Knight Frank Australia Pty Ltd v Paley Properties Pty Ltd
[2014] SASCFC 103
•22 September 2014
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
KNIGHT FRANK AUSTRALIA PTY LTD & ANOR v PALEY PROPERTIES PTY LTD & ORS
[2014] SASCFC 103
Judgment of The Full Court
(The Honourable Justice Sulan, The Honourable Justice Blue and The Honourable Justice Parker)
22 September 2014
PROCEDURE - COSTS - GENERAL RULE - COSTS FOLLOW THE EVENT - THIRD PARTIES
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - CONDUCT OF PARTIES - MISCONDUCT, ETC - GENERALLY
PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS
The plaintiff, Paley Properties, retained Mr Gambranis, an employee of the land agent Knight Frank Australia, to sell a commercial property. Mr De Chellis made an offer to purchase the property in the name of De Chellis Homes. Ultimately the sale did not proceed. Paley Properties sued De Chellis Homes (first defendant), Mr De Chellis (second defendant), Knight Frank Australia (third defendant) and Mr Gambranis (fourth defendant). De Chellis Homes Pty Ltd also brought a third party claim against the land agents, Knight Frank Australia and Mr Gambranis. The trial judge dismissed the action and consequentially the third party action.
The trial Judge made orders that, despite their being successful, Knight Frank Australia and Mr Gambranis pay the costs of action of Paley Properties against Mr De Chellis, and Mr De Chellis' costs on a solicitor and client basis. This was on the basis of Mr Gambranis' misconduct. Paley Properties was to pay De Chellis Homes' costs of action. No order as to costs of the third party action was made.
Neither party on appeal seeks to disturb the costs orders in so far as they were made in favour of De Chellis Homes or Mr De Chellis. The land agents appeal to this Court against the other cost orders of the trial Judge, and Paley Properties cross-appeals the other costs orders.
Held by Blue J (Sulan and Parker JJ agreeing) allowing the appeal:
1. The general rule is that costs follow the event. However, this is subject to exceptions such as when the costs of litigation have been incurred or inceased by a party's misconduct (at [5]).
2. The first step is to determine whether the conduct of a party constitutes misconduct within the meaning of established authorities. The second step, if there is misconduct, is to analyse whether, and if so, the extent to which, the misconduct caused the litigation, its continuation or extent. The third step, if there is causation, is to determine the appropriate costs order (at [57]-[59]).
3. The trial Judge's discretion miscarried because she did not clearly identify the precise conduct of Mr Gambranis said to amount to misconduct, why this caused costs to be incurred in the litigation and finally whether the land agents should be deprived of their own costs, pay their opponents' costs on a party and party basis or pay their costs on a solicitor and client basis (at [60]-[65]).
4. There was an inherant inconsistency in the trial Judge ordering the land agents to pay Paley Properties' costs of action as against Mr De Chellis but not ordering the land agents to pay Paley Properties' costs of action as against the land agents (at [66]).
5. Mr Gambranis deliberately misleading Paley Properties to believe that he had communicated acceptance to Mr De Chellis on 20 August 2009 constituted relevant misconduct. This was one cause of the proceedings being instituted (at [69]).
6. Paley Properties was also at fault in instituting the proceedings notwithstanding that it should have been obvious that its action for breach of contract and for breach of warranty was bound to fail (at [88]).
7. Given there were two concurrent causes of the litigation against the De Chellis parties and both Paley Properties and the land agents were at fault, it is appropriate that each bear their own legal costs (at [95]).
8. As neither party seeks to disturb the costs orders by the trial Judge in favour of the De Chellis parties, the parties should be heard on whether the Court should order each party to pay 50% of the De Chellis parties' costs of action or each party should indemnify the other as to 50% of the costs payable to the De Chellis parties (at [99]-[103]).
9. Appeal allowed (at [101]).
Corporations Act 2001 (Cth); District Court Act 1991 (SA), s 42; District Court Civil Rules 2006 (SA) r 32, r 263(1); Land and Business (Sale and Conveyancing) Act 1994 (SA) s 7; Land and Business (Sale and Conveyancing) Regulations 1995 (SA) reg 7, referred to.
Colgate-Palmolive Company and Anor v Cussons Pty Limited (1993) 46 FCR 225; Collen v Wright (1857) El & Bl 647; Firbanks Executors v Humphreys and Ors (1886) 18 QBD 54; Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72; Tesco Supermarkets Plc v Nattrass [1972] AC 153, discussed.
Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873; Bostock v Ramsey Urban District Council [1900] 2 QB 616; Bullock v The London General Omnibus Company and Ors [1907] 1 KB 264; Colgate-Palmolive Company and Anor v Cussons Pty Ltd (1993) 46 FCR 225; Copping v ANZ McCaughan Ltd (1994) 63 SASR 523; Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95; F. King & Co v Gillard & Co [1905] 2 Ch 7; House v The King (1936) 55 CLR 199; Hamilton v Whitehead (1998) 166 CLR 121; Houghtan v Arms [2006] HCA 59; (2006) 225 CLR 553; House v The King (1936) 55 CLR 199; LEGGO (Trading as A Victor Leggo and Co) v Brown and Dureau Ltd (1923) 32 CLR 95; Milne and Ors v Attorney–General for the State of Tasmania (1956) 95 CLR 460; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451; Paley Properties Pty Ltd v De Chellis Homes Pty Ltd, and R De Chellis and Knight Frank Australia Pty Ltd and P Gambranis [2013] SADC 134; Rapuano (trading as Raps Electrical) v Karydis-Frisan and Anor [2013] SASCFC 93; Hamilton v Whitehead (1998) 166 CLR 121; Houghtan v Arms [2006] HCA 59; (2006) 225 CLR 553; Sanderson v Blythe Theatre Co [1903] 2 KB 533; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165; LEGGO (Trading as A Victor Leggo and Co) v Brown and Dureau Ltd (1923) 32 CLR 95; Wright v Madden (1992) 1 Qd R 344, considered.
KNIGHT FRANK AUSTRALIA PTY LTD & ANOR v PALEY PROPERTIES PTY LTD & ORS
[2014] SASCFC 103Full Court Appeal: Sulan, Blue and Parker JJ
SULAN J: I would allow the appeal and the cross appeal. I agree with the reasons and the orders proposed by Blue J.
BLUE J:
This is an appeal and cross appeal, by permission, against orders relating to the costs of action of the parties following a trial in the District Court.
Paley Properties Pty Ltd sued the first defendant, De Chellis Homes Pty Ltd, for damages for breach of an alleged contract for the sale of a commercial property. Paley Properties sued the second defendant, Richard De Chellis, in the alternative for damages for breach of warranty of authority on behalf of De Chellis Homes. Paley Properties sued its land agents, the third and fourth defendants Knight Frank Australia Pty Ltd and Peter Gambranis (the land agents), in the further alternative for damages for negligence and breach of contract for failing to communicate to the purchaser, De Chellis Homes, the vendor, Paley Properties’, execution of the contract. De Chellis Homes also brought a third party claim against the land agents.
The trial Judge dismissed Paley Properties’ action against all defendants and consequentially dismissed the third party action.[1] No contract came into existence between Paley Properties and De Chellis Homes because Richard De Chellis, who executed the contract on behalf of the purchaser, was only one of two directors of the company (the other director being his father) and he was not authorised by the board of directors to enter into the contract. There was no breach of warranty of authority by Richard De Chellis because he communicated to the vendor’s land agent, Mr Gambranis, that he did not have authority to bind the company and that he also needed the signature of his father. Paley Properties’ claim against the land agents failed because no contract came into existence independently of their failure to communicate to the purchaser the vendor’s execution of the contract.[2]
[1] Paley Properties Pty Ltd v De Chellis Homes Pty Ltd, and R De Chellis and Knight Frank Australia Pty Ltd and P Gambranis [2013] SADC 134.
[2] Ibid.
The trial Judge subsequently made orders in relation to the costs of action that:[3]
1. the land agents pay the costs of action of:
(a) Paley Properties against Richard De Chellis; and
(b) Richard De Chellis,[4]
on a solicitor and client basis;
2. Paley Properties pay De Chellis Homes’ costs of action on a party/party basis until 9 July 2011 after which on a solicitor/client basis;[5] and
3. there be no order as to the costs of the third party action between De Chellis Homes and the land agents.
[3] Paley Properties Pty Ltd v De Chellis Homes Pty Ltd, and R De Chellis and Knight Frank Australia Pty Ltd and P Gambranis [2013] SADC 145.
[4] This was in the nature of a Sanderson order: Sanderson v Blythe Theatre Co [1903] 2 KB 533.
[5] On a party and party basis until 9 July 2011, and thereafter on a solicitor and client basis.
The land agents appeal against the costs orders, contending that the trial Judge should have ordered that they recover from Paley Properties their costs of action in their capacity as defendants and third parties,[6] and that they be indemnified, under a Bullock order,[7] by Paley Properties against their liability for costs of Richard De Chellis under the first order, part (b).
[6] On a party and party basis except their costs of action on the third party action after 30 January 2012, which they seek on a solicitor and client basis.
[7] Bullock v The London General Omnibus Company and Ors [1907] 1 KB 264: a Bullock order requires the unsuccessful defendant to pay the successful plaintiff any costs the plaintiff has paid to the successful defendant. In the Land Agent’s notice of appeal, they sought vacation of the order that they pay the costs of Mr De Chellis but, when permission was granted, they agreed to seek relief only against Paley Properties.
Paley Properties cross appeals against the costs orders, contending that the trial Judge should have ordered that it recover from the land agents its costs of action as against the land agents and as against De Chellis Homes[8] and that it be indemnified, under a Bullock order,[9] by the land agents against its liability for costs to De Chellis Homes under the second order.
[8] Each on a solicitor and client basis.
[9] In Paley Properties’ notice of appeal, it sought vacation of the order that it pay the costs of De Chellis Homes but, when permission was granted, it agreed to seek relief only against the land agents.
Neither party on appeal seeks to disturb the costs orders insofar as they were made in favour of De Chellis Homes or Richard De Chellis under the first order part (b) or the second order, but rather seek Bullock orders against each other in relation to their respective liabilities to the De Chellis parties under those orders. Accordingly, De Chellis Homes and Richard De Chellis took no part on the costs appeal.
Background
Events on 18–20 August 2009
Paley Properties was the owner of a commercial property at 245 Greenhill Road Dulwich. David Paley was its sole director and shareholder. Single storey retail premises were constructed on the land. Paley Properties had in June 2009 obtained development plan consent, but not development approval, for the demolition of the premises and the construction of a two storey retail/office building.
De Chellis Homes was a commercial property developer. It had two directors and shareholders: Richard De Chellis and his father Mario De Chellis. Clause 128 of De Chellis Homes’ Constitution addressed the manner of execution of documents by or on behalf of the company. Richard and Mario De Chellis were also directors and shareholders of De Chellis Constructions Pty Ltd, a residential builder.
Knight Frank Australia was a registered commercial land agent. Peter Gambranis was a registered sales representative employed by Knight Frank Australia.
On 18 August 2009, Paley Properties appointed Knight Frank Australia as its agent to sell the property for $1.6 million (plus GST).[10] That same day, Mr Gambranis met with a prospective buyer, Richard De Chellis (Mr De Chellis), at the De Chellis Constructions office. Mr Gambranis told Mr De Chellis about the property and the proposal that it be redeveloped as two storey retail/office premises. At that stage, Mr De Chellis had not seen the property, nor was he given any plans or other documentation relating to the redevelopment proposal. Mr De Chellis made a verbal offer to purchase the property in his own name (and/or nominee) for $1.5 million with a deposit of $50,000 and settlement within 60 days.
[10] All figures are exclusive of GST, unless otherwise stated.
On 19 August 2009, Mr Gambranis returned to the De Chellis Constructions office with two copies of a contract for the sale of the property to Mr De Chellis and/or nominee for $1.5 million. Mr De Chellis had still not seen the property. He was not given a form 1 vendor’s statement[11] or plans or other documentation relating to the redevelopment proposal.[12]
[11] Land and Business (Sale and Conveyancing) Act 1994 (SA) section 7; Land and Business (Sale and Conveyancing) Regulations 1995 (SA) regulation 7. It was not mandatory to provide a vendor statement to a purchaser before execution of a contract. Section 7 only required that it be served at least 10 days before settlement. However, if a vendor’s statement were not provided before execution of a contract, there was a greater risk that the purchaser would seek to avoid the contract, or alternatively claim damages, for non-disclosure or misrepresentation in relation to a matter which would have been disclosed in the vendor statement. Accordingly, it may be expected that generally agents would serve a vendor statement on a purchaser before execution of a contract.
[12] There was a contest at trial between Mr Gambranis and Mr De Chellis as to what was said on the topic of development approval, but the trial Judge did not make findings on that issue and neither party on appeal invites this Court to do so.
At the 19 August meeting, Mr Gambranis invited Mr De Chellis to make the purchase in a company name to make the contract look more commercial and to “waive” the purchaser’s cooling off rights. Mr De Chellis agreed to make the purchase in De Chellis Homes Pty Ltd’s name. There was a dispute at and before the trial whether Mr De Chellis said anything about that company having a second director. Mr De Chellis gave evidence that he told Mr Gambranis that his father was also a director of the company and would need to sign the contract. Mr Gambranis’ version of this aspect of the conversation differed over time. Ultimately, his evidence at trial was that he did not recall being told this by Mr De Chellis but accepted that it was possible. This was an important issue bearing upon the issue of costs, to which I will return. The trial Judge found that in fact Mr De Chellis did tell Mr Gambranis of the need to obtain the signature of his father and that finding is not challenged on the costs appeal.
At the 19 August meeting, Mr Gambranis crossed out the name Richard De Chellis in Item 2 – Purchaser of the Schedule to the contract and wrote in the words “De Chellis Homes Pty Ltd” and its ABN. He wrote the same words into the execution clause for execution by a company under section 127 of the Corporations Act 2001 (Cth) (the Corporations Act) on page 11 of both copies of the contract.[13] He also crossed out the words “Sole Director/Sole Secretary” in that execution clause. Therefore, the clause required, on its face, the signature of two directors or a director and secretary of the company. Mr De Chellis signed his name as a director and printed his name beneath his signature. No steps were taken to procure a second signature to complete execution of the contract by the company in accordance with section 127 of the Corporations Act
[13] Page 10 of the contract contained provision for execution by the vendors; page 11 contained provision for execution by the purchaser. Mr Gambranis correctly wrote in the words “De Chellis Homes Pty Ltd” and its ABN onto page 11 on one of the copies. However, by mistake, he wrote in the words “De Chellis Homes Pty Ltd” and its ABN on page 10 of the other copy (which was intended to be used by the vendor for execution). No point was taken by the defendants at trial, or by the parties on appeal concerning this error and for simplicity I treat such execution as there was in the name of De Chellis Homes as being on page 11 of both copies of the contract.
Mr Gambranis then met with Mr Paley. Mr Gambranis gave both copies of the contract to Mr Paley. Mr Paley appointed Knight Frank Australia as agent to sell the property for $1.5 million to De Chellis Homes for a fixed fee of $15,000. A handwritten note was made by Mr Gambranis and Mr Paley recording the agreement to pay the commission upon settlement. Mr Paley took the contracts away to seek legal advice.
At about 6.30 pm on 19 August 2009, Mr Paley telephoned Mr Gambranis. They had a discussion on the topic of execution of the contract by Mr Paley on behalf of Paley Properties. There was a dispute at trial between Mr Paley and Mr Gambranis as to what was said in the telephone conversation. Mr Paley gave evidence that he told Mr Gambranis that he had signed the contract and instructed Mr Gambranis to inform Mr De Chellis. Mr Paley gave evidence, corroborated by his wife, that he had in fact signed both copies of the contract immediately before making the telephone call at 6.30 p.m.[14] In contrast, Mr Gambranis gave evidence that Mr Paley said that he would visit his bank the following morning and then decide whether to sign the contract. The trial Judge resolved this conflict by preferring the evidence of Mr Paley and that finding is not challenged on the costs appeal.
[14] The trial Judge found that Mr Paley signed the contract on behalf of Paley Properties at about 6:30 pm on that evening and that finding is not challenged on appeal. Mr Paley mistakenly signed the contract in the execution box for a vendor who was a natural person rather than the execution box for a company. On the afternoon of 20 August 2009, after Mr De Chellis had informed Mr Gambranis that he was withdrawing his offer, Mr Gambranis arranged for Mr Paley to re-execute the contract in the execution box for execution by a company. Mr Paley was the sole director and shareholder of the company. While it appears that there was an issue at trial whether Mr Paley's execution of the contract on the evening of 19 August bound the company because he signed in the wrong execution box, on appeal it is common ground that it did so.
On 20 August 2009 at about 8.40 am, Mr Gambranis telephoned Mr De Chellis. They had a discussion on the topic of execution of the contract by Mr Paley. There was a dispute at and before trial whether Mr Gambranis had communicated to Mr De Chellis that Mr Paley had accepted the offer or executed the contract. Mr De Chellis gave evidence that Mr Gambranis said that Mr Paley was likely to sign the contract. Mr Gambranis’ version of this aspect of the conversation differed over time. Ultimately, his evidence at trial was that he said that Mr Paley was likely to sign the contract and not that Mr Paley had accepted the offer or executed the contract. Nevertheless, Paley Properties, motivated by earlier statements which had been made by Mr Gambranis, invited the trial Judge to find that Mr Gambranis told Mr De Chellis that Mr Paley had accepted the offer.[15] The trial Judge accepted Mr De Chellis’ evidence and made a factual finding that Mr Gambranis only said that Mr Paley was likely to sign the contract and never said that he had accepted the offer. That finding is not challenged on the costs appeal.
[15] It would have been open to the trial Judge to find objectively that Mr Gambranis did tell Mr De Chellis that the offer had been accepted by preferring Mr Gambranis’ contemporaneous accounts (such as email correspondence from Mr Gambranis to Mr De Chellis) to that given by him in the witness box, and by rejecting Mr De Chellis’ evidence in the witness box in light of his contemporaneous accounts in which arguably he did not initially dispute that he had been told informally of acceptance. However, the trial Judge saw and heard the witnesses and made credibility findings which resulted in her accepting the evidence of Mr De Chellis and in particular his denial that Mr Gambranis conveyed in any shape or form acceptance of his offer by Paley Properties. This factual finding by the trial Judge is not challenged by the parties on the costs appeal.
At about 9.30 am that same day, Mr Paley dropped off both copies of the signed contracts at Knight Frank Australia’s office. Mr Gambranis received the contracts when he returned to the office at about 1.15 pm.
At about 1.00 pm, Mr De Chellis sent to Mr Gambranis a text message withdrawing the offer to purchase the property. Mr De Chellis confirmed this when telephoned by Mr Gambranis at about 2.00 pm and by an email sent to Mr Gambranis at about 2.10 pm.
Subsequent communications
On 20 August 2009 at about 2.20 pm, Mr Gambranis sent an email to Mr De Chellis in response to Mr De Chellis’ email confirming withdrawal of the offer. Mr Gambranis replied, inter alia, “As per our conversation, I advised you this morning your offer had been accepted.” Mr De Chellis responded with an email at about 2.25 pm saying, inter alia, “I totally understand you and know that this is not your doing”.
At 3.30 pm, a meeting took place between Mr Paley, Mr Gambranis and Mr De Chellis to attempt to resolve the position. No resolution was reached.
At about 4.30 pm, Mr De Chellis’ solicitor, Mr Beger, telephoned Mr Gambranis. Mr Gambranis told Mr Beger that he had communicated Mr Paley’s acceptance of the offer to Mr De Chellis that morning.
On 21 August 2009, at about 10.40 am, Mr De Chellis sent an email to Mr Gambranis saying that he had not received “formal acceptance” that the offer had been accepted before he withdrew his offer the previous day. Mr Gambranis responded by email at about 11.50 am saying that he had advised Mr De Chellis at 8.41 am the day before that the offer had been accepted.
On 24 August 2009, Mr Paley’s solicitor, Mr Gordon, telephoned Mr Gambranis. Mr Gambranis said that he had told Mr De Chellis at 8.41 am on 20 August by text message that the contract had been signed, but he did not have a copy of the contract. Later that day, Mr Gordon sent by email to Mr De Chellis a letter asserting that there was a binding contract and demanding payment of the deposit.
On 24 August 2009, Mr Beger on behalf of De Chellis Homes sent a letter to Mr Gordon denying that there was a binding contract. Mr Gordon responded demanding payment of the deposit by 4 September 2009, failing which the contract would be terminated and Paley Properties would claim damages from De Chellis Homes.
On 16 February 2010, Mr Gambranis telephoned Mr Beger. He told Mr Beger that, during the telephone conversation with Mr De Chellis on the morning of 20 August 2009, he had said words to the effect “I spoke with the vendor this morning and I understand that the contract is going to be accepted”. He said that he did not tell Mr De Chellis that the vendor had signed the contract or that it had been accepted.
In April 2010, Paley Properties sold the property to another purchaser for $1.25 million.
The proceedings
In June 2010, Paley Properties instituted the action in the District Court against De Chellis Homes. De Chellis Homes filed a defence denying the existence of a contract. It pleaded that an offer was submitted subject to actual authority, no authority was forthcoming and the offer was withdrawn prior to its purported acceptance. It also pleaded misrepresentation by the vendor’s agent that there was full development approval for the construction of two storey retail/office premises, whereas in fact there was only development plan consent.
In September 2010, De Chellis Homes filed a list of documents in the action. It disclosed no minutes of a meeting of directors authorising or ratifying Mr De Chellis entering into a contract to purchase the property, nor conferring any more general authority upon Mr De Chellis to enter into contracts or execute documents on behalf of the company.
In April 2011, De Chellis Homes joined Knight Frank Australia and Mr Gambranis as third parties to the action. De Chellis Homes pleaded against the land agents the same misrepresentation that full development approval had been granted for the site as it had pleaded in its defence.[16] De Chellis Homes pleaded that Mr De Chellis told Mr Gambranis that the offer was subject to his co-director, Mario De Chellis, also signing. De Chellis Homes further pleaded that Mr Gambranis failed to convey that proviso to Paley Properties.[17]
[16] De Chellis Homes pleaded various other misrepresentations by Mr Gambranis. While the trial Judge did not make findings concerning them, her findings were generally inconsistent with De Chellis Homes succeeding on those other pleaded misrepresentations.
[17] It is not clear from the third party statement of claim whether these last two factual pleas formed a part of any cause of action by De Chellis Homes against the land agents. The relevance of these pleas for present purposes is not because they form part of any cause of action but rather because they explicitly articulated De Chellis Homes’ case as to what was conveyed factually by Mr De Chellis to Mr Gambranis.
In April 2011, Knight Frank Australia and Mr Gambranis filed a defence to the third party statement of claim. They pleaded that Mr Gambranis was not aware of the corporate structure of De Chellis Homes or that the contract would have to be co-signed by another director and denied that Mr De Chellis had informed Mr Gambranis of those matters.
In January 2012, the trial of the action commenced. At the end of its opening, Paley Properties sought a ruling that De Chellis Homes could not contest Mr De Chellis’ authority to bind the company because it was not adequately pleaded in the defence. The trial Judge ruled against this submission by Paley Properties, which then sought to join Mr De Chellis as a second defendant. This application was refused and the trial was adjourned whilst this application was appealed. It was allowed on appeal and remitted back to the District Court.
In April 2012, Paley Properties joined Mr De Chellis, Knight Frank Australia and Mr Gambranis as additional defendants. Paley Properties filed a new statement of claim pleading alternative claims against Mr De Chellis for breach of warranty of authority and against the land agents for negligence or breach of contract if it were found that they failed to communicate to the purchaser the vendor’s execution of the contract.
In June 2012, Knight Frank Australia and Mr Gambranis filed a defence. They admitted the existence of a telephone discussion between Mr Gambranis and Mr De Chellis at approximately 8.40 am on 20 August 2009 but otherwise denied the pleading in respect of what was said in that telephone discussion. They did not squarely plead one way or the other whether Mr Gambranis told Mr De Chellis that the contract had been accepted or signed by Paley Properties.
In December 2012, Knight Frank Australia and Mr Gambranis filed a new defence to the third party statement of claim. They maintained their original plea denying that Mr De Chellis had informed Mr Gambranis of the corporate structure of De Chellis Homes or that the contract would have to be co-signed by another director of the company for it to be validly executed.
In March 2013, the trial re-commenced. Upon the conclusion of the evidence of Mr De Chellis and his father, the plaintiff conceded that Mr De Chellis did not have authority to bind De Chellis Homes and that consequently the action should be dismissed as against the first defendant.
Mr De Chellis gave evidence at trial that on 19 August 2009 he told Mr Gambranis that his father was a co-director of the company and he would need to obtain his father’s authority to bind the company. In his evidence in chief, Mr Gambranis gave an account of the discussion that did not include any reference by Mr De Chellis to a co-director. In cross-examination, Mr Gambranis said that, while he did not have a recollection of it, he accepted that Mr De Chellis may have told him that he was not the only director of the company and that his father was also a director.
Mr De Chellis gave evidence that, on the morning of 20 August 2009, Mr Gambranis did not tell him that Mr Paley had accepted the offer or signed the contract. Mr Gambranis gave evidence at trial to similar effect notwithstanding contemporaneous statements and emails by him to the parties and their solicitors on and soon after 20 August 2009 that he had conveyed Mr Paley’s acceptance to Mr De Chellis. Mr Gambranis gave evidence at trial that his contemporaneous statements were incorrect and he had made them because he was trying to get the deal across the line.
On 10 October 2013, the trial Judge delivered reasons for judgment in the action. She found that, with the exception of Mr Gambranis, each witness was honest and reliable. She made an adverse credibility finding in respect of Mr Gambranis’ evidence. She made findings of fact that on 19 August 2009 Mr De Chellis told Mr Gambranis that he did not have authority to bind the company and on 20 August 2009 Mr De Chellis did not tell Mr Gambranis that the offer had been accepted or the contract had been signed by Mr Paley. The trial Judge subsequently heard arguments on costs.
On 1 November 2013, the trial Judge delivered reasons for judgment on costs. Paley Properties observed that the trial Judge did not address in her reasons its application that the land agents pay its costs of action as against them. The trial Judge subsequently heard argument from the parties whether such an order should be made and declined to make such an order.
Reasons for trial judge’s judgment on costs
At all stages throughout the action, Mr Gambranis and Knight Frank Australia were jointly represented and no distinction was drawn between the liabilities or entitlements of Mr Gambranis and Knight Frank Australia in the action or for costs. The same applies in the costs appeal. For convenience, from this point onwards, I refer only to Mr Gambranis on the basis it is understood that Knight Frank Australia is jointly liable and has joint entitlements with him.
On the costs argument, Paley Properties did not oppose an order that it pay the costs of action of De Chellis Homes and Mr De Chellis on a party and party basis. It sought an order that Mr Gambranis pay its costs of the entire proceedings and indemnify it for any adverse costs orders to be made against it in favour of the De Chellis parties.
The De Chellis parties sought costs against Paley Properties on an indemnity basis or in the alternative on a solicitor and client basis after 9 July 2011, following their filing of a formal offer to settle the action under rule 187 of the District Court Civil Rules 2006 (SA) (the Rules). The De Chellis parties sought costs on a party and party basis for the period before 9 July 2011.
Mr Gambranis sought orders that Paley Properties pay his costs of action on an indemnity basis from April 2012, and that De Chellis Homes pay his costs of the third party action on an indemnity basis.
The trial Judge in her reasons for judgment addressed the issues in the following sequence:
1.Should Mr Gambranis be deprived of orders for costs of action in his favour against Paley Properties because of misconduct alleged against him by Paley Properties and the De Chellis parties?
2.Should Mr Gambranis be ordered to pay the costs of action of De Chellis Homes and Paley Properties’ costs of action against De Chellis Homes because of misconduct alleged against him by Paley Properties and the De Chellis parties?
3.Should Mr Gambranis be ordered to pay the costs of action of Mr De Chellis and Paley Properties’ costs of action against Mr De Chellis because of misconduct alleged against him by Paley Properties and the De Chellis parties?
4.If yes to questions 2 or 3 above, should Mr Gambranis be ordered to pay those costs on a solicitor and client basis because of his misconduct?
5.Should Paley Properties be ordered to pay the costs of De Chellis Homes on a party and party or solicitor and client basis?
6.What costs orders (if any) should be made in respect of the third party action?
The trial Judge did not address the issue arising from the application by Paley Properties against Mr Gambranis for its costs of the action against Mr Gambranis.
The trial Judge answered the questions that she identified as summarised at [46] above as follows:
1.Mr Gambranis was guilty of misconduct before and during the trial. This was because the trial Judge rejected his evidence that Mr De Chellis did not tell him that his father had to sign the contract as the other director of De Chellis Homes and, contrary to some of the contemporaneous email and verbal communications made by him, the first time he became aware that Mr Paley had signed the contract was at around 1.15pm on 20 August 2009. It followed that Mr Gambranis should be deprived of his costs of action against Paley Properties. The trial Judge said:
The plaintiff and the first and second defendants say that this is one of those unusual cases where a successful party should not only be denied their costs but should also be ordered to pay the other parties’ costs either in part or in whole. It is contended that misconduct in the circumstances leading to the litigation and during the litigation gives rise to the discretion to not only deprive the third parties, as well as the third and fourth defendants, of their costs but also to require them to pay the costs of the plaintiff, first defendant and second defendant as outlined above.
The submissions by the plaintiff, the first and second defendants rely upon my finding that the evidence of Peter Gambranis was unsatisfactory in a number of respects...
The plaintiff and the first and second defendants rely in particular upon the fact that I did not accept Gambranis’ evidence on two critical factual issues. First I rejected his evidence that Richard De Chellis, the second defendant, did not tell him that his father had to sign the contract as the other director of the first defendant De Chellis Homes Pty Ltd. Second I rejected his evidence that the first time he became aware that David Paley, the sole director of the plaintiff, had signed the contract was at approximately 1.15 pm on 20 August 2009. Gambranis’ evidence on that topic was moreover contrary to some of the contemporaneous email and verbal communications made by him.[18]
[18] Payley Properties Pty Ltd v De Chellis Homes Pty Ltd, and R De Chellis and Knight Frank Australia Pty Ltd and P Gambranis [2013] SADC 145 at [14]-[16].
2.Paley Properties conceded at trial that it could not succeed against De Chellis Homes. That should have been clear to Paley Properties at the latest by the commencement of the first part of the trial on 30 January 2012. It could not be said, therefore, that Paley Properties’ costs of action against De Chellis Homes were incurred as a result of misconduct by the land agents. Paley Properties should therefore pay De Chellis Homes’ costs of action and it was not entitled to an indemnity from Mr Gambranis.
3.The action by Paley Properties against Mr De Chellis had its genesis in the misconduct of Mr Gambranis in failing to pass on the information he had received from Mr De Chellis as to his lack of authority to bind the company and secondly in the inconsistencies in Mr Gambranis’ evidence about whether he communicated the acceptance to Mr De Chellis. It followed that the Mr Gambranis should pay Mr De Chellis’ costs of action and Paley Properties’ costs of action against Mr De Chellis. The trial judge said:
...I conclude that the third and fourth defendants should be deprived of orders as to costs as against the plaintiff because of the misconduct described above. The next questions to be determined are whether the third parties should be deprived of orders for costs and whether the plaintiff, the first defendant and/or the second defendants are entitled to costs from the third and fourth defendants and, if so, on what basis.
…
[The trial Judge then addressed the costs of the claim by Paley Properties against De Chellis Homes and concluded that misconduct did not cause the incurring of costs on that claim because the claim was bound to fail in any event for other reasons]
In relation to the action relating to the second defendant however I consider that this had its genesis in the misconduct. First the failure of Gambranis to pass on the information he had received from De Chellis and second the inconsistencies in his position as to the acceptance issue. I therefore conclude that the plaintiff is entitled to its costs of that action as against the third and fourth defendants jointly and severally and that the second defendant is entitled to his costs as against the third and fourth defendants pursuant to Rule 266.[19]
4.There was no basis for a finding that the failure by Mr Gambranis to pass on to Mr Paley the limitation on Mr De Chellis’ authority was deliberate. Similarly, Mr Gambranis’ failure to pass on to Mr De Chellis that Mr Paley had accepted the offer may also have been an oversight. However, Mr Gambranis subsequently deliberately misstated the position to both parties and this justified the order for costs against him being made on a solicitor and client basis. The trial Judge said:
I see no warrant for costs on an indemnity basis, and so I now consider whether those costs should be paid on a solicitor/client basis. I do not consider that the failure to communicate the information of itself would be a sufficient basis. Whilst it was contended by the plaintiff that this omission must be characterised as a deliberate withholding of information I did not make that finding. I do not know why the information was not passed on. It may have been due to a misunderstanding of the legal position or an oversight rather than a deliberate action. Likewise the failure to pass on the acceptance of the “offer” may have been an oversight. What is plain however is that the subsequent conduct in which Gambranis misstated the position to both parties was deliberate. In view of that in combination with the other matters, I consider that the award of costs ought to be on a solicitor/client basis.[20]
5.Rule 188 of the Rules entitles a defendant who betters a formal offer to costs of action after the offer. The Rule is silent as to whether the defendant is entitled to solicitor and client costs. However, in the exercise of the general discretion, Paley Properties should pay De Chellis Homes’ costs of action up to 9 July 2011 on a party and party basis and thereafter on a solicitor and client basis.
6.Because the costs incurred in the third party action were relatively minimal, in combination with other factors identified, there should be no order as to costs of the third party action.
[19] Ibid at [18] and [23].
[20] Ibid at [24].
The arguments on appeal
It is common ground that the making of costs orders involves the exercise of a discretion. The exercise of discretion will only be disturbed on appeal if it miscarried because the trial Judge acted on a wrong principle, mistook the facts, took into account irrelevant matters or failed to take into account relevant matters.[21]
[21] House v The King (1936) 55 CLR 199 at 504-505 per Dixon, Evatt and McTiernan JJ.
Each party appealing contends that the trial Judge’s exercise of discretion did miscarry. However, their contentions of miscarriage are in quite different respects and with quite different consequences.
Mr Gambranis contends that the alleged misconduct identified by the trial Judge in respect of the first issue referred to at [48] above did not amount to misconduct as recognised by the authorities and did not justify his being deprived of cost as against Paley Properties. Mr Gambranis contends that the alleged misconduct identified by the trial Judge in respect of the third issue referred to at [48] above did not amount to misconduct as recognised by the authorities and did not justify his being ordered to pay the costs of Paley Properties as against Mr De Chellis. Mr Gambranis contends that the alleged misconduct identified by the trial Judge in respect of the fourth issue referred to at [48] above did not amount to misconduct as recognised by the authorities and did not justify his being ordered to pay the costs of Mr De Chellis or of Paley Properties as against Mr De Chellis on a solicitor and client basis. Mr Gambranis contends that the trial Judge was inconsistent in her identification of the alleged misconduct on each of those three issues. Mr Gambranis contends that even if he was guilty of relevant misconduct (which he denies) it did not cause any of the costs in question to be incurred because Paley Properties pursued claims against both De Chellis Homes and Mr De Chellis which were in any event untenable.
Paley Properties contends that the trial Judge acted inconsistently and erred in ordering that Mr Gambranis pay its costs of action as against Mr De Chellis but not ordering that Mr Gambranis also pay its costs of action as against him. Paley Properties also contends that the trial Judge erred in not making an order that Mr Gambranis pay its costs of action against De Chellis Homes and that it be indemnified by Mr Gambranis for De Chellis Homes’ costs of action which it was required to pay.
Relevant principles
The discretion of the court to award costs is not to be fettered by rigid rules.[22] The general rule is that costs follow the event[23] and that costs are ordered on a party and party basis.[24] However, this is subject to important exceptions and qualifications.
[22] District Court Act 1991 (SA) section 42; Copping & Ors v ANZ McCaughan Ltd & Ors (1994) 63 SASR 523 at 527 per King CJ (Mohr and Nyland JJ agreeing).
[23] District Court Civil Rules 2006 (SA) rule 263(1); Milne & Ors v Attorney–General for the State of Tasmania & Ors (1956) 95 CLR 460 at 477 per Dixon CJ, McTiernan, Williams, Fullagar and Taylor JJ; Copping & Ors v ANZ McCaughan Ltd & Ors (1994) 63 SASR 523 at 527-528 per King CJ (Mohr and Nyland JJ agreeing).
[24] Colgate-Palmolive Company and Anor v Cussons Pty Ltd (1993) 46 FCR 225 at 226 per Sheppard J.
One exception or qualification arises when the costs of litigation have been caused or increased by misconduct by a party in or leading up to the litigation.[25]
[25] Bostock v Ramsey Urban District Council [1900] 2 QB 616 at 623 per Vaughan Williams LJ; F. King & Co v Gillard & Co [1905] 2 Ch 7; Anglo Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874 per Devlin J.
In Oshlack v Richmond River Council,[26] McHugh J considered whether the successful party should be deprived of costs due to misconduct:
The traditional exceptions to the usual order as to costs focus on the conduct of the successful party which disentitles it to the beneficial exercise of the discretion. In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd, Devlin J formulated the relevant principle as follows:
"No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct."
"Misconduct" in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation. Thus, the court may properly depart from the usual order as to costs when the successful party by its lax conduct effectively invites the litigation; unnecessarily protracts the proceedings; succeeds on a point not argued before a lower court; prosecutes the matter solely for the purpose of increasing the costs recoverable; or obtains relief which the unsuccessful party had already offered in settlement of the dispute.[27]
(citations omitted)
[26] [1998] HCA 11; 193 CLR 72.
[27] Ibid, at [69].
In Colgate-Palmolive Company and Anor v Cussons Pty Ltd,[28] Sheppard J considered whether to make an order against an unsuccessful party on a solicitor and client or indemnity basis due to misconduct:
[I]t is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud evidence of particular misconduct that causes loss of time to the Court and to other parties; the fact that the proceedings were commenced or continued for some ulterior motive or in wilful disregard of known facts or clearly established law; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions; an imprudent refusal of an offer to compromise and an award of costs on an indemnity basis against a contemnor. Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.[29]
(citations omitted)
[28] (1993) 46 FCR 225.
[29] Ibid at [5].
The first step in deciding whether the misconduct exception or qualification applies is to determine whether the conduct of a party amounts to relevant misconduct within the meaning of the established authorities. When considering that question, the actual conduct of the party that is the subject matter of the action does not itself qualify as relevant misconduct. The mere fact that the evidence of a party is rejected does not in itself qualify as relevant misconduct.
The second step, if it is concluded that a successful party has been guilty of relevant misconduct, is to analyse whether, and if so the extent to which, the relevant misconduct has caused or contributed to the existence, continuation or extent of the litigation and hence to the incurring of costs in the litigation.
The third step, if the misconduct of a party has caused or contributed to the incurring of costs in the litigation, is to determine what is the appropriate costs order. In general terms, it may be expected that a court will be less ready to deprive a successful party of the whole of its costs of action rather than a part, less ready to order a successful party to pay its opponent’s costs of action rather than being deprived of an order for its own costs, and less ready to order a successful party to pay its opponent’s costs of action on a solicitor and client basis rather than on a party and party basis.[30]
[30] See generally Rapuano (trading as Raps Electrical) v KarydisFrisan & Anor [2013] SASCFC 93 at [103] per Peek J (Vanstone and David JJ agreeing).
Did the trial judge’s discretion miscarry?
The trial Judge defined the conduct of Mr Gambranis that might potentially be characterised as misconduct in three different ways at three different stages when considering sequentially the issues that she framed as summarised at 1, 2 and 4 of [46] above and which she answered as summarised at 1, 2 and 4 of [48] above.
The trial Judge proceeded sequentially in determining first, whether Mr Gambranis should be deprived of an order for his own costs, secondly, whether he should be ordered to pay his opponents’ costs and thirdly, whether he should be ordered to pay his opponents’ costs on a solicitor and client basis. However, the conduct of Mr Gambranis asserted by Paley Properties to be misconduct was the same conduct, regardless of whether it was said to give rise to the least extreme order that he be deprived of an order for his own costs or the most extreme order that he pay his opponents’ costs on a solicitor and client basis or an intermediate order that he pay his opponents’ costs on a party and party basis.
The misconduct identified by the trial Judge on question 1 as resulting in Mr Gambranis being deprived of an order for his own costs was the fact that he gave evidence on two topics that the trial Judge rejected. The mere fact that he gave evidence that was rejected should not have led to his being deprived of his costs. The trial Judge also referred at that point to Mr Gambranis’ evidence as to when he first became aware that Mr Paley had signed the contract being contrary to some of his contemporaneous emails and verbal communications; however, the trial Judge made no finding at that point that his contemporaneous communications amounted to relevant misconduct.[31] In addition, the trial Judge reached the conclusion that Mr Gambranis should be deprived of his costs without having analysed whether his misconduct had a causative effect upon the costs incurred in the litigation. Indeed, when the trial Judge moved on to question 2, she concluded that Mr Gambranis’ misconduct did not cause the incurring of costs insofar as the action was brought against De Chellis Homes, but at that point she had already determined that Mr Gambranis should be deprived of his own costs against Paley Properties for all purposes.
[31] Further, the misconduct asserted by Paley Properties was not Mr Gambranis' contemporaneous statements as to when he became aware that Mr Paley had signed the contract but rather his contemporaneous statements as to whether he communicated to Mr De Chellis at 8.40 am that Mr Paley had accepted Mr De Chellis’ offer.
The misconduct identified by the trial Judge on question 3 as resulting in Mr Gambranis being ordered to pay Mr De Chellis’ costs of action and Paley Properties’ costs of action as against Mr De Chellis was, first, his failure to pass on the information he had received from Mr De Chellis about his lack of authority and, secondly, the inconsistencies in his position as to the communication of acceptance by Mr Paley of Mr De Chellis’ offer. In relation to the first matter, after having concluded that Mr De Chellis should pay his opponents’ costs on question 3, the trial Judge went on to say, when considering at question 4 whether those costs should be on a solicitor and client basis, that she declined to find that his failure to pass on the information was deliberate and it may have been the result of misunderstanding or oversight. She went on to make the same observation about Mr Gambranis’ failure to pass on acceptance of the offer. While the trial Judge said that the action against Mr De Chellis had its genesis in Mr Gambranis misconduct, she was apparently referring to his conduct in breach of his duties. This related to the subject matter of the cause of action against him, rather than his subsequent conduct leading up to and in the litigation. The trial Judge did not identify how the misconduct that she identified caused the incurring of costs in the litigation.
The misconduct identified by the trial Judge on question 4 as resulting in Mr Gambranis paying costs on a solicitor and client basis was Mr Gambranis’ subsequent conduct in which he deliberately misstated the position regarding Mr Paley’s acceptance of the offer. This was capable of being characterised as relevant misconduct, but again the trial Judge did not analyse how that misconduct caused the incurring of the costs in the litigation.
Given the complex circumstances of the litigation and the interlocking nature of the costs applications made by the parties, it was essential to identify at the outset the precise conduct of Mr Gambranis said to amount to misconduct and why; next analyse whether, how and to what extent any misconduct caused the incurring of costs in the litigation; and finally to consider in respect of that identified misconduct and its consequences whether it was appropriate to deprive Mr Gambranis of his own costs, order him to pay his opponents’ costs or order him to pay his opponents’ costs on a solicitor and client basis. As a result of not proceeding in this way, the trial Judge’s exercise of discretion miscarried.
Paley Properties contends that there was an inherent inconsistency in the trial Judge ordering that Mr Gambranis pay its costs of action as against Mr De Chellis but not ordering that he pay its costs of action against Mr Gambranis himself. That contention should be accepted. Given that the trial Judge found that Mr Gambranis breached his duty to Paley Properties by failing to follow the instruction to inform Mr De Chellis of its acceptance, if misconduct by Mr Gambranis was properly to be seen as having caused Paley Properties to prosecute its claim against Mr De Chellis, that same misconduct must equally have caused Paley Properties to prosecute its claim against Mr Gambranis himself. For this reason also, the trial Judge’s discretion miscarried.
Relevant misconduct by Mr Gambranis
It is necessary for this Court to consider the exercise of the discretion as to costs afresh. The mere fact that the trial Judge’s discretion miscarried does not necessarily mean that the orders that she made ought not to have been made on the merits.
Mr Gambranis contends that he was not guilty of relevant misconduct. Conversely, Paley Properties contends that he was guilty of relevant misconduct after lunchtime on 20 August 2009 in two respects (which differs somewhat to the trial Judge’s various characterisations of his misconduct):
1.Mr Gambranis deliberately led Paley Properties to believe that he had communicated its acceptance to Mr De Chellis at about 8.41 am that morning, knowing that was false and this caused Paley Properties to institute and prosecute the action against all defendants;
2.Mr Gambranis led Paley Properties to believe that Mr De Chellis had not made any reference to a second director or the need for his authority to execute the contract on behalf of De Chellis Homes, when this was false and this caused Paley Properties to institute and prosecute the action against all defendants.
Ultimately on appeal, Mr Gambranis does not dispute that his conduct identified at point 1 in the paragraph above comprised relevant misconduct under established costs principles. That concession is rightly made. Mr Gambranis admitted in cross-examination that, in the immediate aftermath of Mr De Chellis withdrawing his offer, he deliberately made false statements to both purchaser and vendor that he had already communicated the vendor’s acceptance of the offer to the purchaser so it would appear to be too late for Mr De Chellis to withdraw the offer (if he otherwise could do so). Mr Gambranis acknowledged the true position to Mr De Chellis’ solicitor around six months later, but he did not correct the position as far as Paley Properties, his own former client, was concerned until he was cross-examined at trial. The trial Judge made explicit findings, which are not challenged on appeal, that his statements of the position after the event as to the communication of acceptance were deliberately false.
The position is different in relation to Mr Gambranis’ subsequent statements about his discussion with Mr De Chellis when Mr De Chellis signed the contract. The issue of the need for authority from Mr De Chellis’ father was not raised by Mr De Chellis in the immediate aftermath of his withdrawal of the offer at lunchtime on 20 August 2009. However, in April 2011 Mr Gambranis pleaded in his defence to the third party statement of claim that there was no reference by Mr De Chellis to the existence of a second director or need for the second director’s authority to execute the contract. This was maintained in Mr Gambranis’ further defence filed in December 2012.
Ultimately, Mr Gambranis accepted in cross-examination at trial that it was possible that Mr De Chellis did inform him about a second director who also needed to sign the contract, although he said that he had no recollection of any such reference being made. The trial Judge did not address the question whether Mr Gambranis’ earlier statements in his pleadings between April 2011 and December 2012 were deliberately false. However, the trial Judge explicitly declined to find that Mr Gambranis deliberately withheld this information from Mr Paley, saying that it may have been due to a misunderstanding or an oversight. Paley Properties does not invite this Court to find that Mr Gambranis’ pleadings were deliberately false and in any event there is no basis for this Court to make such a finding. It is not unusual for a witness to say in evidence in chief that something did not happen or they do not recollect it, but then under cross-examination to accept that he or she cannot deny that it might possibly have happened. Mr Gambranis was not asked by any party, and in particular Paley Properties, any questions before trial to ascertain whether he would accept that, while he did not recollect it, it was possible that Mr De Chellis did make reference to a second director. It appears that it was not until April 2011, when he was joined as a third party, that Mr Gambranis became aware of Mr De Chellis’ claim that he had told Mr Gambranis on 19 August 2009 that his father was a co-director of the company. Given this was 18 months after the event, Mr Gambranis’ recollection of the detail of the conversation could be expected to have been substantially diminished. In all of the circumstances, Mr Gambranis’ conduct by his plea in his defence to the third party claim cannot be characterised as relevant misconduct.
Causation
Mr Gambranis argues that his misconduct did not cause the institution or prosecution of the action. First, he contends that his statements about his communication of acceptance to Mr De Chellis did not have any causative effect on the institution or prosecution of the action by Paley Properties. Secondly, he contends that Paley Properties’ action against both De Chellis Homes and Mr De Chellis was untenable in any event for reasons independent of any lack of communication of acceptance.
Mr Gambranis’ first contention should be rejected. Paley Properties and Mr Gambranis both explicitly accept on appeal that, as a matter of law, no contract was capable of coming into existence until the vendor communicated to the purchaser that the purchaser’s offer made by signing the contract had been accepted. They both accept that oral communication of such acceptance was sufficient and in particular that it was sufficient that the vendor orally communicate acceptance without giving the signed contract to the purchaser. It is appropriate to proceed on the basis of the parties’ mutual concessions as to the law without further consideration of the underlying legal principles. On that basis, if Mr Gambranis had told what he acknowledged in evidence was the truth in the aftermath of Mr De Chellis’ withdrawal of the offer to his client Paley Properties or its solicitor when asked, it would have been apparent to Paley Properties and its solicitor that no contract could have come into existence because Mr Paley’s acceptance was never communicated by Mr Gambranis to Mr De Chellis. If Mr Gambranis had corrected his falsehood before Paley Properties instituted the action, the action would never have been instituted. In this sense, Mr Gambranis’ misconduct can be seen to be a cause of the institution and prosecution of the proceedings and hence the incurring of the legal costs.
However, the question remains whether there was a concurrent relevant cause of the institution and prosecution of the proceedings, namely that the action was in any event untenable against both De Chellis Homes and Mr De Chellis independently of the lack of communication of acceptance. Mr Gambranis contends that no contract came into existence for want of authority of Mr De Chellis and there was no warranty of authority by Mr De Chellis in the circumstances.
Did Paley Properties have a tenable case?
The law of contract generally adopts an objective approach in determining whether a contract comes into existence.[32] The question whether the contract was validly executed by De Chellis Homes so as to bind it, and the question whether there was a warranty of authority by Mr De Chellis to Paley Properties are to be determined objectively rather than according to the subjective intentions or beliefs of Mr Paley, Mr De Chellis or his father.
[32] Ermogenous v Greek Orthodox Community of SA Inc [2002] HCA 8; (2002) 209 CLR 95 at [25] per Gaudron, McHugh, Hayne and Callinan JJ; Pacific Carriers Ltd v BNP Paribas[2004] HCA 35; (2004) 218 CLR 451 at [22] per Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd[2004] HCA 52; (2004) 219 CLR 165 at [38], [40] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ.
Page 11 of the contract provided for execution by or on behalf of the purchaser and, after the meeting between Mr Gambranis and Mr De Chellis on 19 August 2009, read as follows:
EXECUTION BY PURCHASER
SIGNED by the Purchaser
on the _______________ day of _____________ 20___
in the presence of:
Signature of Purchaser
______________________________________________Full name of Purchaser
______________________________________________
Signature of Witness
______________________________________________
Full name of Witness
OR
EXECUTED by [De Chellis Homes Pty Ltd]
ABN [79 122 048 015] in accordance with
section 127 of the Corporations Act 2001
on the _______________ day of _____________ 20___
[Signature of Richard De Chellis]
*Director/Sole Director/Sole Secretary (strike out as applicable
[Richard De Chellis]
______________________________________________
Full name (please print)______________________________________________
*Director/Secretary (strike out as applicable)______________________________________________
Full name (please print)OR
SIGNED for or on behalf of _____________________
on the _______________ day of _____________ 20 __
by its duly authorised officer in the presence of:
________________________________
Authorised Officer’s signature___________________________________
Signature of Witness________________________________
Full name of Authorised Officer___________________________________
Full name of Witness________________________________
Position held
Section 127 of the Corporations Act 2001 (the Corporations Act) at material times provided:
127 Execution of documents (including deeds) by the company itself
(1) A company may execute a document without using a common seal if the document is signed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary-that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(5) for dealings in relation to the company.
(2) A company with a common seal may execute a document if the seal is fixed to the document and the fixing of the seal is witnessed by:
(a) 2 directors of the company; or
(b) a director and a company secretary of the company; or
(c) for a proprietary company that has a sole director who is also the sole company secretary- that director.
Note: If a company executes a document in this way, people will be able to rely on the assumptions in subsection 129(6) for dealings in relation to the company.
(3) A company may execute a document as a deed if the document is expressed to be executed as a deed and is executed in accordance with subsection (1) or (2).
(4) This section does not limit the ways in which a company may execute a document (including a deed).
Sections 126 and 129(5) and (6) of the Corporations Act at material times provided:
126 Agent exercising a company's power to make contracts
(1)A company's power to make, vary, ratify or discharge a contract may be exercised by an individual acting with the company's express or implied authority and on behalf of the company. The power may be exercised without using a common seal.
(2)This section does not affect the operation of a law that requires a particular procedure to be complied with in relation to the contract.
...
129 Assumptions that can be made under section 128
...
Document duly executed without seal
(5)A person may assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1). For the purposes of making the assumption, a person may also assume that anyone who signs the document and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.
Document duly executed with seal
(6) A person may assume that a document has been duly executed by the company if:
(a) the company's common seal appears to have been fixed to the document in accordance with subsection 127(2); and
(b) the fixing of the common seal appears to have been witnessed in accordance with that subsection.
For the purposes of making the assumption, a person may also assume that anyone who witnesses the fixing of the common seal and states next to their signature that they are the sole director and sole company secretary of the company occupies both offices.
Article 128 of De Chellis Homes’ Constitution at material times provided:
128. The Company may execute any document (including without limitation, a deed):
128.1 in a manner permitted from time to time by the Corporations Act;
128.2where the Company has only 1 Director and does not have a Secretary – by that Director signing that document;
128.3where the Company has more than 1 Director and the Board has resolved that a Director specified in that resolution is authorised to execute documents (including without limitation, a deed) – by that Director signing the document
AND, where the Company executes a document (including without limitation, a deed) in accordance with this clause a person dealing with the Company may make the assumptions specified in sub-section 129(5) of the Corporations Act.
It can be seen that sections 126 and 127 of the Corporations Act draw a distinction between execution by the company itself - which is governed by section 127 - and execution by an agent on behalf of the company - which is governed by section 126. This reflects the distinction articulated by the House of Lords in Tesco Supermarkets Plc v Nattrass[33] between organs of a company that embody the company itself (whose conduct gives rise to direct liability of the company) and agents of the company that do not embody the company but for whose conduct it may be liable under agency principles (whose conduct gives rise to indirect liability of the company).
[33] [1972] AC 153 at 170 per Lord Reid; see also Hamilton v Whitehead (1988) 166 CLR 121 at 127 per Mason CJ, Wilson and Toohey JJ and Houghton v Arms [2006] HCA 59; (2006) 225 CLR 553 at [44] per Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ.
The execution page for the purchaser contained at page 11 of the contract proceeds upon the same distinction between execution by the company itself - which is provided for in the second execution box in the middle of page 11 - and execution by an agent on behalf of the company - which is provided for in the third execution box at the bottom of page 11.
The execution box in the middle of page 11 provides explicitly that the execution is in accordance with section 127 of the Corporations Act. That execution box makes provision for execution by the company in two different modes, depending on whether the company has one or more directors. If the company has a sole director and secretary, provision is made for the purchaser to strike out the word “director” and for the “Sole Director/Sole Secretary” to sign as the company. If the company has two or more directors, provision is made for two signatures, namely a signature by a director and a second signature by a director or secretary.
In the present case, Mr De Chellis signed as a director, and the words “Sole Director/Sole Secretary” were struck out, thereby designating that the company had two or more directors. In the absence of a second signature by Mario De Chellis as the second director, it was manifest on the face of the execution page of the contract that it had not been executed by the company under section 127 of the Corporations Act.
In theory, if it had had an opportunity, the board of directors of De Chellis Homes might have resolved under article 128.3 of the Constitution that Mr De Chellis was authorised to execute the contract on behalf of the company. However, if Mr De Chellis had been signing the contract pursuant to such a resolution, he would have signed the third execution box at the bottom of page 11 because the execution would not have been under section 127 of the Corporations Act. There were in any event further fundamental difficulties in the way of any case by Paley Properties that the company was bound by the contract by reason of Mr De Chellis’ signature in the second execution box on page 11 of the contract.
First, Mr De Chellis signed the contract on 19 August 2009 during a meeting with Mr Gambranis who suggested changing the identity of the purchaser from Mr De Chellis personally to De Chellis Homes. To the knowledge of Mr Gambranis, Paley Properties’ agent, Mr De Chellis had no opportunity before signing the contract to seek authority from the board of directors or from his father to sign the contract on behalf of the company.
Secondly, De Chellis Homes made disclosure of documents in September 2011. It was apparent from its list of documents that there was no minute of a meeting of the board of directors at which Mr De Chellis was authorised to execute documents on behalf of the company.
Thirdly, even considered prospectively before Paley Properties instituted the action and before disclosure of documents was made, it should have been apparent to Paley Properties that it was extremely unlikely that the board of directors of De Chellis Homes had given plenary authority in advance to Mr De Chellis to execute any document to commit the company to any transaction that he thought fit, being an authority broad enough to encompass the purchase of a property for $1.5 million. If such an authority had been conferred, it would have been tantamount to an abrogation by Mario De Chellis of his duties and obligations as a director of the company.
It should have been apparent to Paley Properties before its institution of the action that the purported execution of the contract by Mr De Chellis under section 127 of the Corporations Act was not in accordance with that section and that the company was not bound under section 127. When Paley Properties contemplated instituting an action against De Chellis Homes for breach of contract, it should have known that its only prospect of success depended upon the extremely unlikely event that the board of directors of De Chellis Homes had resolved to confer a plenary authority upon Mr De Chellis to execute documents. Instituting an action in the hope that disclosure might result in the production of minutes of meeting to that effect can only be characterised as reckless. At the very most, a prudent person in the position of Paley Properties might have made an application for pre-action disclosure[34] in the hope that the board of directors of De Chellis Homes had previously resolved to confer upon Mr De Chellis an authority to execute documents wide enough to empower him unilaterally to execute a contract to purchase a property for $1.5 million (although even such an application might not have succeeded due to the extreme unlikelihood that any such document would exist). Once Paley Properties obtained disclosure of documents from De Chellis Homes and it became apparent that no such resolution had been made by the board, it should have been apparent to Paley Properties that its action against De Chellis Homes was bound to fail.
[34] District Court Civil Rules 2006 (SA) rule 32.
Both at trial and on appeal, Paley Properties disclaimed any reliance upon section 129 of the Corporations Act, colloquially known as the “indoor management rule”. That concession was rightly made. Subsections 129(5) and (6) entitle a person dealing with a company to assume that a document has been duly executed by the company if the document appears to have been signed in accordance with subsection 127(1) and (2) respectively. Page 11 of the contract did not appear to have been signed in accordance with section 127 at all because it indicated that Mr De Chellis was not the sole director and a second director or secretary had not signed as representing the company.
A similar analysis applies to Paley Properties’ action against Mr De Chellis for breach of warranty of authority. It is a well-established legal principle that, if an agent purports to enter into a contract on behalf of a principal, purportedly within the scope of the agent’s authority, and the other party relies upon the agent’s representation of authority to enter into the purported contract with the principal, an implied collateral contract comes into existence.[35] It is a term of the collateral contract that, in consideration for the other party’s promise in the purported contract to the principal, the agent warrants that the agent has authority to enter into the contract. The agent is liable in damages to the other party for any breach of that warranty of authority.[36]
[35] Collen v Wright (1857) 8 El & Bl 647 at 658 per Willes J (Pollock CB, Williams J and Bramwell, Watson and Channell BB concurred); Firbanks Executors v Humphreys & Ors (1886) 18 QBD 54 at 60–61 and 62–63 per Lord Esher MR; Leggo (trading as A Victor Leggo & Co) v Brown & Dureau Ltd (1923) 32 CLR 95 at 104–107 per Isaacs J; Wright v Madden [1992] 1 Qd R 344 at 349–350 per Williams J (Ryan and Dowsett JJ agreeing).
[36] Ibid.
In Collen v Wright,[37] Willes J formulated the principle as follows:
[A] person, professing to contract as agent for another, impliedly, if not expressly, undertakes to or promises the person who enters into such contract, upon the faith of the professed agent being duly authorised, that the authority which he professes to have does in point of fact exist. The fact of entering into the transaction with the professed agent, as such, is good consideration for the promise.[38]
and in Firbanks Executors v Humphreys,[39] Lord Esher M.R formulated the principle as follows:
The rule to be deduced is, that where a person by asserting that he has the authority of the principal induces another person to enter into any transaction which he would not have entered into, but for that assertion, and the assertion turns out to be untrue, to the injury of the person to whom it is made, it must be taken that the person making it undertook that it was true, and he is liable personally for the damage that has occurred.[40]
[37] (1857) El & Bl 647.
[38] Ibid at 657-658.
[39] (1886) 18 QBD 54.
[40] Ibid at 60.
In the present case, in signing his name as a director of De Chellis Homes as part of an execution clause by the company in accordance with section 127 of the Corporations Act, Mr De Chellis was not purporting to act as an agent for the company. Instead, he was undertaking one half of the execution of the contract by the company itself which was manifestly incomplete because the execution clause was not countersigned, as required by the execution clause itself, by a second director or secretary. The partial execution by the company was incapable of conveying to an objective person in the position of Paley Properties that the company had determined to enter into the contract. The position is analogous to the signing of a cheque when provision is made on the cheque for two signatories to sign, the mandate from the customer to the bank requires both signatories to sign but only one of the signatories signs the cheque. On its face, the cheque is ineffective. The position can be contrasted with the position that would have pertained if Mr De Chellis had executed the execution clause at the bottom of page 11 of the contract and purported to sign as agent for and on behalf of the company. In that event, Mr De Chellis would have been purporting to act as agent for the company and would have implicitly warranted that he had authority to do so.
It should have been apparent to Paley Properties before it instituted the action against De Chellis Homes in June 2010 and before it joined Mr De Chellis as the second defendant in April 2012 that an action against Mr De Chellis for breach of warranty of authority was bound to fail.
Appropriate costs orders in the circumstances
The result of the above analysis is that there were two concurrent causes of the litigation being instituted and proceeding to trial. One cause was the misconduct of Mr Gambranis after Mr De Chellis’ withdrawal of the offer on 20 August 2009 by deliberately making false statements to both vendor and purchaser that he had communicated the vendor’s acceptance of the contract to the purchaser on that morning and leading the vendor wrongly to believe that this would be his evidence until the commencement of the trial in March 2013. Another cause was the decision by Paley Properties to institute and prosecute an action against De Chellis Homes and Mr De Chellis personally that was bound to fail for reasons independently of any lack of communication of acceptance. Both causes were concurrent in the sense that, absent either cause, the action would not have been instituted or prosecuted and no legal costs would have been incurred.
Both parties were at fault, and both were responsible for the incurring of the legal costs in the proceedings. There is no basis to apportion a greater degree of responsibility to one or the other of the parties. On the one hand, the conduct of Mr Gambranis was deliberate in that, by his own admission at trial, he lied to the vendor and purchaser about the communication of acceptance, whereas Paley Properties’ decision to initiate and prosecute the proceedings must have been made in the genuine, albeit misguided, belief that it had a good cause of action. On the other hand, it was Paley Properties who initiated and prosecuted the actions which, objectively assessed, was bound to fail independently of the issue of communication of acceptance.
In these circumstances, it is appropriate that, as between each other, Paley Properties and Mr Gambranis bear their own legal costs. In this manner, they each bear costs reflecting their own responsibility for the existence of the litigation. It would be inappropriate that either recovers from the other their own legal costs incurred in the proceedings.
The position is more complex in relation to the costs of action awarded in favour of the De Chellis parties. Neither party seeks to disturb those costs orders on appeal. The costs order in favour of De Chellis Homes was made against Paley Properties, whereas the costs order in favour of Mr De Chellis was made against Mr Gambranis. The question that arises is whether either party should indemnify, fully or partially, the other party in respect of its liability to the De Chellis parties.
Given that each of Paley Properties and Mr Gambranis bear responsibility for the existence of the litigation - including the costs incurred by the De Chellis parties ordered by the trial Judge to be paid by the parties to the appeal - the appropriate order is that Paley Properties and Mr Gambranis be equally responsible for the costs ordered in favour of the De Chellis parties.
As observed at [8] above, neither the appellants nor the cross-appellants seek to disturb the costs orders made by the trial Judge against them in favour of the De Chellis parties. Mr Gambranis seeks an order that he be indemnified by Paley Properties against his liability for costs to Mr De Chellis under the trial Judge’s order; while Paley Properties seeks an order that it be indemnified by Mr Gambranis against its liability for costs to De Chellis Homes under the trial Judge’s order. If the costs orders in favour of the De Chellis parties are not to be disturbed, the appropriate order to ensure that Paley Properties and Mr Gambranis are equally responsible for the costs ordered in favour of the De Chellis parties is to order that they each indemnify the other in respect of 50% of the other’s liability under those costs orders.
The existing costs orders in favour of the De Chellis parties necessitate, if the costs cannot be agreed, two separate adjudications of the costs incurred in the action by De Chellis Homes and of the costs incurred in the action by Mr De Chellis. As they were both represented by the same solicitors and counsel, this would be likely to give rise to complications and difficulties in adjudicating the costs. If the ultimate liability for those costs were to be borne equally by Paley Properties and Mr Gambranis, there appears to be no reason why the costs orders in favour of the De Chellis parties should not be varied to provide that each of Paley Properties and Mr Gambranis is to pay 50% of the costs of action incurred jointly by De Chellis Homes and Mr De Chellis.[41]
[41] Up to 9 July 2011 on a party and party basis and thereafter on a solicitor and client basis.
Conclusion
I would allow the appeal and the cross appeal. I would set aside the costs orders made by the trial Judge, except the order that there be no order as to costs of the third party action (and possibly the orders made in favour of the De Chellis parties).
Subject to hearing all parties, including the De Chellis parties, in lieu of the orders set aside, I would order that:
1.there be no order as to the plaintiff’s costs of action or the third and fourth defendants’ costs of action;
2.the plaintiff pay 50% of the costs of action of the first and second defendants up to 9 July 2011 on a party and party basis and thereafter on a solicitor and client basis; and
3.the third and fourth defendants pay 50% of the costs of action of the first and second defendants up to 9 July 2011 on a party and party basis, and thereafter on a solicitor and client basis.
Alternatively, if the orders by the trial judge in favour of the De Chellis parties are not varied as suggested above, I would order that:
1.there be no order as to the plaintiff’s costs of action or the third and fourth defendants’ costs of action;
2.the third and fourth defendants indemnify the plaintiff as to 50% of the costs payable by it to the first defendant; and
3.the plaintiff indemnify the third and fourth defendants as to 50% of the costs payable by them to the second defendant.
PARKER J: I agree with the reasons of Blue J and the orders that he proposes. I have nothing to add.
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