Via Sanantonio v Walker Corporation [2009] NSWSC 679

New South Wales Supreme Court

CITATION : Via Sanantonio v Walker Corporation [2009] NSWSC 679

HEARING DATE(S) : 19 June 2009 JURISDICTION : Equity Division Commercial List

JUDGMENT OF : McDougall J at 1

EX TEMPORE JUDGMENT DATE : 19 June 2009

DECISION : See paragraph [34] of the judgment.

CATCHWORDS : PRACTICE - challenge to referees' report - no question of principle. - COSTS - meaning of 'proper and reasonable costs' - whether costs incurred were 'proper and reasonable'.

LEGISLATION CITED : Uniform Civil Procedure Rules

CATEGORY : Procedural and other rulings

Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784 CASES CITED : Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 902 Thiess Watkins White Construction Limited v Commonwealth of Australia (1998) 14 BCLR 61

Via Sanantonio Pty Limited (Plaintiff) PARTIES : Walker Corporation Pty Limited (First Defendant) Langley Alexander Walker (Second Defendant)

FILE NUMBER(S) : SC 50192/06

COUNSEL : J A Arnott (Plaintiff) J M Ireland QC / F P Hicks

SOLICITORS : Morgan Lewis Attorneys (Plaintiff) Colin Biggers & Paisley (Defendant)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

McDOUGALL J

19 June 2009 (ex tempore – revised 6 July 2009)

50192/06 VIA SANANTONIO PTY LIMITED v WALKER CORPORATION PTY LIMITED & ANOR JUDGMENT 1 HIS HONOUR: There are before the Court competing notices of motion relating to a report provided to the Court by two referees on 27 April 2009. Pursuant to UCPR rule 20.24, the defendant seeks adoption of the report and judgment and consequential orders following from adoption. The plaintiff seeks the rejection in whole, alternative in part of the report; that the matter be sent back to the referees for certain purposes; and consequential relief. 2 The necessity for the report arose out of the compromise of these proceedings (at the level of principle) effected pursuant to short minutes of order dated 4 February 2008. By clause 4 of those short minutes of order, the plaintiff agreed to pay 50 per cent of certain costs incurred or to be incurred by the defendant in the manner set out in paragraph 4. By paragraph 5, if the parties could not agree as to the amount payable, an inquiry was to be held before an Associate Judge. By paragraph 6, the plaintiff was to pay the amount found due pursuant to that inquiry. The mechanism of reference out was substituted for inquiry. I set out paragraphs 4, 5, and 6 of the short minutes of order:

4. The plaintiff pay to the first defendant 50% of the proper and reasonable costs incurred, or to be incurred by the first defendant, in respect of the said Option Deeds, including 50% of the proper and reasonable costs of seeking or obtaining any development approvals and re-zoning with respect to the Lots. 5. In default of agreement between the parties within 28 days as to the quantum of costs referred to in order 4, an inquiry be held before an Associate Judge to ascertain the quantum of all proper and reasonable costs incurred, or to be incurred, by the first defendant in respect of the said Option Deeds, and seeking or obtaining any development approvals and re-zoning with respect to the Lots. 6. The plaintiff pay to the first defendant such amount as may be found to be due upon the inquiry referred to in order 5. 3 The first dispute is as to what the parties called, and it is convenient for me to call, the first development. That is to some extent a misnomer. However, it is clear, the first defendant submitted a development application in respect of the subject land, on about 29 September 2006, and a very substantially revised application, in respect of the same land, on 12 July 2007. The extent of the revision can be gauged from the following matters:

(1) the number of lots to be created was reduced by over a thousand;

(2) some 300 medium density residential dwellings proposed under the first application were dropped entirely in the revised application; and

(3) likewise, some 300 marina berths proposed by the first application were dropped in the revised application; and

(4) the amount of the overall area devoted to conservation reserves and "green networks" was very substantially increased in the revised application compared to the first application. 4 The plaintiff wished to submit, before the referees, that the first application was doomed to fail, and that the first defendant must have known this. Thus, the plaintiff wished to submit to the referees, the costs incurred in respect of that first application could not be said to be proper and reasonable costs of seeking or obtaining development approval in terms of the first application. 5 It appears that this proposition may have been advanced for the first time in the plaintiff's written outline of submissions provided to the referees shortly before the commencement of the hearing under the reference. In any event, the referees did not deal with the submission in terms. There is some dispute as to precisely how and why this happened. The transcript does not make it clear, and the transcript of the relevant directions hearing is unavailable (I do not think that one was taken). 6 I propose to side-step that dispute, which seems to me to be somewhat sterile, because the referees did in their report advance a view as to the meaning to be attributed to the expression "reasonable costs reasonably incurred". In particular, at paragraph 36 of the report, they said that a cost was proper if it was "not illicit, illegal or improper". In the same paragraph, they said that a cost was "reasonable" if it encompassed "work which was necessary in order to achieve the contractual objective, in this case, the obtaining of development approvals and re-zoning with respect to the lots and the carrying of the option pursuant to the Option Deeds, provided such costs are not out of all proportion to the achievement of that contractual objective". 7 In my view, this approach does not give full content to paragraph 4 of short minutes of order. What is required to be reimbursed is 50 per cent of proper and reasonable costs incurred or to be incurred for the stated purposes. Those stated purposes include "seeking or obtaining any development approvals and rezoning with respect to the lots". A determination of what is proper and reasonable necessarily encompasses the matters to which the referees refer. However, in my view, it goes further. 8 For the purposes of clause 4, the expression "proper and reasonable costs" focuses attention on two matters. The first is whether, in amount, the costs are themselves proper or reasonable. The second is whether they were properly and reasonably incurred for a purpose within clause 4. A particular item of cost (for example, an amount charged by a planning consultant) may be perfectly reasonable in amount. But it would not be properly and reasonably incurred for the stated purpose if the services to which the cost referred were provided for some unrelated purpose. That, of course, is an extreme example and no-one suggested that the referees fell into such obvious error. 9 In this case, for better or worse, there was a live issue as to whether the first application was so manifestly hopeless that it was not appropriate for the first defendant to proceed about it, or not proper to charge the plaintiff with one half of the costs incurred thereby. That issue was raised - I accept, for the purposes of argument, late in the proceedings. It was not, however, dealt with by the referees. It was side-stepped by a process that in effect they would define the quantum of costs related to the first development application and then leave it to the Court to determine whether or not, having regard to what the plaintiff wishes to say about the allegedly hopeless nature of that application, they fall within paragraph 4 of the short minutes of order. 10 I do not think that that was an appropriate way to proceed, and thus I do not think that the referees, in this respect, carried out the task referred to them, in lieu of an Associate Judge, on the terms of paragraph 5. Performance of that task required not merely scrutinising the quantum of the costs but also the purpose for which they were incurred. The latter limb of the task required in turn that the purpose itself be scrutinised to see whether it was a reasonable purpose, or subject for the expenditure of costs, in terms of paragraph 4. 11 It follows in my view, that the aspect under consideration must go back to the referees so that they can answer this aspect of the reference. In this context, I note that the referees suggested at paragraph 8 of the report that they would identify costs relating to the first application. They did not do so: at least explicitly. 12 The next matter in dispute is whether what might be called in-house costs incurred by the first defendant are capable of falling within paragraph 4. The referees held that they were. Their reasons on this commenced at paragraph 31 of the report. At paragraph 33, they say that the object and purpose of the commercial transaction (ie the agreement recorded in the short minutes of order) was in substance to ensure that the first defendant was not out of pocket except as to 50 per cent of the costs. At paragraph 34, they said that, approaching the matter in this way, paragraph 4 was capable of encompassing a reasonable cost for time spent by the first defendant's employees. 13 Mr Arnott of counsel, for the plaintiff, submitted that employees' costs were not "incurred" for the purposes of paragraph 4 because they were costs for which the first defendant would be liable in any event, regardless of the particular activities referred to in paragraph 4. 14 For the defendants, Mr Ireland QC (who appeared with Mr Hicks of counsel) submitted that the costs could properly be regarded as having been incurred for the purposes of paragraph 4. He referred to the decision of Giles J in Thiess Watkins White Construction Limited v Commonwealth of Australia (1998) 14 BCLR 61, in particular at 77. His Honour there pointed out that off-site overheads could be regarded as costs incurred by a contractor, and the question may be whether they might be incurred for the purposes of a particular contract. His Honour said that, because they were in a sense incurred in relation to all contracts on hand from time to time, they were to that extent in part incurred for the performance of each given contract. 15 Mr Arnott submitted that his Honour's observations could be put to one side because they referred to variable costs, not to fixed costs. I am not sure that that is a valid ground for distinction. 16 In any event, of course, the matter has to be resolved by reference to the wording of the parties' bargain, as it is found in paragraph 4 of the short minutes of order. That refers to proper and reasonable costs incurred or to be incurred "in respect of" the option deeds. A subset of those costs (ie a subset of costs incurred "in respect of" the option deeds) is the costs of seeking or obtaining development approvals and the like. 17 I do not think that one can say in some a priori fashion, capable of application to all manner of bargains, that fixed costs are or are not "incurred" in respect of a particular project. In an accounting sense, of course, it may well be appropriate to cost a project not just by reference to variable costs but also by reference to an appropriate proportion of fixed, or office overhead, costs. For other purposes (depending upon on the contract in question), it may not. 18 There is no doubt that an employer incurs the costs of employing employees, and that it continues to incur those costs for so long as the employees remain in employment. The question in this case is whether those costs can be said to be incurred "in respect of" particular transactions upon which those employees are engaged from time to time. In my view, quite clearly, the answer to that question is "yes". It is, I think, wholly artificial to say that, simply because an employee's duties are to be attributed to numerous projects, the costs incurred by the employer in respect of that employee are not incurred in respect of any project individually. 19 It follows, in my view, that the referees did not err in holding that the costs of relevant employees could, as a matter of principle, fall within paragraph 4 of the short minutes of order. 20 That leaves some challenges to the referees' approach to quantification of those costs. One of those challenges related to the way in which the referees calculated the superannuation guarantee charge component. It is common ground that, having regard to the rates at which at least some of those employees were remunerated, the referees allowed too much under this heading. I do not propose myself to attempt to adjust the arithmetic, and will leave it to the parties to do so. 21 The other challenges relate to whether there was evidence from which the referees could be satisfied as to the hourly rates of the employees in question, and as to the way in which the referees calculated that hourly rate (by that I mean to state, the number of hours worked per week on which they based their calculation). 22 The relevant formula is set out at paragraph 90 of the report. I set out: Annual Salary Plus superannuation guarantee at 9% Actual salary Divided by 52 weeks and 36 hours per week Plus pay roll tax Plus worker's compensation insurance Actual hourly rate 23 At this stage, unfortunately, it is necessary to refer to the principles applicable to the adoption of reports. I set out my understanding of those principles in Seven Sydney Pty Ltd v Fuji Xerox Australia Pty Ltd [2004] NSWSC 902 and, in a slightly revised form, in my judgment in Chocolate Factory Apartments Pty Ltd v Westpoint Finance Pty Ltd [2005] NSWSC 784. 24 I will not burden the reader of these reasons by setting out what I said in those cases, but will note simply that my attempts to distill the principles have received some measure of appellant approval. 25 This is not an appeal from the referees' determination. The essential question is whether the Court can be satisfied that they took a rational and considered approach to the task before them, bearing in mind, of course, that they were not bound by the rules of evidence and could inform themselves as they saw fit. 26 It is also necessary to bear in mind that the way that this issue was approached before the referees was something of a moveable feast. The evidence was scattered throughout the transcript, and the parties appeared to have attempted, at least to some extent, to cooperate in adducing it. 27 It is plain that the referees appreciated that the evidence was less than perfect: see for example paragraph 91 of the report where they referred to "the absence of some finer details of [the] remuneration package of" a particular employee. Nonetheless, they did their best, as they were obliged to do. 28 If this were an appeal, many of the criticisms made might be significant. It is not. As to the first subject matter of challenge - that there was no evidence of the annual salary - I am satisfied that the referees did take a rational and considered approach, and that there was enough material before them to enable them to carry out the calculation that they outlined. 29 The other challenge (leaving aside superannuation) relates to the number of hours worked. The question was whether the notional working week or the actual working week should be allowed. In circumstances where, clearly enough, the number of actual hours used varied, I think it was open to the referees to select the measure that they did: notional working hours. Again, I repeat, this is not an appeal. 30 It follows, in my view, that the contested challenges to the issue of internal costs should not succeed. The uncontested issue can be left to the parties to resolve. 31 The remaining question does not arise at this stage because, as I have said, I propose to send the matter back to the referees on the first issue. However, since there appears to be little disagreement, I will mention it now in the hope of saving time and trouble later. 32 It is clear that the plaintiff will be liable to reimburse the first defendant for some amount; the precise amount may require some recalculation. There is a question of GST on external costs. The first defendant paid GST, but got the appropriate input credit from the Australian Taxation Office. In circumstances where there is no loss, it does not seem to me to be appropriate that the plaintiffs should have to reimburse the first defendant for GST in respect of which an input credit has been allowed. I do not understand that position to be in dispute. I hope that, when the question of quantum is finally resolved, the parties will be able to agree on the application of what I have just said. 33 It is appropriate that the parties bring in short minutes of order to give effect to what I have said: that is to say, sending the matter back to the referees. 34 I direct the parties to provide short minutes of order to give effect to these reasons. I reserve the costs of today.

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