Chen v Kevin McNamara & Son Pty Ltd

[2012] VSCA 229

SUPREME COURT OF VICTORIA

COURT OF APPEAL

LIMIN JAMES CHEN and

MEI FANG XU

S APCI 2009 3826

Appellants

v

KEVIN McNAMARA & SON PTY LTD
(ACN 072 144 579)

First Respondent

and

GEORGE P DEUTSCH (NO 2)

Second Respondent

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JUDGES	MAXWELL P, REDLICH JA and ROBSON AJA
WHERE HELD	MELBOURNE
DATE OF HEARING	15 September 2011
DATE OF JUDGMENT	20 September 2012
MEDIUM NEUTRAL CITATION	[2012] VSCA 229
JUDGMENT APPEALED FROM	[2009] VSC 294 (Hargrave J)

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COSTS – Application for costs – Building contracts – Indemnity costs – Whether first respondent entitled to recover indemnity costs pursuant to contractual indemnity provision – When contractual provisions may inform curial discretion – Whether the appellant’s obligation to pay ‘any costs and fees’ arising from legal proceedings relating to the contract entitled the respondent to indemnity costs – Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355 discussed – Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45 discussed – Section 24(1) of the Supreme Court Act 1986 – Application refused – Costs awarded on a party/party basis.

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Appearances:	Counsel	Solicitors
For the Appellants	Francis V Gallichio
For the First Respondent	Mr Philip Marzella	Russell Kennedy
For the Second Respondent	No appearance

MAXWELL P:

1. I have had the advantage of reading in draft the reasons of Redlich JA. I agree that the Builder’s costs of appeal should be assessed on a party/party basis, for the reasons which his Honour gives.

REDLICH JA:

1. Following a dispute in relation to the construction of part of their residential property, the appellants (‘the Owners’) appealed against the dismissal of their proceedings in the Commercial and Equity Division of the Supreme Court of Victoria, in which they had sought declarations that an arbitration initiated by the first respondent (‘the Builder’) was void and that the appointment of the second respondent as arbitrator was also void.  The appeal by the Owners was dismissed.

1. The Builder seeks an order that the Owners pay his costs of the appeal on an indemnity basis.  He submits he is contractually entitled to such costs by virtue of clause 4 of the Standard Conditions of Agreement of the Building Contract, the relevant part of which states:

The Owner shall pay to the Contractor:

Any costs and fees incurred by the Contractor in enforcing or further securing its rights under this Agreement.

1. The Builder submitted that the phrase ‘any costs and fees’ in enforcing his rights was reflective of an objective intention of the parties that he was to be reimbursed for any costs and fees incurred at a higher measure of costs than party and party costs, namely on an indemnity basis.

1. The Owners contended that the Court’s discretion was not to be informed by the contractual provision, as it did not provide in unequivocal language that costs were to be paid on a ‘special basis’.[1]  Therefore the Builder should be awarded his costs on a party and party basis.  

[1]Appellants’ submission, [4].

1. Section 24(1) of the Supreme Court Act 1986 vests in the Court a very wide discretion as to costs.

Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court…is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

1. Though costs are always a matter in the court’s discretion, costs awarded to a successful party are usually party and party costs[2] in the absence of conduct warranting the making of a more onerous order or a contractual basis for enlarging the costs entitlement.[3]

   [2]Re Queen’s Hotel (Cardiff) Ltd [1900] 1 Ch 792; Commonwealth Bank of Australia v Aspenview Productions Pty Ltd [2001] VSC 499, [18] (McDonald J).

   [3]Re Shanahan (1941) 58 WN(NSW) 132, 134 (Street CJ); Sandtara Pty Ltd v Australian European Finance Corporation Ltd (1990) 20 NSWLR 82, 97–8, (Cole J); AGC (Advances) Ltd v West (1984) 5 NSWLR 301, 304 (Hodgson J).

1. An agreement to pay costs will be construed as an agreement to pay costs on a party and party basis, unless it is plain from its terms that costs are to be paid on a ‘special basis.’[4]  Where the terms plainly and unambiguously provide for costs to be assessed on some special basis, the court will take such a provision into account[5] but it is not bound to give effect to any extra-curial contract as to costs.[6]  An agreement to pay costs on a ‘special’ basis is only a factor informing the exercise of the court’s discretion, but not requiring the exercise of that discretion in a particular way.[7]  Generally however, where the parties have unmistakeably agreed to the making of a special costs order, such a term will be given effect[8] to unless there is some other discretionary consideration that militates against the making of such an order.[9]

   [4]Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355.

   [5]Citibank Savings Ltd v Nicholson & Ors [1998] ANZ Conv R 442, 444; Rumball v Mortimore [2000] WASC 126, [14]; Commonwealth Bank of Australia v Aspenview Productions Pty Ltd [2001] VSC 499 (McDonald J); Kyabram Property Investments Pty Ltd v Murray[2005] NSWCA 87 (Beazley JA with whom Hodgson and Ipp JJA agreed).

   [6]For a discussion of relevant authority see Taree Pty Ltd v Bob Jane Corporation Pty Ltd [2008] VSC 228 (Vickery J).

   [7]Russo v Buck (No 2) [2007] SASC 157.

   [8]            Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2) [1993] Ch 171.

   [9]Re  Adelphi Hotel (Brighton) Ltd [1953] 2 All ER 498;  Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3) [2010] NSWSC 1139.

1. Both parties referred to contractual terms that had been considered in other cases as bearing upon the construction that should be given to clause 4 and the costs order that should be made.  Although the parties sought to find a case where the terms were most like the present, none were in identical terms to clause 4.  But the search for like cases illuminated the fact that even very similar terms have sometimes been construed quite differently and these different constructions cannot be reconciled on the basis that the decisions were discretionary.  That said, contractual terms which have been considered in other cases are of some assistance, as there are recurring features of those contractual terms which have been construed as reflecting an intention by the contracting parties that the costs extended to solicitor/client or indemnity costs and those which have been construed as manifesting no such intention.

1. The costs orders made in favour of a successful mortgagee have generally reflected the terms of any special bargain contained in the mortgage contract.[10]  In Re Shanahan[11] Street J found that a contractual entitlement to all costs and expenses in addition to those for which the mortgagor might have been liable at law or in equity to pay to the mortgagee provided a broad entitlement to costs which required the mortgagor to indemnify the mortgagee with respect to any expenditure which the latter might have incurred in its capacity as mortgagee in relation to the secured debt.  The mortgagor was obliged to pay all costs of the mortgagee that were properly payable on ‘a solicitor and his own client taxation’.  Similarly in Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2)[12] and Elders Trustee & Executor Co Ltd

   [10]Citibank Savings Ltd v Nicholson & Ors [1998] ANZ Conv R 442, 444 (Williams J with whom Cox and Mullighan JJ agreed); Rumball v Mortimore [2000] WASC 126, [15].

   [11](1941) 58 WN (NSW) 132.

   [12][1993] Ch 171.

   [13](1998) 20 FCR 164. The clause provided that the mortgagee was entitled to all costs and expenses, including costs as between solicitor and client, incurred by it in consequence of or on account of any default on the part of the mortgagor or incurred by it for the preservation of or in any manner in reference to the security.

   v EG Reeves Pty Ltd,[13] a wide construction was given to a clause that provided that the mortgagee was entitled to all its costs and expenses including costs between ‘solicitor and own client’ incurred by the mortgagee in consequence of or on account of any default on the part of the mortgagor.  

1. Undertakings of guarantee for payment of costs on a solicitor/client basis have also been treated as an extending provision entitling the lender to indemnity with respect to legal expenses properly incurred in a recovery action under the guarantee.[14]  Solicitor/client costs do not, however, provide a full indemnity but are subject to a somewhat more generous test of reasonableness than ordinarily applies in taxation on a party and party basis.

   [14]ANZ Banking Group (New Zealand) Ltd v Gibson[1986] 1 NZLR 556, 566 (Richardson J); Commonwealth Bank of Australia v Aspenview Productions Pty Ltd [2001] VSC 499, [22]–[23] (McDonald J).

1. Where the terms of the guarantee did not specify the nature of the costs, a different outcome resulted.  In Irani v St George Bank Limited (No 3),[15] the guarantees provided that each of the guarantors indemnified the lender against all costs it incurred in exercising, or attempting to exercise, any power or right in relation to the recovery of ‘guaranteed money’.  Whelan J ordered only party and party costs as the terms did not refer to legal costs and were not considered sufficiently clear and unequivocal.  Further the successful party had not pleaded or otherwise appropriately alerted the other party to such a costs claim.

   [15][2005] VSC 456.

1. In Abigroup Ltd v Sandtara Pty Ltd,[16] upon which the Builder particularly relied, the landlord was able to recover costs on a solicitor/client basis from the guarantor.  The relevant clause required the guarantor to ‘unconditionally indemnify’ the landlord from (inter alia) damages costs and expenses which the landlord may suffer or incur consequent upon or arising directly or indirectly out of any breach or non-observance by the tenant of any terms in the lease.  As the language of the ‘indemnity’, in particular its reference to ‘all costs and expenses’, was regarded as reflecting an intention that costs were to be on a solicitor/client basis, the court did not accept that a non-specific provision for `all costs and expenses’ indicated payment of party and party costs or that a specific reference to some other basis for assessment was necessary.  This approach accorded with the statement in Halsbury’s Laws of England,[17] and the authorities there cited,[18] that ordinarily an indemnifier would be liable for the full costs as between solicitor and a client.  A similar indemnity was construed in the same way by Nicholas J in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3).[19]  In Reading Entertainment Australia Pty Ltd v Burstone Victoria Pty Ltd (No 2),[20] Whelan J held that an obligation by the borrowers and guarantor to pay ‘all costs, expenses and fees calculated on a full indemnity basis’ where the ‘Secured Moneys’ was defined to include ‘all reasonable legal and other costs, charges and expenses (including all legal and other costs charges and expenses as between solicitor and own client)’ warranted the making of a costs order on an indemnity basis, as that reflected the contractual entitlement of the appellant to recover costs reasonably and properly incurred in protecting its rights as lender and mortgagee.  

   [16][2002] NSWCA 45 (‘Abigroup’).

   [17]See LexisNexis, Halsbury’s Laws of England (5^th ed), vol 49 (at 1 April 2008) 4 Guarantee and Indemnity, ‘8 Contracts of Indemnity’ [1265].

   [18]Barnett v Corporation of Eccles [1900] 2 QB 423, 428; Born v Turner [1900] 2 Ch 211;  and Great Western Railway Co v Fisher [1905] 1 Ch 316.

   [19] [2010] NSWSC 1139.

   [20](No 2) [2005] VSC 137.

1. The Owners, not surprisingly, relied upon Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd.[21]  There, the trial judge had awarded indemnity costs to the respondent against the appellant on the basis of an agreement between the parties that the appellant ‘indemnify’ the respondent ‘against all or any loss, damages, claims, costs and expenses’ incurred by the respondent as a result of any ‘failing to observe any of the provisions of this Agreement’.[22]  The Court interpreted the obligation to indemnify for losses including costs as an obligation to recompense for costs on a party and party basis, in the absence of unequivocally plain language that the costs were to be on a solicitor/client or indemnity costs basis.[23]

   [21][2010] VSCA 355.

   [22]Ibid [42] (Maxwell P, Tate JA, and Habersberger AJA).

   [23]Ibid [119]. In this respect, clause 5 stood in contrast to the terms of indemnity in clause 9.1 of the Origination Agreement which referred to ‘legal costs on a solicitor and client basis’.

1. In Carbure Pty Ltd v Brile Pty Ltd (No 2),[24] Balmford J found that a clause requiring the tenant to pay the landlord’s reasonable expenses of any default by the tenant in observing the provisions of the lease did not ‘plainly and unambiguously’ require the costs to be paid on other than a party-party basis.  Her Honour did not consider that the addition of the adjective ‘reasonable’ required the tenant to pay the landlord’s expenses on a solicitor-client basis.[25]  As Winneke P said in Spencer v Dowling,[26] the expression ‘reasonably incurred’ is ‘apt to describe costs on a party and party basis, as much as … to describe costs on a solicitor/client basis, because such costs have always been regarded as the costs which are reasonably incurred in the attainment of justice between the parties’.[27]  By contrast, in Van Der Velde v Ng[28] Greenwood J found that a clause which expressly provided for a right to reasonable expenses reasonably incurred in enforcing the mortgage entitled the mortgagee to costs of the proceedings reasonably incurred, on a solicitor/client basis.  Nicholas J in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service (No 3)[29] found the terms ‘Reasonable costs’ and ‘legal costs and expenses on a solicitor and own client basis’ to indicate a common intention that such costs and expenses were to be assessed on an indemnity basis.

   [24][2002] VSC 313.

   [25]This decision was referred to with apparent approval in Pacific Indemnity Underwriting Agency Pty Ltd v Maclaw No 651 Pty Ltd & Anor (2005) 13 VR 483.

   [26][1997] 2 VR 127

   [27]Ibid 147.

   [28][2011] FCA 594.

   [29] [2010] NSWSC 1139.

1. In Antonino Giuseppina Ensabella & Sons Pty Ltd v Players On Downunder Pty Ltd,[30] the landlord claimed costs on an indemnity basis, by virtue of provisions in the lease which obliged the tenant to pay ‘costs charges and expenses’ incurred by the landlord ‘as a consequence of any default by the lessee in the performance or observance of any covenants or agreements contained or implied herein’.  Phillips JA, with whom Ormiston and Charles JJA agreed, found that as the provisions relied upon did not refer expressly to how such costs should be taxed, there was no sufficient reason for ordering anything but party-party costs, there being ‘nothing in the lease to compel another view’.

   [30][2000] VSCA 73.

1. Before construing clause 4 I should address other asserted discretionary factors raised by the parties.  The Owners relied upon additional reasons to support the contention that costs should be awarded on a party and party basis.  First, the Builder had relied upon the clause to have indemnity costs awarded at the conclusion of the trial.  That application was rejected by Hargrave J.  The Builder had not appealed that decision.  Secondly, the Builder gave no warning that he would raise this issue on appeal.  Thirdly, as the parties went to mediation to resolve this dispute, the Owners were entitled to know that a claim for indemnity costs would be made against them if they failed on appeal.

1. These additional contentions are without merit.  The Builder responding to the Owners’ claims was not obliged to provide notice that he intended to seek indemnity costs in the event that he was successful on the appeal.  In any event, the Builder having sought solicitor/client costs at trial, the Owners were on notice that such an application might be made in the event that the appeal failed.  The trial judge, in refusing to make such an order, did not make reference to clause 4 or construe it in a manner inconsistent with the appellant’s present submissions.  Nor is the course taken by the Builder at the mediation a matter to which regard can properly be had.  Moreover, even if the Builder’s intention to rely upon the contractual term as entitling him to indemnity costs should have been raised earlier, its existence remained a factor to be taken into account in the exercise of the Court’s discretion.[31]

   [31]          Cooper v Kinsella (No 2) [2011] NSWCA 140.

1. The Builder also highlighted a number of other factors in support of his contention that the Court should exercise its discretion to award indemnity costs.  First the Builder noted that the Owners had been unsuccessful in challenging the validity of the arbitration clause in the Supreme Court, the Court of Appeal and in formal arbitration.  These challenges had caused extensive delay to the arbitral process and had resulted in significant costs and fees being incurred by the Builder in resisting the Owners’ claim.  Second, the awarding of costs on an indemnity basis in this instance would reflect the public interest in the expeditious resolution of litigation and the underlying policy that arbitration is an efficient and timely method for resolving commercial disputes.  As against these considerations, Hargrave J acknowledged that the application turned on a difficult question of interpretation.  Neither the proceedings below nor the appeal were frivolous or vexatious.  The Owners had reasonable grounds on which to challenge the validity of the arbitration.  Third, as the Builder sought indemnity costs at trial, it ought to have been within the contemplation of the Owners when choosing to appeal that the Builder would seek indemnity costs on appeal.  The Owners may be assumed to have appreciated that such a claim would be made but that does not require the conclusion that such costs should be awarded.  These additional matters relied upon by the Builder do not warrant the displacement of the general rule that the costs should be party and party costs.  

1. It remains to be considered whether the language of clause 4 demonstrates a clear intention that special costs should be awarded.  The clause requires the Owners to pay to the Contractor ‘any costs and fees incurred by the Contractor in enforcing or further securing its rights’.  The Builder submitted that there was no material difference between the phrase ‘all costs and expenses’ in Abigroup and the phrase ‘any costs and fees’ in clause 4 of the agreement in this case and that, properly construed, the language of clause 4 entitled the Builder to costs on an indemnity

basis.  That submission cannot be sustained.  The clause does not specify that the Owner shall ‘indemnify’ the Builder.  It does not refer to ‘indemnity costs,’ ‘solicitor/client costs’ or ‘special costs’.  It contains no language which might signify that the costs contemplated were solicitor/client or indemnity costs.

1. I would refuse the application.  No conduct, well recognised principle or plain and unequivocal contractual term has been identified which would justify the displacement of the general rule that costs should be awarded on a party and party basis.[32]  I would order that the Builder’s costs of the appeal be assessed on a party/party basis.

[32]Re Adelphi Hotel (Brighton) Ltd (1953) 2 All ER 498, 502; Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87, [12];  Taree Pty Ltd v Bob Jane Corporation Pty Ltd [2008] VSC 228, [39].

ROBSON AJA:

1. I have had the advantage of reading in draft the reasons of Redlich JA.  I agree that the Builder’s costs of appeal should be assessed on a party/party basis, for the reasons which his Honour gives.

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