Merkon Constructions Pty Ltd v Residence Company Pty Ltd (No 3)
[2025] VSC 198
•17 April 2025
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
S ECI 2023 03762
BETWEEN:
| MERKON CONSTRUCTIONS PTY LTD (ACN 006 587 319) | Plaintiff |
| and | |
| RESIDENCE COMPANY PTY LTD (ACN 056 096 121) | Defendant |
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JUDGE: | M Osborne J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF JUDGMENT: | 17 April 2025 |
CASE MAY BE CITED AS: | Merkon Constructions Pty Ltd v Residence Company Pty Ltd (No 3) |
MEDIUM NEUTRAL CITATION: | [2025] VSC 198 |
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COSTS — Whether party/party or indemnity — Whether party allowed to rely upon a letter which is headed ‘without prejudice’ but not ‘without prejudice save as to costs’ — Whether letter constitutes a Calderbank offer — Whether defendant acted unreasonably in not accepting the offer — Evidence Act 2008 (Vic) s 131(1).
INTEREST — Whether interest should run from commencement of the proceeding or whether good cause is shown to the contrary — Supreme Court Act 1986 (Vic) ss 58, 60.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | M Galvin KC with O Wolahan | Walpole Johnson |
| For the Defendant | Ian Hone, solicitor | Ian G Hone, barrister and solicitor |
HIS HONOUR:
Introduction
On 28 March 2025, I handed down judgment for the plaintiff, Merkon Constructions Pty Ltd (‘builder’) against the defendant, Residence Company Pty Ltd (‘developer’) in respect of moneys due to the builder following the construction of a multi-level residential apartment building at 10-16 Lilydale Grove, Hawthorn East (‘property’). Judgment was given for the builder in the sum of $2,444,173.33.[1] These reasons concern the question of interest on the judgment sum and costs and assume familiarity with the primary reasons.
[1][2025] VSC 151 (‘primary reasons’).
The builder now seeks interest, pursuant to s 58(1) of the Supreme Court Act 1986 (Vic) (‘Supreme Court Act’) from the date of the second deed of variation, 8 October 2021, alternatively pursuant to s 60(1) of the Supreme Court Act from the date of commencement of the proceeding on 21 August 2023. In addition, the builder submits that it is entitled to an order that the developer pay its costs for the proceeding, on an indemnity basis, including all reserved costs, which include the costs that the builder was ordered to pay the then second defendant, the first mortgagee, Monland Pty Ltd (‘Monland’), by orders made 10 July 2024 (‘10 July 2024 reserved costs’).
In respect of the application for an order for indemnity costs, the builder submits that the developer persisted in the continuation of a defence which had no chance of success. Alternatively, the builder relies upon the developer’s failure to accept an offer of settlement made 31 July 2024 in which the builder offered to accept $1 million in settlement of its claim.
The developer submits that no award of interest should be made at all because the second deed of variation, which is the instrument sued upon by the builder, provided for an interest rate on overdue payments at 0% per annum.
Otherwise, the developer accepts that the builder is entitled to its standard costs but submits that those costs should be limited to the costs incurred by the builder as and from 3 May 2024, which was the date on which the builder served the statement of claim in the proceeding in which it alleged that the developer was indebted to the builder in the sum of $2,448,869.55 plus interest. It does not agree that the costs ordered should extend to the 10 July 2024 reserved costs.
To assess the parties’ submissions in their proper context, it is necessary to have regard to the history of the proceeding.
History of the proceeding
As noted in the primary reasons, the second deed of variation was entered into on 8 October 2021.
On 21 August 2023, the builder commenced this proceeding by originating motion in Form 5B of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘Rules’). The proceeding was commenced against the developer as the first defendant and Monland as the second defendant. Monland held a first registered mortgage over the property. In the originating motion, the builder sought relief comprising:
(a) a declaration that it held an equitable mortgage, alternatively an equitable charge over the property;
(b) a declaration that the amount owed to the builder secured by the mortgage was $2,448,869.55, together with additional late payment fees (‘secured monies’);
(c) judgment for the amount of the secured monies;
(d) an order pursuant to s 91 of the Property Law Act 1958 (Vic), alternatively ord 55 of the Rules, alternatively in the inherent jurisdiction of the Court that the property be sold and the proceeds be applied in the following manner:
(i) first, in payment of all costs, charges and expenses associated with the sale of the property;
(ii) secondly, by payment into Court of the residue (if any);
(iii) an order appointing the builder to have the conduct of the sale of the property in such manner as the builder thought fit.
By summons filed the same day, the builder sought injunctive relief (‘injunction summons’) restraining the disposition of sales proceeds from the sale of the units which comprise the property otherwise than:
(a) in payment of the expenses of sale (including estate agents and legal costs); and
(b) in reduction of Monland’s loan secured by the first mortgage,
with the balance to be paid into court.
The injunction summons also sought injunctive relief to substantially the same effect relating to the receipt of any rental proceeds from the leasing of units at the property. In the injunction summons, the builder also sought orders that the developer and Monland provide it with, inter alia, copies of all loan agreements connected with the loan secured by the registered mortgage, all loan statements to September 2023 for the loan made by Monland, any other securities, mortgages, debentures, general security deeds or specific security deeds that secured the Monland loan, and any other chattels or personal property mortgages and loan agreements between the developer and Monland including loans secured over other properties in Richmond and Plumpton, Victoria.
In affidavits filed in support of the summons the builder’s operations manager Brett Chalmers deposed to, inter alia:
(a) an indebtedness on the part of the developer to the builder in the sum of $2,448,869.55;
(b) a refusal on the part of the developer and Monland to provide information and documentation as to how much is owing by the developer to Monland secured by the first mortgage and how much is owing on two other properties and on what terms;
(c) fears that absent injunctive relief, Monland would continue to permit sales proceeds of units to be diverted to the developer or used to pay other non- secured creditors of the developer and/or that Monland would exercise its rights to favour the developer by tacking the subsequent securities on to the property and engage in marshalling conduct by not fully exercising its rights as first mortgagee over the property due to its security over two other properties owned by or associated with the developer.
In an affidavit sworn in opposition to the summons, the developer’s sole director Mark Oman deposed, inter alia, that rental expenses with respect to those units that had been leased had been applied in reduction of the developer’s outstanding loan facility with Monland, provided an update as to the sales processes in relation to unsold units at the property, provided various information as to the amount said to be owing under the Monland mortgage and details as to the Richmond property.
In respect of the second deed of variation, Mr Oman acknowledged that, pursuant to the second deed of variation, the amount owing to the builder was $2,448,869.55 (‘Merkon debt’), but then referred to cl 2(c)(v) which set out how the developer was to pay the builder from sales of the units and said that as the Monland debt had not been paid in full, the proceeds of sale were being applied to the Monland debt. Mr Oman otherwise deposed to conditional approval with respect to a loan from a third party by which he proposed to refinance the existing Monland mortgage and the Merkon debt in full.
At the return of the injunction summons on 31 August 2023, each of the builder, the developer and Monland were represented by counsel. Interim orders were made by the Court[2] with respect to the disposition of the proceeds of the sale of units at the property largely to the effect sought by the builder in its summons and likewise with respect to the rental proceeds and for the provision of documents largely to the effect sought by the builder. The proceeding was referred to mediation and the further hearing of the injunction summons was adjourned to 6 October 2023.
[2]Constituted by Stynes J. Although the orders are not recorded as being made by consent, it appears that there was no opposition to the orders being made.
On 19 October 2023,[3] the Court fixed the trial for hearing on a date not before 9 February 2024 and otherwise adjourned the further hearing of the injunction summons to the trial of the proceeding. Orders were otherwise made for the filing of evidence and submissions. The builder’s outline of submissions filed 2 November 2023 were largely directed to the appropriateness of judicial sale and only briefly addressed the claim for the debt of $2,448,869.55. Insofar as Monland’s position of first mortgagee was addressed, the submissions noted, inter alia, that Monland’s interest in the land took priority over Merkon’s interest, that Monland’s joinder to the proceeding was necessary for the application for judicial sale to proceed but that Monland had not adduced any evidence or otherwise conveyed any opposition to the application sought.
[3]The further hearing of the summons was evidently adjourned from the 6 October 2023 date referred to in the order made 31 August 2023 to 19 October 2023.
In the developer’s submissions filed 1 December 2024, the developer argued that the second deed of variation was in breach of the builder’s side deed and constituted an illegal contract which should be struck down. Otherwise, the developer opposed the order for judicial sale on the basis that the developer was undertaking an orderly sale of lots and any objections that had been raised by the builder as to the manner of the sale to date were misconceived and unfounded. The developer otherwise submitted that in the event that a judicial sale was ordered, the discretion as to who should have conduct of the sale should be exercised in favour of the developer, as the developer had the greatest interest in maximising the sale price in preference to Merkon, whose interest would be confined to recovering its debt.
On 6 February 2024, Monland appointed receivers and managers over the property. This effectively rendered the builder’s application for judicial sale moot. Accordingly, when the matter came on for trial before me on 15 February 2024 the builder advised that it no longer pursued the relief sought in paragraphs 4, 5 or 6 of its originating motion, being the paragraphs which related to the orders for judicial sale and ancillary orders. Accordingly, on that day, I made orders that the proceeding continue as if it was commenced by writ and for pleadings. The injunctive relief earlier granted on 31 August 2023 was discharged and the builder was released from the undertaking noted in the orders of 31 August 2023.
On 24 May 2024, Monland filed a summons seeking orders that Merkon release caveats that had been lodged by it on various certificates of title comprising lots in the property. The application was returnable before me on 28 May 2024. After hearing argument, I made orders for the removal of the caveats and ordered that the builder pay the costs of the application of both the developer and Monland.
The builder filed its statement of claim on 3 May 2024. The title to the statement of claim listed Monland as the second defendant but the pleading itself contained no such claim and was confined to a claim against the developer alone for $2,448,869.55.
On 7 June 2024, I heard an application by the builder for leave under r 25.02(b) of the Rules to discontinue the proceeding against Monland. The ordinary position as to costs in such circumstance is that they are paid by the discontinuing party (here the builder) but there is provision to otherwise order pursuant to r 63.15. After hearing argument from the parties, I published reasons and made orders on 10 July 2024[4] in which I determined that it was appropriate to otherwise order, save that there should be an order that the builder pay Monland’s costs of and incidental to compliance with paragraphs 2 and 3 of the orders made on 8 November 2023 on an indemnity basis to be taxed in default of agreement.[5] I reserved the question of whether the builder could recover those costs from the developer, until the trial of the claim by the builder against the developer.
[4][2024] VSC 402.
[5]As the reasons made clear, those orders were effectively in the nature of orders for discovery.
On 31 July 2024, the builder and the developer participated in a mediation. Following the conclusion of the mediation, the builder’s solicitors wrote to the developer’s solicitors in a letter sent that day headed ‘without prejudice’. The letter (‘31 July 2024 letter of offer’) read as follows:
We refer to the mediation today in respect of the above matter.
At approximately 1pm, our client proposed that Residence Company Pty Ltd pay the sum of $1 million to Merkon Constructions Pty Ltd within 14 days in order to resolve this proceeding. The proposal was that settlement would only arise from payment, and not the promise to pay.
The mediator, Ms Safe, asked if the offer could remain open for a further seven days. By this letter, the offer is to remain open for acceptance until 5pm on Wednesday, 7 August 2024.
Having regard to the complexity of the issues in the proceeding, if the offer were accepted, the parties would require a Deed of Settlement to be prepared and executed.[6]
[6](Emphasis in original).
The offer was not accepted.
The developer filed its defence on 6 June 2024.
The defence raised two of the three defences ultimately advanced at trial; that the second deed of variation was an illegal contract because it was entered into contrary to the builder’s side deed and that the builder was estopped from asserting that there were further monies due because the builder signed the final certificate issued on 8 December 2022 by which the superintendent acknowledged that ‘all certified money by the Ellis Group Architects had been settled in full between [the builder] and [the developer]’. The signing of the final certificate facilitated the release to the builder of a bank guarantee which had been provided by the builder to the developer for the sum of $837,878. The third defence run at trial was an argument as to the proper construction of the second deed of variation, which was not squarely pleaded.
Relevantly, in paragraph 8 of the defence, the developer pleaded the following:
8The first defendant reserves its right to claim against the plaintiff. inter alia, for:
8.1the Plaintiff failing to complete the Works under the Building Contract in a timely and competent manner in accordance with the provisions of the Building Contract;
8.2 breaching the Builder’s Side Agreement by way of lodging caveats in breach thereof; and
8.3loss and damage arising from the interference by the Plaintiff in the orderly sale and realisation of the apartments built under the Building Contract.[7]
[7](Emphasis in original).
When the matter came on for directions before me on 15 November 2024, the builder raised paragraph 8 submitting that it was entirely inappropriate. I raised the paragraph with Ian Hone, solicitor, who appeared for the developer. Mr Hone properly accepted that the plea was not in proper form and accordingly that paragraph was struck out.
On 19 March 2025, the day before the trial was to commence, I heard an application by the developer to vacate the trial. The application was advanced on the basis that the developer had recently secured funding to brief counsel to advise and to appear at the adjournment application. The developer sought an adjournment so as to provide additional time to investigate whether there were any additional matters of defence and counterclaim available, which included but were not necessarily limited to, the matters that had been previously foreshadowed in paragraph 8 of the defence as struck out on 15 November 2024.
I refused that application and made orders that the developer pay the builder’s costs of and incidental to that application to be paid on the standard basis.
Issues for determination
The above chronology and the submissions advanced by the parties as to interest and costs give rise to the following questions:
(a) Whether the builder’s entitlement to costs consequent upon its success at trial should include all the costs incurred from the commencement of the proceeding on 21 August 2023 or only some of those costs, and in particular only those costs that followed from the date of the service of the statement of claim on 3 May 2024;
(b) Whether any costs ordered in favour of the builder ought to be paid on an indemnity basis either because the defences advanced by the developer were such that they had no prospect of success, or alternatively because the developer obtained a judgment for a sum greater than that set out in the 31 July 2024 letter of offer; and
(c) Whether the builder should be entitled to interest at all, and if interest was to be ordered whether it should be payable pursuant to s 58 of the Supreme Court Act as and from the date of the second deed of variation, alternatively whether it should be payable pursuant to s 60 of the Supreme Court Act payable as and from 21 August 2023, or alternatively whether interest should be payable as and from the date of the filing of the statement of claim on 3 May 2024.
Costs
Under s 24(1) of the Supreme Court Act, the Court has full power to determine by whom and to what extent costs are to be paid. The Court’s discretion as to costs is absolute and unfettered and one that has to be exercised judicially, upon facts connected with or leading to the litigation and not by reference to irrelevant or extraneous considerations.[8]
[8]Latoudis v Casey (1990) 170 CLR 534, 557.
The starting point here is that the builder is entitled to its costs of the proceeding given that it enjoyed success. The developer’s primary argument that costs should be confined to the period as and from 3 May 2024 rests on an asserted clear demarcation of issues between those which arose as and from commencement on 21 August 2023 and those that arose as and from 3 May 2024. The developer submits that whilst the issues from 3 May 2024 were confined to the builder’s debt claim, that issue was discrete from those raised in the proceeding as originally commenced.
There is some merit in this submission, but it is overstated. Contrary to the developer’s submission, the proceeding when commenced did include a debt claim. Specifically, in addition to the claim for a declaration that the amount owed to the builder constituted secured monies (which was necessary for its entitlement to a declaration that it held an equitable mortgage which in turn would entitle it to an order for judicial sale), the builder also sought an order for judgment in the amount of the secured monies.
However, it is clear enough that from 21 August 2023 until 15 February 2024 the focus of the parties attention was on the application for judicial sale, which was part of the relief sought in its originating motion. Relatedly but importantly, the injunction summons evidenced a discrete complaint that the developer and Monland were dealing with the proceeds of sale from the units otherwise than in accordance with the second deed of variation.
Neither the builder’s claim for judicial sale or the question of whether the developer had improperly used the proceeds for sale for purposes otherwise than in accordance with the second deed of variation, were the subject of any final determination. Part of the costs therefore incurred by the builder, which it submits should be part of the costs order to be made, include costs that relate to aspects of the proceeding which were not the subject of any final, or indeed other, determination.
In such a case, the Court is necessarily deprived of the factor that usually determines whether or how it will make a costs order.[9]
[9]Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622, 624.
In relation to the approach to be followed in determining questions of cost in such circumstances, McHugh J noted in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin[10] the following:
In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action.
…
Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. … But such cases are likely to be rare.
If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.[11]
[10]Ibid.
[11]Ibid 624-625 (citations omitted).
Applying that line of reasoning, the developer submits that no costs order should be made with respect to the subject matter of the originating motion or the injunction summons. Insofar as the submission is based on the injunction summons, I accept that the submission has some force. I am in no position now to know whether the developer was improperly disposing of the proceeds of sale.
Insofar as the submission is based upon the assertedly discrete nature of the claimed entitlement to judicial sale, it has some but lesser force. The entitlement to judicial sale rested in part on the fact that the developer had not paid the builder the amounts due under the second deed of variation.
Clause 2(c)(v) of the second deed of variation set out a regime pursuant to which the builder would receive 2.5% of the net proceeds of sale from the first 40 units sold which would reduce the indebtedness of the developer to the builder. This regime was enabled by the deed of amendment between the developer and Monland which enabled the developer to retain 5% of the sales proceeds of the first 40 units.[12] After the first 40 units had been sold, Monland was to receive all the net proceeds with neither the builder nor the developer receiving anything until Monland was repaid. No doubt the arrangement was one which was perceived to suit the commercial interests of the builder and the developer. It presumably reflected the builder’s assessment that the best chance of it getting paid was from the sales proceeds and possibly that the sales proceeds should be enough to repay both the Monland priority debt and the amount owing to the builder. But nothing in the second deed of variation releases the developer from liability to repay the debt owing to the builder or bars the builder from taking action against the developer for the unpaid debt.
[12]See primary reasons at [9].
Thus, the commencement of the proceeding served two purposes. First, it constituted the commencement of an action by the builder for the unpaid debt. Secondly, and insofar as the debt remained unpaid, it constituted a proceeding by which the builder could seek remedies that are available to unpaid creditors who enjoy the benefit of security in the form of an unregistered mortgage or charge. The latter remedies, which the developer rightly argues were the principal focus of the proceeding in the period prior to 3 May 2024, were only necessary because of the developer’s failure to pay the amounts owed.
Against that background, there is also some merit in the submission which underlies the builder’s application for costs from the commencement of the proceeding, which is that the proceeding was only necessary because of the developer’s failure to pay the amounts due. In that respect any lack of success by the builder with respect to the order for judicial sale or on the injunction summons (and here there was only a lack of success because the issues were not determined through no fault of the builder) is no different to a successful plaintiff who succeeds on some issues but not others.
The principles to be applied in determining who should pay the costs of the proceeding in which a party enjoys mixed success were summarised by the Court of Appeal in Chen v Chan (No 2):[13]
(1)The general rule is that costs should follow the event. Absent disqualifying conduct, the successful party should recover its costs even where it has not succeeded on all heads of claim.
(2)The Rules of Court permit significant flexibility in determining questions of costs. In particular, the Court is entitled to examine the realities of the case and will attempt to do ‘substantial justice’ as between the parties on matters of costs.
(3)Where there is a multiplicity of issues and mixed success has been enjoyed by the parties, a Court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.
(4)A Court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.
(5)Where a Court determines to make an order apportioning costs, then it does so primarily as ‘a matter of impression and evaluation,’ rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.
[13][2009] VSCA 233, [10] (citations omitted).
The resolution of the costs issue here calls for the somewhat imperfect application by analogy of principles which arise where there has been no final determination of the merits, as well as principles which arise where a party has enjoyed success on some issues only. The injunction summons does seem largely discrete from the question of the developer’s indebtedness to the builder. The separate nature of the originating motion itself is less clear, including but not limited to the fact that the originating motion did include a claim for the unpaid debt.
Whilst it is tempting in those circumstances to treat the costs associated with the injunction summons separately from those that relate to the originating motion and then to adopt a different approach again with respect to the costs from 3 May 2024, any taxation of costs which involves segregating the costs of the originating motion from those of the injunction summons is likely to be problematic. The injunction summons and the originating motion proceeded largely in parallel and came to an end only because of the appointment of the receivers by Monland. Further and although the focus of the steps taken in the prosecution of the originating motion was on the judicial sale application which was not determined, that application cannot be divorced entirely from the underlying debt claim.
Otherwise, doing the best that I can and accepting that the approach is a matter of broad impression and evaluation, I consider the appropriate course is for the plaintiff to recover 25% of its costs of the proceeding up to and including 15 February 2024 which is the date on which I made orders dealing with the application for judicial sale and the injunction summons. This approach reflects the fact that the injunction summons was separate but not determined and that a substantial part but not all of the origination motion involve issues largely discrete from the debt claim. The entitlement to 25% of the costs extends to the 10 July 2024 reserved costs.
Indemnity or standard costs
It is necessary now to turn to the question of whether any of those costs should be paid on an indemnity basis.
In relation to the costs prior to 15 February 2024, there is no reason for departing from the usual position that the builder is only entitled to standard costs. For me to conclude otherwise, I would have to be satisfied that the developer’s defence of the proceeding prior to that date was so unreasonable as to warrant an order for indemnity costs. In circumstances where a substantial part of the proceeding prior to that point involved the application for orders for judicial sale and the claim for injunctive relief and those matters were not determined at all, it is not possible nor appropriate to make any order other than that those costs be paid on the standard basis.
As noted above, the application for indemnity costs otherwise is based upon two matters; the developer’s failure to accept the 31 July 2024 letter of offer and, secondly, the developer’s continuation of a hopeless case.
In relation to the builder’s reliance upon the 31 July 2024 letter of offer, I accept that it is permissible to have regard to that offer notwithstanding that the letter was headed ‘without prejudice’ not ‘without prejudice save as to costs’. Whilst the absence of the designation ‘without prejudice save as to costs’ would mean that, at common law, the letter could not be relied upon on the question of costs,[14] the common law position has been displaced by s 131 of the Evidence Act 2008 (Vic) which provides, relevantly, as follows:
[14]Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379, 1383; Calderbank v Calderbank [1975] 3 WLR 586, 595.
Exclusion of evidence of settlement negotiations
(1) Evidence is not to be adduced of—
(a)a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute; or
(b)a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute.
(2) Subsection (1) does not apply if—
…
(h)the communication or document is relevant to determining liability for costs;
The effect of s 131(2)(h) is that without prejudice communications relating to costs are admissible as an exception to the proscription imposed by s 131(1).[15]
[15]Marks v GIO Australia Holdings Ltd (No 2) (1996) 66 FCR 128, 135; Alexander v Australian Community Pharmacy Authority (No 2) [2010] FCA 467.
The letter being admissible, the relevant question is whether the developer’s failure to accept the offer constitutes an unreasonable rejection of the offer such as to amount to a special circumstance justifying the award of costs on an indemnity basis.
The quantum of the offer was substantially less than the amount obtained by the builder upon judgment.
That ordinarily would be a factor that would suggest that the developer’s failure to accept that offer was unreasonable such as to enliven the discretion to order indemnity costs.
However, the terms of the offer were such that the developer was required to pay $1 million to the builder within 14 days of acceptance of the offer. As the letter made clear, a settlement would only arise from payment.
In those circumstances, the developer could only accept the offer if the developer had the capacity to pay $1 million within the time period prescribed.
I accept the developer’s submission that it did not have the capacity to pay $1 million to the builder in the time stipulated. The entire conduct of the proceeding by the developer is such as to indicate strained financial circumstances. The developer was unable to retain counsel (save for the purposes of the application for the adjournment) and the overall proceeding arose in a context where the developer lacked capacity to pay the builder, where the developer was apparently in breach of obligations arising under the first mortgage, and where the first mortgagee, Monland, appointed a receiver and manager to the property.
In circumstances where the developer did not have the capacity to pay the $1 million required in order to bring about a settlement, the developer’s non-acceptance of the offer is not unreasonable such as to amount to special circumstances warranting the imposition of indemnity costs.
Turning next to the question of whether the developer persisted in defences which were so devoid of merit that they warrant an order for indemnity costs. The builder submits that an order for indemnity costs may be made where a party ought to have known that the claim was baseless, including on the basis of enquiries that ought to have been made and legal advice that ought to have been obtained.[16]
[16]Viterra Malt Pty Ltd v Peter Youil [2023] VSCA 304, [67]; Macedon Ranges Shire Council v Thompson [2009] VSCA 209, [15] (‘Macedon Ranges’).
The authorities establish that the discretion to order indemnity costs is enlivened where a party properly advised should have known it had no chance of success. Where the litigant in question does not recognise that its case is without merit, it may nevertheless be relevant to whether the discretion should be ordered in favour of such a special costs order.
The Court must measure the conduct against the facts then known or which ought to have been known, the enquiries that the litigant ought reasonably to have made and the legal advice which the litigant ought reasonably to have obtained.[17]
[17]Macedon Ranges (n 16) [15].
In the present case, I accept that the illegality defence was hopeless or, as I described it in the primary reasons, misconceived. Further, the issues with the illegality defence had been canvassed on a number of occasions at directions hearings.
Although the construction argument was rejected and the estoppel argument was raised absent any plea of evidence of detriment, those defences too were weak although perhaps less patently unsustainable than the illegality defence.
Further, the developer saw fit to include in the defence filed 6 June 2024 a plea which it later conceded entirely appropriately could not be sustained.[18] In that plea, it reserved its right to bring further claims, which if made and if established would have given rise to an entitlement to damages which it could set off against the prima facie liability for the debt. Further, the day before the trial, the developer sought an adjournment so as to allow further time for investigations in relation to claims of this nature.[19]
[18]See above [25]-[26].
[19]See above [27].
The combination of the weakness of the defences, the unusual inclusion of paragraph 8 of the defence which notified a further potential offsetting claim and the late and unsuccessful application for an adjournment, all suggest that the defences were of a holding nature and support an inference that the developer was aware of the weakness of the defence or at the least ought to have known of its weakness. These factors also point to the developer knowing that the defences raised had no prospects of success. The developer well knew that there was a prima facie indebtedness; he had deposed to that effect, on 2 October 2023, when he deposed that the amount owing to the builder under the second deed of variation was $2,448,869.55.
It is one thing to rely on defences of a holding nature in a defence filed in the early stages of a proceeding. It is more understandable when a defendant lacks the resources to properly mount a defence. It remains open in such a case for a plaintiff to apply for summary judgment. The raising of holding defences on its own does not mean that a plaintiff is entitled to indemnity costs. But it ought to have become clear to the developer on 15 November 2024 at the latest, when paragraph 8 of the defence was struck out, that the developer was only left with the holding defences. Necessarily and given their weakness, the developer well knew then or ought to have known that the game was up and that it had no prospects of defending the builder’s claim for the unpaid debt.
The circumstances are such as to amount to special circumstances enlivening the jurisdiction to make an indemnity costs order as and from 15 November 2024. Accordingly, the developer will be ordered to pay 25% of the builder’s standard costs of the proceeding from commencement of the proceeding until 14 February 2024, 25% of the costs paid to Monland pursuant to the 10 July 2024 reserved costs and the builder’s costs from 15 February 2024 onwards including reserved costs on the standard basis up to and including 15 November 2024 and thereafter on an indemnity basis.
Interest
The builder claims to be entitled to interest at the rate prescribed by the Penalty Interest Rates Act 1983 (Vic) (‘Penalty Interest Rates Act’) from the date of the second deed of variation pursuant to s 58 of the Supreme Court Act. In the alternative, the builder claims to be entitled to interest at the rate prescribed in the Penalty Interest Rates Act from the date of commencement of the proceeding pursuant to s 60 of the Supreme Court Act.
Section 58(1) of the Supreme Court Act provides:
Interest to be allowed when debts or sums certain recovered
(1)If in a proceeding a debt or sum certain is recovered, the Court must on application, unless good cause is shown to the contrary, allow interest to the creditor on the debt or sum at a rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 or, in respect of any bill of exchange or promissory note, at 2% per annum more than that rate from the time when the debt or sum was payable (if payable by virtue of some written instrument and at a date or time certain) or, if payable otherwise, then from the time when demand of payment was made.[20]
[20](Emphasis added).
Section 60 of the Supreme Court Act provides:
Interest in proceedings for debt or damages
(1)The Court, on application in any proceeding for the recovery of debt or damages, must, unless good cause is shown to the contrary, give damages in the nature of interest at such rate not exceeding the rate for the time being fixed under section 2 of the Penalty Interest Rates Act 1983 as it thinks fit from the commencement of the proceeding to the date of judgment over and above the debt or damages awarded.
I do not accept that the builder is entitled to interest pursuant to s 58 from the date of the second deed of variation (ie, 8 October 2021). The second deed of variation is not a written instrument pursuant to which the debt or sum was payable by virtue of a written instrument at a date or time certain. Rather, the second deed of variation contained an acknowledgment of the debt and then prescribed a particular regime by which the proceeds of the sale of units would be deployed so as to reduce the amount of that debt. On the most favourable reading of the second deed of variation for the builder, portions of the outstanding debt became payable as and when the sale of each of the first 40 units settled. This date however was not 8 October 2021 and it did not apply to the whole of the debt.
Secondly and alternatively, even if that were so, I accept that good cause has been shown to the contrary in this case, at least in the period prior to the commencement of the proceeding. As the developer submits, the second deed of variation provided that a rate of 0% interest would apply on the amount unpaid to the builder.
In circumstances where the parties had agreed by that instrument that no interest would be payable on the amount unpaid, the builder’s reliance on s 58(1) of the Supreme Court Act so as to enliven an entitlement to interest on that sum from the date of that very same instrument, is contrary to the terms of the instrument and in those circumstances constitutes good cause to the contrary.
I do, however, accept that the builder is entitled to interest from the date of commencement of the proceeding on 21 August 2023 at the rate prescribed under the Penalty Interest Rates Act. As noted above, the proceeding when commenced included a claim for the recovery of a debt.
It makes no difference whether the interest is characterised as being payable pursuant to s 58 or s 60 of the Supreme Court Act. Either the filing and service of the originating motion amounted to a demand entitling the builder to interest from the date of the demand pursuant to s 58 or it is payable according to the terms of s 60 which entitles the builder to damages in the nature of interest from the commencement of the proceeding to the date of judgment over and above the debt awarded, unless ‘good cause is shown to the contrary’.
Unlike the position prior to the commencement of the proceeding where the 0% interest provision in the second deed of variation constitutes ‘good cause to the contrary’ in respect of the imposition of statutory interest under s 58, I do not accept that good cause to the contrary is established by reason of the fact that an antecedent agreement was in place which provided that interest would not accrue on the unpaid amounts.
It is one thing for the 0% interest provision of the second deed of variation to apply where the parties were observing its terms and where the builder was content to not pursue its debt via other means, such as the commencement of legal action. Acceptance of the developer’s argument that the 0% interest provision constitutes good cause post the commencement of legal proceeding undermines the rationale of statutory interest.
The purpose for an award of statutory interest was explained by Gillard J in Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (No 3)[21] as follows:
There are three main objectives of the award of interest. First, as compensation to the judgment creditor for being out of the funds from the date of commencement of the proceeding until judgment; secondly, to deter judgment debtors from delaying proceedings and thereby having the use of the money for a longer period; and finally, to encourage defendants to make realistic assessments of their liability in a case and to take bona fide steps to compromise the claim.[22]
[21][2003] VSC 244.
[22]Ibid [61].
Interest on the sum of $2,444,173.33 at the penalty rate of 10% per annum from 21 August 2023 to 17 April 2025 is $404,460.46.[23]
[23]Interest is calculated from 21 August 2023 to 17 April 2025 (604) days at the penalty rate of 10% on the judgment sum of $2,444,173.33.
Orders made
Accordingly, the orders that I will make are as follows:
1.The defendant pay the plaintiff’s costs of the proceeding as follows:
(a)25% of the plaintiff’s standard costs including any reserved costs incurred up to and including 14 February 2024;
(b)25% of the costs ordered to be paid by the plaintiff to the second defendant pursuant to the 10 July 2024 orders;
(c)the costs incurred from 15 February 2024 onwards (excluding those costs referred to in (b)) including any reserved costs of the plaintiff, such costs to be paid on the standard basis up to and including 15 November 2024 and thereafter on an indemnity basis.
2.The defendant shall pay interest to the plaintiff pursuant to s 60 of the Supreme Court Act calculated up to and including 17 April 2025 in the sum of $404,460.46.
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