Leakes Rise Pty Ltd v Leakes Road Property Development Pty Ltd (Costs Ruling)
[2022] VSC 505
•30 August 2022
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2019 04492
| LEAKES RISE PTY LTD (ACN 625 706 658) | Plaintiff |
| v | |
| LEAKES ROAD PROPERTY DEVELOPMENT PTY LTD (ACN 620 781 106) | Defendant |
| – and – | |
| JEAN-FRANCOIS BRASSE (trading as ROWSON BRASSE & CO) | Third Party |
JUDGE: | McDonald J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF JUDGMENT: | 30 August 2022 |
CASE MAY BE CITED AS: | Leakes Rise Pty Ltd v Leakes Road Property Development Pty Ltd & Anor (Costs Ruling) |
MEDIUM NEUTRAL CITATION: | [2022] VSC 505 |
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COSTS – Whether costs of third party proceeding should follow the event – Whether defendant acted unreasonably in rejecting offers of compromise – Whether third party should pay costs incurred by the defendant in defending the plaintiff’s claim – Supreme Court Act 1986, s 24.
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HIS HONOUR:
On 5 August 2022 the Court delivered judgment in this proceeding. The judgment was limited to the defendant’s claim for damages against the third party. The dispute as between the plaintiff and the defendant was settled at mediation on 6 April 2022. The defendant’s claim against the third party continued for a further four days of hearing: 7, 11 and 12 April and 19 May 2022.
The Court dismissed the defendant’s claim for damages against the third party. The defendant’s primary claim was for damages of $815,881. Under the deed of settlement dated 6 April 2022 the defendant agreed to pay to the plaintiff $815,881 out of the $1.755 million deposit paid by the plaintiff upon entering the contract for the purchase of the defendant’s property located at 1212–1218 Leakes Road, Rockbank. The Court dismissed this claim. The defendant failed to establish that if the third party had not negligently drafted the section 32 statement the plaintiff would still have entered into the contract, albeit not armed with a prima facie right of rescission. Consequently, the defendant failed to establish that its loss was caused by the third party’s negligence.
The Court also dismissed the defendant’s alternative claim for damages based on losses flowing from the failed transaction. The Court accepted that the defendant had established a loss of $454,545.54 wasted agent’s commission and $6,816.39 in legal fees paid to the third party. However, this loss was offset by the $939,119 retained by the defendant from the $1.755 million deposit paid by the plaintiff.
This judgment addresses the following issues as to the costs of the proceeding between the defendant and the third party. First, in circumstances where the defendant’s claim against the third party has been dismissed, is there any proper basis for departing from the usual rule that costs should follow the event? Second, if the first question is answered in the negative, should the defendant be ordered to pay any proportion of the third party’s costs on an indemnity basis? Third, should the third party be ordered to pay the costs incurred by the defendant in defending the claim brought against it by the plaintiff?
As to the first issue, the defendant submits that the usual principle that costs follow the event should not apply to the costs of the third party claim. The defendant submits that the third party’s admitted negligence exposed the defendant to ‘an uncertain action by the plaintiff’, which was a direct consequence of the third party’s negligence. The defendant submits that the third party has only avoided liability because of the settlement reached between the defendant and the plaintiff during the mediation on 6 April 2022 which extinguished the loss occasioned by the third party’s negligence.[1]
[1]Defendant’s Submission on Costs dated 12 August 2022, [15].
Any third party proceeding involves an element of uncertainty for the defendant. The liability of the third party to the defendant is genuinely contingent upon the plaintiff’s claim against the defendant succeeding in whole or in part. If the plaintiff’s claim fails no occasion will arise for the third party to indemnify the defendant in respect of any damages the defendant is liable to pay the plaintiff. In these circumstances the costs of the third party proceedings will ordinarily follow the event, even where the defendant has acted reasonably in joining the third party.[2]
[2]Burke v Gillett [1996] 1 VR 196, 200 (Tadgell J, Ormiston and Smith JJ agreeing).
In the present proceeding the defendant settled the plaintiff’s claim on the basis that it retain $939,119 of the $1.755 million deposit and paid the plaintiff the balance of $815,881. In the third party claim the defendant unsuccessfully argued that the sum of $939,119 did not reduce the quantum of damages that the third party was liable to pay it.
The defendant submits that until there had been a settlement of the plaintiff’s claim the defendant could not make an accurate assessment of the extent of the third party’s liability to pay damages. The flaw in this submission is that it disregards the Court’s finding that the $939,119 did not fall within the categories of benefits excluded from the assessment of damages in accordance with the principles in National Insurance Company of New Zealand Ltd v Espagne.[3] I accept that the defendant did not know prior to 6 April 2022 the quantum of funds which could potentially be applied in mitigation of its loss arising from the third party’s negligence. However, at all times the defendant should have been conscious of the risk that any funds it retained from the $1.755 million deposit as a result of any settlement of the plaintiff’s claim could be applied in reduction of the third party’s liability to pay damages. The defendant has failed to establish any proper basis for departing from the usual rule that the costs of the third party claim should follow the event.
[3](1961) 105 CLR 569.
As to the second issue, the third party’s solicitor has filed an affidavit exhibiting a number of Calderbank letters and offers of compromise. The critical consideration in addressing the second issue is whether it was unreasonable for the defendant to have rejected offers of compromise and Calderbank offers prior to the settlement on 6 April 2022.
On 7 September 2021 the third party made an offer of compromise of $600,000 inclusive of interest and costs. On 18 March 2022 this offer was increased to $650,000 plus costs. I accept that it was not unreasonable for the defendant to have rejected the offer of 7 September 2021. As the offer was inclusive of interests and costs the defendant was entitled to proceed on the basis that the offer was inferior to the damages it might recover from the third party. However, the same cannot be said of the offer of 18 March 2022 of $650,000 plus costs. On any view this offer entailed a very significant level of compromise. It was unreasonable for the defendant to have rejected the offer. Although the plaintiff’s claim was still on foot on 18 March 2022 it should have been apparent to the defendant that the offer was well in excess of the $461,361.93 loss attributable to the third party’s negligence. The defendant will be ordered to pay the third party’s costs until 11.00am on 20 March 2022 on a standard basis and thereafter on an indemnity basis.
The third question for resolution is whether the third party should be ordered to pay the costs incurred by the defendant in defending the plaintiff’s claim. The plaintiff’s claim against the defendant comprised two elements: the return of the deposit of $1.755 million and the return of the further payments which had been made towards the purchase of the property which totalled $2,334,119.11. By its defence to the amended statement of claim the defendant admitted the sum of $2,334,119 was payable to the plaintiff. The defendant denied that it was liable to pay the $1.755 million deposit. The third party submits that any order requiring the third party to pay defendant’s costs of defending the plaintiff’s claim should exclude any costs referrable to the admitted sum of $2,334,119. I reject this submission.
The principal issue in dispute between the plaintiff and the defendant was whether the plaintiff validly rescinded the contract to purchase the property from the defendant. The outlines of evidence filed in advance of the proceeding focused heavily on the defendant’s contention (based on s 32K(4) of the Sale of Land Act) that the plaintiff was not entitled to rescind the contract because:
(a) The defendant had acted honestly and reasonably; and
(b) The plaintiff was in substantially as good a position as if it had been provided with a valid s 32 statement.
It is correct that the defendant’s counsel accepted during the course of opening submissions on 5 April 2022 that the defendant was liable to pay the sum of $2,334,119 to the plaintiff. However, if as contended by the defendant, the contract was terminated by the defendant’s notice of default (rather than the plaintiff’s notice of rescission) the defendant had a prima facie right to retain any part of the purchase money paid by the plaintiff until the defendant’s damages flowing from the termination of the contract had been determined, and to apply that money towards those damages.[4] Further, the plaintiff did not make any formal demand for the return of the $2,334,119 until it filed an amended statement of claim on 25 February 2022. I am satisfied that most of the costs incurred by the defendant related to the issue of whether the plaintiff validly rescinded the contract.
[4]CB1849, Contract of Sale dated 6 August 2018, cl 28.4(d).
The third party submits that as a result of the settlement, after deducting the $461,361.93 loss attributable to the third party’s negligence from the $939,119 retained deposit monies, the defendant has made a net gain of $477,757.07. The third party submits that the defendant is not out of pocket unless its costs of defending the plaintiff’s claim exceed $477,757. It submits that the defendant will receive a windfall gain if the third party is ordered to pay any costs incurred by the defendant up to the sum of $477,757. The third party submits that any such windfall gain would breach the indemnity principle of which the Court’s power to order costs under s 24 of the Supreme Court Act 1986 is based.
The purpose of an order of costs is to indemnify or compensate the person in whose favour it is made. This purpose provides a guide to the exercise of the discretion to award costs.[5] The third party’s admitted negligence armed the plaintiff with a right of rescission it would not otherwise have had. The third party’s negligence conferred upon the plaintiff a prima facie right which it would not otherwise have had to make a claim against the defendant for recovery of the $1.755 million deposit. Absent this right of action the defendant would have been entitled to retain the full amount of the $1.755 million on the basis of the contract having been terminated as a result of the plaintiff’s default. It is inapt to describe an order requiring the third party to pay the defendant’s costs of defending the plaintiff’s claim as conferring a windfall gain upon the defendant. Rather, such an order will, in respect of the costs of defending the plaintiff’s claim, put the defendant in the position it would have been in absent the third party’s negligence.
[5]Latoudis v Casey (1990) 170 CLR 534, 563 (Toohey J, Mason CJ agreeing), 567 (McHugh J).
The defendant is an innocent victim of the negligence of a solicitor engaged to act on its behalf in the sale of the property to the plaintiff. An order requiring the third party to pay the defendant’s costs of defending the plaintiff’s claim will compensate the defendant for incurring costs of defending a claim which is directly attributable to the third party’s negligence. In order to achieve an appropriate measure of compensation the third party should pay the defendant’s costs of defending the plaintiff’s claim on an indemnity basis.[6]
[6]Berry v British Transport Commission (1962) 1 QB 306, 321 (Devlin LJ).
The Court will make the following orders:
1. The third party claim is dismissed.
2. The defendant pay the third party’s costs of the proceeding:
(a) until 11.00am on 20 March 2022 on a standard basis, to be taxed in default of agreement; and
(b) from 11.00am on 20 March 2022 on an indemnity basis, to be taxed in default of agreement.
3. The third party pay the defendant’s costs of the plaintiff’s claim on an indemnity basis, to be taxed in default of agreement.
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