Cervo v Kingsley's Pty Ltd
[2018] ACTSC 179
•21 June 2018
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Cervo v Kingsley’s Pty Ltd |
Citation: | [2018] ACTSC 179 |
Hearing Dates: | 12 February 2018 |
DecisionDate: | 21 June 2018 |
Before: | McWilliam AsJ |
Decision: | See [97] |
Catchwords: | APPEAL – APPEAL FROM THE MAGISTRATES COURT – whether the proceedings seeking costs and compensation following termination of a commercial lease were res judicata – effect of concession made by counsel – whether clause of lease should be construed to give rise to a claim for costs or compensation only upon demand – where claim for compensation had not yet crystallised – appeal allowed in part |
Legislation Cited: | Magistrates Court Act 1930 (ACT) s 274 Court Procedures Rules 2006 (ACT) r 425 |
Cases Cited: | Abigroup Limited v Sandtara Pty Limited [2002] NSWCA 45 Apparel Group Pty Ltd v Bettina Liano Pty Ltd [2014] NSWSC 670 Vertzayias v King & Ors [2011] NSWCA 215 |
Parties: | Renato Antonio Cervo (First Appellant) Margaret Anne Cervo (Second Appellant) Kingsley’s Pty Ltd (First Respondent) Kingsley Singarajah Selvarajah (Second Respondent) |
Representation: | Counsel Mr M Orlov (Appellants) Mr P Walker SC with Ms K Katavic (Respondents) |
| Solicitors Gil-Jones Barker (Appellants) Colquhoun Murphy (Respondents) | |
File Number: | SCA 58 of 2017 |
Decision under appeal: | Court/Tribunal: Magistrates Court of the ACT Before: Magistrate Morrison Date of Decision: 21 June 2017 Case Title: Renato Antonio Cervo & Anor v Kingsley’s Pty Ltd & Anor Court File Number: CL 7 of 2016 |
This appeal broadly concerns whether a claim in the Magistrates Court for compensation for breach of a terminated lease and for legal costs ought to have been permitted to proceed to hearing in the court below, rather than being summarily dismissed on 22 June 2017 as an abuse of process.
The appellants, Renato and Margaret Cervo (landlords) hold a Crown lease for a commercial premises in Phillip, ACT (Premises). In January 2014, they entered into a sub-lease (Lease) with the first respondent, Kingsley’s Pty Ltd (tenant). The second respondent, Mr Kingsley Selvarajah provided a personal guarantee and indemnity under the Lease (guarantor).
After the Lease was signed, the landlords and the tenant became involved in a dispute about its terms, including whether or not the tenant was permitted to install an underground grease trap. They could not resolve their differences and eventually the tenant ceased paying rent with a view to mitigating its loss, following which the landlords terminated the Lease.
That brought the landlords and tenant to the Magistrates Court in 2014, with the tenant contesting the termination, alleging misrepresentation and further alleging a breach of the Lease for unreasonable withholding of consent for works to be performed. The landlords sought to confirm the termination and crossclaimed against the tenant to recover ‘compensation’, pursuant to clause 13(2) of the Lease, set out below. I will refer to these proceedings as the 2014 proceedings.
On 12 May 2015, the Chief Magistrate delivered her decision in the 2014 proceedings and confirmed the termination and ordered the outstanding rent to be paid with interest, but refused the landlords’ application for ‘compensation’ on the basis that insufficient detail had been provided and further time ought not be permitted to allow the quantification of the claim. The Chief Magistrate heard further submissions on costs but ultimately made no order as to costs.
There was no appeal from the Chief Magistrate’s decision.
In March 2016, the landlords commenced further proceedings (described hereafter as the 2016 proceedings), this time against the tenant and the guarantor, seeking to recover:
(a)Costs of the 2014 proceedings on an indemnity basis;
(b)Make good costs, following the tenant’s vacation of the premises after the termination was confirmed in the Magistrates Court on 12 May 2015;
(c)Damages for the landlords’ loss of a bargain following the termination of the Lease; and
(d)Costs of the 2016 proceedings.
The tenant and guarantor applied under r 425 of the Court Procedures Rules 2006 (ACT) (Rules) to strike out the landlords’ latest claim and for the summary dismissal of the proceedings. On 22 June 2017, the magistrate made orders to that effect, delivering written reasons for decision (Reasons).
It is the decision of the magistrate to strike out the 2016 proceedings that is the subject of the present appeal.
The Lease
The claims made by the landlords in the 2016 proceedings were based on a number of clauses of the now terminated Lease, which used the terms ‘Lessor’ to describe the landlords, ‘Lessee’ to describe the tenant and ‘Covenantor’ to describe the guarantor. An understanding of the clauses is necessary to understand both the reasoning of the magistrate in the court below and the arguments of the parties on appeal. The following extracts set out the parts of those clauses that are material to the claims in the 2016 proceedings.
Clause 13 is in the following terms (emphasis added):
13 COSTS
Costs of preparation of Lease, renewal and extension
13(1)…
Consents, transaction and default
(2) The Lessee agrees to pay to the Lessor all costs, fees, charges, disbursements and expenses properly and reasonably incurred by the Lessor in relation or incidental to:
…
(c) any breach or default by the Lessee under this Lease;
(d) the exercise or attempted exercise by the Lessor of any right, power, privilege, authority or remedy, against the Lessee or against any Covenantor, to enforce obligations under this Lease, or to terminate this Lease for the Lessee’s breach or default;
Lessor’s internal costs
(3) The Lessor’s costs under sub-clause 13(2) include:
(a) the Lessor’s legal and professional costs and disbursements charged and allowed on a full indemnity basis;
…
Lessee’s obligation to pay costs
(4)(a) The Lessor is entitled to render to the Lessee a statement of any costs and charges and expenses for which the Lessee is liable in accordance with sub-clause 13(2) at any time after they have been incurred. In respect of any such statement, the Lessee shall pay the amount claimed:
(i) when the Lessor’s consent is provided to the Lessee, or
(ii) In any other case, within fourteen (14) days after service of the statement on the Lessee.
(b) The Lessee’s liability shall incur interest on the basis specified in clause 15 from the fifteenth day after the date of service of the statement until the day of payment, calculated on a daily rate.
Among other things, clause 15 provided for interest to be calculated at 3 per cent above a base rate which was defined by reference to the published Commonwealth Bank of Australia Overdraft Index Rate.
Part 4 of the Lease is titled ‘Securing the Lessee’s Obligations’. The clauses giving rise to the claims against the guarantor are clauses 17 and 18, the material parts of which are as follows:
17 GUARANTEE
Entering into Guarantee
(1) In consideration of the Lessor agreeing to grant this Lease to the Lessee at the request of the Covenantor, the Covenantor enters into this guarantee (called “Guarantee”) in favour of the Lessor on the terms specified in this clause.
Scope of guarantee
(2)(a) The Covenantor guarantees the punctual payment of rent…and any other money payable by the Lessee under this Lease and the observance and performance of all the Lessee’s obligations as specified in this Lease throughout the Term (including …occupation under any extension by legislation or by the Lessee acting under legislation or claiming the right to do so) by the Lessee, its successors and assignees of this Lease.
…
(c) This Guarantee extends to claims by the Lessor:
(i) for damages for breaches of lease covenants;
(ii) for breaches of essential terms of this Lease;
…
(iv) for the Lessor’s loss or damage in the event of the Lessee…vacating the Premises;
(v) in the event of the Lessor electing to re-enter or to terminate this Lease;
(vi) for the Lessor’s reasonable legal and other expenses of seeking to enforce those obligations against the Lessee and the Covenantor, recovering possession and terminating this Lease, as provide in clause 13;
…
Guarantee not discharged
(5) This Guarantee is not discharged and the Lessor’s rights against the Covenantor are not affected by any of the following:
…
(b) the Lessor’s neglect or failure to enforce lease covenants against the Lessee or waiver of any breaches or defaults under this Lease;
…
(i) the exercise by the Lessor of its rights of re-entry or any other rights;
(j) this Guarantee and the indemnity in clause 18 being wholly or partly unenforceable.
…
18 INDEMNITY
Indemnity
18(1) The Covenantor Indemnifies the Lessor and agrees to keep the Lessor always indemnified from, against and in respect of all losses, damages and costs incurred or suffered by the Lessor as a result of the Lessee’s breach or repudiation of the Lease or of any obligation under the Lease.
Scope of Indemnity
(2) This indemnity:
(a) is in addition to and distinct from the Covenantor’s liability under the Guarantee;
…
(d) continues throughout the period of continuance of the Guarantee;
(e) extends to losses and damages incurred or suffered by the Lessor as a result of inability to enforce obligations under the Lease or the Guarantee by reason of either of them being or becoming wholly or partly unenforceable;
…
As to the make good and loss of a bargain claims, the material parts of clauses 30 and 34 are as follows (emphasis added):
30 LESSEE’S REPAIR OBLIGATIONS
Lessee’s general obligation
30(1) The Lessee shall keep the Premises and the Lessor’s Fixtures and chattels situated in the Premises in good repair and working condition throughout the Term and shall on expiry or termination of this Lease yield up the Premises to the Lessor in the state of repair and condition as is specified in this clause.
…
Condition of Premises
(5) The Lessee acknowledges that at the Commencement Date the Premises and Facilities are in good repair and working condition.
…
34 REMOVAL OF ALTERATIONS AND FIXTURES
34(1) The Lessee shall:
(a) remove:
(i) all alterations, additions, fixtures, partitions and fittings made or installed by the Lessee in the Building (called “Works”) …
…
(b) reinstate:
(i) the Premises to their condition before the Works were made or installed by the Lessee;
(ii) the Building to the condition before anything was erected or affixed to or inserted into it.
(c) Make good and repair in a proper workmanlike manner, any damage caused to the Premises by the Works and their removal and any damage caused to the Building.
Period of removal
(2) The Lessee shall comply with the obligations under sub-clause 34(1) before the expiry or termination of this Lease.
Consequences of failure to remove and reinstate
(3) If the Lessee fails to comply with the obligations under sub-clause 34(1) as provided in sub-clause 34(2):
…
(b) The Lessor may cause the removal, reinstatement, making good and repair to be carried out, and the Lessee is responsible for and shall reimburse the Lessor for the Lessor’s reasonable costs and expenses;
(c) the Lessee is liable to pay to the Lessor an occupation fee equal to the periodical rent and other monies payable immediately before the termination or expiry of this Lease from the date of the termination …until the Premises are restored in accordance with this clause, that fee being calculated at a daily rate;
(d) If the Lessor incurs further loss in re-letting the Premises by reason of the Lessee’s failure, the Lessor may recover from the Lessee the additional monies which would have been received from a prospective lessee or occupier had the failure not occurred;
(e) The Lessor may recover from the Lessee any other loss sustained by the Lessor by reason of the Lessee’s failure.
Clause 45 is in the following terms:
45 LESSEE’S OBLIGATION TO YIELD UP PREMISES
The Lessee agrees, immediately upon the expiry or legally effective termination of this Lease, to yield up possession and control over the Premises to the Lessor, in the condition and state of repair as required under this Lease.
Clause 51(2) is relevant to any damages claim after termination. It provides:
Antecedent breaches
(2) Termination by either party does not release the parties from liabilities up to the date of termination or from any breaches of obligations under this lease up to the date of termination.
Clause 53 provides:
53 LESSOR’S ENTITLEMENT TO DAMAGES
Damages for breach or for repudiation
53(1)(a) in the event that the Lessee’s conduct (whether acts or omissions) constitutes:
…
(ii) a breach of any covenant in this Lease;
(iii) a breach of an essential term of this Lease;
The lessee covenants to compensate the Lessor for the loss or damage suffered by the Lessor as a consequence of the…breach, whether this Lease is or is not terminated for the…breach or on any other ground.
After termination, clause 54 governs the removal of the tenant’s property. It relevantly provides:
54 REMOVAL OF LESSEE’S PROPERTY
Lessee’s obligation to remove property
54(1)(a) The lessee shall remove all its moveable property, …from the Premises, before
the…termination of this Lease or, if it is terminated by the Lessor, within seven (7) days after this Lease is terminated.
…
(c) The Lessee shall not cause any damage to…the Premises whilst removing its property, shall leave the premises clean and tidy after the removal and shall be liable for the cost of repair of any damage caused by or during the removal.
The decision in the Magistrates Court
The magistrate took into account a number of concessions that had been made by the landlords, the nature and consequences of which are disputed on appeal. One of the concessions relied upon was to the effect that the judgment in the 2014 proceedings precluded the landlords from bringing a fresh claim for any amounts claimed in respect of a cause of action that had arisen under clause 13 of the Lease as at 18 August 2014, which was the date the landlords filed an amended defence and counterclaim in the first proceedings.
The magistrate construed clause 13 of the Lease to conclude (at [39]-[40] of the Reasons) that the claim for the costs of the 2014 proceedings had been raised and determined. The issue had therefore merged in the decision of the Chief Magistrate on 12 May 2015.
The magistrate found (at [43]-[44] of the Reasons) that the claim against the guarantor for such costs, under clause 17 of the Lease, was derivative, so that if the tenant had no liability for those costs, neither did the guarantor.
The magistrate considered the separate indemnity under clause 18 of the Lease and found (at [49] and [57] of the Reasons) that such an obligation was independent from any liability against the tenant. However, as a causal connection was required between the loss suffered by the landlords and the tenant’s breach, this produced a result which was akin to a derivative liability.
The magistrate went on to state ([63]-[64] of the Reasons) that the successful prosecution of any claim for costs now against the guarantor would require the court below to reach a different conclusion to that reached previously by the Chief Magistrate in the 2014 proceedings, and that this constituted an abuse of process.
Turning to the loss of a bargain and make good claims, at [75] of the Reasons, the magistrate referred to the fact that in the 2014 proceedings, no reference had been made in the landlords’ counterclaim to any specific claim for loss of a bargain or the requirement for the tenant to make good the premises.
The magistrate considered (at [91] of the Reasons) the parties’ arguments necessitated going beyond the pleading, and reviewing the substance of what was actually before the Chief Magistrate in the 2014 proceedings, and what was determined by the Chief Magistrate, with a view to deciding whether those causes of action had also merged in the determination of the 2014 proceedings.
The magistrate thus reviewed submissions made in the 2014 proceedings by the landlords, to the effect that if termination was granted, an issue arose of further loss and damage consequent on the tenant gutting the Premises and leaving it in a state that was not fit for use.
The landlords had submitted in the 2014 proceedings that they did not know the extent of rectification work necessary. They sought an order for further damages to address the cost of necessary rectification work, and for further time to quantify losses suffered.
The magistrate found (at [116] of the Reasons) that this submission created a fundamental difficulty for the landlords. The Chief Magistrate had stated the following in the oral reasons deciding the 2014 proceedings (emphasis added):
“In its closing submissions the respondent, in the event of confirmation of termination of the sublease and dismissal of the applications, sought further time to quantify losses suffered. [The] respondent has had ample opportunity to obtain and put before the court evidence of the loss that may be suffered as a result of the breach or default by the applicant. It has failed to do so and no further time will be allowed for that purpose.”
The magistrate stated at [122]-[123]:
[122] There is, as I understand the submissions, no argument that, whilst Her Honour did not expressly say that she was dismissing anything, the only rational construction of what she said is that she was in fact dismissing whatever claim was the subject of her comments just referred to.
[123] Having regard to the background by way of the written submissions the only rational conclusion is that Her honour was purporting to determine the claims which were the subject of…the written submissions. As I have said those claims in the [2014] Proceedings cover what is now sought to be recovered in the Loss of Bargain Damages Claim and the Make Good Claim.
[124] That conclusion effectively disposes of the Landlords’ arguments on both the Loss of Bargain Damages Claim and the Make Good Claim against the Tenant. There is no need for me to address the arguments about whether the causes of action had arisen or whether they were pleaded. Rightly or wrongly her Honour’s decision purported to dispose of them. If the landlords’ arguments are accepted they may have been entitled to relief on appeal ex debito justitae but that does not permit their arguments to be decided by me in these proceedings.
The magistrate then considered the loss of a bargain and make good claims against the guarantor, finding at [129]-[130] that pursuant to clause 17, liability was derivative, and that as the tenant had no liability, neither did the guarantor.
In relation to the indemnity under clause 18, again the magistrate found (at [137]-[140] of the Reasons) that because the Chief Magistrate had determined “claims against the Tenant for the same subject matter of what is now claimed as the Loss of Bargain Damages Claim and the Make Good Claim”, the successful prosecution of such claims now would require the court below to reach a different conclusion, and in that sense constituted an abuse of process.
Accordingly, the magistrate ordered that the claims be struck out and that the proceedings be dismissed, as the conclusions reached about the pleadings arose from matters of principle, which could not be overcome by re-pleading.
As the tenant and guarantor had succeeded on their application, the landlords were also ordered to pay their costs (no party having sought any different costs order).
The nature of the appeal
The appeal is brought pursuant to s 274 of the Magistrates Court Act 1930 (ACT). In this jurisdiction, nothing turns on the fact that the order was an interlocutory decision, being made on a summary basis under r 425 of the Rules. As the appeal involves an amount of more than $2000, leave was not required.
There was no issue that the appeal is by way of rehearing and no party sought to put further evidence before the Court on appeal.
Issues on appeal
By this appeal, filed 18 August 2017, the appellants challenge the orders made by the magistrate on 22 June 2017. On 16 August 2017, orders were made extending the time in which to file an appeal.
I have found it convenient to summarise and group the lengthy appeal grounds as follows:
(a)Grounds concerning the tenant:
(i)The magistrate erred in finding that the claim for the costs of the 2014 proceedings against the tenant was barred because of res judicata (Costs Issue).
(ii)The magistrate erred in construing clause 13 of the Lease to include costs whether or not a demand for payment had been made (Clause 13 Issue).
(iii)The magistrate erred in finding that the claim for compensation which was dismissed in the 2014 proceedings included claims the landlords now sought to make for damages arising upon the termination of the Lease for breach of the tenant’s make good obligations, and for the loss of a bargain (Compensation Issue).
(b)Grounds concerning the guarantor:
(i)The magistrate erred in holding that, as the tenant had no liability for legal costs, make good obligations or loss of a bargain, the landlords could not recover such costs or compensation from the guarantor (Clause 17 Issue).
(ii)The magistrate erred in holding that any finding against the guarantor in the 2016 proceedings would necessarily require the court below to reach a different conclusion from that reached in the 2014 proceedings, which would amount to an abuse of process (Clause 18 Issue).
The parties agreed that the success of the ground I have described as the Clause 17 Issue depended upon the landlords first succeeding against the tenant on the Costs Issue or Compensation Issue.
Applicable legal principles
Res judicata
Res judicata is concerned with causes of action and judgments (or the equivalent of judgments). Where an action has been brought and judgment has been entered in that action, no other proceedings can thereafter be maintained on the same cause of action: Jackson v Goldsmith (1950) 81 CLR 446 at 466; Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 (Anshun) at 597-598 and the cases there-cited. Res judicata operates as a mandatory bar to further proceedings, on the basis of the non-existence of the cause of action after judgment upon it. The very right or cause of action claimed or put in suit has in the former proceedings passed into judgment, so that it is merged and has no longer an independent existence: Blair & Perpetual Trustee Co Ltd v Curran (1939) 62 CLR 464 (Blair) at 531532 per Dixon J.
Further, where an issue of ultimate fact or of law is raised between parties to a proceeding and is necessarily decided, the parties and their privies are bound by that decision and are precluded in a later proceeding from taking up a position on the issue which is inconsistent with the decision: Anshun at 597-598 and the cases there-cited, which include Blair at 531.
Anshun estoppel
By contrast, Anshun estoppel is concerned with causes of action or issues that should have been raised in previous proceedings, but were not: Anshun at 598 per Gibbs CJ, Mason and Aickin JJ.
The test for whether the issue ought to have been litigated as part of the earlier proceedings is based on the reasonableness or otherwise of the conduct of a litigant in the earlier proceedings: see Meriton Apartments Pty Ltd v Industrial Court of New South Wales [2009] NSWCA 434; 263 ALR 556 at [60]. The mere fact that the issue could have been raised does not mean it should have been raised (for the principle to operate). Rather, it has to be so relevant as to make it unreasonable not to raise it: Champerslife Pty Ltd v Manojlovski & Anor [2010] NSWCA 33; 75 NSWLR 245 per Allsop P (as his Honour then was) at [4].
Contrary to the concession made by Senior Counsel for the guarantor in the court below, recorded by the magistrate at [50] of the Reasons, a further distinguishing feature between res judicata and Anshun estoppel is that Anshun estoppel may even arise where the parties to the second proceeding are not the same as the first: Habib v Radio 2UE Sydney Pty Ltd [2009] NSWCA 231 (Habib v Radio 2UE) at [83] per McColl JA (with whom Giles and Campbell JJA agreed); Equuscorp Pty Ltd & Anor v Acehand Pty Ltd & Ors [2010] VSC 89 at [27].
In Habib v Radio 2UE, McColl JA went on to state at [84] and [85] (with emphasis added):
A strict approach is necessary in an Anshun estoppel case to the inquiry whether there exists the requisite identity between the proceedings; the mere fact that the proceedings are closely related is insufficient; a technical approach is not helpful, the doctrine being concerned with substance and not form: see Bazos and Anor v Doman and Ors [2001] NSWCA 347 (at [44]) per Stein JA (Priestley and Beazley JJA agreeing) and the authorities to which his Honour refers. In determining whether an Anshun estoppel has been established, the court inquires into realities and not mere technicalities: R v Humphrys [1977] AC 1 (at 41) per Lord Hailsham; cited with approval by Handley JA (Young CJ in Eq agreeing) in Cleary v Jeans [2006] NSWCA 9;(2006) 65 NSWLR 355 (at [19]). The Court can look at “any material that shows what issues were raised and decided”: Rogers v R (at 263) per Brennan J.
In considering whether an Anshun estoppel has been established, it is necessary to bear in mind that “shut[ting] out a claim ... a party wishes to pursue, without determination of its intrinsic merit, on the ground that it ought to have been raised in earlier litigation...is a serious step, [and] a power not to be exercised except ‘after a scrupulous examination of all the circumstances’ ”: Ling v Commonwealth (1996) 68 FCR 180 (at 182) per Wilcox J, approved in Bazos (at [45]) per Stein JA (Priestley and Beazley JJA agreeing); see also Brisbane City Council v Attorney-General (Qld) [1979] AC 411 (at 425) per Lord Wilberforce.
The interaction between a curial right to costs and a contractual right to costs
The contractual right to costs stands independently of the curial power to award costs: Abigroup Limited v Sandtara Pty Limited [2002] NSWCA 45 (Abigroup v Sandtara) at [9] per Stein JA. Any discretionary judgment on costs that does not address a separate contractual indemnity provision does not give rise to a res judicata, or otherwise preclude enforcement of a contract made at arm’s length. A contractual stipulation as to how costs of future litigation are to be borne as between the parties is not vitiated by an inconsistent order for costs in that litigation: see Vertzayias v King & Ors [2011] NSWCA 215 at [115] and the cases there-cited.
Where there is a contractual right to costs on a particular basis, a court’s discretion should ordinarily be exercised to reflect the contractual right: Gomba Holdings (UK) Limited v Minories Finance Ltd (No 2) [1993] Ch 171 (Gomba Holdings); Australia and New Zealand Banking Group Ltd v Pola [2014] NSWSC 59 at [41].
However, a court is not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs: Abigroup v Sandtara at [9]; Kyabram Property Investments Pty Limited v Murray [2005] NSWCA 87 at [14]; Macquarie International Health Clinic Pty Limited v Sydney South West Area Health Service (No 3) [2010] NSWSC 1139 at [22].
Whether a party is precluded from proceeding to enforce a contractual indemnity in subsequent proceedings requires consideration of the circumstances of each case. In Abigroup v Sandtara, the Court of Appeal held that the contractual indemnity subsequently relied upon in separate litigation in a different court was never an issue in earlier litigation, and accordingly the contractual right had not merged into the judgment for costs made in the earlier litigation, nor was it an abuse of process as the subsequent proceedings did not seek to reverse the decision in the earlier proceedings. Moreover, the Court held (at [11]) that the contractual claim for costs had not crystallised until the conclusion of all of the earlier proceedings, including the judgment for costs. Following judgment, there still may have been costs and expenses which would have been incurred by the indemnified party within the meaning of the relevant contractual clause. Accordingly, no issue of res judicata or Anshun estoppel arose.
However, in Jana Pty Ltd (atf Azizi Family Trust) v Ezistripdemo Pty Ltd & Sam Sharan [2017] NSWSC 1286 at [18], Sackar J heard submissions on costs after delivering judgment in the proceedings and rejected as ‘somewhat artificial’ a submission that the relevant right to costs had not crystallised once judgment had been delivered and findings had been made that a party was in breach of the relevant contract. His Honour exercised the discretion in the same proceedings in accordance with the contractual right to costs on an indemnity basis.
Similarly, in Apparel Group Pty Ltd v Bettina Liano Pty Ltd [2014] NSWSC 670, Ball J exercised the court’s discretion on costs in accordance with a contractual indemnity and there was no issue apparently raised that the right had not crystallised so as to preclude reliance on such a clause.
In Rayner & Anor v Australia and New Zealand Banking Group Ltd [2003] WASCA 264 (Rayner), earlier costs orders had been made without reference to, or any attempt to rely upon, a contractual right of the bank to recover its costs. Such costs were required to be taxed. The bank in that case sought to recover its costs without proceeding to taxation, relying instead on its contractual right, not the court order. The Court of Appeal held that the costs order previously made did not preclude the subsequent enforcement of such a right to costs by the bank, relying on Gomba Holdings and Mansfield v Robinson [1928] 2 KB 353, both of which were considered in Abigroup v Sandtara at [8]-[9]. The Court of Appeal acknowledged (at [29]) that this result may well surprise the applicants in that case, and that it was understandable that a party might take an earlier court order to be a determination of liability on costs. However, that was not the position, in light of the authorities.
In NSW Rifle Association Inc v The Commonwealth of Australia(No. 2) [2012] NSWSC 1098, White J (as his Honour then was) was faced with an application by the Commonwealth to reopen after judgment had been delivered, including the making of costs orders, so that although unsuccessful, it could nevertheless seek recovery of its costs upon a contractual entitlement.
At [25] of his Honour’s reasons, White J distinguished Abigroup v Sandtara, on the basis that the Court of Appeal there held that a lessor was not entitled to enforce a contractual right of indemnity prior to the completion of the first proceedings, and therefore no estoppel arose from the fact that the lessor did not claim on the indemnity basis in those proceedings. In the proceedings before White J, his Honour found the Commonwealth could have relied upon the contractual clause (that is, the right had crystallised), but did not do so. His Honour further stated that the contractual clause was not plain and unambiguous, and while the statutory discretion as to costs should prima facie be exercised in accordance with a clear contractual agreement in relation to the costs of litigation, it did not follow that the costs discretion should be modified to enforce an asserted contractual claim, the words of which were debateable. (In that case, the parties had not pleaded reliance on the clause, so no submissions had been made on it.) His Honour declined to permit the Commonwealth to reopen.
In Ringrow Pty Ltd v BP Australia Pty Limited [2006] FCA 1446, before Rares J, the defendant relied upon Abigroup v Sandtara to make a claim for costs on an indemnity basis, following costs orders made by Hely J in earlier proceedings. Rares J found at [43] that no estoppel operated to prevent the defendant from making a contractual claim for costs in separate, subsequent proceedings, although his Honour earlier referred (at [42]) to the contractual right being conditioned by the implied qualification that what is recoverable are costs ‘properly incurred’, and that if the defendant had been denied an order for costs, or been ordered to pay Ringrow’s costs, a later claim under the contract by the defendant would be met by a defence that the costs claimed had not been ‘properly incurred’.
The same words were used in an indemnity clause in Marmax Investments Pty Ltd v RPR Maintenance Pty Ltd [2015] FCAFC 127; 237 FCR 534. At [229], and without expressing a final view about the matter, the Full Federal Court of Australia considered that the fact that the previous judge had declined to make a costs order in favour of a party was a significant indicator that the costs should not be regarded as costs ‘properly incurred’.
A survey of the above authorities, while not exhaustive, is sufficient to indicate that whether a party who raises a contractual indemnity for costs in proceedings subsequent to costs orders already made will be permitted to bring such a claim closely depends upon the circumstances of the case. These include the language of the indemnity, whether it was pleaded or considered in the earlier litigation (including the submissions made to the judge), why a party refrained from litigating the issue in the earlier proceedings, and the terms of the orders made in the previous proceedings.
Costs Issue and Clause 13 Issue
In the 2014 proceedings before the Chief Magistrate, the counterclaim filed by the landlords (set out in full in the Reasons at [35]) expressly pleaded clause 13 of the Lease. It then pleaded (emphasis added):
The respondents have incurred costs, disbursements and expenses by reason of the applicant’s breaches of the [Lease] particularly those breaches [concerning the failure to pay rent].
The claim then sought judgment for the unpaid rent, interest, compensation and costs.
When the Chief Magistrate had delivered her decision, the parties were invited to make submissions on costs. At that point, the landlords appear to have overlooked what they had pleaded. Neither the submissions, nor the costs orders ultimately made provides any foundation for the view that the court below was doing anything other than exercising its general discretion as to the costs of the 2014 proceedings. There was no transcript and no oral or written reasons for the costs orders made.
Properly understood, the material before this Court on appeal indicates the Chief Magistrate simply did not turn her mind to that issue (because the landlords did not press it) and the costs order was not appealed, nor was any application made to reopen. The lack of any direct or necessary determination by the Chief Magistrate of the operation of clause 13 in relation to costs, being a separate right for consideration in accordance with Abigroup v Sandtara, means that the circumstances did not give rise to a res judicata. In that sense, the magistrate erred in finding at [39] that the issue had merged in the decision of the Chief Magistrate in the 2014 proceedings.
However, that means this Court must then address the alternative argument based on Anshun estoppel, which the magistrate did not consider, following his finding on res judicata. The arguments in the court below and his Honour’s reasoning assist in resolving that issue.
Unlike Abigroup v Sandtara, the issue had been plainly raised in the 2014 proceedings by the counterclaim and the landlords conceded as much before the magistrate. The distinction they sought to draw was that only the legal costs up to the date of the filing of the counterclaim were included in the pleaded claim, so that any legal costs incurred after that date were separate and could be subsequently claimed in separate proceedings. They relied on the words emphasised in the pleading above, that the landlords ‘have incurred’ costs, submitting this did not include costs that were incurred after the counterclaim had been filed.
The magistrate in the court below rejected such an argument, finding “the pleading cannot sensibly be treated as being limited to only those costs incurred as at the date of the pleading”. There was no any error in that finding. When a party is invited to make submissions on costs following the delivery of a decision, whatever the foundation, there is no basis for suggesting that the submissions on costs were in any way limited to costs incurred up to the date of the filing of a counterclaim.
Once the Chief Magistrate had delivered her decision and terminated the Lease, there could be no argument that the entitlement to costs under clause 13 of the Lease had not yet crystallised. The fact that the landlords may not have been in a position to immediately quantify those costs is immaterial. Once the orders were made, the costs ‘of the proceedings’ had been incurred.
Turning to the Clause 13 Issue (which cuts across both the Costs Issue and the Compensation Issue), an argument was put that the cause of action does not crystallise until a demand is made under clause 13(4) of the Lease, and it is only once a statement has been issued that the contractual cause of action arises.
That argument ought be rejected. Properly construed, having regard to the plain words and in the context of the whole clause, clause 13(4) is a provision that triggers both recovery and the charging of interest. It refers to issuing a statement for amounts for which the tenant ‘is liable’. It does not create the liability of itself, in the sense of completing the cause of action. If a statement is never issued, that might give rise to an argument that the landlords have waived the right to pursue recovery for the breach (subject to the waiver provision contained in clause 50 in the Lease), however such a defence does not affect whether the liability has already arisen in the first place.
A court does not lightly shut out a plaintiff from pursuing a claim, but here, the contractual right to costs was an issue so relevant to the issues in the 2014 proceedings that it was unreasonable not to pursue it, because it was expressly pleaded from the outset. The contractual right to costs was separate to the curial right to costs, but having pleaded it, there is no reasonable explanation given by the landlords for not drawing the Chief Magistrate’s attention to the indemnity aspect of clause 13 when making submissions on costs in the 2014 proceedings. The distinction between contractual rights to costs and costs orders made in the exercise of judicial discretion does not mean a party can faintly press an issue and then raise it again in a more fulsome manner at a later date. That is precisely what the estoppel deriving from Anshun is designed to prevent.
The above reasoning does not rely upon the affidavit sworn by Mr Cervo on 12 November 2014 and served in the 2014 proceedings, although not ultimately relied upon at the hearing before the Chief Magistrate. However, as it was part of the evidence before the magistrate in the court below and the parties drew attention to it in submissions on appeal, I will refer to it briefly. The evidence on the question of ‘compensation’ under clause 13 was as follows:
…Mr Varr has taken out all the lights and all the fittings that were part of the Premises. I estimate that it will cost me approximately $30,000 to replace all of these fittings and floor coverings so that I can relet the Premises.
Also, I will have to pay a fee to an agent to help me relet the Premises.
Also, it is likely that I will again have to provide a rent-free period in order to lease the Premises. That has become almost compulsory these days.
I want Mr Varr to compensate me for all of these losses he has caused.
I also want him to compensate me for all my legal costs that I have had to pay defending this case and also terminating the lease so that I can find a tenant for the Premises.
If anything, this last paragraph fortifies the conclusion I have reached, in that it was a matter plainly contemplated by the landlords when preparing their evidence, so that it was unreasonable to simply remain silent in closing submissions on costs, even if such a decision was a deliberate strategy.
For the above reasons, although the landlords have established error on the part of the magistrate with regard to the finding on res judicata, this does not alter the outcome on the Costs Issue or Clause 13 Issue.
Compensation Issue
The landlords contend the magistrate in the 2016 proceedings erred in finding (at [123]-[124]) that the claim for compensation, which was dismissed in the 2014 proceedings, included a claim for damages arising upon the termination of the Lease for breach of the tenant’s make good obligations, and for the loss of a bargain. The landlords submitted that the contractual causes of action based on a failure to make good and damages for loss of a bargain only arose once there was a legally effective termination. As the tenants had contested termination, it only became legally effective when the Chief Magistrate confirmed the termination in the orders of May 2015.
A consideration of the content of clauses 30, 34, 45 and 54 demonstrates that the landlords’ submission in that regard should be accepted. As seen from the words emphasised in the extracts above, the obligation to make good the Premises only arose upon a legally effective termination, because that is the point when the tenant must yield up the Premises.
There may be other similar contractual rights before that point, such as the tenant undertaking works without permission, which require rectification. However, that is a different breach. The tenants were not in breach of the obligation to yield up the Premises in the same condition as when they took possession until expiry of the Lease or in this case, termination.
In the court below, the magistrate relied on the Chief Magistrate determining a somewhat imprecise claim for compensation in the pleadings. In closing submissions, it was put in terms of ‘rectification’ by way of restoring the Premises to the condition before the tenant took possession, which could not yet be quantified. The magistrate referred to the landlords’ submissions to the Chief Magistrate seeking an order for further damages to address the cost of the necessary rectification work, stating at [119]:
…It is apparent from what appears earlier in the paragraph that the reference to rectification work covers what is now sought to be recovered in the Make Good Claim notwithstanding the different nomenclature.
However, the different nomenclature is in fact critical to the determination of whether res judicata arises. The different clauses may deal with similar subject matter, but they give rise to different legal rights and importantly, liability arises at different points in time.
The magistrate’s conclusion is set out above, with the finding that ‘rightly or wrongly’, because the Chief Magistrate purported to dispose of such claims for compensation, and because the landlords did not appeal that decision, they could not now bring claims for making good the Premises and loss of a bargain.
However, merely dismissing a claim for compensation under clause 13 of the Lease does not mean that every subsequent claim for compensation under clause 13 is thereby dismissed. All that the Chief Magistrate determined was that whatever existing claim was being propounded for compensation on the existing breaches, there was more than enough time to file the evidence. That can be seen from her Honour’s words “as a result of the breach or default by the applicant”, which I have emphasised at [28] above. The foreshadowing of a future claim for damages upon yielding up the Premises once the court had confirmed the termination could not be pre-emptively dismissed, as the action had yet to arise. The amended claim dated 17 May 2016 (paragraphs 7.5.3 and 7.14) makes it clear that the claim now being pursued is based upon the tenant’s obligations consequent upon delivering up the Premises and not any earlier breach that might have been included in the claim for compensation pleaded in the 2014 proceedings.
As was made clear in Abigroup v Sandtana, res judicata does not, and cannot, operate in respect of a cause of action that has not yet arisen (or ‘crystallised’). Similarly, the magistrate referred to Marginson v Blackburn Borough Council [1939] 2 KB 426 at 438 as authority for the constituent elements to be established before a res judicata arose, one of which was that the court had jurisdiction over the parties and the subject matter.
A court does not have jurisdiction to determine a cause of action that does not yet exist. The authorities to which reference has been made support the conclusion that the Chief Magistrate’s finding on the general claim for compensation did not give rise to a res judicata on a claim to make good the Premises either on, or within seven days of, legally effective termination.
For the same reasons, a res judicata did not arise in respect of the loss of a bargain claim. The ‘bargain’ that was said to have been lost included the rent-free period that the landlords considered had to be offered to any new tenant, the agent’s letting fee and presumably the time the property remained vacant while rectification works were carried out (to the extent this was not already covered in the make good claim). Again, such losses could only arise once the termination had been confirmed, and in some respects, once the tenant had vacated the Premises.
No question of Anshun estoppel arises for the same reasons. It is clearly not unreasonable not to pursue a claim that has not yet crystallised.
For completeness, the Clause 13 Issue with regard to clause 13(4) was dealt with by the magistrate in the context of the make good and loss of a bargain claims. His Honour held to similar effect at [85] that the terms were a precondition to the right to claim interest, not to the establishing of liability. I have dealt with it above in relation to the Costs Issue. In light of the findings that the causes of action did not arise until termination, it is unnecessary to consider whether the causes of action for compensation were affected by clause 13(4) of the Lease.
In the result, the landlords have succeeded in establishing error with respect to the make good and loss of a bargain claims. Those claims ought be allowed to proceed.
Clause 17 Issue
The corollary of the findings on the Costs Issue and Compensation Issue is that a claim against the guarantor may also be brought pursuant to clause 17 of the Lease, but only in respect of the compensation claims, not the costs of the 2014 proceedings.
Clause 18 Issue
The magistrate’s reasoning bears similarities to the reasoning in Anshun where the majority (at 603) referred to it being generally accepted that a party will be estopped from bringing an action which, if it succeeds, will result in a judgment which conflicts with an earlier judgment. Elsewhere, this is described as the ‘scandal of conflicting judgments’: Habib v Radio 2UE at [161].
There is no discernible error in the magistrate’s reasoning in that regard, nor with the construction of clause 18, namely that the words ‘as a result of’ in clause 18 make it clear that there must be some causal connection between the losses and the breach asserted. To this may be added that the words ‘costs incurred’ in the clause carry the implication that the costs have been reasonably incurred, which may assume significance in light of the finding above that the landlords are estopped from claiming the same amount against the tenant for the breach giving rise to the termination of the Lease.
However, the magistrate also relied on his earlier reasoning that no claim could be made under clause 18 because the Chief Magistrate had already determined the claims for compensation, which I have found was an error, for the reasons given above, and this impacts upon the conclusion reached with regard to clause 18. The landlords are correct in their argument that the right of indemnity under clause 18 did not merge in the judgment in the 2014 proceedings.
This does not mean that the outcome changes on this issue. As set out above, the principles of Anshun can potentially apply to entities who were not parties to the first proceedings, and while I accept there may be strategic reasons for not claiming under a distinct contractual right against a guarantor in the same proceedings as a tenant, in circumstances where the costs issue was a discrete point, was directly connected with the outcome of the 2014 proceedings, an indemnity was squarely pleaded against the tenant, the guarantee was contained in the same contract as the indemnity that had been pleaded, and the parties were separately submitting on how the judicial discretion should be exercised on the substantive matter, it does seem to me that it was unreasonable for the landlords not to bring forward anything they might have to say on who should pay the costs at the time the Chief Magistrate was considering the matter.
If the issue were now permitted to be run solely against the guarantor, the landlords would still have to prove in any fresh proceedings that the costs were incurred ‘as a result of’ a ‘breach’ by the tenant which brings the circumstances of the case sought to be pursued against the guarantor within the application of Anshun in the risk of inconsistent outcomes. I consider that any claim against the guarantor under clause 18 for costs ought to have been brought in the first proceedings and further, that it was unreasonable for the landlords to refrain from doing so.
I have given consideration to the effect of the concession referred to above that Anshun estoppel could not extend to a third party. The concession was as to a legal principle, not a matter of fact. The Court is not absolutely bound to accept it or to act on it: Re Coldham (1989) 84 ALR 208 at 215 per Brennan J (in dissent, but not on that specific point). However, it gives rise to whether the matter needed to be specifically drawn to the parties’ attention on appeal, as a matter of procedural fairness.
The parties did in fact deal with the issue in substance as it has been decided here, notwithstanding they did not describe it as Anshun estoppel. The submission of the parties was recorded by the magistrate at [51] of his Honour’s reasons, immediately after noting the concession of senior counsel:
The [guarantor] does however raise an abuse of process argument. It is, as I understand the submission, that the liability of the Tenant for costs as claimed by the Landlords in the [2014] Proceedings was finally determined by the Court in those proceedings and to permit the question of the [guarantor’s] liability under the indemnity in the lease to be now litigated would be to risk inconsistent outcomes. …
That submission is, in fact, part of the argument as to why an Anshun estoppel arises, as can be seen from the reasoning set out above. Although the majority in Anshun at 602 did not adopt the language of ‘abuse of process’, Brennan and Murphy JJ did in separate judgments (see Anshun at 605, 607). Indeed, the second paragraph of Murphy J’s succinct judgment relevantly provides:
In this instance, the issue now sought to be raised was plainly open to be agitated in the previous litigation. The judgment in that case is inconsistent with the judgment now sought by the plaintiff. To preserve the orderly administration of justice the earlier judgment should be treated as conclusive on the question of indemnity. There is no discretion to allow the raising of that issue against the unwilling defendant; the attempt to do so is properly characterized as an abuse of process. …
Accordingly, the concession did not appear to me to have had any effect on the arguments put by the parties in the court below, and the learned magistrate’s reasoning on that aspect is what has been adopted on appeal. Thus, the landlords have established the ground, but it does not sound in any relief.
Costs
The costs of the appeal ought follow the event. Although the landlords were not successful in the totality of the grounds raised on appeal, they have been what I consider to be substantively successful and there was no part of the appeal that is clearly severable so as to warrant any apportionment. They are entitled to their costs.
As to the costs in the court below, the parties again have each had mixed success. However, using the same reasoning as that for the costs of the appeal, the tenant and guarantor have succeeded in sustaining their strike out applications in respect of specified causes of action and again, that constitutes substantive success, with no issue being separately argued or clearly severable so as to require any separation on costs. It is thus not appropriate to interfere with the magistrate’s exercise of the discretion on costs in relation to the summary dismissal application.
As a consequence of the findings on appeal, the proceedings in the Magistrates Court will continue, albeit in a limited form. The costs of the substantive proceedings ought not yet be determined and the order of the magistrate ought be varied to reflect that position.
Conclusion
The orders of the Court are as follows:
1. The appeal is allowed.
2. The orders of the magistrate in the court below made on 22 June 2017 are set aside and in lieu thereof it is ordered:
(i) Pursuant to r 425 of the Court Procedures Rules 2006 (ACT), paragraphs 7.8-7.11 of the Amended Originating Claim filed 17 May 2016 in proceedings CL 7 of 2016 are struck out.
(ii) The applicants in proceedings CL 7 of 2016 are to pay the respondents’ costs of the interlocutory application.
3. The respondents are to pay the appellants’ costs of the appeal.
| I certify that the preceding ninety-seven [97] numbered paragraphs are a true copy of the Reasons for Judgment of her Honour Associate Justice McWilliam Associate: Date: |