Hu v Kim

These proceedings were listed for hearing before me on 27 and 28 March 2019. The claim of the plaintiffs (Mr Hu and Ms Yao) against the defendants was settled on the first morning of the hearing. The settlement did not extend to costs. After hearing the parties, the Court ordered the defendants to pay the plaintiffs’ costs. The Court also heard brief argument on the cross-claim by the second defendant, Mr Morton, against the first defendant, Ms Kim, for indemnity in respect of Mr Morton’s costs. At the conclusion of that argument, further written submissions were ordered in relation to the indemnity dispute.

This judgment provides the reasons for the costs order which I made. The fundamental reason I did so was that, notwithstanding the parties had compromised their differences, costs should follow the event because the defendants were unable to demonstrate that they had acted reasonably in resisting the plaintiffs’ claims.

Insofar as the cross-claim is concerned, the Court has concluded that on its proper construction the indemnity relied upon by Mr Morton does not extend to any liability he may have to pay the plaintiffs’ costs or his own, because such liability did not arise “as a result of” the contract referred to in the indemnity.

Mr M Ashhurst of Senior Counsel appeared with Mr L Corbett of Counsel for the plaintiffs. Mr J R Young of Counsel appeared for Ms Kim. Mr S Briggs, solicitor, appeared for Mr Morton.

These proceedings concern a set of circumstances very similar to those considered by the High Court in Bahr v Nicolay (No 2) [1988] HCA 16; (1988) 164 CLR 604.

Mr Morton owned a property in Greenwich (the “Property”), being Lot B in DP XXX. A copy of the deposited plan is Schedule “A” to these reasons. It had a large house on it. Mr Morton wanted to subdivide the Property into two lots, which would require the partial demolition of the house.

On 12 July 2016 proceedings between Mr Morton and Lane Cove Council were resolved by the NSW Land and Environment Court making orders pursuant to what was referred to as a “Section 34 Agreement” which included:

On 16 July 2016, Mr Morton entered into a contract (the “First Contract”) to sell to the plaintiffs lot 2 in the unregistered plan which was part of Lot B in DPXXX. The plan attached to the First Contract was the proposed plan of subdivision which had been the subject of the orders of the Land and Environment Court.

As might be expected, the First Contract contained special conditions requiring Mr Morton to register the deposited plan to create the subdivision:

Special condition 30 of the First Contract contained these definitions:

There was no dispute that clause 32.(a) of the First Contract had been satisfied by the Land and Environment Court making the orders referred to in paragraph [7] above.

On 12 November 2016, Mr Morton entered into a contract (the “Second Contract”) to sell the entire Property to the first defendant (“Ms Kim”) which expressly contemplated that Ms Kim would, in effect, take over Mr Morton’s obligations to the plaintiffs under the First Contract. This was done by these special conditions in the Second Contract:

The “Contract” annexed as “Annexure A” referred to in special conditions 32 and 34 was the First Contract.

On 30 January 2017, Ms Kim’s solicitors forwarded a deed of novation to the plaintiffs’ solicitors. The plaintiffs signed the deed of novation on 13 February 2017.

On 17 February 2017, the plaintiffs’ solicitors inquired of Ms Kim’s solicitors when the sale of the Property to Ms Kim would settle and when the deed of novation could be exchanged.

Mr Morton’s sale of the Property to Ms Kim pursuant to the Second Contract settled on 24 February 2017.

Further inquiries were made of Ms Kim’s solicitors by the plaintiffs’ solicitors on 7 March and 14 March 2017, with the response being given on 15 March 2017 that the deed of novation had been sent to Mr Morton’s solicitors that day. A further inquiry was made by the plaintiffs’ solicitors on 20 April 2017.

On 27 April 2017, the plaintiffs’ solicitors requested access to the Property for the purposes of a valuation. Ms Kim’s solicitors replied that they did not know if they continued to hold instructions from their client.

On 24 May 2017, the plaintiffs’ solicitors made a further inquiry of Ms Kim’s solicitors, only to receive the response that Ms Kim’s solicitors did not consider that they still held instructions to act on behalf of Ms Kim.

These proceedings were commenced on 17 October 2017.

On 19 October 2018 the proceedings were set down for hearing before me to commence on 27 March 2017.

The plaintiffs have paid the deposit under the First Contract and, on the evidence filed before me, are ready, willing and able to complete that contract. They had signed the deed of novation. In an affidavit sworn on 25 May 2018, Ms Kim said “I deny that I refused to complete the Deed of novation. To the contrary I had it prepared at my own expense and had caused it to be sent to both the plaintiffs and the second defendant neither of whom has executed it or raised any objection to the form of it”. There was no suggestion from Ms Kim that she would not sign the deed of novation. In an affidavit affirmed on 25 September 2018, Mr Morton had said “I was at all material times and remain, ready, willing and able to execute and perform my obligations under the Deed of novation”.

Having noted all the matters set out in the preceding paragraph, at the start of the hearing I raised with the parties that it was not entirely apparent to me what the parties were really at issue about. It appeared that everybody was willing to sign the deed of novation but that matters had fallen into an inexplicable stalemate where everybody was expecting somebody else to make the first move.

After an extended morning tea adjournment the parties returned to Court to inform me that they had settled the proceedings as between the plaintiffs and the defendants. Costs were not agreed and, after hearing argument, I ordered the defendants to pay the plaintiffs’ costs of the proceedings. I then heard, but did not determine, Mr Morton’s cross-claim against Ms Kim for indemnity in respect of the costs that Mr Morton had incurred in these proceedings. I ordered further written submissions in relation to the cross-claim.

The consent orders which I made as between the plaintiffs and the defendants were:

It is clear that orders 1, 2 and 3 in the preceding paragraph are a more worked out version of, but nevertheless to the same effect as, the orders sought by the plaintiffs in their Amended Statement of Claim (“ASOC”):

Mr Ashhurst SC submitted that there had been a complete capitulation by Ms Kim. Costs should, therefore, follow the event. Ms Kim’s defence of the proceedings had not been reasonable, so the oft-cited decision of McHugh J in Re The Minister for Immigration and Ethnic Affairs for the Commonwealth of Australia; ex parte Lai Quin [1997] HCA 6; (1997) 186 CLR 622 had no application, notwithstanding that the parties had compromised their differences.

It will be recalled that in that case McHugh J said (at 624-625) (emphasis added):

Mr Young submitted that Ms Kim’s defence of the proceedings had been reasonable because the primary allegation against her was always bound to fail. This was the allegation in ASOC paragraph 12 that “The First and Second Defendants have refused to complete the Novation Agreement”. This allegation, it was said, was traversed in paragraph 7 of Ms Kim’s defence that “The First Defendant denies paragraph 12 of the Amended Statement of Claim and further says that the pleading is inconsistent with the Plaintiffs’ own pleading at paragraph 10 above”. The reference to “paragraph 10 above” was to the allegation in the ASOC that “On 30 January 2017, the First Defendant sent the Plaintiff a draft deed of novation”.

Mr Young’s essential submission was that the case alleged against his client in paragraph 12 of the ASOC could never succeed because Ms Kim had never refused to execute the deed of novation. The submission was (T17:35-45):

Mr Young submitted that what Ms Kim had now done was to enter into a sensible, commercial resolution of the proceedings and that, given her reasonable defence of them, there should be no order as to costs.

In reply, Mr Ashhurst SC submitted:

The Court accepts Mr Ashhurst SC’s submissions.

It should have been clear beyond doubt to Ms Kim that, irrespective of whether or not the deed of novation had been completed, she had the obligation under clause 32.2 of the Second Contract to take the requisite steps, including registration of the deposited plan, to enable the First Contract to be completed. Nothing put on her behalf by Mr Young gave any satisfactory, or any, explanation of why she had resisted the relief sought in ASOC paragraph 3.

Nor is the Court satisfied that Ms Kim is assisted by her denial of the allegation that she had refused to execute the deed of novation. That denial may be correct as far as it goes. However, Ms Kim was meeting a claim for an order that she carry into effect her agreement to novate the First Contract. If, as it was now put, she had always been willing to execute the deed of novation, then that position should have been made clear at the pleading stage for at least two reasons.

First, as a matter of pleading the mere denial is insufficient. On this premise the denial was a negative pregnant, concealing a positive allegation, being her willingness to execute the deed of novation. Second, if the first point is thought to be unnecessarily antique or technical, then Ms Kim’s obligation under s 56 of the Civil Procedure Act 2005 (NSW) to do everything to ensure the just, quick and cheap resolution of the real matters in issue required her to expose her willingness to execute the deed of novation and to have gone ahead and done so.

Stripped of the legal technicalities, nothing put on behalf of Ms Kim explains or excuses the fundamental difficulty with her position as to costs, which was that if she was always ready, willing and able to execute the deed of novation, then she should simply have got on and done so when confronted with a pleading which sought an order to that effect.

Costs are in the discretion of the Court, albeit that the discretion must be exercised judicially. Under UCPR Part 42, r 42.1, “the Court is to order that the costs follow the event unless it appears to the Court that some other order should be made”. Ms Kim has failed to demonstrate that the maintenance of her defence to these proceedings was reasonable at any time up until she consented to the orders which I made. Therefore, the prima facie position as to costs must apply and for these reasons I ordered Ms Kim to pay the plaintiffs’ costs.

The costs argument between the plaintiffs and Mr Morton proceeded on similar lines to that with Ms Kim. Mr Ashhurst SC submitted that costs should follow the event given Mr Morton’s capitulation. Mr Briggs contended that his client’s conduct throughout the proceedings had been reasonable so that there should be no order as to costs.

Mr Ashhurst SC sought to demonstrate why Mr Morton’s defence of the proceedings could not be seen as reasonable.

First, Mr Morton had simply denied the allegation in ASOC paragraph 12 that he had refused to complete the novation agreement. More significantly, Mr Morton’s defence expressly did not plead to the claim in ASOC paragraph 14 that the plaintiffs were “entitled to an order as against the first and second defendants that the novation agreement be specifically performed and carried into execution”. The basis for not pleading to that allegation was recited in the defence as being that it did not raise any allegation of fact against him. Mr Ashhurst’s SC submission was that, in those circumstances, Mr Morton had given absolutely no indication that he was prepared to execute the deed of novation until he had said so in his affidavit of 25 September 2018. If that was the case, then why had he not done so and otherwise entered a submitting appearance?

Next, Mr Ashhurst SC drew attention to a settlement offer made on behalf of Mr Morton by a letter from his solicitors dated 28 February 2018. That letter included:

Mr Ashhurst SC submitted there were a number of difficulties with the approach proposed by Mr Morton. The paragraph numbered 1 was wrong in two important respects. First, it was wrong to suggest that there was no allegation made against Mr Morton. There was, namely that he had refused to complete the novation agreement. While the paragraph then correctly noted that only an order for specific performance of the novation agreement was sought against Mr Morton (a point subsequently overlooked by the plaintiffs’ solicitors – see paragraph [55] below), it was wrong to suggest that Mr Morton had “done all he can do to perform that agreement”. That could not be right because he had not signed the deed of novation, notwithstanding that at all material times he was apparently ready, willing and able to do so.

It also does not assist Mr Morton that his solicitor’s letter does not anywhere actually offer to execute the deed of novation. However, this would have been the outcome if Mr Morton had accepted the draft deed of settlement proposed by the plaintiffs in response to his solicitor’s letter of 28 February 2018, which draft included:

Mr Ashhurst SC explained that the final difficulty in resolving the proceedings between Mr Morton and the plaintiffs was that after the plaintiffs had propounded the draft deed reflecting paragraphs A, B and C in the letter of 28 February 2018 (including the term set out in the preceding paragraph), Mr Morton insisted upon a payment of $6,500 being made to him in respect of costs that he had incurred. That proposal was not acceptable to the plaintiffs.

Mr Briggs made three arguments in support of his submission that there should be no order as to costs.

First, he submitted that by expressly not pleading to the allegation of an entitlement to an order for specific performance of the novation agreement Mr Morton had, in effect, admitted that his client would sign the deed of novation. He submitted that was his (Mr Briggs’) understanding of what “does not plead” means in that context.

Second, contrary to the submission put by Mr Ashhurst SC, it was not open to Mr Morton simply to sign the deed of novation and enter a submitting appearance. This was because ASOC prayer 4 sought “in the alternative, damages in lieu of specific performance”. His client was not prepared to be put in a position where he was open to an order for damages.

Third, whatever else may have been the case, at no time after his solicitor’s letter of 28 February 2018 had anyone asked Mr Morton specifically to sign and return the deed of novation.

Again, the Court accepts Mr Ashhurst SC’s submissions. I will deal with Mr Briggs’ submissions in the order in which I have recorded them above.

As to the argument set out in paragraph [47] above, I do not agree that the express “not pleading” to the allegation of entitlement to specific performance was an indication that his client was prepared to execute the deed of novation. As a matter of pleading (see UCPR Part 14, r 14.26), Mr Morton’s defence was correct not to plead to ASOC paragraph 14, because that paragraph only made an allegation of law rather than an allegation of fact. It did not have to be specifically traversed.

However, Mr Briggs’ submission confuses what was the case with an allegation of law as opposed to an allegation of fact. Not pleading to (failing to traverse) an allegation of fact will mean it is taken to be admitted (UCPR Part 14, r 14.26(1)). On any view, not pleading to the allegation that the plaintiffs were entitled to an order for specific performance of the novation agreement cannot be seen as some kind of indication that they were willing to sign the deed of novation.

Furthermore, insofar as Mr Morton may have sought to rely on his denial of ASOC paragraph 12, that submission suffers from the same defect that I have already discussed in relation to Ms Kim’s defence (see paragraph [36] above).

Turning to the submission in paragraph [48] above, I do not accept that the presence of the alternative allegation for damages was a reason not to execute the deed of novation and, if necessary, otherwise enter a submitting appearance. There are two reasons for this conclusion.

First, ASOC paragraph 17 makes it clear that the alternative claim for damages was only made against Ms Kim: “In the alternative, the Plaintiffs are entitled to damages from the First Defendant for breach of the First Contract for Sale and an order that the deposit be returned”. The prayer for damages in lieu of specific performance was a claim for Lord Cairns’ Act damages (now found in s 68 of the Supreme Court Act, 1970 (NSW)) being damages ordered in addition to or in substitution for the decree for specific performance. The pleader recognised, in my respectful view correctly, that because clause 32.2 of the Second Contract bound Ms Kim to carry out the First Contract whether or not the deed of novation was executed, there was no claim for damages against Mr Morton even if he was not ordered to execute the deed of novation. I should note that this point seems to have been overlooked by the draftsperson of the proposed settlement deed (see paragraph [44] above) which, contrary to ASOC paragraph 17, assumes in proposed clause 2.1 that there was a claim for damages pressed against Mr Morton.

Second, even if contrary to ASOC paragraph 17 an alternative claim for damages was pressed against Mr Morton, the practical reality is overwhelmingly against his submission. It is inconceivable that an indication from his solicitors to the plaintiffs’ solicitors that he was willing to execute the deed of novation provided it was made clear that the alternative claim for damages would not be pressed would have been met with anything other than agreement from the plaintiffs. I make that finding not only as a matter of common sense, but because that is exactly what they were prepared to do as is evidenced by clause 2 of their proposed deed of settlement set out in paragraph [44] above.

Finally, it cannot avail Mr Morton to rely on the submission recorded in paragraph [49] above that he was simply never asked to sign and complete the deed of novation. If, as he deposes in his affidavit of 25 September 2018 he was always ready, willing and able to complete the deed of novation, then he should just have done so.

The legal analysis set out in paragraph [38] above in relation to Ms Kim applies equally to Mr Morton. He has failed to demonstrate that the maintenance of his defence to these proceedings was reasonable at any time up until he consented to the orders which I made. Therefore, the prima facie position as to costs must apply and for these reasons I also ordered Mr Morton to pay the plaintiffs’ costs.

Mr Morton sues Ms Kim for indemnity pursuant to clause 32.3 of the Second Contract. It will be recalled that clause 32.3 provides that “[Ms Kim] shall indemnify and shall keep indemnified [Mr Morton] against any and all claims, actions, proceedings or demands that arise or may arise as a result of the Contract referred to in this Special Condition 32.”

The essential pleading is the allegation in paragraph 4 of Mr Morton’s cross-claim that “these proceedings have arisen as a result of the First Contract of Sale”. Paragraph 5 of Ms Kim’s defence responds “[Ms Kim] does not admit paragraph 4 of the Cross-Claim and says that the Amended Statement of Claim filed on 17 November 2017 speaks for itself in relation to the claims of the Plaintiff in the proceedings”.

Mr Morton claims indemnity both in respect of the costs he has been ordered to pay to the plaintiffs and in relation to his own legal costs.

Mr Briggs’ submissions as to why Ms Kim should indemnify Mr Morton can be summarised as follows (omitting reference to authority):

Ms Kim’s submissions can be summarised as follows:

For the following reasons the Court has concluded that the cross-claim fails.

It is helpful to start with four propositions that are clear beyond argument.

First, the contract referred to in clause 32.1, and therefore the “Contract” referred to in clause 32.3, is the First Contract. Despite failing to include Ms Yao as one of the purchasers, the remainder of the clause says “a copy of which is annexed hereto and marked “Annexure A” (the Contract).” The contract which was annexed to the Second Contract was the First Contract.

Second, Mr Morton’s obligation to novate the First Contract is an obligation imposed by the Second Contract. Although not expressed in terms, that obligation is clear by implication or upon the proper construction of clauses 32.1 and 34.2 of the Second Contract.

Third, insofar as Mr Morton is liable to pay the plaintiffs’ costs and to the extent he may have a liability to pay to pay his own costs to his solicitors (which is not a matter I need to decide, and I refrain from doing so, because it is irrelevant to the question of construction), those liabilities either now, or upon demand being made, will fall within the description of “claims, actions, proceedings or demands” for the purpose of clause 32.1. In what follows I shall refer to them as the “Liabilities”.

Fourth, “may arise” clearly includes future liabilities, thereby comprehending a future demand of the kind referred to in the preceding paragraph.

Against that background, I have reached these conclusions, each of which will be considered in turn:

These conclusions are based upon an application of the principles in relation to the construction of indemnities, conveniently summarised by Applegath J in Samways v Workcover Queensland [2010] QSC 127 (“Samways”) in a passage which I gratefully adopt (citations omitted):

The indemnity in this case protects Mr Morton from claims which arise “as a result of the Contract referred to in this Special Condition 32.” The contract referred to in Special Condition 32 is the First Contract. Therefore the indemnity provided is in relation to any claim arising “as a result of” the First Contract.

The relief claimed against Mr Morton in these proceedings is for an order that he specifically perform his obligation under the Second Contract to novate the First Contract. The allegation was that he was in breach of his obligation under the Second Contract. As a matter of the ordinary meaning of the words “as a result of” I do not consider that the Liabilities arise “as a result of” the First Contract.

The phrase “as a result” connotes more than a remote causal link. The online Oxford English Dictionary defines “result” as “to arise as a consequence, effect or outcome of some action, process or design.” Similarly, the online Macquarie Dictionary defines “result” as “to spring, arise or proceed as a consequence of actions, circumstances, premises etc.” These definitions suggest a clear nexus is required between the liability which may arise, and the First Contract.

Furthermore, as Ipp JA, with whom McColl JA agreed, said in F & D Normoyle Pty Ltd v Transfield Pty Ltd [2005] NSWCA 193; 63 NSWLR 502:

In this case the relationship between Mr Morton’s obligation under the Second Contract and the First Contract is no more than the anterior existence of the First Contract. In other words, the obligation in the Second Contract to novate the First Contract would not have been contracted if the First Contract did not exist. So understood, any liability which Mr Morton may have arising from his failure to novate the First Contract does not arise “as a result of” the First Contract because there is not a sufficiently causal or consequential relationship and, further and alternatively, it is too remote.

This conclusion is fortified by considering the commercial purpose of the indemnity as part of the Second Contract. In this regard, I accept Ms Kim’s submission recorded in paragraph [63(3)] above.

If there were ambiguity, then the principle of construction referred to in paragraph [66] of Samways and relied on by Ms Kim (see paragraph 63[2] above – and which, in any event, does not depend upon ambiguity being found) a fortiori requires “as a result of” to be construed in favour of Ms Kim, i.e. narrowly. This yields the same construction as I have already reached in paragraphs [72] to [77] above.

Mr Morton’s cross-claim will be dismissed. Prima facie costs should follow the event. I will give the parties an opportunity to bring in short minutes or make any costs application they may be advised if agreement on costs cannot be reached. Annexure A Hu v Kim_2019_04_23_10_36_34_650 (47.4 KB, pdf) Annexure A Hu v Kim_2019_04_23_10_36_34_650 (47.4 KB, pdf)