- Unreported Judgment
SUPREME COURT OF QUEENSLAND
IBM Australia Ltd v State of Queensland  QSC 70
IBM AUSTRALIA LTD
ACN 000 024 733
STATE OF QUEENSLAND
No 1729 of 2015
Supreme Court at Brisbane
4 April 2016
17 December 2015
The State of Queensland pay IBM Australia Ltd’s costs of and incidental to this action on the indemnity basis to be assessed if not agreed.
GUARANTEE AND INDEMNITIES – INDEMNITIES – CONSTRUCTION OF CONTRACT – where the applicant and respondent entered into an agreement – where a clause in the agreement provided that, in certain circumstances, the respondent “fully indemnifies” the applicant against “any liability (including the amount of any judgement [sic], settlement sum and legal and other costs) incurred by” the applicant – whether this clause affords the applicant a contractual right to costs assessed on the indemnity basis
Abigroup Ltd v Sandtara Pty Ltd  NSWCA 45, cited
Chen & Anor v Kevin McNamara & Son Pty Ltd & Anor (No 2)  VSCA 229, cited
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640, cited
Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397, referred to
Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2)  Ch 171, cited
IBM Australia Ltd v State of Queensland  QSC 342, referred to
Lee v Australia and New Zealand Banking Group Ltd  QCA 284, cited
Platinum United II Pty Ltd v Secured Mortgage Management Ltd (in liq.)  QCA 229, cited
Willmott v McLeay  QCA 84, applied
Law of Costs, 3rd ed, LexisNexis, 2013
Halsbury’s Laws of England, 5th ed, Vol 49
JC Sheahan QC with S Webster for the applicant
S Eggins for the respondent
Jones Day for the applicant
Minter Ellison for the respondent
- On 7 December 2015 judgment was given in this matter for the applicant (IBM) and it was declared that IBM had been released from the claims that the State had made against it in BS 11683 of 2013. The release was contained in the Supplemental Agreement (the agreement) entered into by both parties. That agreement contained a clause which is at the heart of this application.
- Clause 5.1(d) of the agreement provided:
“If the State makes a claim against an IBM Party which is the subject of the State Covenant or State Release, then the State fully indemnifies each IBM Party against any liability (including the amount of any judgement [sic], settlement sum and legal and other costs) incurred by the IBM Party as a result of that claim.” (emphasis added)
- In this application IBM seeks:
- an order which would give effect to the provisions of that clause, and
- an order for costs in this proceeding and in BS 11683 of 2013.
- The State does not dispute that it should pay the costs in both matters but contends that the costs should be assessed on the standard basis. The issue between the parties is whether cl 5.1(d) affords a contractual right to costs assessed on the indemnity basis. IBM, properly in my view, did not seek to argue that the State’s actions brought it within the category of “hopeless cases” considered by Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd.
- Clause 5.1(d) affords IBM a contractual right to enjoyment of the indemnity in that clause. If the State does not comply with the clause, then IBM can sue. But a contractual right to costs does not override the discretionary power of the court with respect to costs. It was put this way by Stein JA in Abigroup Ltd v Sandtara Pty Ltd :
“ It is, of course, correct that a court is not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs. It does not follow, however, that the discretion takes over from the contract and the exercise of discretion against giving effect to the contract precludes enforcement of the contract as to costs. As Salter J said in Mansfield v Robinson  2 KB 353 at 359, agreements as to costs are common practice and perfectly valid and enforceable… The contractual right simply stands independently of the curial power and order.”
- While a contractual provision about costs does not confine a court in the exercise of its discretion, that discretion will usually be exercised consistently with such a provision.
What does cl 5.1(d) provide?
- The proper approach in construing a clause in an obviously commercial document such as the Supplementary Agreement has been reaffirmed in Electricity Generation Corporation v Woodside Energy Ltd :
“ … the objective approach [is] to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties … intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”. (citations omitted)
- The matters to be considered are:
- The language used by the parties,
- The surrounding circumstances known to them, and
- The commercial purpose or objects to be secured by the contract.
The language used
- The words used could hardly be broader. The clause provides that, if the State makes a claim contrary to the agreement, then the “State fully indemnifies” IBM. (In these circumstances “indemnify” means to protect or secure.) It provides that IBM is fully indemnified against “any liability” incurred as a result of the claim. At that point it would be obvious that one of the liabilities that would be incurred in the case of a claim would be costs. But the clause uses a belt and braces approach and provides that any liability includes: “the amount of any judgement [sic], settlement sum and legal and other costs.” The inclusion of those categories does not diminish the extent of the coverage – it only makes it clearer.
The surrounding circumstances
- Clause 5.1 (d) is contained in the Supplemental Agreement. That agreement came into effect following claims by the State that IBM had not performed in accordance with the 2007 Contract. Recital B of the Supplemental Agreement states:
“The State and IBM are in dispute over certain matters in relation to the Contract and have agreed to resolve their dispute, without any admission of liability by either party, on the terms of this agreement, pursuant to the dispute resolution process in the Contract.”
The commercial purpose
- The Supplemental Agreement was entered into for the primary purpose of bringing the dispute between the parties to an end. That, in itself, does provide some indication that a particular measure of costs should be applied.
Is cl 5.1 (d) “plain and unambiguous”?
- The State submits that it should only be ordered to pay costs on the indemnity basis if cl 5.1(d) “plainly and unambiguously” entitles IBM to such an order. The requirement that a provision for the payment of costs be “plain and unambiguous” before it will be construed as requiring the payment of indemnity costs has its origins in authorities dealing with the costs of mortgagees but, as Professor dal Pont observes in Law of Costs:
“[15.43] Much of the case law in this context has focused on the costs of a mortgagee in the event of a mortgagor’s default in the mortgage commitments. Unfortunately, the various cases do not always present a uniform statement of principle.”
- IBM argued that the requirement for a clause to “plainly and unambiguously” provide for costs on a special basis is a special principle relating to cases concerning the costs of mortgagees. It arises for a number of reasons, not least that mortgagees can incur non-curial costs such as, for example, a mortgagee’s sale of a property.
- There are examples, though, where this principle has been applied to cases which have not been concerned with mortgages. In Chen & Anor v Kevin McNamara & Son Pty Ltd & Anor (No 2) the Victorian Court of Appeal applied the “plain and unambiguous” test when considering whether a clause in a building contract gave rise to an entitlement to indemnity costs. The clause relevantly provided:
“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.”
- Redlich JA (who gave the judgment for the court) said:
“ 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.” Where the terms plainly and unambiguously provide for costs to be assessed on some special basis, the court will take such a provision into account but it is not bound to give effect to any extra-curial contract as to costs. An agreement to pay costs on a “special” basis is only a factor informing the exercise of the court’s discretion, but not requiring the exercise of that discretion in a particular way. Generally however, 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.” (emphasis added, citations omitted)
- The test that such a clause must “plainly and unambiguously” provide for the payment of indemnity costs has been adopted by the Court of Appeal for use in matters other than those concerning mortgages. It was applied in Platinum United II Pty Ltd v Secured Mortgage Management Ltd (in liq.). That case involved a dispute over a commercial loan agreement – not a mortgage. When the costs had to be determined the Court was faced with two clauses to consider. Fraser JA said:
“ The respondent also submitted that the Court’s discretion should be exercised to reflect the respondent’s contractual entitlement to costs on the indemnity basis. The respondent referred to the following provisions of the commercial loan facility agreement (“the agreement”) made between the first appellant (as “the Borrower”) and the respondent (as “the Lender”) in May 2007:
(a) cl 15.1: “The Borrower shall indemnify and keep indemnified the Lender against any loss, expenses or tax which the Lender may reasonably sustain, incur or be required to pay as a consequence of:-
(C) the enforcement of all or any of the securities under all or any of the Transaction Documents.”
(b) cl 17.4(a): “The Borrower shall indemnify and upon demand reimburse the Lender for all legal fees on an indemnity basis, documentary costs and out of pocket expenses including and without limiting the generality of the foregoing all other expenses of the Lender in connection with the negotiation, preparation, execution, completion and enforcement of all Transaction Documents.”
- His Honour went on:
“ The general principle is that a mortgagee is ordinarily limited to party and party costs (or “the standard basis of assessment” in r 702 of the Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”)) but a court will usually exercise the discretion as to costs to give effect to a contractual provision which “plainly and unambiguously” provides for taxation on another basis. It is doubtful whether cl 15.1(C) of the agreement confers an entitlement to have costs assessed on the indemnity basis in sufficiently clear terms to justify the exercise of that discretion, but the expression “on an indemnity basis” in cl 17.4(a) clearly comprehends “the indemnity basis of assessment” of costs provided for in UCPR r 703(1).
 In my opinion cl 17.4(a) of the agreement does plainly and unambiguously oblige the first appellant to indemnify the respondent against its costs of the appeal on the indemnity basis. …” (emphasis added)
- It might also be observed that the specific reference to “legal fees on an indemnity basis” in cl 17.4(a) would suggest that the very general words in cl 15.1 would not be construed to include indemnity costs.
- In Willmott v McLeay the Court of Appeal dealt with a contract for the sale of property which contained the following clause:
“9.7 Seller’s Damages
The Seller may claim damages for any loss it suffers as a result of the Buyer’s default, including its legal costs on an indemnity basis and the cost of any Work or Expenditure under clause 7.6(3).”
- In giving the judgment of the Court, Holmes JA referred to Platinum United II Pty Ltd v Secured Mortgage Management Ltd (in liq.) and Chen & Anor v Kevin McNamara & Son Pty Ltd & Anor (No 2) and said:
“ This is not a case in which the parties have contracted “plainly and unambiguously” for payment of costs on an indemnity basis. The right to claim such costs as a component of damages for loss resulting from the buyer‘s default is a different and less certain thing; apart from anything else, the recovered deposit could be brought to account in calculating the loss. Because the appellants have not established a clear right under the contract so as to warrant the exercise of the costs discretion in favour of granting indemnity costs, I would confine the award of costs here and below to costs on the standard basis.”
- IBM argues that, even if the “plain and unambiguous” test applies, cl 5.1(d) mandates a conclusion in its favour. This is so, it might be argued, especially in a case based upon an indemnity.
- In Abigroup Ltd v Sandtara Pty Ltd the clause under consideration provided:
“INDEMNITY BY GUARANTOR. The Guarantor (and if more than one, jointly and severally) hereby unconditionally indemnifies the Landlord and agrees at all times hereafter to keep the Landlord unconditionally indemnified from and against all actions claims demands losses summonses writs proceedings judgments orders decrees damages costs and expenses which the Landlord may suffer or incur consequent upon or arising directly or indirectly out of any breach or non-observance by the Tenant of any of the covenants terms provisions restrictions or conditions in this lease contained or implied and on the part of the Tenant to be performed observed or fulfilled and the Guarantor agrees that this indemnity shall continue and the Guarantor shall remain liable to the Landlord under this indemnity notwithstanding that as a consequence of such breach or non-observance the Landlord has exercise (sic) any of its rights hereunder including its rights of re-entry and notwithstanding that the Tenant (being a company) may be wound up or (being a natural person) may be declared bankrupt and notwithstanding that the guarantee hereby given may for any reason whatsoever be unenforceable either in whole or in part.” (emphasis added)
- Stein JA (with whom Giles JA agreed) said of this clause:
“ Ultimately, it is a matter of construing the words of the indemnity in cl 18.02. It seems to me that the language of the indemnity, in particular its reference to all costs and expenses, is to costs on a solicitor/client basis. The statement in Halsbury, quoted by Brownie J, and the authorities there cited, support this proposition (see Barnett v Eccles Corporation  2 QB 423 at 428; Born v Turner  2 Ch 211; and Great Western Railway Co v Fisher  1 Ch 316).”
- The reference to Halsbury is to a paragraph which, in the current edition, reads:
“In all cases where there is a contract of indemnity the costs of legal proceedings properly incurred by the person indemnified are recoverable under the indemnity, and in such cases it seems that costs on an indemnity basis are to be awarded.”
- It is also appropriate to take into account the nature of the indemnity under consideration. The parties had settled a very large dispute and had set out, in some detail, the manner in which the conflict was to be brought to an end. When clause 5.1(d) speaks of “fully indemnifies” the word “fully” is not mere surplusage. It may be regarded as an intensifier but it is one which applies to “any liability” and it is a full indemnity for any liability – where specific mention is made of costs.
- In ordinary circumstances, assessment on the standard basis is the default measure. But, in this case, a sensible, commercial construction arrives at a plain and unambiguous meaning, namely, that clause 5.1 (d) should be construed as entitling IBM to indemnity costs.
- The contractual provision does not control the exercise of discretion, but there is nothing which would suggest that an order for indemnity costs is inappropriate.
- I order that the State of Queensland pay IBM Australia Ltd’s costs of and incidental to this action on the indemnity basis to be assessed if not agreed.
- IBM also sought a declaration as to the proper form of words to be used in an order based upon the indemnity contained in clause 5.1 (d). That is also concerned with the issue of standard versus indemnity costs. That is a matter which may require further action to be taken by IBM to enforce such rights as it claims to have. It is not appropriate to make such a declaration in the absence of such action.
- The other matter which has yet to be dealt with is the disposition of BS 11683 of 2013. I see no reason why that matter should not be dismissed, but I will hear from the parties.
 IBM Australia Ltd v State of Queensland  QSC 342.
 (1988) 81 ALR 397 at 401.
  NSWCA 45.
 Gomba Holdings (UK) Ltd v Minories Finance Ltd (No 2)  Ch 171; Lee v Australia and New Zealand Banking Group Ltd  QCA 284.
 (2014) 251 CLR 640.
 Law of Costs, 3rd Ed, LexisNexis, 2013.
  VSCA 229
  QCA 229.
  QCA 84.
 Halsbury’s Laws of England, 5th ed, Vol 49, para 890
 See Chen & Anor v Kevin McNamara & Son Pty Ltd & Anor (No 2)  VSCA 229 at .
- Published Case Name:
IBM Australia Ltd v State of Queensland
- Shortened Case Name:
IBM Australia Ltd v State of Queensland
 QSC 70
04 Apr 2016
No Litigation History