Fitch v S & a Gallo Pty Ltd - [2013] SASC 144

SUPREME COURT OF SOUTH AUSTRALIA
(Magistrates Appeals: Civil)
FITCH v S & A GALLO PTY LTD
[2013] SASC 144
Judgment of The Honourable Justice Blue
13 September 2013
PROCEDURE - COSTS - APPEALS AS TO COSTS
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES - DEMAND, OFFER AND CONSENT
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES - CONDUCT TENDING TO LITIGATION
S & A Gallo Pty Ltd sued David and Mathew Fitch in the Magistrates Court. Gallo claimed $25,058 said to be the balance owing for building works undertaken at the Fitchs’ house property.
The Fitchs defended the claim on the basis that the building works were defective, claiming rectification work was required. The Fitchs later counterclaimed for the cost of rectification works to be undertaken.
At the commencement of trial, the parties agreed that consent judgment be entered in favour of Gallo for $20,000 on the claim and in favour of the Fitchs for $16,200 on the counterclaim. No agreement was reached as to costs. The Fitchs sought an order that their costs of action be paid by Gallo. The Magistrate rejected the application and made an order that each party bear their own costs.
The Fitchs seek permission to appeal against the Magistrate’s order.
Held (dismissing the appeal):
1.      Permission to appeal on all grounds is granted (at [25]).
2.      When an action is compromised, there are difficulties in a court being asked to award costs and commonly each party bears its own costs, unless there is an obvious basis on which to award costs in favour of one party (at [21]).
3.      The Magistrate correctly identified the principles relevant to the assessment of costs when an action is compromised (at [30]).
4.    There was no basis established by the Fitchs for finding that Gallo was responsible for the action or that the Fitchs' postion in the action was necessarily vindicated by the result (at [34], [35] and [41]).
5.      (a) The offers before action were not substantive offers. They were only offers to negotiate (at [49]-[50]).
(b) There is no basis to find that there would have been a resolution of the dispute if a meeting had taken place, given the breakdown in the relationship between the parties to that point and what transpired subsequently (at [50]).
6.      The matters identified by the Fitchs are not sufficient in all of the circumstances to make out unreasonable conduct by Gallo of the type which results in a party being ordered to pay costs independently of the result (at [56]).
Building Work Contractors Act 1995 (SA) s 37(6); Magistrates Court Civil Rules 2006 (SA) s 37(1); Supreme Court Civil Rules 2006 (SA) rr 288(1)(b), 292(6); Worker's Liens Act 1893 (SA), referred to.
Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284, discussed.
Advance Resource Services Pty Ltd v Charlton [2008] SASC 118; (2008) 100 SASR 388; Boscaini Investments Pty Ltd v Corporation of Kensington and Norwood [1999] SASC 327; Tobin v Tobin and Myers (1977) 75 LSJS 9, considered.

FITCH v S & A GALLO PTY LTD
[2013] SASC 144
Magistrates Appeal Civil:
Blue J:

In December 2009, the respondent/plaintiff S & A Gallo Pty Ltd (“Gallo”) issued a claim in the Magistrates Court against the appellants/defendants David and Mathew Fitch. Gallo claimed $25,058 said to be the balance owing for building works undertaken at the Fitchs’ house property.
The Fitchs defended the claim on the basis that the building works were defective. The Fitchs later counterclaimed for the cost of rectification works to be undertaken.
The claim and counterclaim were listed for trial to commence on 17 December 2012. At the commencement of trial, the parties agreed that consent judgment should be entered in favour of Gallo for $20,000 on the claim and in favour of the Fitchs for $16,200 on the counterclaim. No agreement was reached as to costs. The Fitchs sought an order that their costs of action be paid by Gallo. David Fitch swore an affidavit on 18 December 2012 in support of the Fitchs’ application for costs.[1] He exhibited communications between the parties between 26 June and 9 December 2009.
[1] An affidavit was also sworn by the Fitchs' solicitor deposing to post-action communications. It is not directly relvant to the issues raised on appeal.
The Magistrate heard argument on the Fitchs’ application for costs. He rejected the application and made an order that each party bear their own costs.
The Fitchs seek permission to appeal against the Magistrate’s order that each party bear their own costs.
Background
In May 2009, the Fitchs entered into a contract with Gallo for the installation of a rainwater storage and storm water drainage system and the laying of pavers over the pipes installed in the ground. The contract price was $65,000 payable by three instalments with the last instalment of $20,000 payable on completion of the works.[2]
[2] All dollar figures quoted herein are inclusive of GST.
In September-October 2009, Gallo issued to the Fitchs an invoice for $20,000, being the final instalment for the works, and claimed $5,058 for variations.
Written communications followed between the parties, debating whether the work was defective and whether Gallo was entitled to payment for variations.
In November 2009, Gallo’s solicitors issued to the Fitchs a formal demand under the Worker’s Liens Act 1893 (SA) for $25,058. Further communications ensued.
In December 2009, Gallo issued a claim in the Magistrates Court for $25,058.
In January 2010, the Fitchs filed a defence alleging defective work and disputing the variations. Although they did not file a counterclaim, they sought relief as part of the defence, including an order that Gallo undertake remedial works.
In May 2010, a court appointed building expert, Mr Robinson, provided an independent report in relation to the alleged defects. He considered that some of the alleged defects should be remedied, one should not and several other defects should be the subject of further investigation or expert report.
In July 2011, the Fitchs obtained a report by Mr Deans, a quantity surveyor, which assessed the cost of rectification (assuming all defects as alleged by the Fitchs) at $36,652. In September 2011, the Fitchs obtained an expert report by Mr Kokkinakis, an engineer, involving an alternative less extensive method of rectification.
In October 2011, the Fitchs filed a counterclaim. They sought an order that they be paid the cost of carrying out remedial works, but did not quantify their cost. They abandoned the claim contained in their original defence for an order that Gallo undertake remedial works.
In November 2011, the Fitchs obtained a further report by Mr Deans estimating the cost of undertaking the rectification works recommended by Mr Kokkinakis at $17,182.
In August 2012, Gallo served an expert report by a quantity surveyor, Mr Centofanti, estimating the cost of undertaking the works recommended by Mr Kokkinakis at $9,989.46.
In September 2012, the cost of rectification work recommended by Mr Kokkinakis was agreed at $16,200.
On 17 December 2012, at the outset of trial, consent judgments were entered for Gallo of $20,000 and the Fitchs of $16,200.
The Magistrate’s reasoning
The Magistrate considered that, when parties settle an action without agreeing on costs, there needs to be a sufficiently clear basis on which to award costs in favour of one party or the other. It was not sufficiently clear that Gallo was the villain and the Fitchs were the victims such that Gallo should pay the Fitchs’ costs. He did not have sufficient material upon which he could determine that Gallo was at fault in the sense that it should be responsible for the Fitchs’ costs. The outcome of the settlement, being a net judgment in favour of Gallo, did not lead to an inference of such fault.
Awarding costs when actions settle
Section 37(1) of the Magistrates Court Act 1991 (SA) provides that costs are in the discretion of the Court.
Whenever parties settle an action resolving all issues other than costs, there are difficulties in a court being asked to award costs. The court will generally not try the whole action to determine the issue of costs.[3] The most common outcome is that each party bears its own costs, unless there is an obvious basis on which to award costs in favour of one party (including that it has acted manifestly unreasonably).[4] However, costs are always in the discretion of the court and that discretion is not fettered by any rules.[5]
[3]    Tobin v Tobin and Myers (1977) 75 LSJS 9 at 12 per Sangster J.
[4]    Gribbles Pathology Pty Ltd v Health Insurance Commission (1997) 80 FCR 284 at 287 per Finkelstein J; Boscaini Investments Pty Ltd v Corporation of Kensington and Norwood [1999] SASC 327 at [19]-[22] per Debelle J.
[5]    Advance Resource Services Pty Ltd v Charlton [2008] SASC 118; (2008) 100 SASR 388 at [8]-[13] per Doyle CJ and [52]-[56] per Bleby J.
A settlement usually involves a compromise in which each party continues to maintain that its position was correct but compromises to avoid the time, cost and risk associated with a trial. The mere fact that a consent judgment resulting from a compromise is awarded in favour of one party does not necessarily mean that the party against whom the judgment is awarded has conceded that the first party would have succeeded if the matter had proceeded to trial.
The grounds of appeal
The first ground of appeal relies upon a contention that the Fitchs offered before commencement of proceedings to resolve the dispute on the same basis as the ultimate settlement. There are several other grounds of appeal.
Permission to appeal is required when the appeal is limited to a question about costs.[6] I determined ex parte to grant permission to appeal on the first ground raising pre‑action offers and referred the question whether permission should be granted on the other grounds to be heard concurrently with the appeal on the first ground on the basis that all grounds would be addressed on the merits.[7]
[6] Supreme Court Civil Rules 2006 (SA) r 288(1)(b).
[7] Supreme Court Civil Rules 2006 (SA) r 292(6).
At the hearing of the appeal, it became apparent that all of the grounds were interrelated and either cumulative or overlapping. In the circumstances, I grant permission to appeal on all grounds.
Ultimately, it is necessary to consider all grounds of appeal in conjunction. I deal with the three essential strands of the Fitchs’ complaints on appeal separately for the purposes of analysis, albeit they are interrelated.
The approach of the Magistrate
Grounds 6 and 7[8] complain of the overall approach of the Magistrate to considering the application for costs.
[8] These grounds are identified in the summons for permission to appeal as grounds 1.6 and 1.7. I have renumbered all grounds of appeal to comprise whole numbers.
Those grounds are that the Magistrate erred by:
6.placing too great an emphasis on the decision of his Honour Justice Finkelstein in Gribbles Pathology Pty Ltd v Health Insurance Commission & Others (1997) 80 FCR 283; and
7.regarding it as necessary for him to form a “clear view” as to the parties’ conduct in order to make a decision as to costs and thereby inferentially requiring the parties to a court action to run a trial in order to determine costs only.
These complaints relate to the following passages from the reasons of the Magistrate:
Having presided over hundreds of cases, I cannot but whole heartedly agree with Finkelstein J in Gribbles Pathology Pty Ltd v Health Insurance Commission & others (1997) 80 FCR at 287 … How is it that I can form a clear view based on a few affidavits and submissions, the factual accuracy of which is in itself challenged? …
The defendants wish me to infer from the material before the court that the plaintiff was the villain and the defendants the victims. Indeed, that may have been the court’s finding, had the matter gone to trial. However, it is impossible to come to such a conclusion in the circumstances that prevail.
…
The head note in the Gribbles case summarises the law succinctly –
‘… There will be very few cases where the issues will be sufficiently clear in the absence of a hearing, for an order for costs to be made in favour of a party’.
There are cases that are exceptional but this is not one of them.
As observed at [21] above, when an action is compromised, there are difficulties in a court being asked to award costs and commonly each party bears it own costs, unless there is an obvious basis on which to award costs in favour of one party. The Magistrate correctly identified the principles in the passages quoted at [29] above.
Basis for finding Gallo responsible
Grounds 1(b), (c) and (d), 4 and 5 complain that the Magistrate ought to have found Gallo responsible for the costs incurred by the parties in the action because, the position adopted by the Fitchs in the action was vindicated by the result of the settlement.
Those grounds are that the Magistrate erred by:
1.     placing too great an emphasis on the fact that there was a net outcome of the    judgments entered by consent in the action when determining costs in circumstances where:
(b)     the Appellants’ original Defence made it clear that the Appellants                  required the Respondent to return to site and complete the outstanding            works before the balance of the contract price would be paid;
(c)     prior to the trial commencing, the Respondent conceded that the remedial               works were required thereby vindicating the position adopted by the   Appellants back in 2009 prior to the litigation commencing; and
(d)     the legal costs incurred by the Appellants since the Court action was   commenced were unnecessarily incurred.
…
4.     regarding the Respondent’s submissions on costs as “casting a query” over some of the Appellants’ assertions made in their costs submissions;
5.     placing too great an emphasis on the need to find the Respondent as “the villain”     when, given the Appellants’ original defence, all that the Learned Magistrate needed to find was that Respondent should have returned to do the outstanding        work …
The Fitchs put an argument in two parts why Gallo should pay their costs notwithstanding that there was a net judgment in favour of Gallo. The first part is that the Fitchs never denied that $20,000 was due to Gallo, being the balance payable for the works provided that rectification works were addressed: the consent judgment in favour of Gallo for $20,000 reflected their position from the outset and can be put to one side. The second part is that the consent judgment for $16,200 on the counterclaim represented vindication of their rectification claim because they sought rectification in their defence and before action. They make an allied submission to part two, namely that Gallo conceded on the first day of trial that remedial works were required.
The first part of the argument may be accepted. However, the Fitchs have failed to make out the premise upon which the second part of the argument is founded. They contend that, on the first day of trial, Gallo conceded that the remedial works recommended by the engineer were appropriate. The only evidential basis for this “concession” is the fact that Gallo entered into a compromise pursuant to which it consented to judgment on the counterclaim for $16,200. As observed above, the mere fact that a party enters into a compromise does not mean that that party is conceding that the other party would have succeeded if the matter had proceeded to trial. The Fitchs did not adduce any evidence before the Magistrate of any concession by Gallo independently of the fact of compromise. Gallo in its submissions to the Magistrate contested it made a concession.[9]
[9] This was one of the paragraphs to which the Magistrate referred when observing that Gallo’s submissions “cast a query” over the Fitchs’ submissions, which observation is itself the subject of ground 4.
In addition, it was relevant for the Magistrate to take into account that the net result of the settlement was judgment for a monetary amount ($3,800) in favour of Gallo against the Fitchs. If the Fitchs’ contention were correct that the fact of compromise ought to be regarded as a concession by each party of the position of the other reflected in the compromise, the consent judgments would have represented a concession by the Fitchs that they owed Gallo $3,800 and that Gallo’s action in the Magistrates Court was vindicated to that extent. While that is not the appropriate approach as explained in the previous paragraph, the Magistrate was correct in observing that a net outcome in favour of the Fitchs might have placed them in a stronger position to contend that they had been vindicated.
In their original defence, the Fitchs pleaded that the works contained defects and sought an order that Gallo remedy the defects. Section 37(6) of the Building Work Contractors Act 1995 (SA) empowers the Magistrates Court, on application by a party to a domestic building work contract, to require the performance of remedial work.[10]
[10] Technically, the Fitchs did not properly invoke section 37(6) at the time of filing their original defence because a counterclaim was required to make an application under that Act.
Later, on 12 October 2011, the Fitchs filed a counterclaim. They did not seek an order for the performance of remedial work. They accepted that this was not feasible due to the breakdown in the relationship between the parties and sought instead the cost of carrying out the rectification work required.
Ultimately, the matter was settled on the basis of monetary payments rather than performance by Gallo of remedial work. This reflected the reality that the relationship between the parties had broken down to such an extent that performance by Gallo of remedial works was not a practicable resolution.
Given the breakdown in the relationship between the parties culminating in the institution of the action in December 2009, the appropriate method for the Fitchs to protect themselves in relation to costs was to make an offer to resolve the matter on the basis of a monetary payment. The fact that they sought in their defence an order for Gallo to perform remedial works was incapable in the circumstances of rendering Gallo’s conduct thereafter unreasonable so as to make it appropriate that Gallo pay the Fitchs’ costs of action.
The Fitchs did not quantify the cost of the rectification works which they contended were required until 19 months after institution of the proceedings, namely in July 2011. At that stage, they quantified rectification costs at $36,652. If they had succeeded on their counterclaim in that amount at trial, their position would have been vindicated because they would have received a significant net judgment in their favour. However, the settlement did not reflect an entitlement to costs of rectification of that order.
The cost of the rectification work which the Fitchs claimed was necessary was not quantified at $16,200 until 26 September 2012, being less than three months before trial. While there was agreement on the quantum, there was no evidence adduced before the Magistrate that Gallo acknowledged liability at that point for rectification work.
Costs upon settlement of action
Grounds 1(a) and (d), 2, 3 and 4 complain that the Magistrate ought to have ordered costs of action in favour of the Fitchs because they offered to settle the matter before action on the same basis as it was ultimately settled in December 2012.

Those grounds are that the Magistrate erred by:
1.     placing too great an emphasis on the fact that there was a net outcome of the    judgments entered by consent in the action when determining costs in circumstances where:
(a)     the settlement that occurred was the same as what the Appellants had offered          to the         Respondent as a means of resolving the dispute back when the dispute          commenced        in 2009;
…
(d)     the legal costs incurred by the Appellants since the Court action was   commenced were unnecessarily incurred.
2.     failing to have proper regard to the fact that the Appellants made no less than two      reasonable proposals to resolve the dispute prior to litigation.
3.     failing to take any, or any proper, account of the affidavit evidence before the         Learned Magistrate.
4.     regarding the Respondent’s submissions on costs as “casting a query” over some of the Appellants’ assertions made in their costs submissions …
The lynchpin of the Fitchs’ contention is that the ultimate settlement was no less favourable to the Fitchs, and no more favourable to Gallo, than had been offered by the Fitchs in 2009 before institution of the action.
Between 6 and 29 October 2009, a series of emails passed between the parties about alleged defects. In the course of those emails, the Fitchs identified some defects. However, they did not provide a comprehensive list of defects, did not identify each defect in full detail and did not identify what rectification work was required in respect of each defect. The correspondence in this respect is in contrast with the Fitchs’ subsequent pleadings in the action and the expert reports obtained by them in 2011.
On 29 October 2009, Mr Gallo sent an email to Mr Fitch requesting advice in writing of the aspects of the work believed by the Fitchs to be incomplete. He said that he would attend to them provided payment was made on site at the time of completion.
Later on 29 October 2009, Mr Fitch sent an email to Mr Gallo proposing instead a site meeting at which items needing completion could be recorded in writing and proposed that, if agreement could not be reached on all items, the parties would move to mediation. On 4 November 2009, Mr Gallo sent an email to Mr Fitch saying that he was not prepared to agree to those terms and had forwarded the issue to his solicitor. The Fitchs contend that Gallo acted unreasonably in not agreeing to the proposal contained in their email of 29 October 2009 and lost an opportunity to resolve the matter.
On 9 November 2009, Gallo’s solicitor sent a notice of demand to the Fitchs under the Worker’s Liens Act 1893 (SA). Between 18 and 20 November 2009, letters passed between the Fitchs and Gallo’s solicitors. An impasse was reached because Gallo’s solicitors required payment of $20,000 as a sign of good faith before undertaking rectification works, and the Fitchs were not prepared to agree to that. On 26 November 2009, the Fitchs requested a meeting to discuss rectification matters and suggested that an independent building inspector might be retained. Gallo did not respond to that request. The Fitchs contend that in so doing Gallo acted unreasonably and lost a second opportunity to resolve the matter.
The proposals made by the Fitchs in October and November 2009 for a meeting were premised on the assumption that agreement could be reached on the nature and extent of each alleged defect and on the nature and extent of rectification works to be undertaken by Gallo. However, it is evident that by 29 October 2009 the relationship between the parties had largely broken down. Once a relationship between builder and client breaks down and mutual trust is lost, it is exceedingly difficult to resolve the matter on the basis that the builder undertakes rectification works satisfactory to both parties.
The Fitchs did not in October or November 2009 put to Gallo an offer in specific terms capable of acceptance which would have been legally binding and resolve the dispute. Their proposals amounted to no more than proposals to meet and if necessary mediate or engage an independent building inspector in an attempt to reach agreement. It can be accepted that the failure of Gallo to meet or mediate was unreasonable. However, there is no basis for a finding that there would have been a resolution of the dispute if a meeting had taken place, given the breakdown in the relationship between the parties to that point and what transpired subsequently. In addition, the Fitchs did not themselves take any other steps to seek to resolve the matter beyond proposing a meeting and mediation or retention of an independent building inspector. The position in this respect can best be illustrated by identifying steps which the Fitchs might have taken which would have better protected them in relation to costs in any subsequent litigation.
At the highest level, the Fitchs could have quantified the cost of rectification of the alleged defects and made a monetary offer to Gallo. If they had done so, and achieved at trial a position no less favourable, prima facie they would have been awarded their costs of action. If they had done so and offered a net payment of $3,800 to Gallo and ultimately the matter had settled on those terms, they would have had a basis on which to seek an order for costs upon reaching the settlement which was reached on 17 December 2012.
At a lower level, the Fitchs could have compiled a document setting out in detail the nature and extent of each defect and the rectification work which they contended was required in respect of each defect. This was requested by Gallo on 29 October 2009 but was not provided by the Fitchs in a comprehensive fashion. Although the Fitchs identified various defects in various items of correspondence, it was not clear how each listing in each different item of correspondence interrelated to the other and there was no comprehensible and comprehensive listing of the nature and extent of all alleged defects and rectification works allegedly required. If the Fitchs had compiled such a document, they would have had a basis to contend both that Gallo’s conduct was unreasonable and that a resolution would have been achieved at that early stage if Gallo had not acted unreasonably.
The Fitchs are not to be criticised for not taking either of the steps identified in the previous two paragraphs. Taking either of those steps would not have guaranteed that they would ultimately have obtained an order for costs of action in their favour upon the settlement reached on 17 December 2009. However, the steps which they did take did not result in circumstances in which it should be ordered that Gallo should pay their costs of action.
Ground 3 complains that the Magistrate failed to take proper account of the affidavit evidence. This appears to refer to the affidavit of Mr Fitch sworn on 18 December 2012 which exhibited the pre-action communications between the parties. It is true that the Magistrate did not refer directly to that exhibit (although he did so indirectly by observing that Gallo cast a query on the Fitchs’ contentions about those communications). However, for the reasons given above, the existence of those communications does not form a ground for ordering that Gallo pay the Fitchs’ costs.
Ground 4 complains that the Magistrate erred in regarding Gallo’s submissions on costs as casting a query over some of the assertions made by the Fitchs. This ground was not specifically advanced at the hearing of the appeal. In any event, the Magistrate’s observation in this respect was accurate because the written submissions by Gallo did take issue with several of the assertions made by the Fitchs in their written submissions about the pre-action communications.
Holistic view
I have considered all strands of the Fitchs’ arguments on appeal, and all grounds of appeal, in conjunction. On the material before the Magistrate, it is not possible to conclude that there was an obvious basis on which to award costs in favour of the Fitchs and there was not a sufficiently clear basis on which to do so. The matters identified by the Fitchs are not sufficient to make out unreasonable conduct by Gallo of the type which results in a party being ordered to pay costs independently of the result.
Conclusion
I dismiss the appeal. I will hear the parties as to consequential orders.