Indemnity costs – is your contract clear cut?

November, 2012

Executive Summary

The Victorian Court of Appeal has considered and summarised previous decisions in relation to contractual provisions that may lead to an award of costs on an indemnity basis.

In Chen & Anor v Kevin McNamara & Son Pty Ltd & Anor [2012] VSCA 229, His Honour Redlich JA (who wrote the unanimous judgment with which Maxwell P and Robson AJA agreed) declined to award costs on an indemnity basis, despite the presence of a contractual provision that purported to permit the recovery of ‘any costs and fees… (incurred) in enforcing or …securing its rights’. The clause in question was taken from a standard form building contract.

While the Court followed a line of authority to the effect that judicial discretion will be retained in relation to costs orders, it confirmed that Courts will usually give effect to any express terms agreed by the parties.

Accordingly, industry participants should seek advice on contractual terms and conditions – particularly indemnities, enforcement provisions and any other clauses regulating the recovery of costs. What appear to be relatively minor differences on their face may cause radically different outcomes.

Background

Kevin McNamara & Son Pty Ltd (‘Builder’) entered into a contract (‘Contract’) to construct a residential property with Chen and Xu (‘Owners’). The Owners sought declarations voiding an arbitration initiated by the Builder in the Supreme Court of Victoria and subsequently the Victorian Court of Appeal. When the Owners’ appeal was dismissed, the Builder sought to rely on the below provision of the Contract to recover his costs of the Owners’ appeal on an indemnity basis:

“The Owner shall pay to the Contractor:

Any costs and fees incurred by the Contractor in enforcing or further securing its rights under this Agreement.”

Judgement

Redlich JA confirmed previous judgments to the effect that the Courts will generally respect the rights of parties to regulate their respective rights and obligations regarding the recovery of costs, stating that:

“Generally…  where the parties have unmistakeably agreed to the making of a special costs order, such a term will be given effect to unless there is some other discretionary consideration that militates against the making of such an order.”

However, any clause relied on to seek costs on an indemnity basis must be unequivocal:

“An agreement to pay costs will be construed as an agreement to pay costs on a party and party basis, unless it is plain from its terms that costs are to be paid on a ‘special’ basis.”

A number of examples, taken from the judgments of courts across multiple jurisdictions, were used to illustrate the different provisions that are not unambiguous enough to enable an award of costs on an indemnity basis, including:

•   a guarantee indemnifying a lender against all costs it incurred in exercising, or attempting to exercise, any power or right in relation to the recovery of money subject of the guarantee (no specific reference to legal costs);

•   an agreement that a party ‘indemnify’ another ‘against all or any loss, damages, claims, costs and expenses’ (obligation to indemnify did not provide for the basis on which the costs would be taxed); and

•   a provision in a lease that provided that the tenant should pay ‘costs, charges and expenses’ (no sufficient reason to order anything by party and party costs).

Conclusion

While Courts retain an absolute discretion in regards to costs awards, where express provisions exist in agreements regarding the award of costs on ‘special’ basis, a greater exposure or recovery – depending on your perspective – will likely result.

Where parties are specifically seeking to either regulate an ability to recover costs on an indemnity basis or to alternatively minimise their potential costs exposure, they should seek legal advice. The risk extends to numerous clauses across various types of contract, as illustrated above.

Contact Mills Oakley

For more information, please contact:

 

rechelle-brost-mills-oakley
Rechelle Brost | Partner
T: +61 7 3228 0421
E: rbrost@millsoakley.com.au
greg-richards-mills-oakley

Greg Richards | Partner
T: +61 7 3228 0443
E: grichards@millsoakley.com.au

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