Downer EDI Rail Pty Ltd v John Holland Pty Ltd; John Holland Pty Ltd v QBE Insurance (Australia) Ltd (No 6); Kellogg Brown & Root Pty Ltd v John Holland Pty Ltd (No 5); John Holland Pty Limited v Kellogg Brown & Root Pty Ltd; Kellogg Brown & Root Pty Ltd v QBE Insurance (Australia) Ltd [2018] NSWSC 581 (2 May 2018)

SUPREME COURT

NEW SOUTH WALES

MEDIUM NEUTRAL CITATION: [2018] NSWSC 581

BEFORE: Stevenson J

DATE OF DECISION: 2 May 2018

JURISDICTION: Equity – Technology and Construction List

DECISION: Costs and final orders as set out at [24], [48] and [54]

CATCHWORDS: COSTS — Party/Party — General rule that costs follow the event — where costs follow the event in main proceedings — whether third and fourth defendant should not have costs incurred preparing evidence of witness not called — whether plaintiffs should have their costs of responding to that evidence — where related proceedings referred to arbitration — where arbitration subsequently remitted to court to be heard concurrently with main proceedings — whether plaintiff should pay costs of that arbitration

PARTIES:

• In proceedings 2015/120806:
  Downer EDI Rail Pty Ltd (First Plaintiff)
  EDI Rail PPP Maintenance Pty Ltd (Second Plaintiff)
  John Holland Pty Ltd (First Defendant/Cross-Claimant)
  Kellogg Brown & Root Pty Ltd (Second Defendant)
  Atlantis Corporation Pty Ltd (Third Defendant)
  QBE Insurance (Australia) Limited (Fourth Defendant/Cross-Defendant)
• In proceedings 2017/69950:
  Kellogg Brown & Root Pty Ltd (Plaintiff)
  John Holland Pty Ltd (Defendant)
• In proceedings 2017/288097:
  John Holland Pty Ltd (Plaintiff)
  Kellogg Brown & Root Pty Ltd (Defendant/Cross-Claimant)
  QBE Insurance Australia Ltd (Cross-Defendant)

FILE NUMBERS: SC 2015/120806; SC 2017/69950; SC 2017/288097

LEGISLATION: 

• Civil Procedure Act 2005 (NSW)
• Civil Procedure Regulation 2017 (NSW)
  
• Commercial Arbitration Act 2010 (NSW)

CASES CITED:

• Downer EDI Rail Pty Ltd v John Holland Pty Ltd; John Holland Pty Ltd v QBE Insurance (Australia) Ltd (No 5); Kellogg
• Brown & Root Pty Ltd v John Holland Pty Ltd (No 4) [2018] NSWSC 326
• Downer EDI Rail Pty Ltd v John Holland Pty Ltd; Kellogg Brown & Root Pty Ltd v John Holland Pty Ltd[2017] NSWSC 529
• John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd[2015] NSWSC 451
• Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
• Management Services Australia Pty Ltd v PM Works Pty Ltd (No 2) [2018] NSWSC 336
• Siemens Ltd v Vaughan Constructions Pty Ltd [2006] VSC 452

JUDGMENT

1. I delivered judgment in this matter on 20 March 2018: Downer EDI Rail Pty Ltd v John Holland Pty Ltd; John Holland Pty Ltd v QBE Insurance (Australia) Ltd (No 5); Kellogg Brown & Root Pty Ltd v John Holland Pty Ltd (No 4)[2018] NSWSC 326.
2. These reasons concern the final orders to be made, including as to costs.
3. I shall use the same abbreviations as in the principal judgment.
4. There were three proceedings before me.
5. I shall deal with each in turn.

Proceedings 2015/120806 – “the Main Proceedings”

6. As a result of my findings of 20 March 2018, these proceedings must be dismissed.
7. Subject to the costs incurred by KBR and Downer arising from the preparation and service by KBR of the affidavits of Mr Gaffney, and the costs incurred by QBE and Downer arising the preparation and service of an affidavit of Mr Humberto Urriola, Downer does not dispute that the proceedings must be dismissed with costs (including the costs of the cross-claims), that there should be interest on costs and that Downer pay the hearing fees in respect of the proceedings.
8. However Downer submits, and I accept, that it should not have to pay the costs incurred by KBR in relation to the preparation and service of Mr Gaffney’s affidavits, nor the costs incurred by QBE in relation to the preparation and service of the affidavit of Mr Urriola; and that Downer should have its costs of responding to those affidavits, and an order that such costs be set off against the costs Downer must otherwise pay.
9. KBR served affidavits sworn by Mr Gaffney on 23 March 2017, 5 October 2017 and 20 October 2017. Those affidavits (especially that of 23 March 2017) were substantial and contained extensive exhibits. That is not surprising. Mr Gaffney was the Senior Civil Engineer at KBR and the principal author of the design of the Detention System (the shortcomings of which I dealt with in the principal judgment).
10. On day nine of the hearing, KBR’s senior counsel informed me and the parties that Mr Gaffney would not be called as a witness. The proposed witness program prepared at the commencement of the hearing anticipated that Mr Gaffney’s cross-examination would take two to three days.
11. KBR’s decision not to call Mr Gaffney may well have been reasonable from KBR’s point of view. It had, and has, no obligation to explain its decision. It may be that a judgment was made that the risk of calling Mr Gaffney outweighed the potential dangers of a Jones v Dunkel(1959) 101 CLR 298; [1959] HCA 8 inference being drawn. I do not know.
12. The decision not to call Mr Gaffney was certainly a forensic decision open to KBR. I see no basis to criticise the timing of the revelation that Mr Gaffney would not be called. KBR had not, expressly or impliedly (by service of the affidavits) undertaken to call Mr Gaffney.
13. However, the fact is that KBR has incurred significant costs, in the preparation of Mr Gaffney’s evidence that, ultimately, it chose not to deploy in its defence of Downer’s claim. Conversely, Downer has incurred costs in responding to evidence that, ultimately was not called.
14. Recently, McDougall J said in Management Services Australia Pty Ltd v PM Works Pty Ltd (No 2)[2018] NSWSC 336 that “in the ordinary way it would be unwise to penalise a party for making such decisions by depriving it of the costs of preparing evidence that, ultimately, was not put before the court” at [34].
15. So much may be accepted. But every case must turn on its own facts.
16. In this case a central question was the adequacy of the design of the Detention System. Mr Gaffney was the author of that design.
17. KBR served extensive evidence from Mr Gaffney. Downer had to respond to that evidence, whether or not KBR decided to call Mr Gaffney.
18. KBR has been successful in the proceedings. But not because of the merit of Mr Gaffney’s design.
19. In those circumstances my opinion is that the justice of the case requires that a special costs order be made.
20. The same must apply in relation to Mr Urriola’s affidavit. It was also lengthy and contained numerous attachments. Mr Urriola was to be the principal lay witness for QBE. He was the Managing Director of Atlantis, the supplier of the cells used in the Detention System. His evidence was the subject of extensive responsive reports.
21. On day seven of the hearing, senior counsel for QBE stated that Mr Urriola would not be called (although that potential had been foreshadowed earlier).
22. Whilst I found that the QBE policy did not respond to the relevant claims, I also found that Atlantis misrepresented the strength of the cells (at [555]).
23. For those reasons, I accept Downer’s submissions that a special costs order should also be made in relation to Mr Urriola’s affidavit.
24. For those reasons, in the Main Proceedings (2015/120806), I make these orders:
    • (1) The proceedings are dismissed.
    • (2) Subject to orders 3 and 4, the plaintiffs pay the defendants’ costs of proceedings 2015/120806 on the ordinary basis including the costs incurred by the defendants in the cross-claims made by the defendants against each other.
    • (3) The plaintiffs pay interest on those costs pursuant to s 101(5) of the Civil Procedure Act 2005(NSW) on and from the date of payment of the relevant costs until the date that the plaintiffs pay all costs due under these orders.
    • (4) Pursuant to reg 10(2) of the Civil Procedure Regulation 2017 (NSW) the plaintiffs are to pay the entirety of the hearing fees in the proceedings.
    • (5) The costs so payable not include any costs referable to the preparation of the affidavits of Adam Gaffney sworn 23 March 2017, 5 October 2017 and 20 October 2017 (the “Gaffney Affidavits”).
    • (6) The costs so payable not include any costs referable to the preparation of the affidavit of Humberto Urriola sworn 31 March 2017 (the “Urriola Affidavit”).
    • (7) KBR to pay the plaintiffs’ costs of considering and preparing replies to the Gaffney Affidavits and of preparing cross-examination on them.
    • (8) QBE to pay the plaintiffs’ costs of considering and preparing replies to the Urriolla Affidavit and of preparing cross-examination on it.
    • (9) Costs referred to in orders 2 to 8 above be set off between the relevant parties.

Proceedings 2017/288097 – “the John Holland Pass Through Proceedings”

25. In August 2014, some eight months before Downer commenced the Main Proceedings, John Holland commenced proceedings 2014/253176 against KBR and Atlantis. I will call these the “Anticipatory Proceedings”. Those proceedings are not before me.
26. John Holland submitted, and Downer did not dispute, that at the time John Holland commenced the Anticipatory Proceedings it was on notice that Downer would bring a claim against it to the effect of that made in the Main Proceedings and that it commenced the Anticipatory Proceedings in anticipation of that claim and to avoid limitation issues.
27. The claim made by John Holland against KBR and Atlantis in the Anticipatory Proceedings is essentially the same as the claim it made against those parties in its cross-claims in the Main Proceedings.
28. There is an arbitration clause in the John Holland/KBR Contract.
29. For that reason, KBR sought an order under s 8(1) of the Commercial Arbitration Act 2010 (NSW) that the Anticipatory Proceedings be referred to arbitration.
30. That application was heard by Hammerschlag J who, on 22 April 2015 referred the Anticipatory Proceedings to arbitration and stayed John Holland’s claim against Atlantis: John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd[2015] NSWSC 451.
31. John Holland and KBR appointed Gyles QC as arbitrator on 15 September 2015. The arbitration proceeded.
32. In September 2017, shortly before the commencement of the hearing before me, John Holland and KBR entered an agreement, the effect of which was that the arbitration proceedings before Gyles QC be transferred to the Court to be heard concurrently with, and in effect abide the outcome of, the Main Proceedings.
33. Accordingly, on 27 September 2017 John Holland commenced these proceedings, which KBR has characterised as “the John Holland Pass Through Proceedings,” seeking orders to that effect.
34. The result was that the issues formerly to be arbitrated before Gyles QC have been determined by me in the course of the Main Proceedings.
35. In those circumstances both John Holland and KBR seek an order that Downer pay the costs that they incurred in the arbitration together with the costs of the John Holland Pass Through Proceedings themselves.
36. John Holland and Downer rely on s 98 of the Civil Procedure Act which provides that costs are at the discretion of the court and that “costs” includes “in the case of proceedings transferred or removed into the court, the costs of the proceedings before they were transferred or removed” (s 98(6)(c)).
37. There is a debate between the parties as to whether the arbitration before Gyles QC can be characterised as “proceedings” for the purposes of s 98(6)(c).
38. In my opinion, the better view is that the word “proceedings” is apt to capture an arbitration which was in respect of a dispute originally before the court, but referred to arbitration under s 8 of the Commercial Arbitration Act.
39. The word “proceedings” is not defined in the Civil Procedure Act,although that Act does deal with “arbitration of proceedings” (in ss 35 to 55) and refers, in s 54(3) to the court’s power to “make orders under section 98 with respect to the costs of referred proceedings”.
40. In Siemens Ltd v Vaughan Constructions Pty Ltd [2006] VSC 452, Kaye J considered the meaning of “proceedings” and concluded at [23] that:

“…whatever process is adopted, that process [to be a ‘proceeding’] must involve the determination or adjudication of a dispute by an independent person or persons adhering to the fundamental tenets of procedural fairness. In other words, there must be a process the purpose of which is that some person or persons, independent to the parties to the dispute, decides that dispute by an impartial consideration of the competing merits of both sides of the dispute.”

41. That reasoning appears to me to be consistent with a conclusion that, for the purpose of the Civil Procedure Act the word “proceedings” includes an arbitration which has been “transferred or removed into the court” (as was the arbitration before Gyles QC).
42. In any event, the point is moot as I have power to make an order as to the costs of the arbitration under s 33D of the Commercial Arbitration Act. That section provides that the Court may make “such orders in relation to the costs of [an] arbitration as it thinks just” in circumstances where “an arbitration is commenced but for any reason fails”.
43. Section 33D(2)(a) provides that an arbitration “is taken to have failed if…a final award is not made by the arbitral tribunal before the arbitration terminates”.
44. That is the circumstance before me.
45. Downer submits that, as commendable as was the decision finally made by John Holland and KBR (in September 2017) to agree that the dispute referred to arbitration should be heard by the Court concurrently with the Main Proceedings, that decision could well have been made earlier and that it is likely that there has been duplication, within the arbitration, of costs incurred in the Main Proceedings.
46. That may be so. But the fact remains that the issues agitated in the arbitration arose by reason of a claim that John Holland, correctly, anticipated Downer would make.
47. If there has been unnecessary duplication of time and costs, the matter can be dealt with during the assessment process.
48. In those circumstances, in the John Holland Pass Through Proceedings (2017/288097) I make the following orders:
    • (1) The proceedings are dismissed.
    • (2) Downer is to pay the costs of John Holland and KBR of those proceedings, including the cross-claim made in those proceedings and the costs of the arbitration before Gyles QC.
    • (3) The plaintiffs pay interest on those costs pursuant to s 101(5) of the Civil Procedure Act 2005 (NSW) on and from the date of payment of the relevant costs until the date that the plaintiffs pay all costs due under these orders.
    • (4) Pursuant to reg 10(2) of the Civil Procedure Regulation 2017 (NSW) the plaintiffs are to pay the entirety of the hearing fees in the proceedings.

Proceedings 2017/69950 – “the Separate Question Proceedings”

49. KBR commenced proceedings 2017/69950 on 6 March 2017 seeking leave to have certain separate questions arising in the arbitration before Gyles QC determined by the Court as preliminary questions pursuant to s 27J of the Commercial Arbitration Act.
50. By notice of motion filed in the Main Proceedings, John Holland sought an order that those questions be determined separately from and before any other issues in the proceedings.
51. For the reasons I gave on 3 May 2017 (Downer EDI Rail Pty Ltd v John Holland Pty Ltd; Kellogg Brown & Root Pty Ltd v John Holland Pty Ltd[2017] NSWSC 529) I dismissed John Holland’s motion but granted KBR leave to have those questions determined at the final hearing.
52. Because of other conclusions to which I came, the answers to the separate questions became moot. Nonetheless I decided them on the basis which was favourable to Downer’s interests (see [331] to [352]).
53. In those circumstances, my opinion is that there should be no order for the costs of the proceedings.
54. Accordingly, in the Separate Question Proceedings (2017/69950), I order that:
    • (1) The proceedings be dismissed with no order as to costs.

Conclusion

55. I propose now to make orders set out at [24], [48] and [54] above.
56. Against the possibility that I have overlooked any matter, I grant the parties liberty to apply on short notice in relation to the form of those orders.
57. Such liberty should be exercised prior to 12pm on 4 May 2018.