Sydney City Council v Geftlick

[2006] NSWCA 280

New South Wales

Court of Appeal

CITATION:	Sydney City Council v Geftlick & Ors [2006] NSWCA 280 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	22 August 2006
JUDGMENT DATE:	18 October 2006
JUDGMENT OF:	Mason P at 1; Hodgson JA at 2; Tobias JA at 3
DECISION:	(a) Leave to appeal granted upon condition that the claimant file its Notice of Grounds of Appeal within seven days of the date of this order; (b) Appeal allowed; (c) Set aside the orders made by his Honour Judge Hughes on 12 October 2005; (d) The first, second and third cross-claims be dismissed and that the fourth cross-claim be remitted to the District Court for further hearing of any outstanding issues thereunder; (e) The first opponent to pay the costs of the claimant and the second opponent up to and including 6 November 2004 such costs to be assessed on the ordinary basis; (f) The claimant to pay the costs of the third opponent with respect to the second cross-claim, such costs to be assessed on the ordinary basis; (g) The claimant to pay the costs of the first and second opponents of the action as and from 7 November 2004, such costs to be assessed on the ordinary basis; (h) Each of the claimant and the second and third opponents to pay its own costs of the first and third cross-claims; (i) Each of the second and third opponent to pay its own costs to date of the fourth cross-claim; (j) The first, second and third opponents to pay the claimant’s costs of the summons for leave to appeal and the appeal but to have with respect to the latter a certificate under the Suitor’s Fund Act 1951, if otherwise qualified
CATCHWORDS:	PROCEDURE – COSTS – costs appeal – multiple claims and cross-claims arising from substantive proceedings – principles – scope of primary judge’s discretion as to costs award – basis for order concerning indemnity costs – costs of appeal where represented by both senior and junior counsel
LEGISLATION CITED:	Arbitration (Civil Actions) Act 1983, s 18 District Court Act 1973, s 63A District Court Rules 1973, pt 39A r9 Law Reform (Miscellaneous Provisions) Act 1946, s 5(1) Legal Profession Act 1987, ss 198D, 198G Roads Act 1993, s 142 Uniform Civil Procedure Act 2005, s 98 Uniform Civil Procedure Rules 2005, r 42.1
CASES CITED:	Anglo Cyprian Trade Agency Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 Arian v Nguyen [2001] 33 MVR 37; NSWCA 5 Australian Coal & Shale Employees’ Federation v The Commonwealth (1953) 94 CLR 621 Boylan Nominees Pty Ltd v Williams Refrigeration Australia Pty Ltd [2006] NSWCA 100 Houatchanthara v Bednarczyk (Court of Appeal, 14 October 1996, unreported) House v The King (1936) 55 CLR 499 Howard v Telstra Corporation Ltd [2003] NSWCA 188 Latoudis v Casey (1990) 170 CLR 543 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 MacDougall v Curlevski (1996) 40 NSWLR 430 Morgan v Johnson (1998) 44 NSWLR 578 Nobrega v Trustees of the Roman Catholic Church of the Archdiocese of Sydney (No 2) [1999] NSWCA 133 Ohn v Walton (1995) 36 NSWLR 77 Oshlack v Richmond River Council (1998) 193 CLR 72 Quach v Mustafa (Court of Appeal, 15 June 1995, unreported);
PARTIES:	Sydney City Council Layla Geftlick Ronali Pty Ltd t/as Tim Green Commercial Edremo Holdings Pty Ltd
FILE NUMBER(S):	CA 40866/05
COUNSEL:	Cl : G Laughton SC / G J Parker Opp 1: S C Gampbell SC / G Walsh Opp 2: S A Kerr / S E Gray Opp 3: J E Sexton SC
SOLICITORS:	Cl: McCulloch & Buggy, Sydney Opp 1: CMC Lawyers, Sydney Opp 2: Wotton & Kearney, Sydney Opp 3: Thompson Cooper Lawyers Pty Ltd
LOWER COURT JURISDICTION:	District Court
LOWER COURT FILE NUMBER(S):	DC 4587/03
LOWER COURT JUDICIAL OFFICER:	Hughes DCJ
LOWER COURT DATE OF DECISION:	12 October 2006

CA 40866/05
DC 4587/03

MASON P
HODGSON JA
TOBIAS JA

Wednesday 18 October 2006

SYDNEY CITY COUNCIL v GEFTLICK & ORS

Judgment

1 MASON P: I agree with Tobias JA.

2 HODGSON JA: I agree with Tobias JA.

3 TOBIAS JA: On 27 October 2000 the first opponent (the plaintiff) fell and was injured when she stepped into an open or uncovered valve pit located in the footpath of the claimant (the Council) adjacent to a commercial building at No 332 Pitt Street, Sydney (the building) owned by the third opponent (Edremo) and managed by the second opponent (Ronali).

4 On 2 October 2003 the plaintiff instituted proceedings in the District Court by way of ordinary statement of claim against the Council and Ronali as defendants. She alleged that they were jointly or severally responsible for the care, control and management of the valve pit situated in the footpath outside the building. She further alleged that the defendants owed her a duty of care, which they had breached when she had stepped into the open valve pit due to its cover having been removed or displaced, and which they had failed to repair. Each of the Council and Ronali cross-claimed against the other and Ronali cross-claimed against Edremo.

5 The proceedings were referred to arbitration pursuant to the Arbitration (Civil Actions) Act 1983 (the Arbitration Act). On 1 September 2004 the Arbitrator found in favour of the plaintiff against the Council and awarded her damages in the sum of $39,501.89. However, he found in favour of Ronali and dismissed the plaintiff’s action against it. He also dismissed all cross-claims.

6 Being a person aggrieved by the Arbitrator’s award, the Council applied for a rehearing of the action pursuant to s18(1) of the Arbitration Act. Pursuant to s18(2) the rehearing was a full, and not limited, rehearing so that all parties in the arbitration were parties at the rehearing.

7 The rehearing ultimately came before his Honour Judge Hughes on 3 May 2005. As a consequence of the Council calling evidence from an employee of Ronali, Ms Kelly Apostolakos, and which the primary judge accepted, his Honour found that neither defendant had been negligent. The plaintiff’s claim therefore failed and a verdict entered in favour of both defendants.

8 A dispute then arose as to the costs of the proceedings including the arbitration. The plaintiff claimed that had Ms Apostolakos been called by the Council in its case before the Arbitrator, the likelihood would have been that he would have found in favour of the Council and not the plaintiff. Accordingly, applying this Court’s decision in Morgan v Johnson (1998) 44 NSWLR 578, it was submitted that the Council could have and should have called Ms Apostolakos in the arbitration and that its failure to do so should result in the Council paying the costs of all parties to the litigation. His Honour acceded to this submission and ordered that the Council pay the plaintiff and Ronali’s costs as well as those of the cross-defendants on an indemnity basis. Although it is not entirely clear from his Honour’s judgment, all parties accepted that that order extended to the costs of the arbitration. It is from this decision that the Council seeks leave to appeal from this Court. That application and the substantive appeal were heard concurrently.

The relevant facts

9 As I have noted above, the plaintiff instituted proceedings in the District Court by way of ordinary statement of claim on 2 October 2003. She alleged negligence against both the Council and Ronali. In their respective defences, the Council denied that it was negligent and Ronali denied that it was responsible for the management of the immediate surrounds including the valve outlet pit situated in the footpath, although it admitted that it was the building manager responsible for the management of the building.

10 A number of cross-claims were filed. The first was by the Council against Ronali in which it alleged that Ronali was the managing agent of the building pursuant to a management agency agreement entered into with the owner, Edremo. It alleged that if the plaintiff was found to have sustained the injuries she alleged, they were caused by Ronali’s negligence in failing to ensure that the valve pit cover was maintained in a satisfactory state of repair and, if it went missing, that it was immediately replaced. It further alleged that Ronali had the use or benefit of a structure (the service valve) in a public road, being Pitt Street, for the purposes of s142 of the Roads Act 1993 (the Roads Act) and, therefore, had a statutory duty to keep the valve pit cover in a satisfactory state of repair so that it was maintained flush with the footpath. The Council alleged a breach of that duty. Finally, the Council claimed indemnity or contribution under s5(1) of the Law Reform (Miscellaneous Provisions) Act 1946 (the Law Reform Act).

11 The second cross-claim was by the Council against Edremo as the owner of the building. It made allegations identical to those made against Ronali.

12 The third cross-claim was that of Ronali against the Council and Edremo. It alleged that the Council was responsible for the care, control and maintenance of the footpath and that if the plaintiff was found to have sustained injury, that injury was caused by the Council’s negligence. Against Edremo it alleged that any such injury, if found, was caused by Edremo’s negligence. In the alternative, it alleged that it was a term of the management agency agreement that Edremo would indemnify Ronali and keep it indemnified against all actions, suits, proceedings, claims, costs and expenses which might be taken or made against Ronali in the course of or arising out of the proper performance of its powers, duties or authorities under the agreement. It thus alleged that if it was found liable to the plaintiff, Edremo was bound to indemnify it under the agreement as well as under the Law Reform Act.

13 The fourth cross-claim was by Edremo against Ronali. It alleged that if Edremo was found liable to the plaintiff, it was entitled to indemnity or contribution from Ronali under the management agency agreement. It further alleged that if the plaintiff suffered any injury, then any liability imposed on Edremo was caused by Ronali’s negligence and thus sought indemnity and/or contribution pursuant to the Law Reform Act. Finally, it alleged breach by Ronali of various terms of the management agency agreement.

The proceedings before the Arbitrator

14 The proceedings before the Arbitrator were heard and determined on 1 September 2004. It appears to be common ground that at approximately 7.30pm on Friday 27 October 2000 the plaintiff caught her right heel in the open service valve pit in the footpath outside the building whereupon she fell and was injured. Oral evidence was given before the Arbitrator on the issue of liability by both the plaintiff and a Mr Glen Bell, the Council’s Asset Inspector, whose relevant responsibility it was to patrol and inspect the footpath where the plaintiff fell on a weekly basis.

15 Mr Bell’s evidence was that on 6 October 2000, in the course of his patrol of the relevant section of Pitt Street, he observed that the lid of the service valve pit had been removed. He ascertained the identity of the managing agent of the adjoining building, Ronali, from a noticeboard attached to those premises. He made a note in his personal diary as well as a Council diary. At the time of the hearing of the arbitration all parties were in possession of Mr Bell’s diary notes. Relevantly, there was an entry for 6 October 2000 in the following terms:

“332 Pitt St missing service lid o/s Perfect Style Hair Design.
Tim Green commercial managing agents 9267 1919 (Kelly). I left message on voicemail to have repaired. Also left my name and phone no.”

16 Regrettably, there is no transcript of Mr Bell’s evidence before the Arbitrator. However, in an affidavit sworn 17 May 2005, Mr Mathew McDiarmid who was the employed solicitor who had the carriage of the litigation on behalf of the Council, deposed that Mr Bell’s evidence before the Arbitrator was to the following effect:

“He testified that each asset inspector has an area of footpath, which they are required to walk around and inspect on a regular basis. Mr Bell said that in October 2000 his area of responsibility included the footpath adjacent to 332 Pitt Street, Sydney. He stated that he walked past 332 Pitt Street about once a week. Mr Bell testified that if he saw something wrong he would report it to the relevant section of Council if it was a Council asset. However, if the problem was something to do with a building he would report it to the building manager. We showed Mr Bell his work diary. He agreed there was an entry in his diary for 6th October 2000, in which he had recorded there was a missing service lid on a pit at 332 Pitt Street, and that the contact person was ‘Kelly’ of Tim Green Commercial. Mr Bell testified that as soon as he got back to his office at lunchtime, he telephoned Kelly. His call went through to Kelly’s voicemail and he left a message explaining what the problem was, and that it needed to be fixed. Mr Bell said he thought that Kelly phoned him back to confirm his message but he was not sure of this. It was Mr Bell’s evidence that he went past the pit in question a short time later and noted the lid had been replaced. He said the procedure was that he would only note items in his diary if there was something wrong and he would not note items that had been previously wrong, but had subsequently been fixed. He said that the pit housed a shut off valve for either the fire system or the water supply for 332 Pitt Street.”

17 Mr Bell’s diary in respect of Tuesday, 7 November also contained the following entry:

“332 Pitt St – missing service valve lid o/s Hair Design
Tim Green Commercial. 9267 1919 Kelly.”

18 According to Mr McDiarmid’s affidavit, Mr Bell

“stated [before the Arbitrator] that on 7th November he again went past 332 Pitt St and observed that the lid had gone missing again. He said that this time he rang and spoke to Kelly and told her that it had to be fixed.”

19 In his reasons for decision dated 1 September 2004, the Arbitrator made the following findings:

“5 The hole in the footpath had been observed on 6 Oct 2000 and noted by an inspector who was employed by the first defendant. The obvious danger was recognised by him and he attempted to contact, by leaving a voice message for, Tim Green Commercial, the second defendant. The second defendant was the managing agent of the adjoining building. There is no evidence that the message was received or acted upon.
6. Mr Bell says that he would have been in the area following his observation of the whole and assumes or is confident that he would have noted the footpath if it had not been repaired. He maintained no follow-up records and had no formal follow-up procedure or system.
7. On 7 November 2000 there is a note in the Council diary that the valve cover had been removed.
8. On 9 November 2000 the service lid was repaired. The plumber who carried out the repair was paid by the second defendant. The first defendant submits that this ‘obviously’ was the second time that the cover had been removed urging a finding that the delay in repair was two days and not one month.”

20 The Arbitrator then found that on the balance of probabilities the missing cover was observed on 6 October 2000 but not repaired until 9 November 2000. He further found that the Council’s duty of care was not discharged by Mr Bell merely leaving a voicemail message with ”Kelly”. He considered that its duty of care was to initiate a warning of the danger and to provide a prompt follow up of the repair. This duty was not discharged.

21 As the Arbitrator was not satisfied that Ronali was responsible for the footpath outside the building, he determined that s142 of the Roads Act did not place any responsibility upon it with respect to the repair of the valve pit as a result of which he concluded that only the Council had failed to discharge its duty of care. He therefore awarded the plaintiff $39,501.89 against the Council and ordered the Council to pay the costs of the plaintiff and Ronali. He dismissed the first and second cross-claims, ordering the Council to pay Ronali’s and Edremo’s costs. He further dismissed the third and fourth cross-claims but made no order as to costs.

22 Apparently, the Council’s solicitors requested the Arbitrator to reconsider his decision upon the basis that he had denied it the opportunity to provide submissions in reply prior to the making of his determination. That request was granted and on 6 September 2004 the Council filed written submissions which, after referring to the message left by Mr Bell on “Kelly’s” voicemail, proceeded in the following terms:

“6. When next passing over the area the service lid was repaired and the surface flush. Mr Bell was 99.99% certain that he recalled that the service lid was in position.
7. Between 6th and 26th October 2000 Mr Bell passed over the area three times including the 6th. On the second visit the lid was in position, on the probabilities the lid was in position on the 3rd visit. Again on the probabilities it is likely Mr Bell’s third visit to the area occurred close to the 26th October 2000. If he passes the area not more often than weekly then he should have passed the area not earlier than 13 October. He had 2 sick days in the period after 13 October and passed the area on 7 November. Between the 13 October and 7 November there are 24 days. The mid point is 25 October. He should have passed the area twice between 13 October and 27 October. On the probabilities the lid was more likely to have been removed on or after 25 October i.e. on 25, 26 or 27 October.
8. On the 7th November 2000 the service valve lid had been removed. There is a note in the red book and in the council diary to that effect.
9. On the 9th November 2000 the service lid was repaired. The plumber was paid by Tim Green Commercial and a nominal amount was paid.”

It was submitted that Mr Bell’s evidence should be accepted.

23 It was further submitted that on the evidence the danger was discovered by Mr Bell on 6 October 2000 and had been remedied within a short period thereafter. Accordingly, it followed that the cover was removed sometime after Mr Bell’s last inspection of the area which, on the probabilities, could have been as late as 26 October.

24 It would appear that the plaintiff made written submissions (which have not been included in the papers before the Court) in response to which the Council contended that the plaintiff had failed to call any evidence in contradiction of that of Mr Bell as a consequence whereof it was likely that the lid was replaced in response to Mr Bell’s voicemail of 6 October.

25 The Council further submitted that it was glaringly improbable that the service pit lid would have remained off and unnoticed for a period of three weeks after 6 October especially as Mr Bell covered the area at least twice in that period which was during the 2000 Olympics when there were many visitors to the City and Pitt Street was being used by many people at the time. It was further submitted that there was no evidence called by Ronali or Edremo that the former did not receive Mr Bell’s message. The correct inference from the absence of that evidence was that the message was received and acted upon.

26 Although it was common ground that “Kelly” was an employee of Ronali at all material times, a tactical decision was taken by it at the arbitration not to call her or any other evidence.

27 In its written submissions to the Arbitrator, Edremo submitted that the plaintiff’s case was based on the false assumption that the pit remained uncovered from 6 October, when the missing lid was first detected by Mr Bell, and 27 October when the accident occurred.

28 Those submissions then set out Edremo’s understanding of Mr Bell’s evidence in the following terms:

”The evidence of Mr Bell establishes that the lid was repaired or replaced in the days following 6 October 2000. The evidence does not establish who repaired or replaced it but that it is not relevant to the determination of liability. The Court would accept the evidence of Mr Bell as there is no contrary evidence. He said that he would have walked the same area within days and weeks of 6 October. His red notebooks confirmed that he walked the same area on more than one occasion. He said in cross-examination by the Cross Defendant that it is probable that he would have been in the area as late as 26 October 2000. The Plaintiff did not seek to challenge that assertion and the Court is bound to accept it.”

29 On 11 October 2004 the Arbitrator published a supplementary statement of his reasons for his award in favour of the plaintiff. Relevantly, he stated that:

“Counsel for the defendants and in particular the first defendant submitted that I must accept the evidence of Mr Bell that the cover was repaired promptly. I think that this places the evidence of Mr Bell too highly. There was no specific system of follow-up inspection other than an informal belief that he would have observed the danger when he walked over his large area on subsequent occasions. There is no reliable evidence as to whether he actually walked along this particular section, no evidence or records of follow up inspection or repair. The evidence that he would have noticed if it hadn’t been done was non compelling.”

30 As a result of this, the Arbitrator confirmed the findings he had made on 1 September 2004 in relation to liability. An application pursuant to s18 for a rehearing was made by the Council on or about 7 November 2004. The matter was listed for hearing before a judge of the District Court on 31 January 2005.

31 Arrangements were made by Mr McDiarmid for Mr Bell to attend court on that day, he having indicated that he was available to do so. On that occasion the Council attempted to tender a report of an expert hydraulic consultant, Mr Don Ledingham, dated 27 January 2005. However as the report had not been obtained nor served prior to the arbitration, Ronali and Edremo objected to its tender. The Council then sought an adjournment of the hearing, which her Honour Judge Gibson granted, ordering the Council to pay the costs of the plaintiff, Ronali and Edremo thrown away by reason of the hearing date being vacated. Those costs were to be paid on an ordinary basis and the Council does not seek to challenge that order which remains in force.

32 The proceedings were relisted for hearing to commence on 3 May 2005 before his Honour Judge Hughes. The hearing proceeded until 6 May 2005 on which date his Honour delivered an ex tempore judgment in which he entered a verdict for the defendants, the Council and Ronali.

The circumstances leading to the calling of Mr Apostolakos at the rehearing before the primary judge.

33 Prior to the hearing before the Arbitrator, Mr McDiarmid, the Council’s solicitor, had subpoenaed Sydney Water and instituted investigations for the purpose of determining whether the valve related to the provision of water to the building. He did not meet with any success in this endeavour as a result of which there was no evidence, except unsatisfactory evidence from Mr Bell, that provided a connection between the valve and the building. This resulted in the Arbitrator finding in favour of Ronali.

34 It was due to this gap in the evidence in the arbitration that the Council commissioned Mr Ledingham’s report for the rehearing. Moreover the Council had served upon both Ronali and Edremo a notice to admit the facts that the valve pit upon which the plaintiff alleged she had tripped, gave access to water pipes which serviced the building and that it was under the care, control and management of each of those parties. However, both Ronali and Edremo filed a notice disputing those facts which led to the engaging of the hydraulic consultant, Mr Ledingham, to prove them. He concluded, having investigated the issue, that the valve pit was located over the water supply line from Sydney Water’s water main to the sprinkler valve control room located within the building.

35 It will be recollected that the Arbitrator found in favour of the plaintiff against the Council originally on the basis that there was no evidence that Mr Bell’s voicemail message to “Kelly” had been either received or acted upon and, in his supplementary reasons, upon the basis that the Council had not established through Mr Bell that, following his voicemail message, the cover had been replaced on the valve pit.

36 According to an earlier affidavit sworn by Mr McDiarmid on 6 May 2005, Mr Bell’s diary entries had not recorded “Kelly’s” last name so that at the time of the arbitration on 1 September 2004, he had no knowledge of her surname. Furthermore, according to Mr McDiarmid’s affidavit sworn 17 May 2005, at the time of the arbitration he not only had no knowledge of “Kelly’s” last name but was also unaware of what evidence she might be able to give with respect to the matter. He deposed that as far as he was aware, there were no other witnesses who could give relevant evidence about the circumstances surrounding the plaintiff’s accident. On the other hand, he was aware of the evidence that Mr Bell would give at the arbitration and considered “on reasonable forensic grounds” that Mr Bell’s evidence would be sufficient to successfully defeat the plaintiff’s claim against the Council. Furthermore, Mr McDiarmid had an expectation that if the evidence of “Kelly” would assist Ronali’s defence of the plaintiff’s claim, it would call her to give that evidence.

37 Mr McDiarmid also deposed that he was aware that the plaintiff’s solicitors knew of “Kelly’s” existence because they had served upon Mr McDiarmid’s firm the diary notes of Mr Bell to which I have already referred. However, neither the plaintiff nor Ronali called “Kelly” to give evidence at the arbitration. According to the submissions of counsel for Ronali on the appeal (who also appeared for Ronali at the trial), he made a forensic decision at the conclusion of the Council’s case at the arbitration not to go into evidence. This was because the plaintiff’s case against Ronali was dependant upon a finding that it had the care, control and management of the valve and the valve pit. However, at the end of both the plaintiff’s and the Council’s case, no reliable evidence had been elicited to establish that fact. Accordingly, the decision was taken not to call any evidence at all. In the circumstances, there could be no criticism of that decision.

38 According to Mr McDiarmid’s affidavit of 17 May 2005, prior to the rehearing on 3 May 2005 he attempted to make arrangements for Mr Bell to attend to give evidence but was informed that he was on leave and uncontactable. Due to Mr Bell’s unavailability, Mr McDiarmid then made arrangements for Mr Joe Prisnicki, Mr Bell’s supervisor at the time of the plaintiff’s accident, to attend court and give evidence.

39 However, Mr Prisnicki’s evidence, although relating to Mr Bell’s duties and responsibilities, did not provide direct evidence that the valve pit cover had been replaced by Ronali following Mr Bell’s voicemail message to “Kelly” on 6 October. Given that the receipt of that message by “Kelly” and her response to it were the issues upon which the Council had failed before the Arbitrator, Mr McDiarmid realised that it would be necessary to establish “Kelly’s” identity, to subpoena her and to determine the evidence that she would give if called. Given that Ronali had not called her at the hearing before the Arbitrator, it became obvious to Mr McDiarmid that the Council could not take the risk of Ronali not calling her on the rehearing: rather, the Council would need to call her itself.

40 Accordingly, in January 2005 Mr McDiarmid issued a subpoena to Ronali to produce its employment records which revealed that it employed a person by the name of Kelly Apostolakos. A subpoena to give evidence was then issued and served upon Ms Apostolakos.

41 In paragraphs 24–27 of Mr McDiarmid’s affidavit of 17 May 2005 he deposed as follows:

“24. On 22nd April 2005 I received a telephone call from Kelly Apostolakos. She confirmed she had been served with a Subpoena to Give Evidence. She also confirmed she was the ‘Kelly’ from Tim Green to whom the subject missing pit lid was reported in October 2000.
25. On 4th May 2005 I had another telephone conversation with Ms Apostolakos. I said words to the effect ‘Our Counsel has requested a conference with you. Is that ok?’. She said words to the effect ‘I’ve been told that I do not have any obligation to talk to you and I would rather not’.
26. On 5th May 2005 I was with Mr Geoff Parker, Counsel retained on behalf of my client, at Court when he said to Kelly Apostolakos words to the effect ‘I’m Geoff Parker, barrister, can I have a word with you?’. Ms Apostolakos said words to the effect ‘I’ve been told I don’t have to talk with you and I’d rather not’.
27. At the hearing, Kelly Apostolakos was called to give evidence on behalf of my client.”

42 The impression given by the foregoing evidence of Mr McDiarmid was that Ms Apostolakos was ultimately called at the rehearing before the primary judge “on the blind”. However, this was not in fact the case. In the telephone conversation referred to in par 24 of Mr McDiarmid’s affidavit, he discussed with Ms Apostolakos the evidence that she would give in respect of which he took a detailed note. Junior counsel for the Council informed his Honour at the costs hearing on 19 May 2005 that he had used that note to lead evidence from Ms Apostolakos at the trial and that in substance her evidence was in accordance with that note.

Ms Apostolakos is called to give evidence before the primary judge

43 Ms Apostolakos was called to give evidence before the primary judge on 4 May 2005. In her evidence in chief she confirmed that she had received the voice mail message of Mr Hall and that it was to the effect that a service lid was missing in the footpath. She said that she called a plumber and told him to fix it and that that was done. She gave further evidence that she would have visited the building on at least five occasions between 6 and 27 October and that on none of those occasions did she notice that the lid of the valve pit was missing. In particular, she gave evidence that it was her practice to visit on either a Thursday or Friday and, when informed that 27 October was a Friday, she was asked:

“Q. On the occasion that you went to the building on 27 October you were quite certain that the cover of that valve pit was off (sic)?
A. Definitely.”

44 Again at the end of her examination in chief the following exchange took place:

“Q. On the occasions that you visited those premises between 6 and 27 October the valve pit installation had a lid on it, correct?
A. Yes.
Q. In particular on the occasion that you visited it, on 27 October 2000, the lid was on the valve pit installation, is that right?
A. Yes.”

45 Ms Apostolakos was then cross-examined. She could not remember being informed by Mr Bell that the cover to the valve pit was missing on 7 November and she could only recollect that she called the plumber once.

46 Notwithstanding the foregoing, in his judgment of 6 May 2005 the primary judge accepted Ms Apostolakos as a truthful witness and that on the receipt of Mr Bell’s voicemail message of 6 October she had arranged for the missing cover to be replaced, which it was, and that she had said positively that she had visited the premises on 27 October and that the valve cover was then in place.

47 Interestingly, with respect to Mr Bell’s diary entries and the evidence of Mr Prisnicki, his Honour said:

“I accept further the evidence given by Mr Prisnicki that Mr Bell’s beat, which is contained in an exhibit before me, was inspected once a week or thereabouts. There is no evidence after 6 October until Mr Bell has an entry on 7 November when another missing cover was noted. There are throughout Mr Bell’s diaries various entries, including the very sorts of things that are the subject of this litigation, including in other parts of the city, these missing covers.”

This was similar to Mr Bell’s own evidence before the Arbitrator as I understand it: and yet the Arbitrator rejected it.

48 The primary judge therefore concluded that the plaintiff had failed to prove on the balance of probabilities that either the Council or Ronali was negligent. Accordingly, he entered a verdict for the defendants.

The question of costs

49 Counsel addressed his Honour on the question of costs after he had delivered his judgment on the substantive issues. The argument with respect to costs was then adjourned to 19 May 2005 when further submissions were made. His Honour then reserved judgment on the question of costs which he delivered on 12 October 2005. He ordered the Council to pay the plaintiff and Ronali’s costs on an indemnity basis and also ordered that it pay Ronali and Edremo’s costs on the cross claims on a similar basis.

50 In his reasons for judgment on costs, the primary judge stated that the evidence before him was significantly and crucially different to that which had been called before the Arbitrator. In particular, Ms Apostolakos had given evidence as to the state of the footpath immediately before the plaintiff had fallen. This, his Honour said, corroborated the evidence of Mr Bell, although the latter was not called before him. However, his Honour acknowledged that Mr Bell’s diary entries and the schedule of the system of inspections he was required to undertake were tendered as business records. He observed that the confirmation of the state of the footpath some short time before the plaintiff fell, significantly altered the question of liability of the defendants so that he had been able to conclude that the cover on the valve pit was in place a short time prior to the plaintiff’s fall.

51 The primary judge then observed that

“[e]ven though Ms Kelly Apostolakos was not an employee of [the Council] they were entitled to call her to appear at the arbitration and did not. They knew of her existence and knew that she was part of the management of the premises immediately adjacent to the spot on the footpath where the flaw occurred and they simply did not call her.”

52 His Honour then referred to the plaintiff’s submission that if Ms Apostolakos’ evidence had been available at the hearing before the Arbitrator, it was more likely that she would have failed in the action.

53 Next, his Honour turned to the decision of this Court in Morgan and expressed the view that he was satisfied that Ms Apostolakos was a crucial witness upon whose evidence the case turned. She had confirmed a system of inspection of the Council’s footpath even though she was an employee of Ronali. In his Honour’s opinion that evidence could have and should have been called in the arbitration. Although he accepted that when the matter came before him Mr Bell was absent on holidays, he acknowledged that Mr Prisnicki, Mr Bell’s superior, had given evidence as to Mr Bell’s system of inspection and, through him, Mr Bell’s diary entries had been tendered. In his Honour’s opinion that evidence combined with that of Ms Apostolakos “turned the case”.

54 In particular, in the afternoon before the alleged incident, Ms Apostolakos had inspected the footpath and there was no missing pit cover. In those circumstances his Honour found that had that been the evidence before the Arbitrator, his decision would have been quite different and the need for the rehearing would not have occurred.

55 The primary judge was also requested by the plaintiff to make an order pursuant to s198G of the Legal Profession Act 1987 that the legal services provided to the plaintiff in respect of both the arbitration and the rehearing be excluded from the operation of Pt 11 Div 5B of that Act. Relevantly, s189D(1), but for any such order, would have limited the plaintiff’s recoverable costs. Relevantly to $10,000. Section 198G provided as follows:

“A court hearing a claim for personal injury damages may by order exclude from the operation of this Division legal services provided to a party to the claim if the court is satisfied that the legal services were provided in response to any action on the claim by or on behalf of the other party to the claim that in the circumstances was not reasonably necessary for the advancement of that party’s case or was intended or reasonably likely to unnecessarily delay or complicate determination of the claim.”

56 His Honour found that it was reasonably likely that the addition of the cross-claimants (Ronali and Edremo) to the plaintiff’s claim was reasonably likely to complicate its determination. Accordingly, he made an order pursuant to s198G that the legal services provided to the plaintiff be excluded from the operation of Pt 11 Div 5B of the Legal Profession Act.

57 It is to be noted that the only party added to the proceedings, which the plaintiff had not otherwise joined, was Edremo who had been joined as a cross-defendant by both the Council and Ronali.

The submissions on the appeal

58 The Council submitted that the primary judge’s discretion to order it to pay the costs of all parties on an indemnity basis with respect to both the arbitration and the rehearing had miscarried for the following reasons:

(a) As at 6 May 2005 when the primary judge entered a verdict in favour of the Council and Ronali, Pt 39A r9 of the District Court Rules 1973 provided that where the court makes an order as to costs, it shall order that costs follow the event except where it appears to the court that some other order should be made as to the whole or any part of the costs.

(b) Accordingly, the proper exercise of the costs discretion would generally require that the unsuccessful party be ordered to pay the costs of the successful party or parties.

(c) The Uniform Civil Procedure Act 2005 came into force on 15 August 2005 (that is, before the primary judge made his order as to costs) in which s98 relevantly provided as follows:

“(1) Subject to the rules of court and to this or any other Act:


(a) costs are in the discretion of the Court; and

(b) the court has full power to determine by whom, to whom and to what extent costs are to be paid;

(c) the court may order that the costs be awarded on the ordinary basis or an indemnity basis.

(2) Subject to the rules of court and to this or any other Act, a party to proceedings may not recover costs from any other party otherwise than pursuant to an order of the court.”


(d) Rule 42.1 of the Uniform Civil Procedure Rules 2005 is in the same terms as Pt 39A r9 of the District Court Rules .

(e) The proper exercise of the costs discretion would normally require an order that the successful party’s costs be paid by the unsuccessful party at least to the extent to which its costs had been reasonably incurred in the conduct of the litigation: Latoudis v Casey (1990) 170 CLR 543 at 566-567; Oshlack v Richmond River Council (1998) 193 CLR 72 at 97.

(f) The exercise of the costs discretion is compensatory rather than punitive: Ohn v Walton (1995) 36 NSWLR 77 at 79.

(g) An order that a successful party pay the costs of an unsuccessful party therefore requires particular justification so that it is rare for such an order to be made unless the successful party’s misconduct has lengthened the proceedings unnecessarily, caused unnecessary issues to be canvassed or otherwise increased the cost of the litigation: see eg, MacDougall v Curlevski (1996) 40 NSWLR 430 at 433G–434C per Priestley AP; at 438 per Cole JA.

(h) Although MacDougall established that it was open to a party to follow a particular course with respect to the calling of evidence in an arbitration under the Arbitration Act , generally speaking that party is required to conduct the arbitration as though it was in fact a hearing of the action and, therefore, to call all its evidence. If that party, for its own forensic reasons, withholds evidence which is then called at a rehearing, then that is a factor which it is permissible for the court to consider in the exercise of its discretion as to costs.

(i) However, as Mason P said in Morgan at 597G, MacDougall does not establish that the normal costs rule (that costs follow the event) must invariably be displaced whenever available evidence is not used by the unsuccessful party in the arbitration who is successful at the rehearing. Rather, the question is whether by the exercise of due diligence, the identity of what is ultimately a critical witness could be ascertained and/or whether the relevant party has held back that evidence as a consequence of a deliberate tactical decision to do so.

(j) In the present case, Mr McDiarmid’s evidence established that he was unaware of “Kelly’s” true identity and although it was ultimately accepted by the Council that Mr McDiarmid could, with due diligence, have ascertained her identity (after all her telephone number was recorded in Mr Bell’s diary note), nevertheless it could not be said that Mr McDiarmid had made a deliberate tactical decision not to call her or had deliberately held back her evidence at least in circumstances where he was unaware of what evidence she might give.

(k) Furthermore, there was no challenge to Mr McDiarmid’s affidavit evidence, to the effect that he considered that Mr Bell’s evidence would establish that not only had “Kelly” received his voicemail message and had arranged to have the valve pit cover replaced, but also in his subsequent inspections of the area, Mr Bell had not noticed that the pit cover had again been displaced until 7 November.

(l) Mr McDiarmid also believed that Ronali was aware of “Kelly’s” identity and what evidence she would give. If that evidence established that Mr Bell’s voicemail message was received and acted upon, then it was his reasonable expectation that Ronali would call her to give that evidence as it was in its and the Council’s interest that it be established that Mr Bell’s voicemail message was received and acted upon. There was, therefore, no reason for Mr McDiarmid to believe that Ronali would not call “Kelly” to establish those matters in order to corroborate Mr Bell’s evidence.

(m) It would be a counsel of perfection at the time of the arbitration for Mr McDiarmid to have realised that Mr Bell’s evidence might not have been accepted by the Arbitrator merely because, as it turned out, Ronali was only able to produce one invoice of a plumber which was found by the Arbitrator to relate only to the repair of the valve pit on 9 November.

59 It was submitted by the plaintiff that, first, reasonable diligence could have ascertained “Kelly’s” identity and what she was prepared to say as in fact occurred when she was interviewed over the telephone by Mr McDiarmid on 22 April 2005. Second, although there was a reasonable possibility that Mr Bell’s evidence would be accepted by the Arbitrator, the fact was that he had delegated “Kelly” to arrange to have the valve pit cover replaced and thus left her with the direct responsibility of ensuring that this was done. On the other hand, Mr Bell was responsible for a substantial length of footpath within the City and was therefore less likely than “Kelly” (whose responsibility it was to maintain the building on behalf of Ronali) to notice whether the valve pit lid had been replaced or not. Third, the present case was indistinguishable from that determined by this Court in Morgan given that “Kelly’s” evidence was not only ultimately critical to the determination of the issue of liability but also could, with reasonable diligence, have been called.

60 In these circumstances it was the duty (costs wise) of the Council to put its best foot forward at the arbitration in the absence of special circumstances. Mr McDiarmid simply took the risk that the Council’s case would be proven by Mr Bell’s voicemail message and later inspections. Council had available to it direct corroborative evidence from “Kelly” that the valve pit had been repaired and, in putting its best foot forward at the arbitration, it ought to have called her so as to ensure, as far as possible, that its case was fully exposed before the Arbitrator. Accordingly, the primary judge properly exercised his discretion to order the Council to pay the costs of the plaintiff and Ronali as well as Edremo.

61 Ronali adopted the plaintiff’s submissions with respect to the issue as to whether the primary judge’s discretion had miscarried. It submitted that it was under no obligation to call “Kelly” itself at the arbitration notwithstanding that it and the Council had a common interest in establishing that the displaced lid from the valve pit had been replaced and, as far as reasonable inspection could establish, had not been displaced again prior to the plaintiff’s accident.

62 Given the legal basis upon which the plaintiff had alleged liability on the part of Ronali, namely, that it had had the care, control and management of either the relevant part of the footpath or at least the valve pit within the footpath, and given that neither the plaintiff nor the Council had elicited evidence at the arbitration to establish that the valve pit had any connection to the building, Ronali was entitled at the close of the plaintiff’s and the Council’s case, to take the tactical decision not to call any evidence including that of Ms Apostolakos.

63 Finally, having made similar submissions to those of Ronali, Edremo contended that at the arbitration the Council had not established that Edremo had control of the valve within the valve pit for the purposes of the Council’s cross-claim against Edremo. Consequently it was unnecessary for Edremo to call any evidence including that of Ms Apostolakos. On the other hand, the critical evidence of Ms Apostolakos at the rehearing before the primary judge, and upon which the latter specifically relied, was that she had seen the cover to the valve pit in place on the very day of the accident. Although Mr Bell’s evidence was relevant to this issue, it was more vague and certainly nowhere near as cogent in terms of specific observation as that of Ms Apostolakos.

64 It was thus submitted by Edremo that the Council should have put its best foot forward and called the critical evidence of Ms Apostolakos as Mr Bell’s evidence did not go as far as hers ultimately did. Accordingly, there was no miscarriage of the primary judge’s discretion in ordering the Council to pay Edremo’s costs as well as those of the plaintiff and Ronali.

65 As the parties also made submissions with respect to the order for indemnity costs made by the primary judge, it is appropriate to first deal with the initial issue as to whether or not his Honour’s discretion miscarried in making an order for costs otherwise than one by which costs followed the event.

Did the primary judge’s discretion miscarry with respect to his refusal to order that costs should follow the event?

66 The relationship between the District Court Act 1973 and the Arbitration Act was stated by Mason P, with whom Sheller JA and, relevantly, Powell JA agreed, in Morgan at 582 E–F in the following terms:

“Pursuant to the combined operation of s63A of the District Court Act 1973, the Arbitration (Civil Actions) Act 1983, proceedings may be referred for determination by an arbitrator. The arbitrator must give reasons (as s15(1)). Absent and application for re-hearing, the award is declared ‘final and conclusive’ (s18(1)) with certain presently relevant exceptions. However, s18(2) permits a person agreed to by the award of an arbitrator to obtain an order for a re-hearing of the action, providing certain requirements are complied with. The court that hears and determines an action by way of re-hearing may make an order for the payment of costs in respect of the hearing before the arbitrator in addition to the costs of the action itself (s18(4)).”

67 Judicial application of the general costs discretion and its interaction with the rules dealing with settlement offers had been the subject of three earlier decisions of this Court: Quach v Mustafa (Court of Appeal, 15 June 1995, unreported); Houatchanthara v Bednarczyk (Court of Appeal, 14 October 1996, unreported); and MacDougall. They were reconsidered by the President in Morgan, who summarised the relevant principles in the following terms (at 597–598):

“Before us the defendant submitted that there is a significant difference between the situation of a defendant who makes a deliberate tactical decision not to call available evidence at an arbitration (as in Quach and MacDougall ) and the situation in the present case where the importance of the additional evidence, or the need to call additional evidence, was not appreciated until during the hearing of the arbitration and after it had concluded. This is said to be quite a different situation to a party deliberately holding back evidence which it knows to be important in such a way as to render the arbitration ‘a form of litigious charade’: Quach (at 10), per Kirby P. I agree that there is a distinction, although ultimately it is a matter of degree. In any event it would be wrong to treat Quach and MacDougall as establishing that the relevant rule must invariably be displaced whenever available evidence was not used.
It is certainly true that the parties are entitled to conduct the re-hearing in such manner as they think fit but, as Quach and MacDougall point out, there may be costs consequences. If a party tenders evidence at an arbitration that is wholly unexpected then the other party can scarcely be criticised for not anticipating it or responding to it at the arbitration. Nor can the party necessarily be criticised for not seeking an adjournment at the arbitration, given that arbitrations are usually expected to finish in one day. But in the present case the issue of the plaintiff’s prospects of promotion was at all times a live one, and there is no reason other than the apparent inefficiency of the defendant or his legal advisers for the matter not being dealt with vigorously at the arbitration. Due diligence would have seen the calling of some at least of the ultimately critical witnesses.
In saying this I would not preclude taking into account, in a proper case, evidence that there was an actual consensus between the parties to the arbitration that they would contest in the arbitration on some limited basis. But this was not such a case.
It can therefore be seen that the ultimately critical evidence was not at hand at the time of the arbitration, but could with reasonable diligence have been available and called. This distinguishes the present case from Quach ”.

68 Morgan was considered by this Court in Howard v Telstra Corporation Ltd [2003] NSWCA 188. In that case the appellant injured his shoulder in May 1998 when he tripped over a cable that had been laid across his driveway by an employee of the respondent. His claim for damages was referred to arbitration under the Arbitration Act. The only witness as to liability called in the arbitration was the appellant. The arbitrator found that the appellant’s case needed corroboration or supplementary evidence. Accordingly, he dismissed his claim.

69 The matter was subsequently reheard in the District Court. At the rehearing the appellant called two additional witnesses. The trial judge believed the appellant and his witnesses and gave judgment in favour of the appellant. The trial judge ordered the defendant to pay the costs of the appellant up and to including the day before the arbitration but thereafter the appellant was to pay the costs of the defendant including the costs of the arbitration. The trial judge relied on MacDougall and Morgan.

70 Davies AJA, with whom Santow JA and Young CJ in Eq agreed, held that MacDougall was distinguishable because the defendant in that case had decided for forensic purposes not call available evidence at the arbitration but to reserve such evidence for use at the trial if a rehearing was requested. In the present case it was simply considered unnecessary to call the additional witnesses. The facts did not suggest that there was any deliberate holding back of evidence for a strategic purpose.

71 Morgan was also distinguishable because in that case there was the additional element of a settlement offer made by the defendant and rejected by the plaintiff whereas in the present case no such offer had been made. As the effect of the trial judge’s order was to deprive the appellant (as the successful plaintiff) of the costs of any hearing of his action and, indeed, to order him pay the costs of both the arbitration and the rehearing, the mere failure to call witnesses at the arbitration who were later called at the rehearing could not justify that result. It was therefore held that the trial judge’s order was perverse in the sense that it was unreasonable and plainly unjust so that his discretion miscarried: Australian Coal & Shale Employees’ Federation v The Commonwealth (1953) 94 CLR 621 at 626–628; House v The King (1936) 55 CLR 499 at 504-505.

72 After citing the passage from the judgment of Mason P in Morgan v Johnson (to which I have referred in [67] above), his Honour observed that on the facts as found by the trial judge, and applying the principles enunciated in McDougall and Morgan, it was appropriate for a costs order to be made which reflected the Court’s disapproval of the failure of the appellant to call evidence from the two witnesses in the arbitration, evidence which was necessary to support his claim but not one which was as draconian as that of the trial judge. His Honour thus concluded:

“27. There are many differing orders which could have been made, but two costs orders which readily present themselves for consideration in a situation such as this are firstly, that the plaintiff pay the costs of the unsuccessful arbitration and the defendant pay the costs otherwise incurred in the action and, secondly, that the defendant pay the costs up to the order of the arbitrator and the plaintiff pay the costs thereafter.
28. Had his Honour made either order, I would have considered that no error of principle in his Honour’s approach to the issue was demonstrated. His Honour dealt with the matter on the basis of the facts before him. He exercised his discretion. He did not apply what he considered to be an inflexible rule.
29. However, his Honour’s order was that the defendant pay the costs up to and including 19 November 2001, the day before the arbitration and the plaintiff pay the defendant’s costs thereafter. The effect of this order was to deprive Mr Howard, a successful plaintiff, of the costs of any hearing of his action, indeed to make him pay the costs of both the arbitration and the trial. The mere failure to call witnesses at the arbitration who were later called at the trial cannot justify this result. In my opinion, his Honour’s order was perverse, that is to say, unreasonable and plainly unjust. In the present case, there was no deliberate decision to withhold evidence for forensic purposes, as justified the severe order in MacDougall v Kolevski .”

73 It is to be noted that in MacDougall the trial judge was informed that the witnesses’ evidence he had regarded as decisive, had not been called to give evidence before the arbitrator by the defendants who had argued that they had taken a forensic decision not to call any witnesses on their behalf so as not to show their hand if the matter was to be reheard by a judge. In those circumstances, the trial judge ordered that the plaintiff should pay the defendant’s costs up to and including the day before the commencement of the arbitration and that the defendant should pay the plaintiff’s costs from that day onwards on an indemnity basis. The appeal from that decision was dismissed.

74 The primary judge, purporting to follow the decision of this Court in Morgan, found that Ms Apostolakos was a crucial witness whose evidence changed the whole complexion of the case as it had been presented before the Arbitrator as she confirmed a system of inspection of the relevant part of the footpath even though she was Ronali’s employee. As her evidence would have “turned the case”, his Honour found that had that evidence been called before the Arbitrator his decision would have been quite different and the need for a rehearing would have been avoided.

75 In the foregoing circumstances the primary judge, in the exercise of his discretion, determined that the Council should pay the plaintiff’s and Ronali’s costs of the action and those of Ronali and Edremo with respect to the cross-claims. As I understand it, his Honour’s reasoning was that those cross-claims had been kept alive as a consequence of the Council’s application for a full rehearing. If the Arbitrator had determined the issue of liability in favour of the Council and Ronali, as a consequence of Ms Apostolakos’ evidence that was called in conjunction with that of Mr Bell, the action and the cross-claims would have been dismissed and the plaintiff ordered to pay the costs of the Council and Ronali in the action. All the cross-claims would also have been dismissed and the Council ordered to pay Ronali’s costs of the first cross-claim and those of Edremo in the second cross-claim with no order as to the costs of the third and fourth cross-claims. In fact, those were the orders that the Arbitrator made.

76 The matter should have ended there. However, as a consequence of the rehearing, each of Ronali and Edremo were required to incur the costs of defending the position that they had already successfully defended before the Arbitrator.

77 Although the bona fide of Mr McDiarmid is not in question, in my opinion there is no doubt that with due diligence he could have ascertained the identity of Ms Apostolakos prior to the arbitration as in fact he did without apparent difficulty in early 2005. He would have then become aware of the evidence that she would have given if called. Furthermore, even he did not think it was necessary to call Ms Apostolakos in the Council’s case, prudence dictated that he ought to have ascertained with certainty whether she would be called in Ronali’s case.

78 If not, and knowing first that her evidence would corroborate that of Mr Bell and second, that the law required a party to an arbitration such as the present to call all available evidence in support of that party’s case, it follows that in those circumstances it was open to the primary judge to exercise his discretion to order the Council to pay some of the other parties’ costs. This may have been done on the ground that, at least to a degree, the Council had been delinquent in failing to call Ms Apostolakos to give evidence before the Arbitrator.

79 It was a relevant factor to the exercise of the primary judge’s discretion that Mr McDiarmid did not make a deliberate tactical decision not to call all available evidence in the arbitration when he failed to exercise diligence in ascertaining the identity of, and then calling, Ms Apostolakos in the Council’s case. Yet, on the face of his judgment his Honour did not take it into account. As Mason P pointed in Morgan at 597G, it is ultimately a matter of degree as to the circumstances which would justify the exercise of a trial judge’s discretion to make an order which departed from the usual order that costs follow the event.

80 In my opinion, the fundamental flaws in the primary judge’s exercise of his discretion were twofold. First, he went too far in ordering the Council to pay the plaintiff’s, Ronali’s and Edremo’s costs of the action and the cross-claims both in the arbitration and the rehearing. Second, he ordered that those costs be paid on an indemnity basis.

81 As to the first flaw, it is apparent, as the primary judge held, that there would have been a verdict not only for Ronali but also for the Council had Ms Apostolakos’ evidence been called before the Arbitrator. In these circumstances of the arbitration any order for costs would have followed the event. Accordingly, the plaintiff would have been ordered to pay the Council’s and Ronali’s costs of the action and, possibly, an order would have been made that the plaintiff pay the costs of the parties to the cross-claims other than the fourth.

82 On the other hand, it would have been well within his Honour’s discretion to have ordered the Council pay the plaintiff’s, Ronali’s and Edremo’s costs with respect to the action and of the first, second and third cross-claims as and from the date upon which the Council sought a rehearing, namely, 7 November 2004. But because there was no basis upon which the principles adumbrated in Morgan could, in the circumstances of the present case, have justified the primary judge’s order so far as it related to the costs of the arbitration, the exercise of his discretion in ordering that those costs be paid by the Council miscarried.

83 So far as the second flaw is concerned, the Court was informed that before the primary judge only the plaintiff and Edremo sought an order for indemnity costs against the Council. The basis for such an order advanced by the plaintiff was that the Council treated the arbitration “as a futile proceedings, thereby escalated (sic) the costs”, presumably because it sought a rehearing. The basis advanced by Edremo related to some Calderbank offers it had made.

84 His Honour ordered that the costs payable by the Council to the plaintiff but also to Ronali and Edremo should be on an indemnity basis but gave no reasons for coming to this conclusion. In particular he made no reference to the reasons advanced by the plaintiff and Edremo for the making of such an order. On that ground alone, that order cannot stand. It is to be noted that there is nothing in Morgan or any of the other authorities which deal with a Court’s discretion to depart from the principle that costs should normally follow the event where the unsuccessful party in an arbitration has done nothing more than called an otherwise available and essential witness only at a rehearing, where costs have been ordered to be paid by that ultimately successful party on an indemnity basis.

85 In Oshlak, Gaudron and Gummow JJ at 89 [44], when considering the proposition that the sole purpose of a costs order is to compensate one party at the expense of another, observed:

“It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstances of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs but for costs on a ‘solicitor and client’ basis or an indemnity basis. The result is to more fully or adequately compensation the successful party for the disadvantage of what would otherwise have been the position of the unsuccessful party in the absence of such delinquency on its part.”

86 In the same case, McHugh J, who dissented in the result, referred to a passage in the judgment of Devlin J in Anglo Cyprian Trade Agency Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874 to the effect that a plaintiff who has been successful 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. His Honour then observed (at 97–98 [69], omitting citations) that:

“ ‘Misconduct’ in this context means misconduct relating to 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 has already offered in settlement of the dispute.”

87 However, it is clear that his Honour was referring to these examples of “misconduct” as possibly justifying depriving a successful party of his costs or, perhaps, ordering that party to pay the costs of the other parties, but only on a party/party or ordinary basis.

88 This issue was also referred to by this Court in Arian v Nguyen [2001] 33 MVR 37; NSWCA 5 where Ipp AJA, with whom Foster AJA agreed, observed at [38] (omitting citations):

“It is rare for a successful party who is guilty of misconduct in the litigation to be ordered to pay the unsuccessful opponent’s costs where the misconduct does not lengthen the proceedings unnecessarily, cause unnecessary issues to be canvassed or otherwise cause the cost of the litigation to be increased. Indeed, the court’s entitlement to depart from the usual order that costs follow the event has sometimes been said, in effect, to be subject to the qualification that the misconduct in question occasioned unnecessary litigation and expense. In other cases, however, this qualification has not been mentioned. On balance, it seems to me that while delay and increased expense brought about by improper conduct in the course of litigation are highly relevant factors in the discretion to depart from the usual order as to costs, they are not essential to the exercise of that discretion. It would, in any event, be very unusual for misconduct of that kind not to cause unnecessary delay and expense.”

89 It is clear from the foregoing that Ipp AJA accepted that misconduct or improper conduct of the type that he exemplified was a relevant factor in the exercise by a court of its discretion to depart from the usual orders as to costs. It was not suggested that such a departure without more would justify an order that the successful party pay the other parties’ costs on other than the ordinary basis.

90 Finally, in LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74, Young CJ in Eq, with whom Meagher and Hodgson JJA agreed (the latter adding some observations of his own), observed (at [108]) that the trial judge in that case had considered the decision of this Court in Nobrega v Trustees of the Roman Catholic Church of the Archdiocese of Sydney (No 2) [1999] NSWCA 133 where it was held that the test to be applied (in determining whether costs should be paid on an indemnity basis) was that the ordinary rule that costs on a party/party basis should only be departed from where the conduct of the party against whom the order is sought is “plainly unreasonable”. At [119] his Honour concluded that he could see no reason why the Court should not continue to follow Nobrega on the issue of indemnity costs. So should this Court in the present case.

91 The question which should therefore be asked is whether the failure of the Council to call Ms Apostolakos in its case before the Arbitrator was, relevantly, “plainly unreasonable”. In my opinion, Mr McDiarmid’s conduct could not be so characterised. Although he was in error in failing to ascertain the identity of “Kelly” and the nature of the evidence that she could have given if called, matters which he could have easily discovered by the exercise of due diligence, he made a judgment (wrongly as it turned out) that the Council’s case would succeed on Mr Bell’s evidence alone and that, in any event, he expected that Ronali would call her in its case to corroborate Mr Bell’s evidence.

92 That exercise of judgment, although bona fide, was misplaced for two reasons. First, Mr McDiarmid should have been aware of the decision in Morgan to the effect that it was incumbent upon a party to an arbitration to call all available and relevant witnesses whose identity and evidence could be discovered by the exercise of due diligence. Second, to the extent that Mr McDiarmid anticipated that Ronali would call Ms Apostolakos, he took no steps to ascertain from its solicitors whether it would in fact do so. That conduct might be described in all the circumstances as imprudent but it was certainly not “plainly unreasonable” as to justify an order that the Council pay costs on an indemnity basis. In holding to the contrary, the primary judge’s discretion miscarried.

93 For the sake of completeness I should note that the Council challenged the primary judge’s order pursuant to s198G of the Legal Profession Act which exempted the litigation from the provisions of Div 5B and in particular, from the cap on the plaintiff's costs of $10,000 imposed by s189D(1). As the plaintiff ultimately failed in the proceedings and was unsuccessful in her claim for personal injury damages, there was no “amount recovered” within the meaning of s198D(1). Accordingly, the costs cap in that provision had no application in respect of the costs which the plaintiff was otherwise entitled to recover pursuant to the orders which I shall propose but which are not dependant upon the plaintiff having succeeded on her claim: see Boylan Nominees Pty Ltd v Williams Refrigeration Australia Pty Ltd [2006] NSWCA 100 at [70]–[76]. It is therefore unnecessary to determine whether his Honour was justified in making the order he did pursuant to s198G.

What orders should now be made?

94 My finding that the primary judge’s exercise of his discretion miscarried requires that his orders for costs be set aside and that this Court re-exercise that discretion. As I have already observed, had Ms Apostolakos’ evidence been called before the Arbitrator, it was not in contest that the plaintiff would probably have failed before him and there would have been a verdict for the defendants. In these circumstances, there is no reason why costs should not follow the event so that the plaintiff should be ordered to pay the Council’s and Ronali’s costs of the action in the arbitration on the ordinary basis. Neither the Council nor Ronali contended that the plaintiff should pay those costs on any other basis. On the other hand, the Council should be ordered to pay the plaintiff and Ronali’s costs of the action on and from 7 November 2004 but on the ordinary basis. Again, it was not contended that the Council should pay those costs on an indemnity basis.

95 That leaves for determination the costs of the cross-claims. The parties were in agreement and it would follow in any event, that the first, second and third cross-claims should be dismissed. Ronali and Edremo sought an order remitting the fourth cross-claim to the District Court for the further hearing of any outstanding issues arising. In these circumstances there should be no order as to the costs of that cross-claim to date.

96 I have given careful consideration as to whether the Council should be ordered to pay the costs of the other three cross-claims and, if so, whether the plaintiff should be subject to a Bullock or Sanderson order with respect to the costs of those cross-claims incurred on and before 6 November 2004. As the issues raised in those cross-claims substantially overlapped with the issues in the plaintiff’s action, it seems to me that the additional costs incurred by the Council and Ronali in litigating those cross-claims would be minimal. Edremo is in a different situation as it was not joined as a defendant to the plaintiff’s action. Accordingly, I consider that justice would be done by making no order with respect to the Council’s and Ronali’s costs of the first three cross-claims.

97 On the other hand, so far as Edremo’s costs are concerned, there is no reason why in both the arbitration and the rehearing the appropriate order should be that the Council pay Edremo’s costs of the second cross-claim. Although Edremo was joined by Ronali with the Council as a cross-defendant to the third cross-claim, any costs Edremo would have incurred with respect to that cross-claim would be minimal. The bulk, if not all, of its costs in the litigation would have been incurred in defending the second cross-claim brought against it by the Council.

98 However, Edremo submitted that its costs should be assessed on an indemnity basis. It relied on Calderbank offers made to the Council, as it did before the primary judge. The first offer was made on 31 August 2004, the day before the arbitration, in which Edremo offered to pay its own costs if the second cross-claim against it was dismissed. The second offer was made on 16 December 2004 and was in the same terms as the first offer. The third offer was made on 20 April 2005 (being prior to the rehearing which commenced on 3 May 2005) and offered to contribute 10% towards any settlement with the plaintiff “on the best terms up to $95,000 all inclusive”. On 21 April 2005 Ronali offered to contribute 33⅓% on the same terms as Edremo’s offer.

99 The first and second offers did not fairly represent a compromise and can be put to one side. The difficulty with the third offer was that the Council was in no position to accept it unless the plaintiff was prepared to accept a verdict of not more than $95,000 inclusive of costs. There was no evidence that she was prepared to do so except an assertion to that effect in the letter of offer. Furthermore, the offer required the Council to pay the balance of the $95,000 after deducting Edremo’s 10% and Ronali’s 33⅓%. In the circumstances, even if the plaintiff had offered to accept $95,000 inclusive in full settlement of her claim, in my opinion it was not unreasonable for the Council to have rejected her offer which, in turn, required it to reject Edremo’s and Ronali’s offer. Accordingly, the Council should only be required to pay Edremo’s costs on the ordinary basis.

The costs of the appeal

100 Before concluding these reasons, it is necessary to refer to the parties’ representation before this Court. This was an appeal confined to challenging the costs orders of the primary judge where the plaintiff was originally awarded slightly less than $40,000 in damages. The Council and the plaintiff were each represented by both senior and junior counsel. Ronali was separately represented by two junior counsel. Edremo was represented by senior counsel only. In total seven counsel appeared, three senior counsel and four junior counsel. Accordingly, the Court at one point considered whether it should, with respect to the costs of the appeal, limit those costs to one counsel per party. In this respect, it was submitted that generally speaking, in the past this Court had conventionally accepted without question that it was appropriate for any party to an appeal before this Court to be represented by senior and junior counsel.

101 The “convention” so referred to neither exists nor is one the Court would necessarily endorse as a general proposition. So far as orders for costs made by this Court are concerned, each case where appropriate will be considered on its own merits so far as the allowance of two counsel is concerned. However, I would emphasise that this is normally a matter for a court appointed costs assessor to determine except in the very rare case where the Court makes a special order disallowing the costs of two counsel. This is not such a case.

102 In the circumstances of the present case, a limiting order in relation to the costs of the appeal so far as the number of engaged counsel are concerned would, therefore, not be justified. In this respect, senior counsel for each of the Council and the plaintiff did not appear at the trial but their juniors did. Leading junior counsel for Ronali appeared at the trial and his junior was his instructing solicitor at the trial but who has recently been called to the Bar.

Conclusion

109 Accordingly, I would propose the following orders:

(a) Leave to appeal granted upon condition that the claimant file its Notice of Grounds of Appeal within seven days of the date of this order.

(b) Appeal allowed.

(c) Set aside the orders made by his Honour Judge Hughes on 12 October 2005.

(d) The first, second and third cross-claims be dismissed and that the fourth cross-claim be remitted to the District Court for further hearing of any outstanding issues thereunder.

(e) The first opponent to pay the costs of the claimant and the second opponent up to and including 6 November 2004 such costs to be assessed on the ordinary basis.

(f) The claimant to pay the costs of the third opponent with respect to the second cross-claim, such costs to be assessed on the ordinary basis.

(g) The claimant to pay the costs of the first and second opponents of the action as and from 7 November 2004, such costs to be assessed on the ordinary basis.

(h) Each of the claimant and the second and third opponents to pay its own costs of the first and third cross-claims.

(i) Each of the second and third opponent to pay its own costs to date of the fourth cross-claim.

(j) The first, second and third opponents to pay the claimant’s costs of the summons for leave to appeal and the appeal but to have with respect to the latter a certificate under the Suitor’s Fund Act 1951, if otherwise qualified.

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15/11/2006 - This judgment which was originally published on 18 October 2006 contained in error some unauthorised material. it is now republished with that material deleted with consequential amendments to the text. - Paragraph(s) [100]-[108]