Archonstruct Pty Ltd v Karalis (No 5) - [2012] SADC 36

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
ARCHONSTRUCT PTY LTD v KARALIS & ORS (No 5)
[2012] SADC 36
Judgment of His Honour Judge Nicholson
3 April 2012
PROCEDURE - COSTS

ARCHONSTRUCT PTY LTD v KARALIS & ORS (No 5)
[2012] SADC 36
Introduction

The procedural history of this long standing matter has been summarised in the judgment of Kourakis J in the Full Court[1] and in my earlier judgment.[2] Following the Full Court decision, delivered on 23 December 2008, the matter was remitted to the District Court for the determination of a discreet 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”.
[1] [2008] SASC 368 at paragraphs [3]-[46].
[2] Archonstruct Pty Ltd v Karalis & Ors (No 4) [2012] SADC 5.
The discreet matter of substance was resolved by the parties without the need for a further hearing and the only consequential matters left for this court to resolve were those of interest and costs. In my earlier judgment I ruled on questions of interest and held that the plaintiff was entitled to a final judgment against the defendants in the amount of $224,406.34 inclusive of interest. The only matter thereafter remaining to be determined, being the subject of this judgment, was the question of costs.
Extant costs orders at the time immediately prior to the appeal to the Full Court
After his Honour Judge Kitchen’s final judgment dated 6 June 2008, the following orders, as between the plaintiff and the defendants, were extant.[3]
[3]    As entered on 12 June 2008, FDN 107.
1.Final judgment for the plaintiff against the defendants in the sum of . . . .
2.Interest on the sum . . . is awarded . . . .
3.That up to and including the date of judgment made by his Honour Judge Bright on 17 November 2004:
a.      plaintiff to have its costs of the claim against the defendants;
b.      defendants to have their costs of the counterclaim against the plaintiff.
4.The defendants are to pay two-thirds of the plaintiff’s costs of the claim and the counterclaim between the date of the orders of his Honour Judge Bright on 17 November 2004 and the orders of 30 March 2007.
5.Plaintiff and defendants to bear their own respective costs of and incidental to the issues in the order made on 24 October 2007.
6.The plaintiff is to pay the costs of the defendant as between party and party of and incidental to the proceedings for the determination of the quantum of the reasonable cost of underselling (sic: undersetting) determined in the judgment on 6 June 2008.
In addition, some final costs orders made during interlocutory stages of the proceedings have not been disturbed and remained to be enforced.[4]
[4] See, for example, the costs orders referred to in the affidavit of David Ash Black sworn 1 March 2012 (the “Black affidavit”) at paragraph [20].
Orders 1, 2, 4 and 5 were set aside following the defendant’s successful (in part) appeal to the Full Court. The subject matter of orders 1 and 2 was taken up and dealt with in my order, referred to above, when giving the plaintiff final judgment against the defendants. Orders 3 and 6 were not set aside and remain to be enforced.
As far as order 5 is concerned, the plaintiff submitted that it should be re-instated and the defendants conceded, during argument, that it would be appropriate to re-instate it, subject to the defendants’ argument that a special costs order ought be made in its favour in reliance on a so called Calderbank letter of offer put to the plaintiff on 13 October 2004.
In other words, the defendants submitted that they should be entitled to a costs order taxed on a solicitor and client basis as a consequence of an alleged imprudent failure, by the plaintiff, to accept the offer of final settlement made to the plaintiff in that letter. Counsel for the defendants then conceded that, if I were to rule against the defendants on that issue, it would be appropriate for order 5 to be re-instated.
However, there may have been some confusion during the hearing before me as to what order 5, in fact, related to. At one stage during submissions, counsel for the plaintiff indicated that order 5 related to the costs incurred by both parties in connection with arbitration proceedings commenced and abandoned very early in the litigation, that is, in about 2001. On a further review of the materials, that does not appear to be correct. Order 5 refers to the costs “of and incidental to the issues in the order made on 24 October 2007”. Whilst they were the terms of the sealed order, during the argument which lead to the order being made his Honour, Judge Kitchen, said this[5].
In lieu of 5, delete the words and insert this:
The plaintiff and the defendant bear their own respective costs of and incidental to the determination of the issues and the orders made on 24 October 2007. (Emphasis supplied)
In the opening paragraph of his Honour’s (second judgment) of 24 October 2007, 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”.
[5] Transcript of 12 June 2008 at page 30.
In my view, the intent behind order 5 was to deal with the costs incurred by the parties with respect to all of the issues dealt with in the hearing leading to the judgment of 24 October 2007. Order 5 was not directed to the costs of the failed arbitration. Indeed, point 5 of his Honour’s conclusion in the judgment of 24 October 2007[6] was in the following terms.
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.
According to the copy of the court record for this matter,[7] on 23 October 2008, his Honour Master Rice made final orders with respect to the costs of the abandoned arbitration. Those orders have not been the subject of appeal nor in any other respect challenged and remain to be enforced.
[6] [2007] SADC 107 at page 14.
[7] Black affidavit, exhibit DAB-1.
Order 4 was intended to deal with the parties’ claims for costs concerning both the claim and the counter claim between the date of the orders made by his Honour Judge Bright on 17 November 2004 (see order 3 above) and the orders of his Honour Judge Kitchen of 30 March 2007. In his judgment of 24 October 2007, Kitchen J intimated (point 4 of the conclusion)[8] that an order in terms of order 4 should be made. However, he deferred making that order until there had been a final determination by the court of the quantum of the defendant’s entitlement to their undersetting costs and a final determination with respect to the outstanding Scott Schedule matters that had been remitted to an arbitrator pursuant to s33 of the District Court Act following his Honour’s judgment of 30 March 2007. His Honour made the order intimated (that is, in terms of order 4 above) on 12 June 2008 following his Honour’s judgment of 6 June 2008 during which these two issues were finalised.
[8] At page 14.
The issues dealt with in his Honour’s judgment of 6 June 2008 were the subject of their own dedicated cost orders: the defendants’ costs with respect to the undersetting issue is dealt with in order 6 above which has not been disturbed and the parties’ costs in connection with the arbitration that did proceed, relating to remaining Scott Schedule items (that is, other than the undersetting, the slip joint and the underfloor ventilation items) were dealt with in the rolled up arbitrator’s award, made by consent, of $10,000.[9]
[9] These matters are more fully dealt with and explained in my earlier judgment, Archonstruct Pty Ltd v Karalis & Ors (No 4) [2012] SADC 5.
As I have already indicated, the matters dealt with by his Honour’s judgment of 24 October 2007 were also the subject of their own dedicated costs order, being order 5 above which order was set aside by the Full Court.
It is for this reason, I apprehend, that on 12 June 2008, by way of order 4, his Honour only dealt with the costs of the claim and the counter claim up until the orders of 30 March 2007; in other words, all matters of substance dealt with in further hearings between the parties thereafter had been made the subject of additional dedicated costs orders.
Finally, by way of background and context, it is to be remembered that the only changes brought about by the Full Court to the position ultimately arrived at by Judge Kitchen with respect to all substantive matters were as follows:
(a)The plaintiff’s claimed entitlement to $242,828 was set aside and this issue remitted to the District Court for a (first) hearing on the merits. The issue was, ultimately, settled without the need for a hearing such that, by consent, the plaintiff was found entitled, on its claim, to the greater (by $12,172) sum of $255,000.
(b)The plaintiff’s entitlement to interest, in accordance with a contractual provision which purportedly conferred interest at the rate of 18% per annum,[10] was set aside and the issue of interest remitted to the District Court for determination in accordance with the discretion available under s39 of the District Court Act 1991.
[10] The contractual provision relied on referred to compound interest but the plaintiff conceded, and Judge Kitchen calculated interest based on, only an entitlement to simple interest.
The parties’ essential submissions
It is with this background and context in mind that consideration needs to be given to:
(a)the plaintiff’s primary submission that order 5 should be re-instated and that order 4 should be re-instated, but extended so as to cover the period 17 November 2004 until the conclusion of the proceedings; and
(b)the defendants’ primary submission that, by virtue of their Calderbank offer made 13 October 2004, the defendants should be entitled to their costs on a solicitor and client basis from 27 October 2004 until the conclusion of the proceedings.
Apropos (b) above, the defendants acknowledged that order 3 dealing with the costs of the proceedings until 17 November 2004 had been undisturbed. However, they argued that, if their entitlement to solicitor/client costs consequent on the Calderbank letter dated 13 October 2004 was sound, order 3 ought to be amended so as to apply until 26 October 2004 rather than 17 November 2004. This would permit the defendants to enjoy their special costs order for the period from 14 days after the service of the Calderbank letter (13 October 2004).
The court’s approach to the remaining costs issues
The matter has been remitted to this court to consider what consequences for costs should follow from the revisitation by this court, after the Full Court appeal, of the plaintiff’s claim to outstanding progress payments and the determination of its entitlement to interest absent the contractual entitlement found by Judge Kitchen but rejected by the Full Court. I recognise that with respect to the subject matter of those costs orders that have been set aside (4 and 5) the discretion that resides in the trial judge as to costs, ordinarily, is to be exercised afresh. However, the matters remitted to this court by the Full Court were discreet and quite confined in scope. I am mindful that his Honour Judge Kitchen was the trial judge and intimately involved in the matter throughout the period from no later than 7 August 2006 until his making of orders on 12 June 2008 following his third and final judgment. As counsel for the plaintiff submitted, Judge Kitchen had the advantage of conducting the three hearings before him, seeing and hearing the trial witnesses and coming to terms with and forming conclusions about all of the issues between the parties thrown up by this long running and complex litigation.
To some extent I am to be guided with respect to any discretion I exercise, by the approach to the costs issues, in general, adopted by his Honour, bearing in mind, of course, the extent to which that general approach has been compromised by the Full Court decision and later developments. In this respect, I also bear in mind the Full Court injunction that I am to make “such consequential orders as may be necessary and appropriate in the light of further findings and orders of the District Court.”
The Calderbank letter
By letter dated 13 October 2004 addressed to the then solicitors for the plaintiff, the defendants offered to resolve all outstanding disputes between plaintiff and defendants by the payment of $125,000 (inclusive of interest) together with an additional $50,000 towards costs.
In other words, our clients offer to pay your client $175,000, all inclusive, in full and final settlement of claims arising out of this matter.
However, the offer made was a conditional offer.
This offer is made contemporaneously with and conditional upon the acceptance of an offer to the plaintiff (sic: the architect, a related party) a copy of which, addressed to [the architect’s solicitors] is attached hereto.
This is a Calderbank letter and is written without prejudice save and except as to costs.
By letter dated 12 October 2004, addressed to the solicitors for the architect, the solicitors for the defendants offered to resolve the dispute with the architect on a basis of “both parties to walk bearing their own costs”. The offer was similarly conditional.
This offer is made contemporaneously with and conditional upon the acceptance of an offer to the plaintiff a copy of which, addressed to [the plaintiff’s then solicitors] is attached hereto.
This is a Calderbank letter and is written without prejudice save and except as to costs.
The offer to the plaintiff in the letter dated 13 October 2004 stipulated no time in which it might be accepted.[11] The defendants argued before Judge Kitchen that the plaintiff’s failure to accept this offer was imprudent. The offer to settle was made on 13 October 2004 before the commencement of the trial before Judge Bright on 8 November 2004. Accordingly, so the defendants argued, they should have been entitled to a special costs order as against the plaintiff.
[11] The two letters are exhibits DAB-2 and DAB-3 to the Black affidavit.
The outline of the defendants’ submissions with respect to this issue before Judge Kitchen, dated 4 July 2007, was put before the court during the present argument. Of course, the circumstances before Judge Kitchen, at the time he heard the argument, were different from those before this court. According to Judge Kitchen’s findings, the plaintiff was entitled to $242,828 before setting off any defendants’ entitlement and the plaintiff was entitled to a more generous interest calculation. The defendants submitted that, as a consequence of his Honour’s determinations to that point, the amount of $125,000, as offered by way of settlement, exceeded that which the defendants then contended would be the plaintiff’s ultimate entitlement inclusive of interest, following the anticipated set-off.
His Honour did not concede that the Calderbank offer would necessarily exceed the plaintiff’s ultimate entitlement and was, of course, unable to form a concluded view on this issue at the time because the defendants’ costs of the undersetting work and the arbitrator’s award for the outstanding Scott Schedule items still had to be determined. Nevertheless, his Honour rejected the defendant’s argument for reasons to do with the form of the offer, in particular, its conditional nature.[12] I agree with that reasoning of his Honour. Furthermore, the reasoning is not affected by the subsequent change in the plaintiff’s entitlement on its claim, or the subsequent change in the method by which interest is to be calculated or the ultimate calculation of that interest.
[12] See Archonstruct Pty Ltd v Karalis (No 2) [2007] SADC 107 at paragraph [35].
The defendants contend[13] that their offer of 13 October 2004 to the plaintiff was rendered unconditional by a letter from the solicitors for the architect dated 26 October 2004 addressed to the defendants’ solicitors[14] which included the following.
Further to previous communications in relation to this matter I advise that my clients are prepared to renew their offer that your clients claim against [the architect] be settled on the basis that each party bear its own costs.
As you would appreciate, the offers that had been made by your clients are effectively incapable of acceptance by [the architect] because they are linked to the resolution of [the plaintiff’s] claim.
Therefore this offer is put in isolation as a final effort to resolve matters between our respective clients.
[13] Black affidavit at paragraphs [23]-[24].
[14] Exhibit DAB-4 to the Black affidavit.
This letter, on behalf of the architect, operated not as an acceptance of the defendants’ conditional offer directed to the architect – there could be no such unilateral acceptance by the architect – but as a rejection of that offer and, in particular, of the conditional nature of that offer, and as the assertion of a counter-offer. Unless and until that counter-offer were to be accepted by the defendants (it was not) the defendants’ offer to the plaintiff would retain its conditional status and be incapable of independent or unilateral acceptance by the plaintiff.
In addition, the plaintiff’s final position is now known. I have found the plaintiff to be entitled (after the defendants’ due set-off) to the sum of $96,762.90 together with simple interest at the rate of 12% per annum on the amount of $91,762.90 for the period 1 July 2000 until judgment on 1 February 2012.[15] As at 13 October 2004, the date of the plaintiff’s letter of conditional offer, the plaintiff was entitled to an amount in the order of $143,977. The defendants’ offered (conditionally) the sum of $125,000 together with a further $50,000 towards costs. In other words, the plaintiff succeeded in an amount greater than that which was offered, leaving aside the imponderable issue of costs.
[15] Archonstruct Pty Ltd v Karalis & Ors (No 4) [2012] SADC 5.
In these circumstances, I am not satisfied that the plaintiff acted imprudently in failing to reach a three party compromise on the terms the defendants were offering. The defendants’ argument that it should be entitled to receive its costs on a solicitor and client basis fails. However, this still leaves open the question of whether the defendant should have their costs for the proceedings from 17 November 2004 to date on a party and party basis, or whether the orders, as sought by the plaintiff, or some variation thereof, are appropriate.
The issues still not the subject of costs orders
I have reflected on whether or not to abandon the piecemeal approach to costs adopted by Judge Kitchen and to make just the one, all encompassing, order for the period after 17 November 2004 (see order 3) and embracing all of the subject matter of the overturned orders 4 and 5. Order 6 remains undisturbed and could not be included in such a process. However, in my view, this would not be appropriate. The case is one of those relatively rare cases where costs orders directed at separate issues between the parties is warranted and particularly so given that four separate hearings (and judgments) concerning substantive issues have resulted. Furthermore, the change in the parties’ respective fortunes after the appeal, as compared with the position before Judge Kitchen, is not so significant as to warrant a wholesale revision of the approach to costs undertaken by his Honour. For these reasons I propose to review orders 4 and 5 in isolation.
Order 5 – subject matter

Order 5 related solely to the issues dealt with in Judge Kitchen’s second judgment.[16] In this judgment, his Honour dealt with five issues as between the plaintiff and the defendants.
(a)The first issue dealt with was whether or not the plaintiff’s purported contractual right to compound interest at the rate of 1.5% per month comprised a penalty and therefore was unenforceable. His Honour ruled against the defendant’s contentions in this respect. However, his Honour proceeded to make interim calculations and to pronounce an interim order for payment of interest based on the plaintiff’s concession that interest at the contractual rate of 1.5% per month was to be calculated on a simple basis only. On appeal, the Full Court determined that, on its proper construction, the parties’ contract did not include the term which purportedly provided for interest at 1.5% per annum.[17] It was unnecessary for the Full Court to determine whether or not the term relied on by the plaintiff, had it formed part of the contract, would have comprised an unenforceable penalty.[18]
(b)The second issue dealt with by Judge Kitchen in the 24 October 2007 judgment concerned the date from which the plaintiff’s entitlement to interest accrued (1 July 2000). This finding by his Honour, in effect, survived the Full Court appeal and was adopted, albeit with further reasoning and support, in my recent judgment dealing with interest issues.[19]
(c)The third issue dealt with by his Honour was the question of whether or not the defendants were entitled to a costs order based on their Calderbank letters. I have already re-visited this issue. In essence, I have come to the same conclusion, in favour of the plaintiff, for reasons similar to Judge Kitchen’s.
(d)The fourth issue dealt with concerned the defendants’ unsuccessful application for a Bullock order against the plaintiff with respect to the architect’s costs that the defendant had been ordered to pay. This issue has not featured subsequently.
(e)Finally, Judge Kitchen heard argument on and determined the issue of costs generally as between the plaintiff and the defendants which ultimately resulted in costs order 4 above.
[16] 24 October 2007, [2007] SADC 107.
[17] See Karalis & Anor v Archonstruct Pty Ltd [2008] SASC 368 at [123].
[18] Kourakis J speaking for the Full Court at [131] held that the plaintiff “had no right to penalty interest”. However, I do not take his Honour to have been referring there to the distinction drawn, in contract law, between an enforceable liquidated damages clause and an unenforceable penalty damages clause.
[19] Archonstruct Pty Ltd vKaralis (No 4) [2012] SADC 5.
In summary, the effect of (a) to (e) above is that some legal argument before his Honour concerning the proper construction of the interest rate provisions in the written contractual document was wasted and ultimately decided unfavourably to the plaintiff and the argument leading to costs order 4 above was conducted on a slightly different basis than that now applicable (see further below). In my view, whilst the defendants have enjoyed some further limited success, it is not such as to warrant a costs order different from Judge Kitchen’s order 5, although I will be making a change with respect to order 4 (see below). To the extent that, with respect to the subject matter of order 5, I am required to exercise the discretion afresh, I would make an order in similar terms. However, I would make it in accordance with his Honour’s original wording; the plaintiff and defendant are to bear their own respective costs of and incidental to the issues and the orders made on 24 October 2007.
Order 4 – subject matter
I have set out above the subject matter dealt with by order 4 where I reached the conclusion that all matters of substance dealt with in hearings after 30 March 2007 had been made the subject of additional dedicated costs orders.[20] The only changes to the situation that confronted Judge Kitchen, as a result of the Full Court appeal and which might bear on the continued appropriateness or otherwise, of an order in terms of order 4, are those as summarised in paragraph [13] above. After the appeal, the plaintiff succeeded again with respect to its claim but this time by a greater amount ($12,172) and the question of interest was resolved by the court in a manner that fell somewhere between the parties’ respective contentions. In these circumstances, and in the exercise of my discretion, I see no reason to depart from the basic structure of order 4 with the period of its operation extended to the end of these proceedings, apart from one matter.
[20] See paragraphs [9] to [13] above.
Ultimately, the plaintiff failed in a number of respects with respect to its claim to a contractual entitlement to interest. Of some significance is the fact that the written contractual basis upon which Judge Kitchen operated was varied, quite significantly, by the Full Court. Further, when the proper basis for the plaintiff’s entitlement to interest was identified,[21] its award in this respect was considerably less than it would have been had the purported contractual entitlement been good. To this, not insignificant, extent, the defendants ultimately succeeded, in part, with their defence to the claim. In my view, in the circumstances of this litigation this should be reflected in the costs order dealing with the subject matter of order 4. I would order that, subject to other costs orders already in place or to be made by me, the defendants are to pay 60% of the plaintiff’s costs of the claim and two-thirds of the plaintiff’s costs of the counterclaim from the date of the orders of his Honour Judge Bright on 17 November 2004 to the conclusion of the proceedings in this court.
[21] Pre-judgment interest in accordance with the discretion conferred by s39 of the District Court Act 1991.
Final orders as to costs
Orders 3 and 6 made by his Honour Judge Kitchen have not been disturbed and remain to be enforced by the parties. They are in the following terms.
3.Up to and including the date of judgment made by his Honour Judge Bright on 17 November 2004:
(a) Plaintiff to have its costs of the claim against the defendants;
(b) Defendants to have their costs of the counterclaim against the plaintiff.
6.The plaintiff is to pay the costs of the defendants as between party and party of and incidental to the proceedings for the determination of the quantum of the reasonable cost of undersetting determined in [his Honour Judge Kitchen’s] judgment on 6 June 2008.
In addition, such final costs orders made during the interlocutory stages of the proceedings which have not been disturbed remain to be enforced by the parties. Under this heading and for the purposes of order 2 below I include the costs of the Scott Schedule arbitration which had already been ordered in favour of the defendants as part of the rolled up arbitrator’s award of $10,000 made by consent.[22]
[22] See paragraph [10] above.
For the reasons given I now make the following further costs orders.
1.The plaintiff and the defendants are to bear their own respective costs of and incidental to the issues and the orders made on 24 October 2007.
2.Subject to such interlocutory costs orders as have been made in the proceedings, and which have been or which remain to be enforced, and subject to order 1 made today and order 6 entered by Judge Kitchen on 12 June 2008 (FDN 107) the defendants are to pay 60% of the plaintiff’s cost of the claim and two-thirds of the plaintiff’s costs of the counterclaim between the date of the orders of his Honour Judge Bright on 17 November 2004 and the completion of the proceedings in this court.
The defendants’ application for a stay of execution of the judgment
By interlocutory application filed on 3 February 2012,[23] the defendants sought a stay of execution of the judgment delivered by me on 1 February 2012 in favour of the plaintiff. In support of the application, the defendants filed an affidavit of their instructing solicitor, David Fullerton Cleland, sworn 3 February 2012.[24] At the time of hearing argument on the costs issues I also received some submissions from the parties on this question of a stay, although not full argument. Now that final costs orders have been made in the matter, the parties and the court will be in a better position to assess the merits of any stay application should it be pursued. I will hear the parties further, if necessary, on the fate of the plaintiff’s application for a stay of execution of the judgment.
[23] FDN 139.
[24] FDN 138.