Crea v Bedrock Construction and Development Pty Ltd; Bedrock Construction and Development Pty Ltd v Crea - [2020] SADC 169

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
CREA v BEDROCK CONSTRUCTION AND DEVELOPMENT PTY LTD; BEDROCK CONSTRUCTION AND DEVELOPMENT PTY LTD v CREA & ANOR
[2020] SADC 169
Decision of His Honour Judge O'Sullivan
4 December 2020
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS
INTEREST
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - THE CONTRACT - CONSTRUCTION OF PARTICULAR CONTRACTS AND IMPLIED CONDITIONS - VARIATIONS
On 10 July 2019 the Arbitrator appointed in this matter published her Award determining a number of issues in relation to building defects, but did not determine liability for the costs of rectifying those defects.
The remainder of the issues, including the question of liability for rectification and completion costs were reserved to the trial in this Court. The Court published its reasons on 21 August 2020 in which both parties were successful. The question of pre-judgment interests and costs was reserved.
The respondent submitted that the Court should award a judgment for the difference between the two sums.
On the question of interest, the issues concerned the period over which interest was to be calculated and the applicable rate.
On the issue of costs, the applicant submitted that given its success and the respondent’s success, the applicant should receive 80% of is costs and the respondent 20% of its costs such that the applicant sought an order for 60% of his costs, including the costs of and incidental to the arbitration.
The respondent submitted that there be no order as to costs.
Held:
1. That judgment be entered for the applicant in the sum of $123,714.37 inclusive of GST and interest.
2. That judgment be entered for the respondent in the sum of $97,016.34 inclusive of GST and interest.
3. That the respondent pay the applicant 60% of his costs of and incidental to the action, including 60% of the costs of and incidental to the Arbitration.
District Court Act 1991 (SA); Supreme Court Supplementary Rules 2014 (SA); Uniform Civil Rules 2020 (SA); District Court Civil Rules 2006 (SA); Supreme Court Rules 1987 (SA), referred to.
Bellgrove v Eldridge (1954) 90 CLR 613; Gertig v Davies and Another (2003) 85 SASR 226; Tincknell & Anor v Duthy Homes Pty Ltd & Anor [2020] SASCFC 24; Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6; A, DC v Prince Alfred College Inc (No 2) [2016] SASCFC 27; McDonnell & East Ltd v McGregor (1936) 56 CLR 50; Shrapnel v Laing (1888) 20 Q.B.D 334, considered.

CREA v BEDROCK CONSTRUCTION AND DEVELOPMENT PTY LTD; BEDROCK CONSTRUCTION AND DEVELOPMENT PTY LTD v CREA & ANOR
[2020] SADC 169
Introduction

A number of issues in this matter were referred to an arbitrator for trial.
Section 33 of the District Court Act 1991 provides that the Court will adopt the award of an arbitrator to whom issues have been referred for trial as part of its judgment on the issues referred unless good reason is shown to the contrary.
The Arbitrator published her Award on 10 July 2019 (“Award”). The trial of the remaining matters took place in this Court in December 2019, January 2020 and July 2020.
On 21 August 2020 I delivered my reasons in which I indicated there would be judgment for the applicant in the sum of $105,159.67 (incl GST) and judgment for the respondent on its cross-claim in the sum of $83,641.93 (incl GST) whilst reserving the question of costs and interest. There was no set off pleaded by the respondent.
Prior to the trial proceeding in this Court, the respondent identified four items in the Award to which it objected to the Court adopting as part of its judgment on the referred issues. The respondent indicated those objections would be made at the trial before the Court. At trial, the respondent was unsuccessful in its objection to the Court’s adoption of those four items as part of its judgment on those issues.
When the matter was referred to arbitration the respondent also indicated there were defects in relation to which the respondent would allege that instructions were given to do the work in a particular way such that under those circumstances there could not be a defect. Although the Arbitrator dealt with whether an alleged defect was, in fact, a defect per se, this specific issue was reserved to the Court. The respondent was, to a great extent, unsuccessful in its allegations that defects were not defects because of instructions given to it. It followed that the respondent was also unsuccessful in its objection to the Court’s adoption of items falling into this category as part of its judgment on those issues.
At trial the respondent also objected to various categories of items in the Arbitrator’s Award being adopted by the Court as part of its judgment on those issues. Those categories comprised:
1First, where the Arbitrator had found defective design, those costs assessed by the Arbitrator to rectify the defect had to be deducted from the total cost assessed by the Arbitrator for rectification work. The respondent submitted that in cases where there was both defective design and defective workmanship, there needed to be an assessment of what the resulting rectification costs (if any) which were the responsibility of the respondent. The respondent enjoyed some success in relation to the issue of mixed defective design and defective workmanship;
2Second, there was incomplete work which the respondent alleged it was not given the opportunity to complete. The respondent objected to the adoption of the Arbitrator’s Award insofar as the Arbitrator assessed the costs of completion. The respondent was unsuccessful in its objection;
3Third, there were defects which the respondent alleged it was not given the opportunity to rectify. The respondent objected to the adoption of the Arbitrator’s Award insofar as the Arbitrator assessed the costs of rectification. The respondent was unsuccessful in its objection;
4Fourth, the respondent alleged that in some cases carrying out rectification work would be unreasonable within the meaning of Bellgrove v Eldridge[1] such that any sums assessed by the Arbitrator for carrying out defects falling into that category should be deducted from the rectification costs assessed by the Arbitrator. The respondent was unsuccessful in its objection.
[1] (1954) 90 CLR 613.
The issue of defects and the objections to the adoption of the Award as part of the Court’s judgment occupied a significant part of the time spent at trial.
The respondent claimed Variations in the cross-claim. The respondent enjoyed some success on its claim for Variations, being awarded $16,441.33 (excl GST) against a claimed $29,856.20 (excl GST). The Variations also comprised a significant part of the time spent at trial.
The respondent claimed delay costs. It was successful in that claim although the quantum was reduced from a claimed $30,852 to $21,035.43. The delay claim occupied only a small part of the time spent at trial.
Both the applicants and respondent claim interest and costs.
Documents relied upon
The applicant relies upon the affidavit of Joseph Philip De Ruvo sworn 10 September 2020,[2] written submissions filed 15 September 2020,[3] responding submissions to the respondent’s claim for interest filed 21 September 2020[4] and the responding submissions of the applicants on the respondent’s claim for costs filed 18 September 2020.[5]
[2]    FDN54.
[3]    FDN58.
[4]    FDN63.
[5]    FDN59.
The respondent relies on the affidavit of Anna Maffei sworn 10 September 2020 and filed 11 September 2020,[6] written submissions on the question of costs filed 15 September 2020[7] and written submissions in reply to the applicants’ submissions which does not appear to have been filed but was received by the Court on 17 September 2020.
[6] FDN56.
[7] FDN57.
Interest
The Court has power to award pre-judgment interest pursuant to s 39 of the District Court Act (SA) 1991.
Applicant’s submissions
The applicant submits that interest should be awarded on the basis that the claim was for an unliquidated amount. It submits further that the Court has a discretion as to both the rate at which and the period over which interest is to be applied.
Respondent’s submissions
The respondent submits that since its claim was a liquidated claim, interest runs from the date the debt fell due which it submits was 7 days from the date of invoice, i.e. 30 May 2016.
Period over which interest is to run
The first question is the period over which interest is to run.
The applicant submits that there are two potential commencement dates:
i.The first is the date of the Architect’s Certificate of Defects dated 22 July 2016;
ii.The second and alterative date is the date proceedings were issued, namely 16 March 2017.
Consideration as to the period
Under s39(2) of the District Court Act, in the case of a liquidated sum, the interest to which a party is entitled is to be calculated in respect of a period fixed by the Court running from when the liability to pay the amount of the claim fell due to the date of judgment unless the Court otherwise determines.
As to interest on the respondent’s claim, although the respondent claims interest from the date commencing 7 days from the date of invoice, I can find no reference to that time period in the contract between the parties (which I found had been terminated) nor in the covering letter from the respondent’s solicitors to the applicant dated 23 May 2016. The covering letter demanded payment by no later than 25 May 2016, a period of 2 days. I consider that time period to be unreasonable.
The amount claimed in the invoice, Exhibit D2, was clearly wrong insofar as the balance of progress claim 4 is concerned and also its claim for Variations.
In all the circumstances, I consider that the period of time over which interest should run on the respondent’s entitlement is from the date of its cross-claim - 13 September 2017.
As to interest on the applicant’s claim, in my reasons I found that the Architect’s certificate of defects was of no effect. Accordingly, I do not consider that interest should run from the date of that document which is 28 June 2016. In my view, interest should run from the date of the institution of proceedings namely 16 March 2017.
Rate of interest
The contract having been terminated by the applicant through his agent the Architect on 19 May 2016, I do not consider that any sums which became due after that date attracted the application of the contractual interest rate on overdue amounts. Further, under s 39(2), the rate of interest is to be fixed by the Court.
Pursuant to Rule 208 of the Supreme Court Supplementary Rules 2014, the rate of interest applicable to pre-judgment interest was the Reserve Bank of Australia target rate plus 4%. That rate applied until 18 May 2020 at which time it became 5%.
Adopting the rates specified in Rule 208 to 18 May 2020 and the rate of 5% thereafter, I determine that in relation to the applicant’s damages, exclusive of GST,[8] the applicant is entitled to pre-judgment interest over the period from the commencement of these proceedings to Friday, 4 December 2020, in the sum of $18,554.70, giving a total of $123,714.37 (incl GST).
[8] On the basis that both the applicant and respondent has to account for the GST they receive.
The respondent is entitled to interest on the same basis as I have adopted for the applicant but running from 13 July 2017 to Friday, 4 December 2020 in the sum of $13,374.41, giving a total of $97,016.34. (incl GST).
Costs
Applicants’ submissions on costs
The applicant submits he was successful both on the defects claim and overall, thereby entitling him to an order for costs. He concedes that the respondent was successful to a degree on its Variation claim and is entitled to some costs on that topic.
The Arbitrator found the cost of rectifying the defects and incomplete work was $113,736.37 (incl GST) but did not determine if the respondent was liable for those costs. The Arbitrator also addressed the issue of defective design as part of her consideration of defects.
The applicant seeks the costs of the arbitration.
Ultimately, the Court determined the applicant was entitled to $105,159.67 (incl GST) for the cost of rectifying defects and incomplete work.
In the proceedings before the Court, the respondent was awarded the sum of $16,491.33 (incl GST) out of a claimed $29,856.20. It was also successful in a delay claim where it recovered the sum of $23,138.97 (incl GST) out of a claimed $30,852 (incl GST).
On that basis, the applicant submits it was successful on approximately 80% of its claim such that the respondent is entitled to 20% of its costs with the result that the owner is entitled to an order for 60% of its costs of the action, (including the costs of and incidental to the Arbitration).
Respondent’s Submissions on costs
The respondent submits that there be no order as to costs.
The basis of that submission appears to be that the respondent made an offer on 9 October 2018 that the claim and counter-claim be dismissed with no liability as to costs. The respondent also points to an offer made by the applicant on 10 April 2019 that the respondent pay $175,000 on the balance of the claim and cross-claim plus costs fixed in the sum of $270,000. Neither offer was bettered by the other party.
The respondent submits that in the event a judgment for the difference between the two sums is entered, that judgment will exceed the respondent’s filed offer by a trivial amount and the Court is entitled to have regard to both offers when exercising its discretion on costs. I deal with the question of whether there should be a judgment for the balance in favour of the applicant below but at the outset, since neither party was successful in bettering their own offers, I do not consider the offers add any weight to the exercise of my discretion.
Difference Judgment
The respondent submits that in accordance with the Rules, the Court should enter a judgment for the difference between the two sums. The Uniform Civil Rules commenced operation on 18 May 2020. Nonetheless I consider that the District Court Civil Rules 2006 (“DCR”) apply to this matter on the basis that the matter was heard and determined under those Rules and it is only fair that the costs be determined by reference to the known rules at the time of and prior to the time the matter was argued.
DCR Rule 224(2) provides:
(2)If a plaintiff succeeds on a claim, and the defendant on a counterclaim, the Court may give judgment in favour of the party who establishes the greater entitlement for the difference.
Rule 224(2) gives the Court a discretion as to whether it enters a judgment for the difference between the two sums in favour of one party.
The respondent submits further that notwithstanding it did not plead a set off, whether equitable or legal, the Court should enter a judgment for the difference to the applicant in the sum of $21,514.74. In so doing it asks the Court in the exercise of its inherent jurisdiction to award costs on the basis there was an equitable set off between claim and counter-claim. It relies on Gertig v Davies and Another.[9]
[9] (2003) 85 SASR 226, [23]-[26].
A number of points may be made about that Full Court authority. First, the Court was considering, amongst other matters, rule 101.01(1) of the Supreme Court Rules 1987 which set out the powers the Court may exercise when awarding costs. Doyle CJ dealt with that question and it is clear that in doing so his Honour was considering the situation where a liability for costs may be set off against a liability for damages. Second, his Honour expressly noted that it was not necessary to consider a submission that the appellant, Gertig, was entitled to set off costs against the damages due to Davies on the basis on the basis it was a ‘true equitable set off’. Third, his Honour considered an alternative which was a set off in the exercise of the Court’s inherent powers.[10]
[10] Ibid.
The position Doyle CJ was considering was not the same as presents itself here with two partly successful claims.
As to whether there should be an equitable set off, the respondent refers to Tincknell & Anor v Duthy Homes Pty Ltd & Anor[11] and a statement attributed to the Full Court in paragraph 12 of that judgment. That reference is, in fact, part of a passage from the judgment of Debelle J in Badge Constructions Pty Ltd v Penbury Coast Pty Ltd[12] where his Honour said:
The overriding principle is that the order for costs is fair and just in all the circumstances. The arbitrator has a broad discretion to ensure such a result. Thus, it will be appropriate when considering what award should be made as to costs to have regard to the conduct of the parties. So, a party may not be entitled to costs if he has advanced an inflated claim or counter-claim with the apparent purpose of frightening the other party by the fear of the costs of proceedings to drop the claim or accept less than the claim: Archital Luxfer Ltd v Henry Boot Construction Ltd [1981] 1 Lloyds Rep. 642.
The reasoning underlying the principles so far as they apply to cases arising out of building contracts are expressed in these terms in Hudson:
“It should be remembered that in building and engineering cases the issue between the parties is almost invariably financial, and that the machinery of the sealed offer is available to protect the position on costs. Though there may be many issues, in legal pleading terms, of claim, set-off, and counterclaim, the parties’ eyes will always have been fixed on the final balance owing one way or another. Whoever secures or avoids paying that balance in effect has won. Only in the case of wildly exaggerated claims, or separate and costly issues on 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 a final balance of claim and counterclaim should be paid his costs. There are cases in other situations where separate orders for costs on claim and counterclaim are appropriate, but counterclaims on building and engineering contracts arise out of the same transaction and are equitable set-offs, and the basic commercial realities, in the vast majority of cases argue very strongly, it is submitted, for a single award of costs in favour of the party ultimately successful on balance, unless the balance is so small as to justify the view that a party responsible for initiating the litigation and obtaining such a balance can be regarded as having been effectively unsuccessful.”
In this context it is relevant to note that in cases under a building contract, where both the claim and the cross-claim arise under the building contract, the cross-claim constitutes an equitable set-off: Hanak v Green [1958] 2 QB 9 at 25-26 and at 29. That principle will usually have important consequences in respect of costs since, if the cross-claim exceeds the amount of the claim, the claim will be treated as having failed: Hanak v Green (supra) and see also the discussion in Hudson (11^th edition) para 8.118.
Given the particular issues which arise when determining costs where both the claim and counter-claim arise out of a building contract and both claim and counter-claim are successful, it might be putting the principle too high to assert that exceptional circumstances are required to justify a departure from the general principles noted above. It is not necessary to decide that issue here. But it can at least be said that there must be good cause for departing from the general principles.
In this case there was a claim and cross-claim or counter-claim. The builder claimed certain items as variations. The building owner cross-claimed for an entirely separate item, namely, the failure of the builder to construct a cross-over, which failure was in breach of the building contract. Since both the claim and the cross-claim arose out of the same building contract, the cross-claim constituted a set-off. In the result, the award substantially favoured the builder. It justified a single costs order in favour of the builder or at least that an order that each party have its costs. If the arbitrator applied settled principles, he would have ordered the building owner to pay the builder’s costs on the balance recovered by the builder. The arbitrator should not have made any other order unless there was good reason to depart from that general principle.
[11] [2020] SASCFC 24.
[12] [1999] SASC 6, [11]-[14].

Although, the cross-claim constitutes an equitable set off, nonetheless, a cross-claim must be pleaded in the defence.[13] As I have noted, no set off was pleaded.
[13] District Court Civil Rules 2006, r 100(4).
The applicant submits that in any event there can be no legal set off because the applicants’ claim was for damages and not a liquidated sum.[14] I accept that submission.
[14] McDonnell & East Ltd v McGregor (1936) 56 CLR 50, 62.
As I have noted above, the Court has a discretion to enter a judgment for the difference between the two sums.[15] I do not consider that is an appropriate course in this matter in the absence of a pleaded set off. Accordingly, I decline to enter a judgment for the difference.
[15] Shrapnel v Laing (1888) 20 Q.B.D 334, 338.
Principles in relation to costs
The principles that govern an award of costs are well settled. In A, DC v Prince Alfred College Inc (No 2)[16] the Full Court explained the approach to the award of costs as follows:
[16] [2016] SASCFC 27, [5]-[13].
The principles governing the exercise of the costs discretion are well established. The Court exercises a judicial discretion with respect to costs in which the general rule is that costs ordinarily follow the event unless there are special circumstances justifying another order. In more recent times, courts more readily modify the general rule recognising that the interests of justice sometimes require a reduction in the costs that would otherwise have been awarded to a successful party when that party has failed on particular disputed questions of fact or law. In Ruddock v Vardalis (No 2), Black CJ and French J summarised the principles as follows:
Within the general discretion of the courts to award costs it is accepted by decisions in both Australian and English jurisdictions that:
·    Ordinarily costs follow the event and a successful litigant receives costs in the absence of special circumstances justifying some other order.
·    Where a litigant has succeeded only upon a portion of the claim, the circumstances may make it reasonable that the litigant bear the expense of litigating that portion upon which he or she has failed.
·    A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other parties' costs of them. In this sense “issue” does not mean a precise issue in the technical pleading sense but any disputed question of fact or law.
The modification of the ordinary rule to reflect the way in which particular issues in the litigation are determined is a response to those ‘cases in which issues are raised which unduly extend the time and expense of litigation’.
In Victoria and Master Builders Association of Victoria Ormiston JA explained that in an era of high cost litigation it had become necessary to more often allocate costs according to success on particular issue because ‘regrettably there are many cases in which issues are raised which unduly extend the time and expense of litigation’. Those observations were echoed in Mickelberg v Western Australia by Newens J who referred also to ‘the burdens imposed on the public resources of the Court’ by parties pursuing claims on which they are ultimately not successful.
Just as parties must make a cost benefit and risk analysis decision on whether to bring an action at all, so too must decisions be made about which claims to include within an action. Parties should not be encouraged to add to a claim which has sufficient prospects, in itself, to justify the bringing of an action other claims, of doubtful merit, on the assumption that the costs of pursuing the latter claims will be recovered because of success on the good claim.
In adversarial litigation the parties and their legal advisors carry the primary responsibility for ensuring the cost-effectiveness of litigation because they have a particular knowledge and understanding of the controversy, and the available evidence, which the court cannot know because of legal professional privilege.
It is therefore the responsibility of the legal profession to actively consider the affect of adding doubtful claims, or mounting defences to good claims without any foundation for doing so, on the efficient resolution of the proceedings. In accordance with that duty legal practitioners must give advice on the relative merits of the possible claims and defences and on the cost and time implications of pursuing those claims so that the litigant is in a position to give informed instructions on how to conduct the proceedings.
The authorities to which we have referred make it clear that the rule does not only apply to a ‘precise issue in the technical pleading sense’ but extends to any substantial disputed question of fact or law. There is of course a limit to the dissection of an action which is practicably possible.
On the other hand, the court should not be overly parsimonious in the award of costs to a plaintiff who has won a judgment against a wrongdoer who has denied liability on all of the grounds of the plaintiff’s claim.
There can be no precision in the balancing of the tension between the ordinary rule and its qualification. Much will depend on the extent to which the costs of the litigation of the separate issues can easily be separated out and on the reasonableness of the forensic decision of the successful party to pursue, not only the claims on which he or she succeeded, but also those claims on which he or she failed.              (citations omitted)
Consideration
The applicants’ claim was to an extent largely defensive in the sense that the Arbitrator had assessed rectification and completion costs in her Award in the sum of $113,736.37 (incl GST).
In all the circumstances, in my view the justice of the case is such that the applicant should receive its costs of the action and the respondent its costs of the action albeit subject to a reduction representing the parties’ respective success.
In the exercise of my discretion, I consider that the applicant in entitled to 80% of its costs and the respondent 20% of its costs.
Orders
I make the following orders:
1I enter judgment for the applicant in the sum of $123,714.37 inclusive of GST and interest;
2I enter judgment for the respondent in the sum of $97,016.34 inclusive of GST and interest;
3I order that the respondent pay the applicant 60% of his costs of and incidental to the action, including 60% of the costs of and incidental to the Arbitration.