Bibbo v Nikou & Delatex Pty Ltd (No 2) - [2011] SADC 140

District Court of South Australia
(Civil)
BIBBO v NIKOU & DELATEX PTY LTD (NO 2)
[2011] SADC 140
Reasons for Decision of His Honour Judge Beazley (ex tempore)
25 November 2011
PROCEDURE - COSTS
Building contract – the plaintiff entitled to recover the sum of $137,283.83, inclusive of interest, on his claim – the defendants entitled to recover the sum of $111,181.00 inclusive of interest on their counterclaim.
The plaintiff seeks a determination that a single judgment be entered in favour of the plaintiff against the defendants for the balance owing to him after the deduction of the sum awarded to the defendants on their counterclaim – consideration of the discretion in 6 DCR 224(2).
HELD: Single judgment entered in favour of the plaintiff in the sum of $26,102.83 inclusive of interest, being the balance owing to the plaintiff. The defendants' counterclaim is dismissed.
COSTS
The plaintiff seeks an order for costs in his favour on the final balance judgment, and in respect of two specific applications where costs had been reserved – consideration of the admissibility of offers made by the defendants both prior to and during a mediation between the parties - relevance of s 67C(2) of the Evidence Act and s 32(3) of the District Court Act – consideration of asserted “rule” that the party ultimately successful on the final balance of the claim and counterclaim ought be entitled to an order for the costs of action.
HELD:
1) That save and except for the costs awarded in paragraph 2 hereof, the defendants pay to the plaintiff 50% of the costs of the whole of the action on a party/party basis to be taxed or agreed.
2) That the defendants pay to the plaintiff the costs of and incidental to the application to amend pleadings made on 16 September 2009 on a party/party basis to be taxed or agreed.
District Court Act 1991 s 32(3); Evidence Act 1929 s 67C(2); District Court Civil Rules 2006 6 DCR 224(2), referred to.
Pizimolas v Pizimolas (No 2) [2010] SASC 209; Rayner v Pethick [2006] SASC 70; Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178; Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; Hudson's Building & Engineering Contracts (Sweet & Maxwell, 1995 11th Edition); Kane Constructions Pty Ltd v Sopov (No 2) [2005] VSC 492; Kane Constructions Pty Ltd v Sopov (No 3) [2006] VSC 32; Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6; BMD Major Projects Pty Ltd v Victorian Urban Developments Authority [2007] VSC 409; Miles v Palm Bridge Pty Ltd [2001] WASC 42; [2001] WASCA 334; Formosa v Eminent Forms Pty Ltd [2005] SASC 35; Forlyle Pty Ltd v Tiver [2007] SASC 464, considered.

BIBBO v NIKOU & DELATEX PTY LTD (NO 2)
[2011] SADC 140
Introduction

On 27 October 2011, I published my Reasons detailing the bases for concluding that the plaintiff was entitled to judgment on his claim in the sum of $137,283.83, inclusive of interest, and that the defendants were entitled to judgment on their counterclaim in the sum of $73,000 together with interest thereon.
To enable the parties to consider the consequences flowing from those Reasons, I adjourned consideration of:-
·the quantum of interest to be awarded to the defendants on their counterclaim.
·the form of orders, and in particular, whether a single judgment for the balance in favour of the plaintiff ought be entered pursuant to 6DCR Rule 224.
·the costs of the action.
Interest
On 18 November 2011 I heard submissions from the parties as to the question of interest. I concluded that the defendants were entitled to interest at the rate of 6.5 per cent per annum on the sum of $73,000 awarded on the counterclaim as and from 12 October 2003. The plaintiff’s counsel very properly conceded that despite the long delays in the action, the defendants were entitled to interest for the full period to 27 October 2011. I assessed that interest to be in the sum of $38,181.00. Accordingly the defendants are entitled to judgment on their counterclaim in the sum of $111,181.00, inclusive of interest.
Procedural Matters
As I have already noted, the plaintiff is entitled to judgment on his claim on the sum of $137,283.83. In the event that I determined that a single judgment ought be entered pursuant to 6 DCR 224, for the balance owing, after deducting of the sum awarded on the counterclaim, the plaintiff would be entitled to judgment in the sum of $26,102.83 inclusive of interest.
Further evidence
The defendants’ counsel submitted that the question of a single judgment was inextricably entwined with the question of costs. See Kane Constructions Pty Ltd v Sopov (No2).[1] The defendants sought to tender an affidavit in which their solicitor had deposed to certain matters purportedly relevant to the question of costs.[2] I was informed that the affidavit included correspondence relating to matters raised in a mediation conducted by a Master of this court between February and July 2008.
[1] [2005] VSC 492
[2] Affidavit of Sean Ryan sworn 17 November 2011
I expressed concern as to the admissibility of such material pursuant to s 67C(1) of the Evidence Act, or alternatively, pursuant to s 32(3) of the District Court Act.
Section 67C of the Evidence Act, provides:
67C—Exclusion of evidence of settlement negotiations
(1)     Subject to this section, evidence of a communication made in connection with an attempt to negotiate the settlement of a civil dispute, or of a document prepared in connection with such an attempt, is not admissible in any civil or criminal proceedings.
(2) Such evidence is, however, admissible if—
(a)     the parties to the dispute consent; or
(b)    the substance of the evidence has been disclosed with the express or implied consent of the parties to the dispute; or
(c)    the substance of the evidence has been partly disclosed with the express or implied consent of the parties to the dispute, and full disclosure of the evidence is reasonably necessary to—
(i)enable a proper understanding of the other evidence that has already been adduced; or
(ii)   avoid unfairness to any of the parties to the dispute; or
(d)    the communication or document included a statement to the effect that it was not to be treated as confidential; or
(e)    the proceeding in which the evidence is to be adduced is a proceeding to enforce an agreement for the settlement of the dispute or a proceeding in which the making of such an agreement is in issue; or
(f)    the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute; or
(g)    the making of the communication, or the preparation of the document, affects the rights of a party to the dispute; or
(h)   the communication was made, or the document was prepared, in furtherance of—
(i)    the commission of a fraud or an offence; or
(ii)the doing of an act that renders a person liable to a civil penalty; or
(iii)   the abuse of a statutory power.
(3)    Subsection (1) does not apply to parts of a document that do not concern attempts to negotiate a settlement of a dispute, if it would not be misleading to adduce evidence of only those parts of the document.
As Counsel for the plaintiff had not been given the opportunity to take instructions as to the matters deposed to therein, I adjourned, until today, further consideration of the admissibility of the affidavit; the question of costs and the final orders.
Admissibility of affidavit
Counsel for the plaintiff, Mr Ross-Smith, submitted that save for a letter dated 28 March 2007, from the defendants’ solicitor to the plaintiff’s then solicitors, the affidavit exhibited correspondence and detailed discussions which were exchanged during or arose out of the mediation, and were accordingly inadmissible pursuant to s 67C(1) of the Act.
Counsel for the defendants, Mr Britton, conceded that if I were to conclude that the balance of the correspondence had been exchanged in the course of the mediation, or alternatively had arisen out of the mediation, then it would not fall within the exceptions provided in section 67C(2) of the Act.
Both parties accepted that I ought receive the affidavit, de bene esse, in order to determine its admissibility.
In Pizimolas v Pizimolas (No2)[3] Kourakis J. considered the effect of s 67C of the Evidence Act. On the question of costs His Honour received a letter of offer, de bene esse, in which the plaintiffs had expressed their intention to tender the letter if the offer was bettered at trial. In Rayner v Pethick,[4] Bleby J. similarly examined correspondence containing offers of settlement. His Honour held that an application for an order for costs is “a proceeding” for the purposes of s 67C of the Act.
[3] (2010) SASC 209 (reversed on appeal on unrelated issue)
[4] (2006) SASC 70
In each case those courts concluded that the relevant correspondence was inadmissible as it had not fallen within an exception in s 67C(2) of the Act, nor was it otherwise admissible at law.
Conclusion as to admissibility
Save for the letter dated 28 March 2007,[5] I am of the opinion that the correspondence and all of the matters referred to in the affidavit did arise out of that mediation. None of it falls within the exclusions in s 67(2) of the Evidence Act. Accordingly none of that material is admissible pursuant to s 67C (1) of the Act.
[5] Exhibit SAR 1 to the affidavit of Mr Ryan
The letter of 28 March 2007, prima facie, is inadmissible pursuant to s 67C(1) of the Act, detailing as it does, with negotiations between the parties on a without prejudice basis to resolve the proceedings. However in Cutts v Head,[6] for reasons affirmed by the courts in Pizimolas (No2) and in Rayner v Pethick, supra, Oliver L.J. said, ‘Where a letter has been made without prejudice, but there is an expressed reservation as to costs, then in those circumstances a letter would be admissible on the question of costs.’
[6] (1984) Ch 290
Upon the assumption, for the purposes of argument only, that the subject letter, dated 28 March 2007, is admissible, it does not assist the defendant’s submissions as to the costs of action. From the plaintiff’s point of view it tends to reinforce his submission that the counterclaim as ultimately pursued by the defendants was grossly exaggerated.
The proposal by the defendants was for the payment of a sum of $30,000 by the defendants upon the completion of work by or on behalf of the plaintiff in respect of the windows at both residences.
It provided for a period of 7 days only in which to accept the offer, and was put forward on the basis that each party bear its own costs. In my opinion the time for acceptance of the offer was unreasonable. Further the proposal, having regard to the fact that the plaintiff had been kept out of his liquidated claim for some 4 years at that time, and had incurred substantial costs, was not a reasonable attempt to compromise his claim.
Single or separate judgments
I turn then to the question as to whether I ought to enter one judgment for the balance owing to the plaintiff, or separate judgments on the claim and the counterclaim.
Counsel for the defendants, Mr Britton, submitted that the subject contract was an entire contract. He referred to Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd, [7] for the principle that it was open to the parties “to incorporate in the contract any clause they please”, and accordingly could have expressly provided for the enlarging of the ordinary rights of set off available at law. In Tan Hung Nguyen v Luxury Design Homes Pty Ltd [2004] NSWCA 178, the Court of Appeal had considered a contract which expressly provided for a single judgment for the balance owing to a party.
[7] (1974) AC 689
The Court expressly adopted the principle in Gilbert-Ash and entered a balance judgment.[8] Mr Britton submitted that, in the subject case, the parties had not provided for such a set off in the contract, and, accordingly, separate judgments ought be entered.
[8] See also Melbourne Glass Pty Ltd v Coby Constructions Pty Ltd (inreported decision of Gillard J. 20/11/97)
Mr Britton also referred to the provisions of s 32 of the Building Work Contractors Act 1995.
Counsel for the plaintiff Mr Ross-Smith repeated that in considering whether to enter a single balance judgment, the courts have traditionally linked that decision to the decision in respect of costs. See Kane Constructions Pty Ltd v Sopov No.2, [9] and No.3 [10].
[9] (2005) VSC 492
[10] (2006) VSC 32
The principles of law
Mr Ross-Smith referred to Badge Constructions Pty Ltd v Penbury Coast Pty Ltd[11], in which Debelle J had considered the question of costs in the context of an arbitrator’s award. The arbitrator had allowed the major part of the builder’s claim, and a greater part of the owner’s defects counterclaim. He had entered a balance award in favour of the builder, but held that each party to the building contract ought bear its own costs of the arbitration.
[11] (1999) SASC 6
Debelle J. said that the overriding principle is that the order for costs must be fair and just in the circumstances. He noted that the otherwise successful party may not be entitled to costs if he had advanced an inflated claim or counterclaim with the apparent purpose of frightening the other party with the costs of the proceedings.
However his Honour then referred to a series of cases in which it was expressed as a “principle” that where a counterclaim is essentially a defence of set off, the court ought give the party who obtains the balance judgment, the costs on the scale appropriate to the quantum of that judgment.
His Honour referred to an extract from the 10^th Edition of Hudson’s Building and Engineering Contracts as follows:
Only in the case of wildly exaggerated claims or separate and costly issues upon which the successful party has failed and which it was wholly unreasonable for him to raise can there be, it is submitted, any justification for departing from the rule that the party ultimately successful on the final balance of the claim and counterclaim should be paid his costs.
His Honour noted that the justification for such a principle was that parties to a building contract ultimately have their eyes on the final balance and that whoever secures the final balance will, in effect, have succeeded. He expressed the opinion that in the vast majority of cases a single award of costs in favour of the party ultimately successful on the balance ought be awarded unless the balance “is so small as to justify the view that the party responsible for initiating the litigation and obtaining such a balance can be regarded as having been, effectively, unsuccessful.”
In one sense this “principle” reflects 6 DCR 263(1) which provides that “as a general rule, costs follow the event”. That is to say that whenever a court determines that a single balance judgment be entered, the “event” is the judgment in favour of the party entitled to the balance judgment.
That general principle had at least initially, been applied with approval, in building cases, in most superior courts in Australia.[12]
[12] See BMD Major Projects Pty Ltd v Victorian Urban Development Authority (207) VSC 409, Ray Laurence Constructions Pty Ltd v Nolks (2010) NTSC 37, Miles v Palm Bridge Pty Ltd (2001) WASC 42, Kane Constructions Pty Ltd v Sopov [2006] VSC 32
In Miles v Palm Bridge Pty Ltd[13] Hasluck J. allowed an appeal from the decision of an arbitrator, in a building case, in which he had ordered that each party bear its own costs, essentially because of the conduct of both parties. His Honour, on appeal, affirmed the “principle” expressed in Badge Constructions Pty Ltd, supra, that the costs ought follow the event, which was the awarding of a balance judgment.
[13] (2001) WASC 42
Hasluck J. did however indicate that the otherwise successful party may be deprived of his costs, “if special circumstances or grounds are identified which justify an amelioration of the basic rule”.
His Honour affirmed dicta from earlier decisions of the Supreme Court of Western Australia to the effect that “any severity in the operation of the rule is overcome, at least theoretically, by the provision in the court rules as to filing offers.
An appeal from his Honour’s decision was allowed by the Court of Appeal in Western Australia.[14]
[14] (2001) WASCA 334
That court did not expressly refer to “the principle” expressed by Debelle J. in Badge Constructions. It is implicit however, from its Reasons that the court regarded the final flow of money as an important factor. It allowed the appeal on the basis that the court below ought to have remitted the question of costs to the arbitrator who was in the best position to consider the conduct of the parties, and implicitly, whether it would justify a departure from “the principle”.
In Formosa v Eminent Forms Pty Ltd, Bleby J similarly considered the exercise of an arbitrator’s discretion to award costs. The arbitrator had expressed the view that, if he had not been constrained by the rule in Badge Constructions, he would have awarded costs to the owner because of the unlawful termination of the contract by the builder. He had awarded the costs of the arbitration to the builder because it had succeeded on a balance judgment and “there was neither an exaggerated claim nor other separate costly issues”.
His Honour referred to that principle which he called “the Hudson principle”, and, said that it was not a rule of practice in this State.
Although his Honour seems to have expressly approved the Reasons of Hasluck J. in Miles v Palm Bridge Pty Ltd, supra, he said ultimately that the discretion to award costs should not be fettered by such a rule of practice.
His Honour relevantly said, at paragraphs 26 and 27:
A little reflection will demonstrate, by way of example, how that situation could arise. Two parties may agree to submit their dispute to arbitration. The builder has only one claim, namely that he be paid the money due under the contract which he claims he has completed. The owner may dispute that and may claim the costs of a variety of rectification works for allegedly defective workmanship. The matter is submitted to arbitration. A conference occurs before the hearing at which it is agreed that the builder performed the work under the contract and is entitled to the balance due subject only to possible offsets for the claims of the owner. The arbitrator is told that the liability to the builder is acknowledged. The sum is agreed, and the arbitrator is asked to take that into account when fixing the amount due to the owner (if any) for the alleged defective work. The arbitration proceeds. It would be surprising if, in those circumstances, the costs of the arbitration fell to be determined according to whether the amount awarded to the owner fell above or below the agreed amount to which the builder was entitled and according to the net amount awarded by the arbitrator, when the whole of the arbitration was devoted to the liability of the builder for the alleged defective work. The arbitrator would be obliged to consider, in the exercise of his discretion in those circumstances, even if the amount awarded to the owner was less than the amount owed to the builder, whether the prima facie rule that costs follow the event should be displaced because of the success of the owner in the matters which became the subject of the arbitration.
I accept that as a general rule a party who secures a judgment for the balance, after arbitration, of a series of contested claims and counterclaims will generally be regarded as the successful party. Generally, it may be appropriate to make an award in his favour, but not necessarily of the full amount to which the "winner" might otherwise be entitled if it were a contest on a single issue.

In Forlyle Pty Ltd v Tiver,[15] the Full Court of the Supreme Court considered the distinction between claims which may ultimately be found to have been exaggerated, yet had been properly brought by a party following expert advice; and those claims which have been made improperly. It pointed out that in most cases a party acting upon the advice of an expert in pursuing a claim or counterclaim would not be said to have acted improperly.
[15] [2007] SASC 464
Discussion
I respectfully adopt the approach suggested by Bleby J. in the Formosa case that the discretion to award costs ought not be fettered by the Hudson “principle” I also accept that, in general, the party who secures a balance judgment will be regarded as the successful party, but one who will not necessarily receive a full award of costs.
The defendants’ counsel submitted that each party ought bear its own costs of the action, essentially because the action ought to have been resolved for a relatively small sum on or about 28 March 2007.
The plaintiff’s counsel submitted that the court ought enter a balance judgment in favour of the plaintiff, and that he ought receive the costs of action which follow the event of a balance judgment.
The defendants did not admit the plaintiff’s claim until after the commencement of trial. By that time the quantum of the plaintiff’s claim had been increased significantly by interest at 10% per annum, pursuant to the terms of the subject building contract.
This claim for interest would have been obvious to the defendants. As I have already noted the plaintiff’s claim had grown to the sum of $137,282.83 as at the date of the publication of my reasons for judgment.
Conclusion as to form of judgment
In my opinion having regard to the history of this action and the fact that the counterclaim was treated by the parties essentially as a defence of set off, even if not pleaded as such, the proper exercise of the discretion in 6 DCR 224, dictates that a single judgment be entered for the plaintiff for the balance. Accordingly I will enter judgment for the plaintiff against the defendants in the sum of $26,102.83 inclusive of interest, and I will otherwise dismiss the counterclaim.
Costs
What emerges from the dicta in the case law is that an order for costs may be made on the final balance whenever it is appropriate. The question is whether in this case it is appropriate to do so.
On any view, the final flow of money in a building contract case is a significant factor to be taken into account in the proper exercise of the discretion to award costs.
In weighing up the factors relevant to the discretion, I have not overlooked the fact that, at the time the proceedings were issued in October 2003, the plaintiff was aware of the respective Dalby and Stuart Skinner reports, and of the latter’s estimate of the cost of rectification in the sum of $80,000.
At that time, the quantum of the plaintiff’s claim was similar to the estimate of the defendants’ true counterclaim. This is a factor which points to an order that each party ought bear its own costs of the action.
The fact remains that the plaintiff’s claim was for a liquidated sum. There was no proper defence to that claim. It was not until the trial had started that the defendants had elected to abandon their assertion that the plaintiff had overcharged them.
I accept, of course, that the plaintiff has been recompensed for the delay by an order for interest for all of those intervening years at 10% per annum.
The defendants’ counterclaim, by contrast, was at all times properly in dispute.
On any view the plaintiff is entitled to his costs in respect of his claim. The significant costs of this trial however were incurred in respect of the counterclaim. Had the plaintiff’s claim been resolved at an earlier time, then in the absence of a filed offer, the defendants, having succeeded to the extent of $73,000 plus interest, would have been prima facie entitled to the costs of the counterclaim. In my opinion, however that approach is too simplistic on the facts of his case.
The defendants had filed a counterclaim which was, in my opinion, wildly exaggerated. It was for a sum totalling $457,454.12, between four and six times the sum eventually awarded.
Indeed at the commencement of the trial, the quantum of the counterclaim was expressed to be even higher in light of work undertaken by Mr Arevalo.
I accept that the defendants had acted upon expert advice as contained in the respective reports of Mr Jankovic and Mr Petris. I have found that those reports were prepared on an incorrect basis, namely the cost of rectifying and completing the work at the cost to the defendants, rather than upon the basis of the cost of rectification only, and at the cost to the plaintiff.
Although the defendants’ conduct in pursuing an exaggerated counterclaim is not improper within the meaning of the case law, the fact remains that the filing of a counter-claim to that exaggerated level had obvious adverse consequences. It meant that any settlement was impossible. Had the claims been limited to the extent that I have determined, the probability is that the action would have settled.
By the time that the trial had commenced and the defence to the plaintiff’s claim had been abandoned, it was then far too late to resolve the action, because of the size of the counter-claim.
The trial was taken up almost entirely by the counter-claim, addressing a range of items which ought never have been raised by the defendants.
Accordingly, I have, as at the date of trial, a plaintiff with an irresistible claim for liquidated damages and an exaggerated counter-claim by the defendants. Balanced against that, is that in 2003 the quantum of the claim on the one hand, and the counter-claim on the other was about the same.
Conclusion as to costs
In my opinion a just award of costs is that the plaintiff ought receive an award of portion of the costs of the whole action. Ultimately I have concluded that it is appropriate in all the circumstances to award the plaintiff 50 per cent of the costs of the whole of the action.
In addition there were two matters identified, in respect of which costs had been reserved. The plaintiff seeks a specific award of costs in respect of each.
They were respectively an order made on 16 September 2009 giving leave to the defendants to file and serve a further pleading; and on 23 September 2009, giving leave to the defendants to issue a subpoena directed to Katnich Dodd.
In my opinion the latter order made for the issue of the subpoena on 23 September 2009 could not have led to the plaintiff incurring any costs. Accordingly I make no order as to the costs of that application.
However the position is different in respect of the order for pleadings. The plaintiff was obliged to file and serve an additional pleading. Accordingly I order that the defendants must pay to the plaintiff the costs of and incidental to that application made by the defendants in respect of that pleading issue on 16 September 2009.
Formal orders
I make the following orders:
1.That judgment be entered for the plaintiff against the defendants in the sum of $26,102.83 inclusive of interest. That judgment is for the balance of moneys owing to the plaintiff after deducting the defendants’ assessed counter-claim of $111,181.00 from the plaintiff’s assessed claim of $137,283.83.
2.That the defendants’ counter-claim otherwise be dismissed.
3. That save and except for the costs awarded in paragraph 4 hereof, the defendants do pay to the plaintiff, 50% of the costs of the whole of the action, on a party/party basis, to be taxed or agreed.
4.That the defendants do pay to the plaintiff the costs of and incidental to the application made by the defendants to amend their pleadings on 16 September 2009 on a party/party basis to be taxed or agreed.