Paley Properties P/L v De Chellis Homes P/L & R. De Chellis & Knight Frank Australia P/L & P Gambranis - [2013] SADC 145

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
PALEY PROPERTIES P/L v DE CHELLIS HOMES P/L & R. DE CHELLIS & KNIGHT FRANK AUSTRALIA P/L & P GAMBRANIS
[2013] SADC 145
Judgment of Her Honour Judge McIntyre
1 November 2013
PROCEDURE - COSTS
The plaintiff’s claim against each of the four defendants was dismissed as were the first defendant’s third party proceedings. The general rule that costs follow the event was complicated by factual findings made in relation to the conduct of the third parties who were also the third and fourth defendants and various offers made by the parties.
The plaintiff and the first and second defendants 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. However whilst the misconduct directly impacted the plaintiff’s claim for breach of warranty of authority against the second defendant, it did not strictly speaking impact the proceedings as they related to the first defendant and thus the third party proceedings brought by the first defendant.
The first defendant made an offer to the plaintiff under 6 DCR 187 on 22 June 2011. This offer was not accepted by the plaintiff and was not bettered.
Held:
1.Third and fourth defendants to pay the plaintiff’s costs of action as against the second defendant on a solicitor/client basis.
2.Third and fourth defendants to pay the second defendant’s costs of action on a solicitor/client basis.
3.The plaintiff to pay the first defendant’s costs of the action on a party/party basis until 9 July 2011 and thereafter on a solicitor/client basis.
4.That there be no order as to costs of the third party proceedings.
Disctrict Court Rules 2006 6R 264(5), r187, R187(3)(a), referred to.
Rapuano (trading as Raps Electrical) v Karydis Frisan and Anor [2013] SASCFC 93, applied.
Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd (2010) 31 VR 46; Cretazzo v Lombardi (1975) 13 SASR 4; Donald Campbell & Co v Pollak [1927] AC 732 at 812; Oshlack v Richmond River Council [1998] 193 CLR 72; Ritter v Godfrey [1920] 2 KB 47; Lombard Insurance Co Pty Ltd v Pastro (1994) 175 LSJS 448; BHP Billiton Ltd v Parker [2012] SASCFC 73, considered.

PALEY PROPERTIES P/L v DE CHELLIS HOMES P/L & R. DE CHELLIS & KNIGHT FRANK AUSTRALIA P/L & P GAMBRANIS
[2013] SADC 145

On 10 October 2013 the plaintiff’s claim against each of the four defendants was dismissed as were the first defendant’s third party proceedings. The parties raised a number of complex issues relating to the question of costs. I heard argument on this topic on 15 October 2013.
The general rule is that costs follow the event.[1] This applies to third party proceedings with each having its own separate event.[2] This prima facie position is however complicated by factual findings that I made in relation to the conduct of the third parties who were also the third and fourth defendants. In addition there were various offers made by the parties which impact the question of costs.
[1] DCR 6R263
[2] Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd (2010) 31 VR 46
Costs applications
During argument the parties used the term costs on an indemnity basis synonymously with solicitor/client costs. For convenience I will do likewise in my reasons but I will make a distinction in terms of the orders because there is a distinction under DCR 6 R 264(5).
Orders for indemnity costs are made on the basis that the party will be fully reimbursed for costs incurred in the conduct of the litigation except to the extent that the party paying the costs shows them to have been unreasonably incurred. Orders for solicitor/client costs are made on the basis that the party will be fully reimbursed for costs reasonably incurred by the party in the conduct of the litigation.
First & Second Defendants
The first and second defendants initially sought orders as follows:
1That the plaintiff pay the first defendant’s costs of the action from 9 July 2011 on an indemnity basis and before that on a party/party basis.
2That the plaintiff pay the second defendant’s costs of action on an indemnity basis or in the alternative on a party/party basis.
3That the first defendant’s costs of the third party action be paid by the third party and in addition to that the third parties pay the difference between the first and second defendant’s costs of the principal action on an indemnity basis and a party/party basis. In the alternative that the plaintiff pays the third parties’ costs directly pursuant to Rule 266.
Following the plaintiff’s application that the third and fourth defendants be liable to indemnify the plaintiff in relation to the costs of the first and second defendants, the first and second defendants sought a further order. In the event that the plaintiff’s application is successful, the first and second defendants seek orders that the third and fourth defendants be jointly and severally liable for the costs of action of the first and second defendants.
Third & Fourth Defendants/Third Parties
The third and fourth defendants and the third parties seek orders as follows:
1That the first defendant pay the third parties’ costs on an indemnity basis from 6 April 2011 to date and in the alternative on a party/party basis.
2That the plaintiff pay the third and fourth defendants’ costs on an indemnity basis from April 2012 to date and in the alternative on a party/party basis.
The Plaintiff
The plaintiff does not resist orders being made against it in respect of the first and second defendant on a party/party basis but resists orders on an indemnity basis. As to the third and fourth defendant, the plaintiff put three propositions as follows:
1That they should be denied any order for their costs whether pursuant to the defence of the principal action or the defence of the third party action.
2That the third and fourth defendant should be ordered to pay the plaintiff’s costs of the proceedings; and
3That they should indemnify the plaintiff for any adverse costs orders payable to the first and second defendants.
Summary of the legal principles
Recently the Full Court of the Supreme Court considered various costs issues in Rapuano (trading as Raps Electrical) v Karydis Frisan and Anor.[3] In his reasons, on behalf of the Court, Peek J extensively reviewed the Rules and the principles set out in the relevant case law. In particular I was assisted by His Honour’s reasons relating to the costs consequences of offers made under the Rules, the award of indemnity costs[4] and the correct approach to misconduct by a party. I respectfully adopt and apply His Honour’s reasons.
[3] [2013] SASCFC 93
[4] The same terminology issue arose as to the use of indemnity costs interchangeably with solicitor/client costs. As His Honour determined that an award was not justified on either basis he used the terms interchangeably for convenience. See footnote 73.
As His Honour indicated in his reasons:
Analysis as to the awarding of indemnity costs usually starts from a position where the applicant is found to be entitled to an award of party-party costs in its favour, the question then arising as to whether the particular circumstances of the case justify an increase of that award to the level of indemnity costs.[5]
[5] At para 95
Given that all parties to this action applied for indemnity costs it is necessary for me to first consider the position of each of the applicants.
Third Parties’/Third & Fourth Defendants’ conduct
The plaintiff, who was unsuccessful, seeks orders in respect of the third parties, the third and fourth defendants as outlined above.
The first defendant is prima facie liable to pay costs in relation to the third party notice because of its success in the principal action brought by the plaintiff, albeit that it might have an entitlement to indemnity from the plaintiff for the third party costs. The second defendant did not issue any third party notices.
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.[6] 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.
[6] Cretazzo v Lombardi (1975) 13 SASR 4 at p12, Donald Campbell & Co v Pollak [1927] AC 732 at 812
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. Gambranis was the fourth defendant and one of the two third parties joined by the first defendant. In the pleadings Gambranis was referred to as the representative of the third defendant and the other third party. The defence as conducted did not make a distinction between the third and fourth defendants and proceeded on the basis that their interests were identical.
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.
The parties referred in argument to the cases of Cretazzo v Lombardi[7], Donald Campbell & Co v Pollak[8], Oshlack v Richmond River Council[9] and Ritter v Godfrey.[10]These cases were considered by Peek J in Rapuano[11] where His Honour concluded:
The reality is that it is for the defendants to satisfy two threshold requirements before an award for indemnity costs in their favour can be considered. First, that although the plaintiff was successful, he should nevertheless be wholly deprived of an order for costs in his favour. Second, that, in addition, the defendant, despite being unsuccessful, is entitled to an order for costs on a party-party basis. It is only after both these requirements are satisfied that an unsuccessful defendant could embark on the contention that he should be further entitled to an order for indemnity costs rather than just party-party costs.[12]
[7] See note 6 above
[8] See note 6 above
[9] [1998] 193 CLR 72 at p97-98
[10] [1920] 2 KB 47 at p60
[11] See note 3 above
[12] At Paragraph 103
Adopting that process in this case 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.
A difficulty arises because, whilst the misconduct to which I have referred directly impacts the plaintiff’s claim for breach of warranty of authority against the second defendant, it does not strictly speaking impact the proceedings as they relate to the first defendant. It was conceded by the plaintiff during the trial that as a matter of law it was necessary for both directors of the first defendant to sign the contract documents in order to constitute an offer capable of acceptance. This was a proper concession to make and effectively disposed of the plaintiff’s claim against the first defendant and the first defendant’s proceedings against the third parties. It cannot be said that the misconduct of Mr Gambranis directly affected the decision of the plaintiff to maintain the proceedings against the first defendant once the position concerning signatures was made plain to it, although the misconduct certainly muddied the waters in respect of the proceedings generally which would undoubtedly have lead to the plaintiff taking a cautious approach. Likewise it is necessary to consider the reasonableness of the first defendant’s action in joining the third parties and maintaining the third party proceedings in light of this contractual issue.
The contractual position ultimately accepted by the plaintiff has been maintained throughout the proceedings by all four defendants and the third parties. It was raised in the amended defence filed on behalf of De Chellis Homes Pty Ltd on 23 December 2010 and the third parties’ response to the third party notice filed on 19 April 2011. There was correspondence passing between the parties after that date in which this issue was raised.[13] The position should have been clear at the latest by the time the matter first came before me for hearing on 30 January 2012. Mr Richard De Chellis and the third parties were joined as defendants on 24 April 2012.
[13] Affidavit of Peter Mark Jacobsen sworn 14 October 2013
Where a plaintiff’s claim or allegations make it reasonable for a defendant to issue third party proceedings and the third party proceedings are unsuccessful solely by reason of the failure of the plaintiff’s claim a defendant should ordinarily recover from the plaintiff its costs of the third party action including those it may be ordered to pay to the third party.[14] The court may also order the plaintiff to pay those costs directly to the third party.[15] I do not consider that it was inappropriate for the first defendant to join the third parties or to maintain the third party proceedings in view of the plaintiff’s position throughout the proceedings. I will deal with the consequences of that shortly.
[14] Lombard Insurance Co Pty Ltd v Pastro (1994) 175 LSJS 448.
[15] 6DCR266
I do not consider that it is appropriate to make an order that the third and fourth defendants pay the first defendant’s costs or the plaintiff’s costs in the action as against the first defendant. Costs ought to follow the event. Prima facie therefore the plaintiff is liable to pay the first defendant’s costs. I will deal with the basis upon which those costs are to be paid shortly.
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.
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.
First Defendant’s costs against the plaintiff
The District Court Civil Rules provide a regime for the making of “formal offers of settlement” by filing the offer in Court.[16] That regime is set out in 6 DCR 187 and 6 DCR188 of the Rules of Court 2006. A formal offer can be filed by a Plaintiff or by a Defendant. It must be in the approved form pursuant to Rule 187(3)(a).
[16] BHP Billiton Ltd v Parker [2012] SASCFC 73 at [261-265].
The objects of the Rules are set out as follows:
3.     Objects
(a)    To establish orderly procedures for the just resolution of civil disputes; and
(b)     To facilitate and encourage the resolution of civil disputes by agreement between the parties; and
(c)      To avoid all unnecessary delay in the resolution of civil disputes; and
(d)     To promote efficiency in dispute resolution so far as that object is consistent with the paramount claims of justice; and
(e)    To minimise the cost of civil litigation to the litigants and to the State.
The first defendant made an offer to the plaintiff under 6 DCR 187 on 22 June 2011. This offer was not accepted by the plaintiff and has not been bettered through judgment. Rule 6 DCR 188(6) details the consequences of a failure to accept a filed offer as to principal relief as follows:
(6)     If a formal offer of settlement so far as it relates to principal relief is not accepted by the party to whom the offer is made and the Court determines the relevant action or claim on terms (as to principal relief) that are no more favourable to the party than the terms of the offer, then, subject to the Court's order to the contrary—
(a)the party to whom the offer was made is not to be entitled to costs referable to the period falling after the relevant date; and
(b)     the party that made the offer—
(i)if a defendant—is entitled to costs referable to the period falling after the relevant date; and
(ii)if a plaintiff—is entitled to the whole of the party's costs of action on a solicitor/client basis and the defendant is not entitled to any costs not otherwise ordered.
(6A) ……………
(7)     In sub rules (6) and (6A), the relevant date is the date falling 14 days after the date of service of the offer.
The first defendant seeks costs referrable to the period falling after the relevant date, in this case 9 July 2011, on a solicitor/client basis. There are some difficulties however with DCR 6R 188 (6) which specifies a different regime in respect of plaintiffs and defendants. The distinction between the plaintiff and defendant appears to be that a plaintiff is entitled to the whole of their costs of action on a solicitor/client basis whereas a defendant is entitled to costs referrable to the period falling after the relevant date. There is no mention of solicitor/client costs in relation to defendants. However in this case the defendant is entitled to costs of the whole action on a party/party basis because it was successful even in the absence of the filed offer. It is my view that the Rule leaves open the general discretion as to costs.
In this case the question of costs following the relevant date ought to be considered on the basis of solicitor/client costs given the prima facie entitlement of the first defendant to costs on a party/party basis. Having carefully considered the matter I consider that in all of the circumstances, and bearing in mind the objects of the Rules, it is appropriate to award the first defendant its costs as against the plaintiff on a solicitor/client basis after 9 July 2011.
Third Party proceedings

The remaining question is whether I should make orders requiring the first defendant to pay the third parties’ costs and order the plaintiff to indemnify the first defendant or pay those costs direct to the third parties.
This is a difficult issue because the plaintiff ought to have been aware of the likely outcome of the contractual issue relating to the first defendants at least by the time it took steps to join the second defendant in April 2012. The plaintiff could at this stage have discontinued as against the first defendant and simply proceeded against the second defendant in respect of breach of warranty of authority. I would not award costs of the third party proceedings prior to April 2012 in view of the lack of clarity of the issues, brought about in major part by Mr Gambranis’ conduct.
It is plain from the correspondence passing between the parties that the first and second defendants were willing to negotiate with the plaintiff as to resolution as at April 2012 and other later stages of the proceedings. Two major impediments to such resolution were the insistence of the third parties on contribution to their costs and the complete failure by the third parties, third and fourth defendants to address the breach of warranty argument advanced by the plaintiff. That is, if the plaintiff was successful in establishing a breach of warranty as against the second defendant but the third and fourth defendants had failed to act in accordance with the agency agreement by failing to communicate acceptance (as I found) then the plaintiff would have succeeded against the third and fourth defendants.
I have already disallowed the third and fourth defendants’ claims for costs because of their misconduct. I consider that the third parties’ costs after April 2012 were limited. There were no procedural steps required to be taken by them. The third parties and the third and fourth defendants were represented by the solicitors throughout and by the same counsel at trial. The time taken by the contractual argument at trial was minimal. This, taken in conjunction with the impediments to settlement outlined above, persuades me that the appropriate order to make is no order as to costs of the third party notice.
I make orders as follows:
1.Third and fourth defendants to pay the plaintiff’s costs of action as against the second defendant on a solicitor/client basis.
2.Third and fourth defendants to pay the second defendant’s costs of action on a solicitor/client basis.
3.The plaintiff to pay the first defendant’s costs of the action on a party/party basis until 9 July 2011 and thereafter on a solicitor/client basis.
4.That there be no order as to costs of the third party proceedings.