again in these reasons.
After hearing the matter for 8 days, Bright DCJ entered a consent judgment on 17 November 2004. A major complaint by the defendants had been that the plaintiff had failed to include a damp proof course or some other suitable protective mechanism in the underfloor brickwork. Throughout the litigation this work, as ultimately performed, has been described as the “under-setting” work and I will continue to refer to it in this way. The orders made included:
(i)The [defendants] are to have judgment against the [plaintiff] for the reasonable costs of inserting a viscourse damp-proof membrane at the appropriate level in all walls and all floors supporting the floor slab.
(ii)All other aspects of the claims by all the parties against each other are adjourned to a date to be fixed, including the question of the reasonableness, or otherwise, of the costs referred to in [(i)].
August 2006 – March 2007: Kitchen DCJ First Hearing and Judgment
His Honour Judge Bright retired on 30 June 2005 and the trial resumed before his Honour Judge Kitchen on 7 August 2006. Kitchen DCJ delivered his first judgment in the matter on 30 March 2007.[4] Amongst the issues dealt with by his Honour in this judgment were the plaintiff’s entitlement to be paid the amount said to be due under outstanding monthly progress claims together with the damages claims by the defendants for disturbance and inconvenience likely to be suffered in the future when the under-setting work came to be performed,[5] for the anticipated alleged diminution in value of the defendants’ house, being the difference between the value of the house had the under-setting work been performed by the plaintiff at the appropriate time and the estimated value of the house once the delayed under-setting work ultimately came to be performed,[6] and for various other items of alleged defective work by the plaintiff as provided for in a Scott Schedule.
[4] Archonstruct Pty ltd v Karalis & Ors [2007] SADC 34.
[5] That is, consequential on the finding that the plaintiff was in breach of contract in failing to have performed this work.
[6] His Honour reasoned, from the evidence, that it would be apparent to any prospective purchaser that the under-setting work had been performed at a later date and that this might raise concerns about the potential for hidden defects, at [148]-[149].
By this time the under-setting work still had not been performed. In fact it was not completed until May 2007. The orders made by his Honour Judge Kitchen at the conclusion of this first hearing included the following.
(i)The plaintiff is entitled to recover from the defendants $242,828 [being outstanding progress payments].
(ii)The defendants are entitled to set-off against the plaintiff entitlements;
(a)the amount assessed or agreed pursuant to [(i)] of the order made on 17 November 2004 [the under-setting work];
(b)the sums of $8,000 assessed for disturbance and inconvenience, and $20,000 assessed for diminution in the value of the defendants’ house; and
(c)the amount assessed in the defendants’ favour in relation to the remaining items in the Scott Schedule.
(iii)Subject to the order to be made pursuant to s33 of the District Court Act referring the remaining items in the Scott Schedule for assessment, in all other respects the defendants’ set-off and counter-claim against the plaintiff is dismissed . . .[7]
[7] I have taken the form of these orders from the court “Copy of Record” entry for 30 March 2007 which is in slightly different (but not materially so) form from the orders or proposed orders as set out on p37 of his Honour’s judgment.
His Honour, at the same time, directed that the matters in the Scott Schedule be referred for assessment by an arbitrator pursuant to s33 of the District Court Act. His Honour also indicated that he would hear counsel on matters of interest and costs. In due course, his Honour’s order that the plaintiff was entitled to $242,828 was one of the orders appealed against to the Full Court. The appeal was allowed in this respect and this order was set aside. The matter was remitted to the District Court for a re-consideration of the plaintiff’s entitlement in this respect.
In these, his first, reasons for judgment, his Honour also made other determinations or findings of significance to the defendants’ counter-claim. The parties had been in dispute over the precise method to be used for the still outstanding work to be done in installing a damp protective mechanism in the underfloor brickwork. Various methods were under consideration including the under-setting method ultimately employed. Each method had different advantages and disadvantages and came with a different likely cost. His Honour determined “that the under-setting method is one which the defendants have shown is reasonably necessary to remedy, as much as possible, the defect in the below floor level brick wall.”[8] In addition, his Honour confirmed that “the plaintiff is liable to the defendants pursuant to the order made in November 2004 for the reasonable cost of, in effect, the under-setting of the wall with a viscourse damp-proof membrane.[9] Finally, and of potential significance, is a finding by his Honour in the following terms.
I find no sufficient support in the evidence . . . to conclude that the defendants have failed to mitigate their loss by not earlier proceeding with the works to remedy the defect in the sub-floor walls.[10]
[8] [2007] SADC 34 at [132].
[9] At [140].
[10] At [161].
The notion of set-off is mentioned in the judgment at paragraph [94] where his Honour quoted from paragraphs 17.1 and 20.1 of the “set-off and counter-claim” although neither of these paragraphs has anything to do with the defendants’ pleaded claim to a set-off. Curiously, there is no reference to set-off in the defendants’ “Further Amended Defence, Set-Off and Counter-Claim” filed on 24 October 2005 under the heading “Particulars of Defence”; the only reference that can be found in the pleading is in the heading “Particulars of Set-Off and Counter-Claim” and in the defendants’ prayers for relief at the end of this composite pleading, where they assert,
and the defendants:
(1) set-off an equal or like amount to any found to be owing to the plaintiff under the provisions of the contract;
(2) counter-claim against the defendants by counter-claim jointly and severally:
(a). . .
(b). . .
(c). . .
A proved entitlement to a set-off operates only by way of a defence.[11] Such an entitlement was only barely raised in the defendants’ pleadings, and not within the defence itself. Nevertheless, it does seem that Kitchen DCJ acted on the basis that the defendants were asserting, by way of defence, an entitlement to a set-off. His Honour referred to the notion of set-off in the heading immediately prior to [114] of the judgment and found the defendants to be entitled to a set-off in his summary in paragraph [161] at the end of the judgment. However, there is no discussion anywhere in the judgment of the principles of equitable set-off[12] and no discussion of any application of these principles to the facts of the case before his Honour. In particular, and notwithstanding that his Honour found an entitlement to a set-off, there is no discussion in the judgment nor express finding by his Honour as to when the set-off is to take effect. Given that the most substantial component of the defendants’ counter-claim (the under-setting works) still remained to be assessed, there could be no set-off put into effect until such an assessment had been arrived at and final orders between the plaintiff and defendants made.
June 2007 – October 2007: Kitchen DCJ Second Hearing and Judgment
[11] A defendant must plead and establish a counter-claim if it is to recover anything from the plaintiff; see generally Gathercole v Smith (1881) 7 QBD 626.
[12] The parties, correctly, accept that, on any analysis, the defendants would not be entitled to a common law set-off.
The matter came before Kitchen DCJ for a second time in June and July of 2007 following which his Honour delivered a second judgment on 24 October 2007.[13] In the first paragraph of this judgment his Honour recorded that “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.” His Honour further noted, inter alia, that the plaintiff had substantially succeeded (to the extent of $242,828) with its contractual claim for the unpaid balance of its accounts relating to the construction of the defendants’ dwelling.
[13] Archonstruct Pty Ltd v Karalis & Ors (No. 2) [2007] SADC 107.
His Honour made, inter alia, the following further findings:
(i)that a contractually provided compound interest rate of 1.5% per month was not penal;[14]
(ii)that the plaintiff, nevertheless, had informed the court that it did not seek compound interest, only 1.5% per month simple interest;[15]
(iii)that it was reasonable to infer that the plaintiff had paid, if not all, then substantially all of the accounts received by it from tradesmen and suppliers concerning the dwelling (although there is no finding by his Honour as to on what date or dates any such payments had been made);
(iv)that the invoices relevant to the plaintiff’s progress claims in the amount of $242,828.00 had been supplied to the defendants in June 2000;[16] and
(v)that the plaintiff had no entitlement to interest before copies of the invoices were delivered to the defendants and that “accordingly . . . interest did not begin to accrue until 1 July 2000”.[17]
[14] [2007] SADC 107 at [27] and [28].
[15] At [28].
[16] At [30].
[17] At [30]. An important Full Court finding was that the plaintiff had no contractual entitlement to interest at 1.5% per month.
His Honour went on to calculate interest on the sum of $242,828 “at the contract rate from 1 July 2000 to 13 October 2004 to be $268,300 (approximately)”.[18] A re-working of the mathematics indicates that his Honour did, in fact, calculate this interest amount in reliance on the contract rate of 1.5% per month compound rather than a rate of 1.5% per month simple as had been conceded by the plaintiff.
[18] At [31].
However, and notwithstanding that his Honour made findings to the effect that pursuant to the terms of the parties’ contract, interest on amounts due to the plaintiff began to accrue on 1 July 2000 (on the basis that all relevant invoices had been provided in June) and notwithstanding that his Honour proceeded to calculate interest on the amount to which he had found the plaintiff to be entitled ($242,828) from that date of 1 July 2000, ultimately, his Honour did not make any interest order in favour of the plaintiff on this basis.[19] The order relating to interest, ultimately made by his Honour, appears on its face, to ignore the fact that the plaintiff was found entitled (by his Honour, subject of course to appeal) to the whole of this liquidated sum of $242,828 as from 1 July 2000 and that the plaintiff had remained out of its money since then.[20]
[19] The order in fact made is at paragraph [54] of the judgment and sealed order No. 3 in FDN 94. The interest order is set out and discussed further below.
[20] Cf; District Court Act 1991 s39(2)(b) “. . . interest . . . will be calculated in respect of a period fixed by the court (which must, however, in the case of a judgment given on a liquidated claim, be the period running from when the liability to pay the amount of the claim fell due to the date of judgment unless the court otherwise determines) . . .”.
His Honour explained that he chose 13 October 2004 to be the end point for this initial interest calculation (and notwithstanding that his Honour’s determinations were made and judgment published some 3 years later on 24 October 2007) because it was on that day, 13 October 2004, that the defendants’ solicitors sent to the plaintiff’s solicitors a so called Calderbank letter.[21] His Honour did not explain why the fact of this Calderbank letter having been sent on 13 October 2004 was of significance to an interest calculation in addition to the question of costs (being the purpose of the letter as expressly stated in it). However, it is possible to draw an inference as to his Honour’s reasoning.
[21] Calderbank v Calderbank [1976] Fam 93.
His Honour recorded his initial interest calculation, as described above, in paragraph [31] of the judgment but immediately went on to discuss the Calderbank letter in the context of the defendants’ submissions as to costs.[22] During his analysis of the costs implications of the Calderbank letter, his Honour estimated, with an eye to the evidence then available and the parties submissions, that the anticipated expense to be incurred by the defendants when ultimately they were to undertake the under-setting work was in the order of $130,000 and that the amount claimed by the defendants for the items referred to in their Scott Schedule was in the order of $50,000. His Honour had already found that the defendants were entitled to $8,000 on account of damages for inconvenience and $20,000 on account of damages for diminution in value. The total of their actual and anticipated entitlements was therefore $208,000.
[22] See paragraphs [32] to [54].
His Honour noted the defendants’ claim to be entitled to “set-off” that amount against the plaintiff’s entitlement. His Honour observed that, in these circumstances, the plaintiff would be left with an award of $35,000 only.[23] His Honour then noted the defendants’ contention that the plaintiff’s entitlement to interest should be confined to that sum of $35,000 at 1.5% per month compounding to 14 October 2004 (presumably the date of receipt of the Calderbank letter) and that interest calculated on that basis would be approximately $38,000 producing a total of $73,000 payable by the defendants to the plaintiff after such an anticipated set-off. His Honour further noted[24] the defendants’ contention that this amount of $73,000 was considerably less then the sum they had offered to pay the plaintiff to compromise the proceedings in the 13 October 2004 Calderbank letter.
[23] At [34].
[24] At [34].
Having made these predictions about the likely wash-up of any set-off and after having noted the defendants’ contentions concerning the plaintiff’s entitlement to interest, his Honour again left the topic of interest and proceeded to consider whether or not the plaintiff had behaved imprudently in failing to accept the Calderbank offer. His Honour held that it had not been imprudent for the plaintiff to fail to accept the offer and concluded[25] “therefore, the defendants’ costs on their counter-claim against the plaintiff should be on the usual basis of party and party”. His Honour did not address the defendants’ contentions, that the plaintiff’s interest entitlement should be restricted to interest only on the sum of $35,000 and only for the period 1 July 2000 to 14 October 2004.
[25] At [35].
At this point in the judgment, the inference might have been open that his Honour had rejected the defendants’ contentions concerning the plaintiff’s entitlement to interest based on the Calderbank letter, particularly given his Honour’s initial interest calculation in paragraph [31], the express finding that it had not been imprudent for the plaintiff to fail to accept the Calderbank offer and the fact that the defendants had not yet been put to any expense for the under-setting work.
However, whilst his Honour did not discuss the matter of interest again before expressing his conclusions at page 14 of the judgment, he ultimately ordered;[26]
3. By way of interim order pursuant to s38 of the District Court Act the first and second defendants pay to the plaintiff $80,675 (which sum includes $45,675 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 final determination of the court;
3.1of the quantum of the first and second defendants’ entitlement pursuant to the order made on 18 November 2004 [for the costs of under-setting]; and
3.2of the award of the arbitrator appointed pursuant to s33 of the District Court Act [to assess the value of the Scott Schedule items].
[26] The exact quote is taken from the sealed order as entered; interim judgment filed 31 October 2007, FDN 94.
It is to be noted that this interest component of $45,675 has been arrived at by applying a rate of 1.5% per month simple interest to the principal sum of $35,000 for the period of 1 July 2000 to 1 October 2007.[27]
[27] His Honour indicated arguendo, (transcript 12 June 2008 at p7) that his Honour had taken the view that because interest under the contract was payable monthly it did not accumulate on a daily basis and, as such, the fact that his judgment had been delivered in the middle of the month of October did not indicate an entitlement in the plaintiff to interest for those extra days of October.
It can be seen that his Honour ultimately adopted the plaintiff’s concession that interest should be calculated on a simple not compounding basis but has maintained the contractual rate of 1.5% per calendar month. The justification for this, given his Honour’s earlier finding that the contractual rate of interest (1.5% compound) did not constitute a penalty, is not apparent from his Honour’s reasons. His Honour simply adopted the apparently spontaneous act of generosity on the part of the plaintiff.
It also is to be noted that, contrary to the implied intimation at paragraph [31] of his Honour’s reasons to the effect that the plaintiff ought to be entitled to interest on the full amount due and owing of $242,828 from 1 July 2000 until at least 13 October 2004, but consistently with the defendants’ contention outlined in paragraph [34] of the reasons, his Honour has allowed, albeit only by way of an interim order, interest only on the plaintiff’s anticipated entitlement after set-off. However, his Honour allowed interest not only for the period of time after the date of the Calderbank letter to the date of his Honour’s judgment but also for the four years and three months from 1 July 2000 until the date of the Calderbank letter, 13 October 2004.
His Honour appeared, initially, to have been of the view that the plaintiff should be entitled to interest on the full amount of the liquidated sum then owing ($242,828) from 1 July 2000 until 14 October 2004, the date when the defendants’ Calderbank offer, if accepted, would have reduced the plaintiff’s loss to an estimated $35,000 but that thereafter, the plaintiff should only be entitled to interest calculated on any such balance after set-off. However, his Honour awarded, on an interim basis, interest on a notional set-off to take effect as at 1 July 2000.
October 2007 – June 2008: Kitchen DCJ Third Hearing and Judgment
The matter came back before his Honour Judge Kitchen on various days during October and November 2007, February and March 2008 and his Honour delivered a third judgment on 6 June 2008.[28]
[28] Archonstruct Pty Ltd v Karalis & Ors (No. 3) [2008] SADC 70.
The principal matters dealt with during this hearing and in his Honour’s third judgment were a final assessment of the reasonable cost to the defendants of the under-setting work and an assessment of the amount to be awarded to the defendants for outstanding Scott Schedule items.
His Honour found that the under-setting work commenced in October 2006 and was completed in May 2007.[29] The defendants claimed for the price of the work as completed subject to some adjustments and incidental costs. The plaintiff disputed the quantum of the defendants’ claim. His Honour referred to evidence to the effect that there had been a significant escalation in costs for work of this nature in Adelaide over the intervening period from September 2001.[30] His Honour recognised that there was an issue as to the date at which the defendants’ damages with respect to the under-setting should be assessed.
[29] [2008] SADC 70 at [2].
[30] At [18] and [19].
His Honour noted[31] the prima facie general rule that damages, whether for tort or for breach of contract, should be assessed as at the date when the cause of action arose.[32] However, his Honour recognised that here are exceptions and that the rule must yield if “some other date is necessary to provide adequate compensation”.[33] An example of where the general rule might not be followed is where a person does not move immediately to carry out repairs or to mitigate loss and the delay is not unreasonable in the circumstances.[34] His Honour, Judge Kitchen, concluded as follows.[35]
Perhaps the proper approach is to assess the damages at the date of the hearing and then look at the question of mitigation to see whether assessment and an earlier date is justified, an approach, although in a different context, adopted by Oliver J in Radford v De Froberville (1978) 1 All ER 33.
Later in the judgment his Honour said this.[36]
The delay in carrying out the remedial works by the defendant has probably led to the costs of them being greater in 2006 than they would have been in 2001 perhaps (based on Mr Paddick’s evidence) in the range of a factor between 16.4% and 25% for the period to November 2004 alone.
In my opinion, although the delay in the defendants arriving at the point where they set out to engage [the contractor] to carry out the under-setting is significant, this is a case where it was not unreasonable for the defendants to be particular in their approach to the several issues involved in the nature and extent of the remedies required, where the plaintiff was agitating those issues as being matters of substance. In my view the defendants have not failed to mitigate their loss by delaying until in October 2006 the carrying out of the work of under-setting.
[31] At [24].
[32] Citing Johnson v Perez (1988) 166 CLR 351.
[33] Johnson v Perez at 367 per Wilson, Toohey and Gaudron JJ.
[34] Johnson v Perez at 386 per Dawson J.
[35] At [24].
[36] At [76] and [77].
His Honour thereupon assessed the defendants’ damages in accordance with the actual cost to them of having the under-setting work performed in 2006 and 2007, in the amount (inclusive of some incidental costs) of $120,237.10.
In addition, the parties reported to his Honour that all outstanding issues concerning alleged defects as identified in the Scott Schedule had been resolved and that, by consent, the arbitrator had made an award of $10,000 against the plaintiff in favour of the defendants.
The position had now been reached where Kitchen DCJ was in a position to make final orders with respect to all substantive issues between the plaintiff and the defendants. The nature of those orders was foreshadowed in paragraphs [80] and [81] of his Honour’s third set of reasons for judgment.[37] After hearing further submissions as to the nature and form of the orders to be made.[38] Formal orders were made by his Honour at a hearing on 12 June 2008. I quote from the sealed copy of the judgment filed 11 February 2009 (FDN 107).
THE COURT ORDERS that:
1.Final judgment for the plaintiff against the defendants in the sum of $49,590.90 which sum is in addition to the interim award of $35,000 made on 24 October 2007.
2.Interest on the sum of $49,590.90 referred to in paragraph 1 hereof is awarded in the sum of $77,782 such sum being in addition to the interim award on 24 October 2007 upon the sum of $35,000.
[37] Archonstruct Pty Ltd v Karalis & Ors (No. 3) [2008] SADC 70 at p19.
[38] Transcript 12 June 2008 pp1-32.
It can be seen from paragraphs [80] and [81] of his Honour’s reasons that the sum of $49,590.90 was arrived at by taking the plaintiff’s entitlement of $242,828 “against which the defendants were entitled to set-off . . . [their] total set-off [of] $158,237.10”[39] and to deduct the sum of $35,000, being the interim award ordered on 24 October 2007.
[39] The defendants’ entitlement to a set-off of $158,237.10 was arrived at by totalling the $8,000 damages for inconvenience the $20,000 damages for diminution in value of the house, $120,237.10 being the reasonable cost of the under-setting works and $10,000 being the consent award for the outstanding Scott Schedule items.
His Honour further held[40] that the plaintiff was entitled to simple interest on the sum of $49,590.90 from the date of 1 July 2000 at the rate of 1.5% per month to the date of judgment. His Honour observed,
the commencing date and the rate are fixed for the same reasons that appear in my reasons for judgment delivered on 24 October 2007.[41]
[40] At [81].
[41] Archonstruct Pty Ltd v Karalis & Ors (No. 2) [2007] SADC 107.
His Honour’s interest calculation of $77,782 was based on a period of 7 years and 11 months, that is, from 1 July 2000 to 1 June 2008.[42] Initially, his Honour based his calculation on a balance of the principal amount found due to the plaintiff of $49,590.90. However, after hearing further from the parties he added further interest calculated on 50% of the $10,000 awarded following the arbitration, that is, he added interest on a further $5,000.[43]
[42] Transcript of further submissions, 12 June 2008 at p7.
[43] Transcript of further submissions, 12 June 2008 at p25-28.
After reviewing the mathematics involved, the final interest calculations represented:
(i)simple interest on the interim award of $35,000 at 1.5% per month from 1 July 2000 to 1 October 2007 (that is, the interim award of interest accrued as at the date of the interim judgment on 24 October 2007);
(ii)simple interest on the balance of the final amount found due to the plaintiff of $49,590.90 at 1.5% per month from 1 July 2000 to 1 June 2008 (the effective date for interest calculation purposes of the final judgment delivered on 6 June 2008); and
(iii)simple interest (by agreement of the parties) on an additional sum of $5,000 at 1.5 % per month from 1 July 2000 to 1 June 2008 (being the effective date for interest calculation purposes of the final judgment delivered on 6 June 2008).
The effect of the interest calculations and the implicit finding of his Honour Judge Kitchen was that the set-off to which the defendants were entitled was effected as at 1 July 2000, that is, the date that the progress payment claim monies owed by the defendants to the plaintiff fell due and notwithstanding that the defendants were not out of pocket with respect to, at least, the major component of their damages award until many years later.
Furthermore, notwithstanding that the plaintiff still had not been paid its interim award of $35,000[44] as at the time of his Honour’s third judgment (6 June 2008) it received an award of interest on that sum calculated only until 1 October 2007. Had his Honour’s approach remained in force, the plaintiff would have been deprived of interest on this sum at the contractual rate of 1.5% per month during the period 1 October 2007 to 1 June 2008. It would have been entitled only to interest at the much lower judgment debt rate, in accordance with the rules of court. The only reason for this was that an interim award had been made, albeit, in circumstances where that interim award had never been met.[45]
September to December 2008: the Full Court Appeal
[44] On 17 December 2007 his Honour Judge Barrett of this court granted the defendants’ application for a stay of execution of the plaintiff’s interim judgment; [2007] SADC 133. That stay has never been lifted, although the interim judgment was overturned by the Full Court.
[45] In the circumstances where the defendants had successfully applied for a stay of the interim award, it would seem that the plaintiff would have been better off having never obtained it.
The matter went on appeal to the Supreme Court. The Full Court judgment was delivered on 23 December 2008.[46] Kourakis J delivered the only judgment. Both White and Layton JJ agreed with the orders, as proposed, and reasons given by Kourakis J.
[46] Karalis & Anor v Archonstruct Pty Ltd & Ors [2008] SASC 368.
Kourakis J observed that the appeal was against the final orders of Kitchen DCJ that reflect findings made in three separate judgments.[47] His Honour summarised the ultimate findings and orders made in the three judgments and reviewed, at some length, various other factual findings and the evidence said to support the factual findings. His Honour then listed 18 issues to be determined on the appeal[48] the only two of present relevance being:
9. What were the terms of the contract between [the defendants] and [the plaintiff] as to the payment of progress claims and, in particular, was the entitlement of [the plaintiff] to payment, and interest in default of payment, dependent on the architect’s certification that the amount claimed was payable?
13. Did the parties agree during the trial to defer the issue of the quantum of [the plaintiff’s] entitlement to payment of the progress claims made by it, and if so, did the judge err in making a final award in favour of [the plaintiff] on those claims?
[47] At [18].
[48] At [40].
Kourakis J held, for reasons given, that he was not persuaded that any of the factual findings of Kitchen DCJ should be set aside.[49] The appeal was successful in only two respects. The Full Court held that the default interest provision applicable to monies due to the plaintiff but unpaid (compound interest at 1.5% per month) as provided for in clause 16 of the written contract document (exhibit B35) was not a term of the plaintiff’s engagement and did not apply to a breach by the defendants of the obligation to pay the monthly claims.[50] The effect of this was that no obligation to pay interest on monies due and unpaid was imposed on the defendants by the parties’ contractual agreement so that the plaintiff’s pre-judgment interest entitlement, if any, fell to be determined pursuant to s39 of the District Court Act 1991.
[49] At [41].
[50] At [42].
The second basis upon which the appeal succeeded was the finding by the Full Court that, in proceeding to assess the quantum of the plaintiff’s entitlement for the work that was the subject of the outstanding and unpaid progress claims, Kitchen DCJ had overlooked the parties’ agreement (with the court’s knowledge and acceptance) to defer that question until after his Honour had delivered reasons for decision on the other issues.[51] The Full Court held that this issue had to be remitted to the District Court for further hearing and determination and that the question of costs as between the plaintiff and the defendants necessarily would have to be re-visited after that determination. As a consequence, the costs orders between the plaintiff and the defendants were also to be set aside.
[51] At [46]. As part of the parties agreement in this respect it was flagged that further evidence might need to be adduced and an effect of the trial judge embarking on a determination contrary to this agreed position was that the parties had not had an opportunity to fully put their respective cases before his Honour.
In reaching these conclusions, the Full Court made various findings as to the terms of the parties contract.
(i)The plaintiff had a contractual right to submit monthly progress claims.[52]
(ii)The amounts claimed did not become due and payable until such supporting documents as were reasonably requested by the defendants were provided.[53]
(iii)The default interest provision in the written document was not incorporated into the parties’ contract and as a consequence the plaintiff had no right to (contractual) penalty interest.[54]
(iv)The contractual consequence of the plaintiff’s failure to provide invoices when requested was that its progress claims did not become due and payable.[55]
(v)Further, the contractual result following from the failure to provide the relevant invoices was that the obligation of the defendants to pay the amount claimed was suspended until the relevant documents were provided.[56]
[52] At [122].
[53] At [122].
[54] At [123] and [131].
[55] At [133].
[56] At [136].
The effect of the Full Court’s findings in (i), (ii), (iv) and (v) above together with the refusal by the Full Court to set aside any of the trial judge’s factual findings was that the plaintiff’s properly proved progress payment claims fell due and payable as at 1 July 2000.
The Full Court in rejecting the contractual interest rate relied upon by the plaintiff and in finding that there had been an agreement to defer quantification of the plaintiff’s claim, in effect, decided issues 9 and 13 (set out above) in favour of the defendants. The consequence was that so much of the matter between the plaintiff and the defendants as related to the quantum of the plaintiff’s entitlement under the contract was ordered to be remitted to a judge of the District Court or referred to an arbitrator pursuant to s33 of the District Court Act 1991, for further determination.[57]
[57] At [145].
I set out now the last paragraph of the judgment of Kourakis J under the heading “Conclusion”[58].
[58] Paragraph [177].
I would allow the appeal only for the purpose of remitting the matter to the District Court to determine the contractual liability of [the defendants] to [the plaintiff] in accordance with [131] and [145] of these reasons and making such consequential orders as may be necessary consistently with the remaining findings of the judge. [The plaintiff] is entitled to contractual remuneration for work performed by it until the termination of the contract by [the plaintiff’s] acceptance of the repudiation by [the defendants] on 29 March 2000. In all other respects I would dismiss the appeal. The conclusion I have reached would appear to require that order 4 made on 24 October 2007 and orders 1, 2, 5 and 6 made on 12 June 2008 be set aside. I would hear the parties as to the precise orders that should be made.
The sealed orders entered by the Full Court on 4 February 2009 were in slightly different terms.
THE COURT ORDERS that:
1.The appeal by the [defendants] against order No. 4 made on 24 October 2007 and against orders No. 1, 2, 4 and 5 made on 12 June 2008 be allowed.
2.Order No. 4 made on 24 October 2007 [interim award of $35,000 plus interest] and orders No. 1 [final judgment for $49,590.90], 2 [further interest], 4 [costs] and 5 [costs] made on 12 June 2008 are set aside.
3.The matter is remitted to the District Court for it to determine the contractual liability of [the defendants] to the [plaintiff] in accordance with paragraphs [131] and [145] of the reasons of the Honourable Justice Kourakis delivered on 23 December 2008 and for the purpose of making such consequential orders as may be necessary and appropriate in the light of the further findings and orders of the District Court. (Emphasis supplied)
4.In all other respects, the appeal be dismissed.
The matter was remitted to the District Court but no further hearing on the merits has been necessary. The parties have agreed the plaintiff’s entitlement to unpaid progress payments at $255,000. In other words, the effect of the Full Court appeal and the parties’ subsequent agreement, in this respect, has been to substitute $255,000 for the original finding by his Honour Judge Kitchen, that the plaintiff was entitled to be paid $242,828.
In addition, the parties have agreed, at least in the context of a set-off, that the plaintiff is to be entitled to simple interest calculated at the rate of 12% per annum. However, counsel for the defendants told the court, during submissions, that the agreement with the plaintiff for an interest rate of 12% was reached strictly on this basis and that if the court were not to engage in a set-off calculation but to award interest to the plaintiff on some other basis, an interest rate or rates had not been agreed. As I understand the position, the plaintiff maintains that a final agreement has been reached for an interest rate of 12%, insofar as the plaintiff’s entitlement is concerned, come what may, but no interest rate has been agreed insofar as it may become necessary to calculate separately an interest amount due to the defendant with respect to its damages on the counter-claim.
Depending on the manner by which the court approaches the interest question, it may be necessary for further submissions and perhaps evidence to be heard and a finding made as to the precise nature of the parties’ agreement concerning the interest rate. This issue can be deferred for the moment.
The primary issue before the court is the extent to which and the manner by which the court is constrained in calculating and ordering interest in accordance with the discretion conferred by s39 of the District Court Act, given that the Full Court remitted only discreet issues for further determination, which issues have now been resolved,[59] but otherwise left intact the “findings and orders of the District Court”. The Full Court directed this court to make such consequential orders as may be “necessary and appropriate in the light of the [undisturbed] findings and orders of the District Court”.
[59] As far as the interest rate question is concerned, either there now is an enforceable agreement between the parties or, if not, the court will strike a rate or rates in accordance with the discretion conferred by s39 of the District Court Act.
The Parties’ Submissions
Both the plaintiff and the defendants provided detailed written material and submissions[60] which were supplemented by oral argument. However, I have formed the clear view that the resolution of the interest question is constrained and ultimately dictated by an application of the law of equitable set-off to the findings and orders of Judge Kitchen. Accordingly, and without meaning any disrespect to counsel, I have set out in these reasons only a bare summary of their principal submissions.
The Plaintiff’s Submissions
[60] See the Introduction above.
The plaintiff’s principal submission is to the effect that on a proper consideration of the various judgments of Judge Kitchen, there was, no “finding” that the defendants were entitled to a set-off and that this court, as now constituted, is not bound to apply any set-off. In the alternative, the plaintiff submitted that because the plaintiff’s entitlement to recover damages together with interest, as ordered by Judge Kitchen, was set aside on appeal, the court, as presently constituted, is now faced with different factual circumstances and is entitled to exercise the discretion available to it under s39 of the District Court Act afresh. The plaintiff submitted that this court is not bound by prior statements on the part of Judge Kitchen that were based on different findings and, as such, the court’s discretion with respect to interest is unfettered. As part of the plaintiff’s argument, it posited a distinction between “findings” and between “statements” and argued that to the extent Judge Kitchen referred to the defendant as being entitled to a set-off, such was merely a statement and not a finding. As such, his Honour’s approach, insofar as it involved a purported set-off, does not fall within the “findings” of the District Court and the court’s discretion with respect to the awarding of interest is not thereby constrained by the orders of the Full Court.
The plaintiff submitted that the ultimate issue was the “equity of the situation” and that it was “incomprehensible that the Full Court intended to fetter the court’s exercise of its discretion under s39”. As such, “a different quantum and a different interest rate called for the re-consideration of the equity of the situation and in particular, whether the court is still prepared to set-off in the circumstances.”[61]
[61] Paragraph [13] of the plaintiff’s supplementary written submissions, 13 December 2011.
The plaintiff argued that the defendants’ entitlement should not be set-off against the plaintiff’s entitlement and provided a number of reasons why, in its submission, the allowing of a set-off would lead to an inequitable or unfair result. The plaintiff’s primary position was that there should be no set-off, that the plaintiff should be entitled to the sum of $255,000 together with simple interest at the rate of 12% per annum to the date of judgment, that the defendants should be entitled to the sum of $158,237.10, that the defendants should be entitled to interest (at a yet to be determined rate) on the sum of $151,570.43 from the date of the reasons for judgment on 6 June 2008 to the date of judgment[62] and that the parties would “net-off” their respective entitlements.
[62] The plaintiff maintained that the sum of $10,000 awarded to the defendants by the arbitrator presented a difficulty. It was a global settlement sum and there was no basis upon which an accurate allocation between damages, costs and interest could be effected. The plaintiff submitted that, for interest purposes, an arbitrary allocation of 33.33% to the damages component would be fair. Since the award of $10,000 in favour of the defendants was made by his Honour Judge Kitchen in his reasons for judgment dated 6 June 2008, the defendants should be entitled to interest not on $158,237.10 but on $151,570.43 from the date of the reasons on 6 June 2008 to the date of final judgment.
In the alternative, and in the event that a set-off were to be applied, the plaintiff submitted that any set-off should take effect as at 6 June 2008 (the date of the reasons finalising the defendants’ entitlement). On this basis, the plaintiff should be entitled to simple interest at the rate of 12% per annum on the sum of $255,000 for the period 1 July 2000 to 6 June 2008 and thereafter simple interest at the rate of 12% per annum on the sum of $103,429.57[63] until the date of final judgment.
[63] $255,000 less $151,570.43; see the previous footnote.
The plaintiff submitted (with reasons) that if the court were to determine that the defendant was entitled to set-off the amounts due to it any such set-off would “not arise until judgment [was] given on 6 June 2008”.[64] However, in my view, the arguments provided by the plaintiff in support of this submission were arguments relevant to the a priori question of whether or not an order that the defendants were entitled to an equitable set-off, in the circumstances, was appropriate at all. I discuss this issue further below.
Defendants’ Submissions
[64] See generally paragraph [31] to [34] of the plaintiff’s initial written submissions.
The defendants submitted that the court, as presently constituted, is bound by the order for set-off made by Judge Kitchen and that the interest entitlement should be determined in that context. The defendants submitted that the amount to which the plaintiff should be found entitled and upon which interest should be calculated is the sum of $96,762.90. They arrive at this sum by taking the plaintiff’s entitlement (as now agreed) of $255,000 and deducting the amount ultimately found by and set-off by his Honour Judge Kitchen as at 6 June 2008 in the total amount of $158,237.10.[65]
[65] Damages for inconvenience and disruption - $8,000, for diminution in value - $20,000, for the under-setting works - $120,237 and for the Scott Schedule items - $10,000.
The defendant further submitted that interest should be payable by the defendants to the plaintiff on that amount but only from the time when it was known that a credit would exist in favour of the plaintiff, that is, from 1 June 2007 until final judgment.
The defendants submitted that Judge Kitchen made a finding that there is to be a set-off and that the court is bound by that finding. However, the defendants further submitted that it did not follow that the court was bound to award interest from 1 July 2000 but that, when exercising the discretion available under s39, an order for interest commencing from a much later date could be made. Counsel for the defendants, in his oral submissions, put a number of arguments as to why the finding or order for a set-off made by Judge Kitchen was the proper order to be made in all of the circumstances and fairly reflected the merits between the parties and as to why, on the proper exercise of the discretion available under s39, the defendants should pay interest only from 1 June 2007 and not 1 July 2000.[66]
[66] I have inferred that the defendants selected a commencement date of 1 June 2007 because it was in May of 2007 that the under-setting work was completed and the quantum of the defendants’ damages for breach of contract, at least in this respect, crystallised.
Resolution of the Interest Question
There is a paucity of discussion in Judge Kitchen’s various judgments of the notion of set-off including the arguments in favour of and against the ordering of an equitable set-off which, like other equitable remedies, is discretionary.[67] Nevertheless, it is clear to my mind that Judge Kitchen made a finding, and indeed ordered, that the defendants were entitled to set-off the damages ultimately found due to them against the plaintiff’s claim. Whether or not the question of equitable set-off was argued fully, or at all, before his Honour is not to the point as far as this court is concerned. The defendants had pleaded an entitlement to a set-off and his Honour made a finding that the defendants were entitled to a set-off.[68] His Honour made final (subject to appeal) orders consistent with his finding that the defendants were entitled to a set-off.[69] The only type of set-off available in the circumstances was an equitable set-off within the fourth of the categories identified in the case law[70] being where the party seeking the benefit of an equitable set-off can show some equitable ground for being protected against his adversary’s demand. The orders made by his Honour dealing with interest are explicable only on the basis that his Honour had allowed an equitable set-off, thereby reducing the sum due to the plaintiff and on which interest was to be calculated as from the date the plaintiff’s entitlement accrued, that is, 1 July 2000.
[67] See the discussion in Rory Derham’s “The Law of Set-Off” 3rd ed at [4.44]-[4.47].
[68] Paragraph [2] under the heading “Summary” on page 37 of the judgment of 30 March 2007 [2007] SADC 34 and paragraphs [80] and [81] of his Honour’s judgment of 6 June 2008 [2008] SADC 70.
[69] Orders filed 11 February 2009 (FDN 107).
[70] See Meagher, Gummow and Lehane “Equity, Doctrines and Remedies” 4th ed at [37-035]
His Honour’s final order allowing the set-off was made on 12 June 2008. It was only then that his Honour finally declared the position between the parties to be that the defendants owed the plaintiff, and the plaintiff had an enforceable judgment for, $84,590.90 (that is, $242,828 less defendants’ damages as assessed by his Honour of $158,237.10).
As it happens, the plaintiff’s initial entitlement of $242,828 has been set aside and replaced with the sum of $255,000. However, apart from this one change, his Honour’s findings and orders in this respect were not challenged on appeal and were left undisturbed. The Full Court directed this Court to make such consequential orders as may be “necessary and appropriate in the light of the [undisturbed] findings and orders of the District Court”. As such, I am bound to follow Judge Kitchen’s approach subject to adjusting for the plaintiff’s correct, as now agreed, entitlement. It follows that there should be final judgment for the plaintiff, for the amount of $96,762.90.[71]
[71] The plaintiff’s entitlement of $255,000 less the defendants’ set-off of $158,237.10.
As far as the question of interest is concerned, his Honour’s findings and orders resulted from a contractual entitlement to interest perceived to have been enjoyed by the plaintiff. His Honour applied the contractually provided for interest rate (subject to the plaintiff’s concession) and chose a commencing date for his calculations, again, in accordance with the plaintiff’s perceived contractual entitlement to demand payment. These findings of his Honour did not survive the appeal. At no time did his Honour exercise the discretion as to interest rate or commencement date required upon an application of s39 of the District Court Act. These two discretions are now to be exercised for the first time.
It is common ground that the set-off to which the defendants had been found entitled is an equitable set-off and not a common law set-off.[72]
[72] See generally D Galambos and Son Pty Ltd v McIntyre (1974) 5 ACTR 10, Meagher, Gummow and Lehane “Equity, Doctrines and Remedies” 4th ed chapter 37 and Rory Derham “The Law of Set-Off” 3rd ed chapter 4.
The right to a common law set-off derives from the English Statutes of Set-off enacted in 1729 and 1735. These were incorporated into the laws of the various Australian jurisdictions including South Australia.[73] A common law set-off applies where there are mutual debts between the parties. It may be “pleaded at bar” and operates as a procedural defence. In other words, separate and distinct debts remain in existence until there is judgment for a set-off, and the defence, if successful, takes effect only when judgment is given by reducing the claim against which is operates.
[73] Australian Courts Act 1828 (9 Geo.4, C85) s24, and see Davies v Gertig (No 2)(2002) 83 SASR 521; [2002] SASC 257 at [95]ff including fn 25.
The received view is that set-off in equity – at least insofar as the so-called fourth category of equitable set-off is concerned – operates substantively.[74]
[74] See Meagher, Gummow and Lehane “Equity Doctrines and Remedies” 4th ed at pp1057-1060; Rory Derham “The Law of Set-Off” 3rd ed at pp93-105; AWA v Exicom Aust Pty Ltd (1990) 19 NSWLR 705 at 710-711; Gilsan v Optus (No 3) [2005] NSWSC 518; Lord v Direct Acceptance Corporation Ltd (Rec and Man Appointed)(In Liq) (1993) 32 NSWLR 362; Murphy v Zamonex (1993) 31 NSWLR 439 at 465; Roadshow Entertainment Pty Ltd v (ACN 053 006 269) Pty Ltd Rec and Man Appointed (1997) 42 NSWLR 462 at 481. In Gertig v Davies (2003) 85 SASR 226, the South Australian Full Court considered the nature of an order for set-off available to the Supreme Court in its inherent power when exercising the discretion, formerly available to it, when awarding costs pursuant to Rule 101.01(1) of the 1987 Supreme Court Rules. Doyle CJ (with whose reasons Mullighan and Besanko JJ agreed), considered such a set-off to have a substantive effect similar to the statutory set-off available under s86 of the Bankruptcy Act 1966 (Cth). The Chief Justice did not express a final view about the procedural–substantive dichotomy in the context of equitable set-off.
Giles J in AWA Ltd v Exicom Australia Pty Ltd[75] explained the juristic basis of an equitable set-off in the following terms.[76]
Prior to the Judicature Act, an equitable set-off was enforced by an injunction obtained in equity to restrain the plaintiff at law from proceeding with his action without giving credit to the defendant for the amount of his cross-demand. Hence it was not enough simply to point to a cross-demand: there had to be shown “… some equitable ground for the defendant being protected against his adversary’s demand”. Hence also where that equitable ground was shown the defendant had a defence to the claim, and more than just a cross-demand. The so-called equitable set-off could be better described as an equitable defence and operates to reduce or extinguish the plaintiff’s claim.
Thus the effect of an equitable set-off is not just a restraint upon enforcement of a judgment, but a restraint which if imposed will have important consequences if (for example) the plaintiff be insolvent. Its effect is not just procedural. There must be something additional to the fact of a cross-demand to cause the court, in the exercise of its equitable jurisdiction, to require the plaintiff to set-off against his claim, the claim of the defendant.
That requirement has often been expressed in language to the effect that the equitable set-off must go to the root of or impeach the title of the plaintiff’s claim. What is meant by such phrases, particularly in the light of the more recent cases, itself needs explanation. In D Galambos & Sons Pty Ltd v McIntyre Woodward J extracted from the language used by Lord Cottenham LC in Rawson v Samuel and the cases to which his Lordship referred that the prerequisites of an equitable set-off were clear cross-claims for debts or damages which were:
“… so closely related as to subject-matter that the claim sought to be set-off impeached the other in the sense that it made it positively unjust that there should be recovery without deduction.” (Emphasis by Giles J).
[75] (1990) 19 NSWLR 705 at 710-711.
[76] Citations omitted.
Derham puts the position this way.[77]
[T]he view that the defence is substantive does not mean that it operates as an automatic extinction of cross-demands. Rather, the creditor’s conscience is affected, so that the creditor is not permitted in equity to treat the debtor as being indebted to him to the extent of the debtor’s cross-claim. At law the cross-demands remain in existence and retain their separate identities until extinguished by judgment or agreement. But as far as equity is concerned, it is unconscionable for the creditor even before judgment to regard the debtor as a debtor to the extent of debtor’s (sic) cross-demand, or to treat the debtor as having defaulted in payment to that extent, if circumstances exist which support an equitable set-off. In this sense, it operates in equity as a complete or a partial defeasance of the plaintiff’s claim.
[77] At p94-95, citations omitted.
The defendants’ entitlement to set-off the amount of $158,237.10 found due to them by Judge Kitchen, necessarily operates by way of impeaching the plaintiff’s title to the amount of $255,000 otherwise due to it. As a consequence there has been a partial defeasance of the plaintiff’s claim which, as a consequence of the equitable set-off, stands at $96,762.90. Had the defendants’ claim been assessed soon after the dispute arose the fact that this[78] was all that the plaintiff was entitled to and that any interest entitlement would be calculated on this net amount only would have come as no surprise. The problem for the plaintiff is that it has been out of its money (and either paying, or not accruing interest on the full amount of the outstanding progress payments) for many years. However, the effect of the equitable set-off is that the plaintiff was only ever entitled to a net award of $96,762.90 and the difference between this amount and the total of the outstanding progress payments ($255,000) was always going to remain unpaid by the defendants at the plaintiff’s expense.
[78] Albeit subject to the defendants' set-off entitlement being calculated in accordance with then applicable prices.
I am satisfied that, consistent with the authorities that explain the juridical basis for and the effect of the equitable set-off ordered by Judge Kitchen, the starting point for a statutory pre-judgment interest calculation is the finding that, as at 1 July 2000, the defendants were indebted to the plaintiff by way of a liquidated amount of $96,762.90.
It follows that I reject the plaintiff’s submission that I am free to refuse to allow a set-off or that any set-off should only operate from 6 June 2008, thus allowing for pre-judgment interest to run on the full amount of $255,000 for the best part of 8 years. The plaintiff raised a number of reasons why to do otherwise would produce an inequitable result including that whilst it is only entitled to be paid its due in the year 2000 money terms, the defendants will enjoy a set-off calculated on the basis of the value of money in 2007 and that there had been a significant increase in the cost of the under-setting work over the period. The defendants raise counter arguments. However, in my view, none of this and, in particular, whether the result is equitable or inequitable, is to the point. These are considerations that might bear on the question of whether an equitable set-off should have been ordered in the first place[79] and which might have been agitated had his Honour’s order for an equitable set-off been a subject of the appeal to the Full Court. I am mindful also that, like other forms of equitable relief, terms may be imposed as a condition of granting an equitable set-off. However, as with the making of the order itself, it is not this court’s role to re-visit the order made by Judge Kitchen in order to impose terms designed to alleviate any perceived unfairness.
[79] An equitable set-off can be refused, in the exercise of the discretion, on various bases including, for example, where the cross-claim would depend upon the outcome of the taking of a long and complicated account, Rawson v Samuel 41 ER 451, or would involve considerable delay such that the claimant would not be adequately compensated, Roadshow Entertainment Pty Ltd at 489.
In my view and subject to any re-visiting of the Full Court appeal from Judge Kitchen’s orders, the parties and this court are bound to apply the order for a set-off to the effect that the plaintiff has only ever been entitled to a judgment amount of $96,762.90.
The plaintiff’s contractual right to be paid outstanding progress payments as at 1 July 2000 was not disturbed by the Full Court. Section 39(2)(b) of the District Court Act provides that pre-judgment interest
will be calculated in respect of a period fixed by the Court (which must however, in the case of a judgment given on a liquidated claim, be the period running from when the liability to pay the amount of the claim fell due to the date of judgment unless the Court otherwise determines).
In this case, I see no reason and nothing in the defendants’ submissions serves to persuade me, to determine otherwise. The plaintiff is entitled to simple interest at the agreed rate of 12% per annum commencing 1 July 2000.
However, interest is not to run on the full amount of the judgment sum. At the time Judge Kitchen undertook his interest calculations the parties agreed that, in order to take account of the fact that the award for the Scott Schedule damages was an undifferentiated global figure of $10,000 which included damages, interest and costs, only $5,000 of it should be included as part of any judgment amount for the purpose of pre-judgment interest calculation. I see no reason why the parties should not be held to this agreement. Therefore, the plaintiff’s interest is to be calculated on the sum of $91,762.90.
The remaining question concerns the end point for the period of the interest calculation. Section 39 provides that this shall be the date of judgment unless the court otherwise determines. Ordinarily, where a damages award is varied on appeal the judgment, as varied, will be effective as from the date of the trial Judge’s decision and pre-judgment interest will be calculated to that date[80] with the successful party being restricted thereafter to interest in accordance with the statutory regime regulating interest on judgment debts.[81]
[80] Chakravarti v Advertiser Newspapers Ltd (1998) 72 SASR 361.
[81] In this case, District Court Act s42.
Judge Kitchen entered an order that the plaintiff was entitled to recover from the defendants the sum of $242,828 on 30 March 2007.[82] However, no judgment capable of enforcement was entered to this effect given his Honour’s declaration to the effect that the defendants were entitled to an, as then inchoate, set-off. It was on 11 February 2009[83] that his Honour entered “final judgment” for the plaintiff after taking account of the defendant’s then crystallised set-off. It was this final judgment that was overturned on appeal.
[82] “Copy of Record” for 30 March 2007 following Archonstruct Pty Ltd v Karalis & Ors [2007] SADC 34 delivered on 30 March 2007.
[83] FDN 107.
In addition, consideration is to be given to his Honour’s interim judgment for $35,000 (plus interest) made on 24 October 2007 which also was overturned on appeal.
The question arises as to whether the final judgment for $96,762.90 that I will enter should take effect today or, as to $35,000, on 24 October 2007 and, as to the balance, on 11 February 2009. The question may not only be of academic interest. The agreed pre-judgment interest rate of 12% per annum is likely to differ from the judgment debt interest rates applicable under s42 and the extra period of time (between two years and three and a half years) may not be inconsequential.
Both parties approached their submissions on the question of interest on the basis that the end point for any interest calculations would be the date of final judgment delivered by me, not any of the dates of the judgments given by Judge Kitchen. Whilst the point I have raised was not expressly dealt with during submissions, both parties presented their submissions in the context that the court was setting out to award interest in exercise of the discretion conferred by s39. As such, I doubt that the issue was overlooked but, rather, was conceded by both parties.[84]
[84] See the plaintiff's written submissions at paragraphs [28] and [30.2] and its supplementary written interest calculations and the defendants' written submissions at paragraph [8.2].
In any event, in my view, the situation in Chakravarti v Advertiser Newspapers Ltd[85] is to be distinguished from the present. In that case, a judgment for unliquidated damages was varied on appeal. To allow the variation to take effect at the time of the Full Court’s decision, rather then at the time of the trial judge’s judgment, would have caused practical difficulties, as explained by the Full Court. In the present case, the judgment of Judge Kitchen, insofar as the plaintiff’s entitlement is concerned, was not varied on appeal it was vacated. The finding that the plaintiff was entitled to any monetary amount and all that flowed from it, was wholly set aside and the matter remitted to the District Court for a fresh determination. A full hearing on the merits was envisaged, there not having been such a hearing before Judge Kitchen. As it happened the parties were able to reach agreement so as to enable a consent judgment.
[85] (1998) 72 SASR 361.
The net effect is not a variation, by the Full Court, of his Honour’s judgment in this critical respect. Indeed there has been no consideration of merits and determination of quantum by the Full Court at all. There is but a first and only (merits based)[86] judgment by a differently constituted trial court. There is no good reason (practical or otherwise) why the date of any “final” determination previously made but vacated should be accorded primacy over the only final determination now in place.
[86] In the sense that a merits based hearing was to take place but for the settlement of this aspect of the dispute by the parties.
Conclusion
The plaintiff is entitled to pre-judgment simple interest at the rate of 12% per annum on the amount of $91,762.90 for the period 1 July 2000 until today’s date,[87] that is, 11 years and 216 days. That calculation produces an amount of $127,643.44.
[87] This interest is pursuant to statute and not any contractual entitlement. Accordingly I am not constrained, by Judge Kitchen’s reasoning, to ignore any part of a month.
The plaintiff is entitled to a final judgment against the defendants in the amount of $224,406.34,[88] inclusive of interest. I will hear the parties on the question of the costs of the proceedings generally.
[88] The amount due to the plaintiff after set-off of $96,762.90, together with interest of $127,643.44.
Addendum
On 11 April 2012 and after hearing from the parties the judgment in favour of the plaintiff in the amount of $224,406.34 inclusive of interest was recalled and, in lieu, judgment entered for $238,316.48 inclusive of interest.
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