1165 Stud Road v Power (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

JUDICIAL REVIEW AND APPEALS LIST

S CI 2012 05116

1165 STUD ROAD PTY LTD (ACN 104 794 461)	Plaintiff
v
ROBERT JAMES POWER AND OTHERS	Defendants

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JUDGE:	VICKERY J
WHERE HELD:	Melbourne
DATE OF HEARING:	31 August–2 September, 3 September and 9 September 2015
DATE OF JUDGMENT:	18 December 2015
CASE MAY BE CITED AS:	1165 Stud Road v Power & Ors (No 2)
MEDIUM NEUTRAL CITATION:	[2015] VSC 735

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COSTS – Non-party cost applications – Alleged breaches of overarching obligations under Civil Procedure Act 2010 (Vic) – Section 29 applications – Section 30 time limit not observed – Whether proceeding ‘finalized’ for the purposes of s 30 – Section 29 application statute barred - No jurisdiction to make a s 29 order – Inherent jurisdiction of the Court to make a non-party costs order – Section 24 Supreme Court Act 1986 – Knight v FP Special Assets Limited (1992) 174 CLR 178 considered and applied against one non-party – Rule 63.23 Supreme Court (General Civil Procedure) Rules2005 (Vic) considered but not applied – Principles of Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 on indemnity costs applied against one non-party.

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APPEARANCES:	Counsel	Solicitors
For the Third Defendant	Mr O’Bryan SC Mr C Truong	Arnold Bloch Leibler
For the First and Second non-party respondents to the Third Defendant’s summons	Mr M Clarke	Ms Michelle HM Ong
For the Third non-party respondent to the Third Defendant’s summons	Mr S Pitt	R B Flinders

HIS HONOUR:

The Third Defendant, Palms Court Management Pty Ltd (“Palms”), makes application for costs against non-parties in this proceeding brought by the Plaintiff, 1165 Stud Road (the “Proceeding”).

In particular, Palms, by its summons filed 22 December 2014, makes application to the Court for costs orders jointly and severally, and on an indemnity basis (the “Costs Applications”), against each of the following non-party respondents (the “Respondents” or the “Non-party Respondents”):

(a)John Gdanski (“Gdanski”) (a former director and solicitor acting for the Plaintiff, 1165 Stud Road Pty Ltd (In Liquidation)) (the “Plaintiff” or “1165 Stud Road”);
(b)Renato Chilelli (“Chilelli”) (a former director of the Plaintiff, 1165 Stud Road); and
(c)Rockwell Bates Pty Ltd (“Rockwell Olivier”) (an incorporated law practice trading as “Rockwell Olivier”).

The Costs Applications are made by Palms:

(a)against Gdanski on the basis of alleged breaches of the Civil Procedure Act 2010 (Vic) (the “CPA”), r 63.23 of the Supreme Court (General Civil Procedure) Rules2005 (Vic) (the “Supreme Court Rules”) and in the Court’s inherent jurisdiction;

(b) against Chilelli on the basis of the Court’s inherent jurisdiction;
(c)against Rockwell Olivier on the basis of alleged breaches of the CPA, r 63.23 of the Supreme Court Rules and the Court’s inherent jurisdiction, and
(d)against all Non-party Respondents on an indemnity basis pursuant to the principles expressed in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd.[1]

[1](1999) 87 FCR 134.

The costs applications follow an election by the liquidator to discontinue the claims against Palms and a notice of discontinuance filed in the Proceeding on behalf of the Plaintiff by Rockwell Olivier on 19 May 2014 pursuant to orders made on 12 May 2014 by Daly AsJ.

Relevant Background and Critical Events

At the time of commencement of this Proceeding the property at 1165 Stud Road Rowville (the “Property”) was landlocked save for access by way of carriageway easement over another property at 1171 Stud Road, Rowville (the “Neighbouring Property”). The Neighbouring Property was owned by Palms. However, Palms had completely built over the 7.5m wide carriageway easement by the construction of a restaurant on the Neighbouring Property. Both the Plaintiff, as vendor, and the purchaser, who were the First and Second Defendants, Robert Power and Plenty Road Investments Pty Ltd respectively, wrongly assumed that the carriageway easement was in fact located over a carpark in the forecourt of the restaurant on the Neighbouring Property.

The Plaintiff, as vendor, signed a contract of sale dated 18 May 2012 to sell the Property to the First and Second Defendants for the sum of $2.3m.

The sale did not proceed.

A dispute arose between the vendor of the Property, which was the Plaintiff, 1165 Stud Road, and the purchaser who were the First and Second Defendants, Robert Power and Plenty Road Investments Pty Ltd respectively, about the circumstances in which the obstructed easement on Palms’ land at 1171 Stud Road, Rowville (the Neighbouring Property) was not disclosed at the time of sale in May 2012.

Following demands and negotiations between the Plaintiff, the First and Second Defendants and Palms in mid-2012 concerning the obstructed easement, the present proceedings were issued in September 2012 by the Plaintiff.

Gdanski and Chilelli were directors of the Plaintiff until late February 2014. Gdanski and Chilelli are, either personally or through their corporate vehicles, the shareholders of the Plaintiff. Gdanski, who was also the Plaintiff’s solicitor, signed the Overarching Obligations certificate as an officer of the Plaintiff when proceedings were issued.

The Plaintiff was represented by Sackville Wilks (from the date of issue of the Proceeding to October 2013) and Rockwell Olivier (from October 2013). Gdanski was a Director of Sackville Wilks (until October 2013) and an employee solicitor of Rockwell Olivier (from October 2013) and had carriage of the matter at both legal firms.

Commencing on 28 February 2013, Palms foreshadowed that it would make an application for security for its costs of the Proceeding unless the Plaintiff could provide evidence of its ability to meet a costs order against it. The Plaintiff’s stated position was that there was sufficient equity in the Property to meet any adverse costs order that Palms may obtain.

The Plaintiff’s claims against Palms were initially interference with easement, misleading conduct and unconscionable conduct. The claim for interference with easement was abandoned in mid-2013.

On 27 September 2013, and unknown to Palms, the Plaintiff re-sold the Property. That same day, the parties (including Gdanski and Mr Caillard of counsel on behalf of the Plaintiff) attended a second mediation at the offices of the solicitors for Palms, Arnold Bloch Liebler (“ABL”).

On 22 October 2013, Daly AsJ fixed the trial for hearing on 4 June 2014 on an estimate of 3 to 5 days and made various pre-trial orders including for the filing of a Court Book and witness statements in March and in April 2014. The Court also ordered that any application by the Plaintiff to join a further party be filed and served by 19 November 2013 returnable 28 November 2013.

On or about 12 December 2013, pursuant to the contract of sale entered into on 27 September 2013 and unknown to Palms, the Plaintiff transferred the Property in fee simple to a Mr Traian Iurescu. Following settlement of this sale, $1,062,076.32 was deposited into the Plaintiff’s bank account and $210,000 (less agent’s fees) was deposited into Rockwell Olivier’s trust account. As at 30 May 2014, those funds were no longer held by either the Plaintiff or Rockwell Olivier.

Rockwell Olivier acted for the Plaintiff in relation to both the proceeding and in relation to the conveyance of the Property from the Plaintiff to Mr Iurescu.

In late 2013 and early 2014, the Plaintiff foreshadowed an application to extend the time for making a joinder application and sought the consent of the other parties for this purpose. However, the application was never made.

In March 2014, Palms ascertained that the Property had been re-sold by the Plaintiff. That fact of the re-sale, and the details surrounding the re-sale and distribution of the proceeds of sale, were never disclosed by the Plaintiff or its solicitors to Palms. Further, these events occurred in the face of a security for costs issue being alive between the parties. No discovery was provided by the Plaintiff in relation to the contract of sale of the Property executed on 27 September 2013.

On 31 March 2014, Palms wrote to the Plaintiff’s solicitors seeking security for costs in the Proceeding and discovery of documents concerning the re-sale. There was no response to this correspondence. Further, none of the proceeds of the re-sale were placed into trust or quarantined for the purposes of meeting any possible adverse costs order.

On 3 April 2014, a draft Court Book index was circulated by the Plaintiff. This was the last step taken by the Plaintiff and the only pre-trial step taken by Rockwell Olivier on its behalf. The letter seeking security for costs preceded the Plaintiff’s letter of 3 April 2014 attaching a draft Court Book index. There was no indication at that stage that the Plaintiff proposed to cease the litigation.

On 9 April 2014, the Plaintiff went into voluntary liquidation. That fact, and the circumstances of the liquidation, were not disclosed by the Plaintiff or its lawyers to Palms. Palms only discovered the Plaintiff’s status whilst preparing its application for security for costs.

On 9 May 2014, the liquidator elected not to proceed with the claims against Palms and, on 19 May 2014, a notice of discontinuance was filed by Rockwell Olivier on behalf of the Plaintiff. The balance of the Proceeding subsequently resolved as between the liquidator and the First and Second Defendants.

The Proceeding

The Defendants in the Proceeding were:

(a)Robert Power (the First Defendant, who signed the contract of sale for the purchase of the Property dated 18 May 2012);
(b)Plenty Investments Pty Ltd (the Second Defendant, which was the nominee of the purchaser, Robert Power);

(c) Palms (the Third Defendant, the owner of the Neighbouring Property); and
(d)Bestway Pty Ltd (“Bestway”) was joined by Palms as a third party and then Bestway was subsequently joined as the Fourth Defendant (Palms engaged Bestway to prepare and lodge a town planning application with the Council to develop the Neighbouring Property owned by Palms).

Whether the Claims in the Proceeding Arguable

The Applicant, Palms submitted that the Proceeding was devoid of prospects of success to the point where it should never have been brought or maintained as against it. As to the merits of the case it contended that:

(a)There was cogent documentary evidence that from early 2007 Gdanski and therefore the Plaintiff knew or at least had the means of knowing that the easement was obstructed;
(b)The evidence disclosed that in the period February to March 2007, in the lead up to the Plaintiff’s purchase of the property from Parkland Estate Pty Ltd, Gdanski was party to correspondence with Parkland’s estate agent the effect of which was that:
(i)Bestway had stated that the easement needed to be moved closer to Stud Road and therefore there was a plan for variation of easement;
(ii)the Plaintiff made an offer to purchase the property conditional on the easement being moved;

(iii) Parkland did not agree to include the condition; and
(iv)Gdanski was extremely concerned about access to the property, did not want to be landlocked and was advised to speak directly with Bestway on access issues.

On this basis, Palms submitted that it was plain that Gdanski and the Plaintiff knew these matters, and that the claim against Palms founded on a misrepresentation by silence as to the obstruction of the easement had no prospects of success and should never have been advanced.

The Non-party Respondents to the Costs Applications submitted that the claims made in the Proceeding were arguable.

They submitted that:

(a)The claim against the First and Second Defendants (the purchaser and his nominee) concerned the validity of the notice of rescission and whether the First and Second Defendants were entitled to avoid the contract under s 32 of the Sale of Land Act 1962 (Vic) and/or s 52 of the Trade Practices Act 1974 (Cth). This allegation arose because it was pleaded by the First and Second Defendants that 1165 Stud Road failed to disclose that the easement on title had been built over;
(b)The Plaintiff maintained it was not aware that the easement had been built over when it purchased the Property in 2007 and when it entered into the contract of sale;
(c)It was not only plausible that the Plaintiff did not know of the problem with the easement, but it would be extraordinary, if despite knowing Palms had built over the easement, it would re-sell the Property with such knowledge. Each of Gdanski and Chilelli both gave evidence that they did not know that Palms had built over the easement at the time of entering into the contract of sale in 2012 and only discovered the problem when informed by the purchasers’ solicitors (acting for the First and Second Defendants) in June 2012;
(d)The claim by the Plaintiff against Palms (as third defendant) was in the alternative. If the contract was not enforceable by reason of the existence of the built over the easement, then it was claimed that it suffered loss as a result of entering into the contract of sale, for which Palms was said to be liable;
(e)It was claimed that there was evidence of an admission (by the solicitors for Palms) that Palms should have amended or varied the easement; that Palms had wrongfully built over the easement; and that Palms had failed to inform the Plaintiff that it had built over the easement;
(f)The causal connection between the conduct of Palms resulting from what is alleged Palms failed to disclose to the Plaintiff, is found in the allegation pleaded in paragraph 24 of the Further Amended Statement of Claim, as follows:
[24] But for the conduct of the Third Defendant referred to in paragraphs 16, 21A, 21B, 21C, 21D, 21E, 21F, 21G, 22 and 23 hereof, and the conduct of Bestway referred to in paragraphs 21A, 21B, 21C, 21D, 21E, 21F, 21G, 21H, 22 and 23 hereof, the Plaintiff:
(1) would not have entered into the Contract of Sale;
(2)would not have attached the Plan of Subdivision to the vendor’s statement;
(3)would not have expended substantial funds to rescind the contracts of sale of proposed units to be constructed on Lot 3 so that the First Defendant could have vacant possession;

(4) would not have engaged a real estate agent to market Lot 3.

(g)A third party proceeding against Bestway was brought by Palms in which it was alleged:
At paragraph [10] thereof –
10In around October 2002, the third defendant retained the third party to prepare on its behalf a town planning application to build a restaurant on the neighbouring property, which included preparing relevant planning documentation including restaurant drawings and site plans (the retainer);

At paragraph [12] thereof –
12The third party owed the third defendant a co-extensive tortious duty to take reasonable care in performing the retainer to avoid the third defendant suffering loss and damage;

At paragraph [13] thereof –
13 Pursuant to the retainer:
(a)on or around 22 October 2002, the third party on behalf of the third defendant submitted an application to Knox City Council to develop the neighboring property (Application No 20036257) (the redevelopment application);
(b)in the period between October 2002 and August 2005, the third party on behalf of the third defendant liaised with Knox City Council and with the Lorenzini Group, the relevant building surveyor, and drew relevant documentation including detailed site plans and drawings in connection with the issue of a planning permit and building permit for the redevelopment of the neighbouring property;

At paragraph [14] thereof –
14Negligently, and in breach of the implied term of the retainer, the third party:
(a)prepared planning documents locating the restaurant over Easement E-3 on the neighbouring property or alternatively failed to properly prepare planning documents so that Easement E-3 was not obstructed by the restaurant;
(b)failed to undertake any or alternatively any proper survey of the neighbouring property to ensure that the restaurant was not located over any easement or other encumbrance including Easement E-3;
(c)allowed the redevelopment application to proceed and liaised with Knox City Council and with the Lorenzini Group with the restaurant located over Easement E-3;
(d)permitted the construction of the restaurant over Easement E-3 on the neighbouring property;
(e)failed to advise or notify the third defendant that the restaurant had been constructed over Easement E-3 as soon as it was aware.

I accept that the Plaintiff abandoned its claims regarding the alleged interference with its use of the obstructed easement on the part of Palms. This left remaining the allegations of misleading and deceptive conduct against Palms. The remaining claim against Palms was re-formulated to plead that the Plaintiff was misled by Bestway, which was the agent of Palms when it prepared a plan of subdivision in 2004, and made representations to the Plaintiff in February and March 2007 regarding access to its Property. The misleading conduct alleged was founded upon a misrepresentation by silence.[2]
[2]As to which see: Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, [32] (Black CJ); Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 39 FCR 97, [114] (Hill J); McMahon v Pomeray Pty Ltd & Ors [1991] ATPR ¶41-125, 52,857-858; and Fraser v NRMA Holdings Ltd (1995) 55 FCR 452, 453.

It is also noteworthy that:

(1)despite numerous threats, no application was even brought to strike out 1165’s claim;

(2) no summary judgment application was brought;
(3)a third party proceeding was brought by Palms in which Palms made the allegations referred to above against Bestway .

In these circumstances, in the absence of a trial, where the merits could have been appropriately evaluated on the basis of the facts found, I am not in a position to be positively satisfied on the balance of probabilities, that the Proceeding was devoid of prospects of success to the point where it should never have been brought or maintained as against Palms. This is particularly so where the allegation of misrepresentation was founded upon a misrepresentation by silence, where the whole of the circumstances call for examination to determine whether a finding of a duty to speak was warranted, and where there is conflicting evidence as to the relevant knowledge of the persons alleged to have been misled.

Relevant legal principles
Civil Procedure Act 2010

The Civil Procedure Act 2010 (Vic) (the “CPA”) imposes a number of obligations on lawyers and clients which have a bearing on costs.

The Court outlined these provisions in Kenny & Anor v Gippsreal.[3] For convenience I will repeat relevant passages from the Gippsreal judgment below.
[3][2015] VSC 284, [16]–[41] (“Gippsreal”).

The purposes of the CPA are provided for in s 1, which provides:

Purposes

(1) The main purposes of this Act are—

(a)to reform and modernise the laws, practice, procedure and processes relating to civil proceedings in the Supreme Court, the County Court and the Magistrates' Court and provide for uniformity;

(b) to simplify the language relating to civil procedure;
(c)to provide for an overarching purpose in relation to the conduct of civil proceedings to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute;

(d)to amend various Acts in relation to the conduct of civil proceedings to reflect the new procedures

(2) Without limiting subsection (1), this Act provides for—

(a)overarching obligations for participants in civil proceedings to improve standards of conduct in litigation;
(b)expanding the powers of the courts in relation to costs in relation to civil proceedings;
(c)the enhancement of case management powers of the courts, including in relation to discovery;
(d)further enhancement of appropriate dispute resolution processes;

(e) reform of the law relating to summary judgment;
(f)clarifying sanctions available to courts in relation to contravention of discovery obligations;
(g)the management and control of expert evidence in civil proceedings

The definition of ‘civil proceeding’ is provided in s 3 as: ‘any proceeding in court other than a criminal proceeding or quasi-criminal proceeding’.

The overarching purpose of the CPA are provided for in s 7.

Section 7 provides:

Overarching purpose
The overarching purpose of this Act and the rules of court in relation to civil proceedings is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.
Without limiting how the overarching purpose is achieved, it may be achieved by—
(a)       the determination of the proceeding by the court;
(b)       agreement between the parties;
(c)       any appropriate dispute resolution process—
i.        agreed to by the parties; or
ii.        ordered by the court.

A court is bound to seek to give effect to the overarching purpose in s 8, which provides:

Court to give effect to overarching purpose
(1)A court must seek to give effect to the overarching purpose in the exercise of any of its powers, or in the interpretation of those powers, whether those powers—
(a)in the case of the Supreme Court, are part of the Court's inherent jurisdiction, implied jurisdiction or statutory jurisdiction; or
(b)in the case of a court other than the Supreme Court are part of the court's implied jurisdiction or statutory jurisdiction; or
(c)arise from or are derived from the common law or any procedural rules or practices of the court.

(2)Subsection (1) applies despite any other Act (other than the Charter of Human Rights and Responsibilities Act 2006) or law to the contrary.

The overarching obligations under the CPA are defined in Part 2.3 of the CPA.

They are extended to apply to a wide range of participants in civil litigation, including for present purposes under s 10(1)(b), any legal practitioner or other representative acting for or on behalf of a party.

Section 10 provides:

Application of overarching obligations—participants
(1) The overarching obligations apply to—
(a) Any person who is a party;
(b)Any legal practitioner or other representative acting for or on behalf of a party;

(c)       Any law practice acting for or on behalf of a party;
(d)Any person who provides financial assistance or other assistance to any party in so      far as that person exercises any direct control, indirect control or any influence over the conduct of the civil proceeding or of a party in respect of that civil proceeding, including, but not limited to—
i.        an insurer;
ii.a provider of funding or financial support, including any litigation funder.

(2)Subject to subsection (3), the overarching obligations do not apply to any witness in a civil proceeding.
(3)The overarching obligations (other than the overarching obligations specified in sections 18, 19, 22 and 26) apply to any expert witness in a civil proceeding.
(4)Subsection (3) is in addition to, and not in derogation of, any existing duties applying to expert witnesses.

Part 2.4 of the CPA then provides sanctions for the contravention of the overarching obligations. Sections 28–31 of the CPA, which together comprise Part 2.4, are central to the present applications, and are set out in full below.

Section 28 calls upon the courts, in exercising their powers in civil proceedings, including in exercising a discretion in relation to costs, to take the overarching obligations into account.

Section 28 provides:

Court may take contravention of overarching obligations into account
(1)In exercising any power in relation to a civil proceeding, a court may take into account any contravention of the overarching obligations.
(2)Without limiting subsection (1), in exercising its discretion as to costs, a court may take into account any contravention of the overarching obligations.

Section 29 empowers a court to impose sanctions, which are defined in a non-exhaustive list, including sanctions by way of orders as to costs (s 29(1)(a) and (b)) and the payment of compensation (s 29(1)(c)), if a court is satisfied that, on the balance of probabilities, a person has contravened any overarching obligation.

Section 29 provides:

Court may make certain orders
(1)If a court is satisfied that, on the balance of probabilities, a person has contravened any overarching obligation, the court may make any order it considers appropriate in the interests of justice including, but not limited to—
(a)an order that the person pay some or all of the legal costs or other costs or expenses of any person arising from the contravention of the overarching obligation;
(b)an order that the legal costs or other costs or expenses of any person be payable immediately and be enforceable immediately;
(c)an order that the person compensate any person for any financial loss or other loss which was materially contributed to by the contravention of the overarching obligation, including—
i.an order for penalty interest in accordance with the penalty interest rate in respect of any delay in the payment of an amount claimed in the civil proceeding; or

ii. an order for no interest or reduced interest;
(d)an order that the person take any steps specified in the order which are reasonably necessary to remedy any contravention of the overarching obligations by the person;
(e)an order that the person not be permitted to take specified steps in the civil proceeding;
(f)any other order that the court considers to be in the interests of any person who has been prejudicially affected by the contravention of the overarching obligations.

(2)       An order under this section may be made—
(a)       on the application of—
i.        any party to the civil proceeding; or
ii.any other person who, in the opinion of the court, has a sufficient interest in the proceeding; or

(b) on the court's own motion.
(3)This section does not limit any other power of a court to make any order, including any order as to costs.

The CPA then provides for the process and procedure to govern s 29 applications, including the time limitation for the application.

Section 30 provides:

Applications for orders under section 29
(1) An application for an order under section 29 is to be made—
(a)in the court in which the civil proceeding was, or is being, heard; and

(b) in accordance with the rules of court.
(2)An application for an order under section 29 must be made prior to the finalisation of the civil proceeding to which the application relates (excluding any period for appeals).
(3)For the purposes of subsection (2), if an order, including an order in respect of costs, is made after the date of finalisation of the civil proceeding to which the application relates, the date of making of the last of the orders is taken to be the date of finalisation of that proceeding.

Provision is then made for an extension of time within which an application for an order under s 29 must be made.

Section 31 provides:

Extension of time for application
(1)Despite section 30(2), a person may apply to the court for an extension of time to apply for an order under section 29 after the finalisation of the civil proceeding.
(2)The court may grant an extension of time for making an application under section 29 if satisfied that the person making the application was not aware of the contravention of the overarching obligations until after the end of the period specified in section 30(2).

(3) An application under this section may be made by—
(a) any party to the civil proceeding; or
(b)any other person who has a sufficient interest in the civil proceeding.

It may be observed that the operation of s 30 in combination with s 31 in effect creates two classes of potential applicants for s 29 orders:

1.those to whom s 31(2) may apply, namely persons who were not aware of the contravention of the overarching obligations until after the end of the period specified in s 30(2); and it follows,
2.those to whom s 30(2) may apply, namely persons who were in fact aware of the contravention of the overarching obligations before the end of the period specified in s 30(2).

The Court of Appeal in Yara Australia Pty Ltd & Ors v Oswal[4] took the opportunity to review the statutory regime and the obligations that are imposed by the CPA.[5] Referring to ss 1(2)(a) and (b), the Court observed that the Act provides for ‘overarching obligations for participants in civil proceedings to improve standards of conduct in litigation’, and ‘expanding the powers of the courts in relation to costs in relation to civil proceedings’.
[4] [2013] VSCA 337 (‘Yara’).
[5] Ibid [5]–[11].

The Court stated further, that pursuant to the provisions of the CPA:[6]

The court is obliged to give effect to the overarching purpose of the Act ‘to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute’. The court is directed to further the overarching purpose by having regard to the objects and matters articulated in s 9 of the Act which include the efficient use of judicial and administrative resources and dealing with the proceeding in a manner proportionate to the complexity and importance of the issues and amount in dispute.
The overarching obligations apply to any person who is a party, any legal practitioner, legal representative or law practice acting for or on behalf of a party. The overarching obligations do not override any duty or obligation of a legal practitioner arising under common law or statute to the extent that such duties and obligations and the overarching obligations can operate consistently. But a legal practitioner or law practice engaged by or on behalf of a client in connection with a civil proceeding ‘must comply with the overarching obligations despite any obligation ... to act in accordance with the instructions or wishes of the client’. A legal practitioner is not required to comply with any instruction or wish of a client which is inconsistent with the overarching obligations, and must not cause the client to contravene the overarching obligations To the extent that there is an inconsistency between a legal practitioner’s duty to a client and their overarching obligations, the obligation prevails.
Part 2.3 outlines the overarching obligations The duty stated in s 16 is that each person to whom the overarching obligations apply has a paramount duty to further the administration of justice. The overarching obligations include the obligation to only take steps that are considered to be necessary to resolve or determine the dispute. [Footnotes omitted]

[6] Ibid [9]–[11].

With regard to the operation of s 29 of the CPA specifically, the Court said:[7]

Section 29 of the Act in particular is a unique provision, conferring powers broader than those in any other jurisdiction in Australia, to sanction legal practitioners and parties who fail to meet their overarching obligations

[7] Ibid [17].

As was further observed, s 29 of the CPA provides the Court with broader and more flexible powers than under the Supreme Court (General Civil Procedure) Rules 2005 (the ‘Rules’) or those under its inherent jurisdiction.[8] To this observation I would add that s 29 of the CPA also clarifies and possibly extends the Court’s power to award costs pursuant to s 24 of the Supreme Court Act 1986 (Vic).
[8] Ibid [18].

The Court expanded further on the operation of s 29 in the following passage:[9]

The Court’s powers under s 29 of the Act include the power to sanction legal practitioners and parties for a contravention of their obligations as the heading to Part 2.4 indicates. In our view, these powers are intended to make all those involved in the conduct of litigation — parties and practitioners — accountable for the just, efficient, timely and cost effective resolution of disputes. Through them, Parliament has given the courts flexible means of distributing the cost burden upon and across those who fail to comply with their overarching obligations. A sanction which redistributes that burden may have the effect of compensating a party. It may take the form of a costs order against a practitioner, an order that requires the practitioner to share the burden of a costs order made against their client or an order which deprives the practitioner of costs to which they would otherwise be entitled. The Act is clearly designed to influence the culture of litigation through the imposition of sanctions on those who do not observe their obligations. Moreover, the power to sanction is not confined to cases of incompetence or improper conduct by a legal practitioner. Where there is a failure by the practitioner, whether solicitor or counsel, to use reasonable endeavours to comply with the overarching obligations, it will be no answer that the practitioner acted upon the explicit and informed instructions of the client. A sanction may be imposed where, contrary to s 13(3)(b), the legal practitioner acts on the instruction of his or her client in breach of the overarching obligations.
Section 28(2) enables a court, in exercising its discretion as to costs, to take into account any contravention of the overarching obligations. In our view, the enactment of s 29 together with s 28(2) imbues the Court with broad disciplinary powers that may be reflected in the costs orders that are made. The Court is given a powerful mechanism to exert greater control over the conduct of parties and their legal representatives, and thus over the process of civil litigation and the use of its own limited resources.

[9] Ibid [20]–[21].

Section 29 of the CPA therefore has both compensatory and punitive elements where there is a finding of a contravention of an overarching obligation required by the CPA.[10]
[10] See Hudspeth and Scholastic Cleaning and Consultancy Services (No 4) [2013] VSC 14, [5]–[7] (Dixon J).

The Court summarised its analysis with the following observation:[11]

The Act prescribes that parties to a civil proceeding are under a strict, positive duty to ensure that they comply with each of the overarching obligations and the court is obliged to enforce these duties The statutory sanctions provide a valuable tool for improving case management, reducing waste and delay and enhancing the accessibility and proportionality of civil litigation. Judicial officers must actively hold the parties to account.

[11] Yara [2013] VSCA 337, [26].

The Court concluded with the following guidance as to how a judge may go about making an ‘own motion’ order under s 29(2)(b). The approach is consistent with the time limit imposed on litigant applicants for s 29 orders required by s 30(2):

As the sanction for a breach will usually lie in an appropriate costs order, a judge may at the conclusion of the reasons for judgment immediately invite oral submissions as to why there should not be a finding that the Act was contravened. The judge may in a relatively brief way deal with that issue in providing succinct reasons for a finding that there has been a breach of the Act and how that finding affects the orders for costs that are to be pronounced.

A further element in application of the CPA provisions, which is relevant to the present application, is the component of the overarching obligations which includes the obligation to take steps that are considered to be necessary to resolve or determine the dispute. This is consistent with the s 7 obligation ‘to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’ including by means of ‘agreement between the parties’.

Rule 63.23 Supreme Court Rules in Relation to Lawyers

In addition to the provisions of the CPA, r 63.23 of the Supreme Court Rules provides a further statutory power for the Court to make costs orders against lawyers.

Rule 63.23 provides:

Costs liability of lawyer
(1)Where a solicitor for a party, whether personally or through a servant or agent, has caused costs to be incurred improperly or without reasonable cause or to be wasted by a failure to act with reasonable competence and expedition, the Court may make an order that—
(a)all or any of the costs between the solicitor and the client be disallowed or that the solicitor repay to the client the whole or part of any money paid on account of costs;
(b)the solicitor pay to the solicitor's client all or any of the costs which the client has been ordered to pay to any party;
(c)the solicitor pay all or any of the costs payable by any party other than the client.

(2)Without limiting paragraph (1), a solicitor fails to act with reasonable competence and expedition for the purpose of that paragraph where any application in or trial of a proceeding cannot conveniently be heard or proceed, or fails or is adjourned without any useful progress being made, by reason of the failure of the solicitor to—
(a) attend in person or by a proper representative;
(b) file any document which ought to have been filed;
(c)lodge or deliver any document for the use of the Court which ought to have been lodged or delivered;

(d) be prepared with any proper evidence or account; or
(e) otherwise proceed.
(3)The Court shall not make an order under paragraph (1) without giving the solicitor a reasonable opportunity to be heard.
(4)The Court may, before making an order under paragraph (1), refer the matter to a Costs Judge or another Associate Judge for inquiry and report.

…
(6)The Court may order that notice of any proceeding or order against a solicitor under this Rule be given to the client in such manner as the Court directs.
(7)This Rule shall, with any necessary modification, apply to a barrister as it applies to a solicitor.

Inherent Jurisdiction
Costs Orders Against Lawyers

The Court also has inherent jurisdiction to make a solicitor for a party, and it follows a barrister for a party, liable for costs. In Myers v Elman[12] Viscount Maugham, after referring to the jurisdiction of the court to discipline a solicitor for professional misconduct, proceeded:[13]

In my opinion, the jurisdiction as to costs is quite different. Misconduct or default or negligence in the course of the proceedings is in some cases sufficient to justify an order. The primary object of the court is, not to punish the solicitor, but to protect the client who has suffered and to indemnify the party who has been injured.
...
It is a rule supplementary to the summary jurisdiction of the court. It is not limited to misconduct or default, but expressly extends to costs incurred improperly or without reasonable cause, or costs which have proved fruitless by reason of undue delay in proceeding under a judgment or order. The jurisdiction to order the solicitor to pay costs to the opposite party is exercised on similar grounds.

[12][1940] AC 282.

[13]Ibid 289.

In making such an order, the court is exercising a power over its own officers which is at once summary, disciplinary and compensatory.[14]

Statutory Basis

[14]Michael v Freehill Hollingdale & Page (1990) 3 WAR 223, 233. See also Davy-Chiesman v Davy-Chiesman [1984] Fam 48; [1984] 1 All ER 321, 328; Monitronix Ltd v Michael (1992) 7 WAR 195, 200; De Sousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544; Caboolture Park Shopping Centre Pty Ltd (in liq) v White Industries (Qld) Pty Ltd (No 1) (1993) 45 FCR 224; 117 ALR 253, 261; Deputy Commissioner of Taxation v Levick (1999) 168 ALR 383; [1999] FCA 1580; affirmed in Levick v DCT (2000) 44 ATR 315; [2000] FCA 674. See also: White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169, 229; affirmed in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134; 163 ALR 744; [1999] FCA 773.

Section 24 of the Supreme Court Act 1986 (Vic) gives the Court full power to determine by whom and to what extent the costs are to be paid.

Section 24 provides:

Costs to be in the discretion of Court
(1)Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.

(2) Nothing in this section alters the practice in any criminal proceeding.

This power is sufficiently broad to order that a person, who is not a party to the proceeding, pay the costs of a party.[15]

Knight v FP Special Assets Limited

[15]Knight v FP Special Assets Limited (1992) 174 CLR 178; Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563, [16] per Croft J citing Knight v FP Special Assets Limited (1992) 174 CLR 178; Guss v Geelong Building Society (in liq) [2001] VSC 288, [7] (Ashley J).

In Knight v FP Special Assets Limited, [16] Mason CJ and Deane J examined a statutory costs regime of similar breadth to s 24, namely s 58 Supreme Court Act 1867 (Qld) in combination with O 91 r 1 of the Rules of the Supreme Court (Qld). Order 91 r 1 provided, subject to certain irrelevant exceptions:

Subject to the provisions of the Judicature Act and these Rules, the costs of and incident to all proceedings in the Court, including the administration of estates and trusts, shall be in the discretion of the Court or Judge:

[16](1992) 174 CLR 178 (“Knight”).

Having considered the background to the jurisdiction to order costs against non-parties, their Honours said this:[17]

Against this background, it is impossible to construe the wide and general words of O.54 r.1 and its successor O.91 r.1 as delimiting the jurisdiction to order payment of costs as one which was and is confined to parties to the proceedings. The language of the rule is quite inapt to give expression to the complex course of judicial decisions at common law and in equity before the Judicature Acts. Moreover, the extended concept of "party", including as it does a variety of persons on whom notice of proceedings is served, makes it inappropriate to introduce a limitation which was applied at a time when the concept of "party" related to a person on the record of the proceedings. It is preferable to interpret the words of the rule according to their natural and ordinary meaning as conferring a grant of jurisdiction to order costs not limited to parties on the record and ensure that the jurisdiction is exercised responsibly.

[17]Ibid 190.

The joint judgment adopted the general principle that, generally speaking, only parties on the record of the proceedings are bound by the orders made in the proceedings:[18]

The main thrust of the appellants' argument is, however, that the rule should be construed by reference to the supposed principle, said to be recognized both at common law and in equity, that, beyond certain well-established exceptions (which do not include the present case), the courts do not have jurisdiction to order payment of costs by a non-party. The principle, so-called, is but a reflection of the general statement, often made, that a court cannot make an order against a person who is not a party to the proceedings. That, of course, is true. Generally speaking, only parties on the record of the proceedings are bound by the orders made in the proceedings. But there are now a variety of situations in which persons, not being parties in that sense, will be bound. In this respect, it is interesting to note that s.1 of the 1876 Act defined "(p)arty" so as to include "every person served with notice of or attending any proceeding although not named on the Record".

[18]Ibid 186.

However, their Honours went on to recognise a general category of case in which an order for costs could be made against a non-party:[19]

For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active role in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.

[19]Ibid 192-3, quoted with approval in Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75, 94-5.

In Knight, Dawson J said further:[20]

The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party…

[20]Ibid, 202.

By way of summary, the principles in Knight may be distilled in the following formulation: Although generally speaking, only parties on the record of the proceedings are bound by the orders made in the proceedings, the law recognises an exceptional category of cases where it is appropriate for a costs order to be made against a non-party where:

(a)       the party to the litigation is an insolvent person or man of straw;
(b)      where the non-party has played an active part in the conduct of the litigation;
(c)       the non-party has an interest in the subject matter of the litigation; and
(d)      the interests of justice require that an order be made

The Knight principles have been applied in a number of recent cases.[21]
[21]See, for example, Ian Huntly Philip v JPM Developments [2015] NSWSC 495; IPEX ITG Pty Ltd (in liq) (receivers appointed) v Victoria [2014] VSCA 315; Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406; Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563; Kebaro Pty Ltd v Saunders [2003] FCAFC 5.

In FPM Constructions v Council of the City of Blue Mountains,[22] the Court of Appeal of New South Wales considered the application of the principles to a corporate Plaintiff. Despite the fact that the non-party said to be liable for costs was both a sole director and a 50% shareholder of the corporate Plaintiff, and that he was also the company's sole witness and was active in the litigation, the Court refused the non-party costs application. Their Honours held that the corporate Plaintiff was there quite properly suing to recover moneys for its own benefit and it mattered not that it had a sole director who took active part in the case.
[22][2005] NSWCA 340 (Beazley, Giles and Basten JJA) (“FPM ConstructionsI”).

The Court rightly highlighted that:[23]

Were it otherwise, the corporate veil would, in effect, be nullified at the very point at which it provides protection against personal liability for the shareholders and directors. The carefully crafted exceptions to the principle would overtake the principle itself were that the case.

[23]Ibid [206].

Their Honours observed further that:[24]
[24]Ibid [210] (emphasis added).

It is clear that the categories of case which may attract the exercise of the power are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria:
(a)the unsuccessful party to the proceedings was the moving party and not the defendant;

(b) the source of funds for the litigation was the non-party or its principal;
(c) the conduct of the litigation was unreasonable or improper;
(d)the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and
(e)the unsuccessful party was insolvent or could otherwise be described as a person of straw.

The Court concluded in its consideration of the relevant principles that:[25]

The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis, so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the “interest” in its outcome or subject-matter.

[25]Ibid [214] (emphasis added).

The principles, as explained in FPM Constructions, have been accepted and applied in a number of recent decisions in Australia.[26]
[26]Re Lorie Najjar & Sons Pty Limited (in liq) (No 9) [2014] NSWSC 56 (Black J); HM&O Investments Pty Ltd (in liq) v Ingrain [2013] NSWSC 1778 (Stevenson J); The Beach Retreat Pty Ltd v Mooloolaba Yacht Club Marina Ltd [2009] QSC 84 (Stevenson J); Manderson M&F Consulting v Incitec Pivot Ltd (No 3) [2011] VSC 441 (Croft J); Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154, [83] (Keane CJ, Lander and Foster JJ); Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563, [28]-[29] (Croft J) (“Permark”); Refractory Constructions Pty Ltd in the matter ofA4dable Geeks Pty Ltd (in liq) v A4dable Geeks Pty Ltd(in liq) [2014] FCA 1162 (Logan J), [21]–[23].

In application of the Knight principles, a number of matters are of relevance:

(a)Making a costs order against a non-party requires exceptional circumstances.[27] In the vast majority of cases it would be unjust to make an award of costs against a non-party;[28]
[27]Kebaro Pty Ltd v Saunders [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ) (“Kebaro”); Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563, [75] (Croft J).
[28]Guss v Geelong Building Society (in liq)[2001] VSC 288, [7] (Ashley J).

(b) The principles apply where proceedings have been discontinued;[29]
[29]Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406; Permark [2013] VSC 563.
(c)It is sufficient if a company, which is the relevant party, is insolvent at the time of the application for a non-party costs order;[30]
[30]Permark [2013] VSC 563, [39].
(d)A real, direct and material connection with the principal litigation must be established such that the non-party can be described as a ‘real party’ to the litigation[31]. For this purpose, it is sufficient to establish an ‘active role in the conduct of the litigation’ if the non-party is sufficiently closely connected with the prosecution of the litigation and can be fairly described as a ‘real party’ in ‘critical’ or ‘important’ respects.[32]
[31]Kebaro [2003] FCAFC 5, [103].
[32]Ibid [111]–[114]; Arundel Chiropractic v DCT (2001) 179 ALR 406, 414 (Callinan J). The Kebaro reasoning was cited with approval in IPEX ITG Pty Ltd (in liq) (receivers appointed) v Victoria [2014] VSCA 315, [42].
(e)For there to be an interest in the subject of the litigation, a direct financial interest is not required.[33] It is not enough that the fruits of success in the litigation either belonged to the non-party or were substantially within his gift;[34]
[33]IPEX ITG Pty Ltd (in liq) v State of Victoria [2011] VSCA 134, [15]-[16] (Tate JA and Macauley AJA); Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) (No 2) [2014] VSC 147, [16]–[17] (Hargrave J) cf. IPEX ITG Pty Ltd (in liq) v State of Victoria (No 2) [2011] VSC 39, [15] (Sifris J).
[34]IPEX ITG Pty Ltd (in liq) v State of Victoria [2011] VSCA 134, [15] (Byrne J); Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) (No 2) [2014] VSC 147, [16]–[17] (Hargrave J).
(f)It may be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in ‘critical’ and ‘important’ respects, albeit not the only such party. It is not necessary to demonstrate that the relevant non-party exclusively controlled the conduct of the proceedings. It is enough if the role of the non-party is sufficiently closely connected with the prosecution of the litigation, so that the non-party may fairly be described as one of the actors in ‘important’ and ‘critical’ respects;[35]
[35]Kabaro [2003] FCAFC 5, [113]–[114]; IPEX ITG Pty Ltd (in liq) (receivers appointed) v Victoria [2014] VSCA 315, [42] (Neave, Santamaria and Kyrou JJA).
(g)As the breadth of the concept affirms, there are numbers of factors which may be taken into account in determining whether the interests of justice call for an order to be made. They include factors such as those as illustrated in the current case-law listed below. In making these observations, it is important to recognise that each of the examples is no more than one of the many relevant matters that may be considered when weighing the interests of justice in an application for costs against a stranger to the litigation. The examples include:
(i)a recognition that there are two important principles at stake: on the one hand the proper ambit of limited liability, and on the other a facility to provide fair costs compensation for successful defendants. An application for security for costs at an early stage reconciles these imperatives;[36]
(ii)whether an application for a security for costs order was made promptly at an early stage of the proceeding, and whether any decision not to apply for security for costs was reasonably justified and satisfactorily explained;[37]
(iii)whether the non-party was warned or put on notice of the risk of a non-party cost application at an early stage, and whether the failure to give such a warning was justified or unreasonable in the circumstances and satisfactorily explained;[38]
(iv)whether the Plaintiff company was used simply as a vehicle set up to conduct the litigation in order to protect the individuals standing behind it;
(v)whether there are findings of fact at trial which may be relevant in considering the conduct of the non-party; and
(vi)when standing back and weighing each of the relevant factors which relate to a particular case, it would be unjust, in the circumstances, if the successful defendants were unable to recover their costs.

Cost Orders Based on Knight Principles Against Non-party Directors of a Company

[36]Candibon Pty Ltd v Minister of Planning (No 2) [2012] VSC 424, [41] (Emerton J).

[37]Permark [2013] VSC 563, [68].

[38]Ibid [24], [68].

Gdanski and Chilelli were both directors of the Plaintiff company until late February 2014.

In Permark International Interiors Pty Ltd v Amoveo Pty Ltd,[39] Croft J carefully reviewed the Australian cases where, like the present, the question whether costs should be ordered against a non-party arose where a corporate litigant was unsuccessful and the non-party or non-parties sought to be made liable in respect of the costs of the successful party or parties were directors of the unsuccessful corporate litigant. Examples were provided by his Honour where Australian courts have made cost orders against a principal director and shareholder of a company which is a party to the proceedings.[40]
[39][2013] VSC 563, [27]-[35].
[40]Oz B and S Pty Ltd v Elders IXL Ltd[1993] FCA 371; (1993) 117 ALR 128; Yates Property Corp Pty Ltd v Boland (No 2)[1997] FCA 760; (1997) 147 ALR 685; Jacara Pty Ltd v Perpetual Trustees WA Ltd[2000] FCA 595; (2000) 185 ALR 463; Waiviata Pty Ltd v New Millenium Publications Pty Ltd[2002] FCA 481; FMP Constructions Pty Ltdv Council of the City of the Blue Mountains [2015] NSWCA 340; Rushton (Qld) Pty Lt v Rushton NSW Pty Ltd [2004] QSC 47.

In Permark, the new solicitors for the Plaintiff, Permark, had, on the record, filed a notice of discontinuance on behalf of Permark, which brought the proceeding to an end. Messrs Gourley and Smith were the two directors of Permark and were two of the non-parties sought to be made liable for the costs of the Second Defendant, Procutech, upon the discontinuance. In rejecting the application for non-party cost orders against the directors, Croft J observed:[41]

As indicated in the authorities to which reference has been made, the piercing of the corporate veil in applications of this kind is not a step to be taken lightly. The separate legal personality of corporate entities is long established and serves many purposes which are beneficial to both society and the economy. Thus, apart from in exceptional cases, a corporate party rather than its human agents will bear any adverse costs consequences in litigation. Legal systems, such as ours, reconcile preservation of the separate legal personality of corporate entities and interests of adverse parties to corporate plaintiffs by providing machinery in the litigation process whereby an adverse party may seek security for costs against a corporate plaintiff.

[41]Permark [2013] VSC 563 [79].

In Rushton (Qld) Pty Lt v Rushton NSW Pty Ltd,[42] Muir J also rejected an application for a non-party costs order against a sole director and shareholder of the unsuccessful corporate party to a proceeding. In doing so, Muir J emphasised that the fact that the sole director and shareholder was the ultimate decision-maker was not necessarily decisive:[43]

In my view the mere fact that a person is the sole director and shareholder of an unsuccessful litigant corporation will not, without more, suffice to justify a costs order against that person. And that is so even if the person was a corporation’s sole, principal or ultimate decision maker in relation to the litigation.
To conclude otherwise would be to ignore the principle that costs orders against non-parties are “exceptional” and ought be made only is appropriate in the interests of justice. The control of a corporate litigant by a director who is also its sole or majority shareholder is an unremarkable occurrence. It is sanctioned by a long established legislative framework which recognises that a company has an independent legal personality distinct from that of its members and that neither members nor directors, as a general proposition, are personally liable for its acts or defaults.

...
A reluctance to ground non-party costs orders merely on the circumstances of sole ownership and control of the defendant corporation is evident in Taylor v Pace Developments Ltd(1991) TLR 228 (CA) in which it was observed that the controlling director of a one-man company was inevitably the person who caused the costs of the litigation to be incurred, by causing the company to defend the proceedings. In that context Lloyd LJ noted –
‘But it could not be right that in every such case he should be made personally liable for costs, even if he knew that the company would not be able to meet the Plaintiff’s costs should the company lose its case.
That would be far too great an inroad on the principle of limited liability. In the great majority of cases the directors of an insolvent company, which defended proceedings brought against it, should not be at personal risk.’”

[42][2004] QSC 47.

[43]Ibid [12]–[15].

This approach was echoed by Croft J in Permark where his Honour concluded:[44]

In the present circumstances, I am of the opinion that Permark’s failure to succeed in pursuing its claim as a result of its losses at interlocutory stages and subsequent discontinuance does not have consequences for the Non-Parties in terms of costs liability. In my view, the material before the Court and the submissions made against them do not establish exceptional circumstances in any relevant sense. Rather, the evidence establishes that the directing mind, or minds, of Permark and those less directly involved in the conduct of the proceeding were doing no more than would be expected of its human agents, particularly having regard to their duties as directors. Additionally, it is entirely unsurprising, and unexceptional, that these human agents stood to benefit directly or indirectly from success in the proceeding or that some individual or their corporate entities were funding the proceeding, directly or indirectly, having regard to the nature of Permark as a commercial entity, a private company.

[44]Permark [2013] VSC 563, [83].

In Manderson M & F Consulting (a firm) v Incitec Pivot Limited (No 3),[45] Croft J had earlier considered an application for a special non-party costs order against directors of corporate trustees in partnership, who had failed in the course of attempting to plead a case for breach of confidence. Having regard to the principles of limited liability and separate legal personality, his Honour said:[46]

Clearly, like any corporate entity, the corporate partners of MMFC can only “think and act” through natural persons. Consequently, it was unsurprising that Manderson and Karis were the directing minds of MMFC in the conduct of the litigation. There is, however, no evidence that the litigation was conducted in a way that was unreasonable or improper. At all times throughout the proceeding, MMFC was represented by reputable solicitors and by senior counsel with very substantial experience and expertise in relation to intellectual property matters. Each version of the statement of claim of drafts were put forward by MMFC signed by one of these senior counsel (or with drafts indicating that one of these senior counsel would sign). There is no suggestion that any of these senior counsel acted otherwise than with absolute professional propriety and in accordance with their obligations as senior counsel in signing a statement of claim or appearing in support of a proposed statement of claim which was indicative of their intention to sign. In these circumstances, and where MMFC was the proper Plaintiff to the proceeding, the making of a costs order against Manderson and Karis would have the effect of setting aside the effect of the separate legal personality of the corporate partners of MMFC as corporate entities and put at risk of personal liability directors and, possibly, other officers of these corporations who conducted the litigation on their behalf. For these reasons, I am of the opinion that it would not be appropriate to make any costs order against Manderson or Karis.

[45][2011] VSC 441.

[46]Ibid [37].

Croft J in Permark summarised the liability of directors for the costs of unsuccessful litigation prosecuted by their company in the following way:[47]

It is clear from the authorities that more is needed than findings and reasoning that because a director was the driving force in the company’s litigation and that any benefit flowed to the director, the director should therefore be seen as being the real litigant. The actual conduct of the party to the proceeding is also important in deciding whether to exercise the discretion to award costs against a non-party.

[47]Permark [2013] VSC 563, [33] (Croft J).

On the other hand, in a later case of Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) (No 2),[48] decided after Permark, Hargrave J applied the principles in Knight making non-party costs orders against two directors of the relevant company, in what his Honour described as ‘the highly unusual circumstances of this case’. His Honour concluded:[49]

The fact remains that the litigation fits within the scope of the cases recognised by the High Court in Knight for the making of a non-party costs if the interests of justice require it. As I have stated, I am satisfied that the litigation was determined upon and pursued by Bradley and Kelly through an insolvent company and for their principal benefit. They played an active part in the litigation by determining to accept the word of their father and prosecute a case which depended upon his word being accepted by the Court. …
In the highly unusual circumstances of this case, I find that Bradley and Kelly, while hiding behind corporate and trust veils, took the significant risk that the Court would believe their father. The Court did not, and the litigation was lost because of a finding that their father practised an elaborate fraud. It would be unjust if the successful defendants were unable to recover their costs in these circumstances.

Flower & Hart Principle

[48][2014] VSC 147. Leave to appeal of this decision was refused: Ballantyne Suites Pty Ltd (in its own right and as trustee of the Ballantyne Property Suite Unit Trust and Ballantyne Property Suite 2 Unit Trust) v Ballantyne Chambers Pty Ltd (in liq) [2014] VSCA 223.

[49]Ballantyne Suites at [24].

The costs applications made by Palms are also founded on the inherent jurisdiction of the Court derived from the principles applied in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd.[50] Goldberg J concluded from his review of the authorities that the jurisdiction to order a solicitor to pay costs of the other party is enlivened when the solicitor has:[51]

unreasonably initiated or continued an action when it had no or substantially no prospects of success but such unreasonableness must relate to reasons unconnected with success in the litigation or to an otherwise ulterior purpose or to a serious dereliction of duty or serious misconduct in promoting the cause of and the proper administration of justice. Further, the cases establish the proposition that it is a relevant serious dereliction of duty or misconduct not to give reasonable or proper attention to the relevant law and fact in circumstances where if such attention had been given it would have been apparent that there were no worthwhile prospects of success.

[50]229; affirmed in Flower & Hart (a firm) v White Industries (Qld) Pty Ltd (1999) 87 FCR 134; 163 ALR 744; [1999] FCA 773.

[51]White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169, 239.

In Williams v Spautz,[52] a plurality of the High Court (Mason CJ, Dawson, Toohey and McHugh JJ) approved the general rule in connection with issuing proceedings for an improper purpose derived from the comments of Lord Evershed MR in the judgment of the UK Court of Appeal in In re Majory,[53] as follows:

that court proceedings may not be used or threatened for the purpose of obtaining for the person using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are primarily designed and exist; and a party so using or threatening proceedings will be liable guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused.

[52] (1992) 174 CLR 509, [39].

[53](1955) Ch 600, 623-624.

In Jeffery & Katauskas v SST Consulting,[54] the High Court further considered the concept of abuse of process. The majority (French CJ, Gummow, Hayne and Crennan JJ) observed that the contemporary approach in the United Kingdom and Australia takes ‘no narrow view of what can constitute abuse of process’ and that the categories of abuse of process are not closed.[55] The majority observed in this respect that:[56]
[54] (2009) 239 CLR 75.
[55]Ibid. [27].
[56]Ibid, [27], [28].

… certain categories of conduct attracting the intervention of the courts emerged in the nineteenth and twentieth centuries and included:
(a)proceedings which involve a deception on the court, or are fictitious or constitute a mere sham;
(b)proceedings where the process of the court is not being fairly or honestly used but is employed for some ulterior or improper purpose or in an improper way;
(c)proceedings which are manifestly groundless or without foundation or which serve no useful purpose;
(d)multiple or successive proceedings which cause or are likely to cause improper vexation or oppression.

The term “abuse of process”, as used in Australia today, is not limited by the categories above or those which constitute the tort. It has been said repeatedly in the judgments of this Court that the categories of abuse of process are not closed …
In a decision relying in part on what was said Knight, the Privy Council in Dymocks
Franchise Systems (NSW) Pty Ltd v Todd held that “generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails”.

On this basis Palms contended that a lawyer who advances a case, not in order to vindicate any legal rights of the Plaintiff but for an ulterior purpose, commits an abuse of process which justifies an order that the lawyer pay the costs of the party who is the victim of the abuse.

Indemnity costs

Whether to allow costs other than on a standard basis is in the discretion of the court, to be exercised by applying well recognised grounds for the making of such a costs order.

An unreasonable refusal to accept a Calderbank offer may provide a basis for ordering indemnity costs.[57] The critical question is whether the rejection of the offer was unreasonable in the circumstances.
[57]See Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435.

Further, as observed by the Court of Appeal in Yara, the breach of the overarching obligation under the CPA is also a matter that may be taken into account in making an order for costs, and there will be cases where a breach of an obligation under the Act may support an order for indemnity costs.[58]
[58]Yara [2013] VSCA 337, [56].

Findings of Fact

I make the following findings of fact in this Application:

(a)In 2002, Parkland Estate Pty Ltd (“Parkland”) was the registered proprietor of a large piece of land on the corner of Wellington Road and Stud Road in Rowville and it engaged the fourth defendant, the consultant Bestway Group Pty Ltd (“Bestway”) to sub-divide that land;
(b)In around August 2002, Palms entered into a contract of sale with Parkland to acquire part of the land that became 1171 Stud Road (the “Neighbouring Property”);
(c)On or around 13 July 2004, Knox City Council (the “Council”) approved Parkland’s proposed plan of subdivision which included the Neighbouring Property and a carriageway easement (the “Easement”) being created on the Neighbouring Property in favour of 1165 Stud Road (the “Property”) to enable access to the Property from Stud Road, via the Neighbouring Property;
(d)Palms engaged Bestway to prepare and lodge a town planning application with the Council to develop the Neighbouring Property. In around October 2004, a building permit was issued in respect of the Neighbouring Property with settlement also occurring around this time;
(e)In the period between October 2004 and April 2005, Palms built a Chinese restaurant on the Neighbouring Property which resulted in the easement being built over;
(f)In early 2007, there were negotiations between the Plaintiff and Parkland in relation to the proposed purchase of the Property;
(g)In the period between February and March 2007, there was email correspondence between Peter Ross of Appleby Real Estate, Parkland’s real estate agent, and Philip Singh of Bestway, and Mr Ross and Gdanski on behalf of the Plaintiff in relation to access to the Property. Gdanski does not deny reading these emails:
By email dated 26 February 2007 from Phillip Singh of Bestway to Peter Ross, Mr Singh said:
Peter,
Further to your call re:lot3, stud road, Rowville, attached is the registered Plan of subdivision. (sheets 1 & 2)
Note:
Lot 3 has access through the carriageway easement in Lot 2. (E-3) Road throughsE-1 [sic] and E-3 have been constructed.
The third sheet (variation of easement) is currently in the process of being approved.
Note:
The design plan (lot 2) changed and the roadway (constructed) requires E-3 be moved closer to Stud Road. This plan will become the approved carriageway easement for lot 2, and the road entry for lot 3.
should you have any further queries, please do not hesitate to call.
Regards,
Phillip Singh

This email attached documents entitled “Plan for Variation of Easement” and “Plan of Subdivision”. By email dated 26 February 2007 from Peter Ross to Gdanski titled “FW: Lot 3 STUD road”, Mr Ross said:
John
Attached please find clarification sought for you in relation to access to Lot 3 by means of entering from the common road(s) dividing the adjoining lot 2 and Hungry Jacks and via the frontage of Lot 2.
Should you have any further queries do not hesitate to call me or Bestway Group – Frank Singh direct on 9886 4200 or mobile 0403 222 766.

By email dated 8 March 2007 from Peter Ross to Gdanski, Mr Ross said:
John For your information.

The email attached a document containing an offer to purchase the Property a condition:
Purchase only conditional in relation to the common road access for Lot 3 therein subject to the amendment to title as shown in the Plan of Subdivision attachment. This condition should be no problem to Parkland Estate as previously confirmed and is presently being arranged by Frank Singh.

By email dated 9 March 2007 from Mr Ross to Gdanski, Mr Ross said:
John
Obviously I understand that access to the site is paramount. The information I have forwarded to you shows the easement and clearly on inspection of the site the common road is in existence.
Therefore is there anyway [sic] you would be prepared to delete this condition after consultation with Frank Sing [sic] if he was able to provide satisfactory information to you.
Simply, I am having a problem with the Chinese perhaps unnecessarily because they are over focusing on this condition.
The removal of this issue might clear the pathway for a successful result to proceedings.

By email dated 10 March 2007 from Gdanski to Mr Ross, Gdanski said:
It really is I don’t see how it can cause them a problem. Without it we have a useless piece of land.

By email dated 13 March 2007 from Mr Ross to Gdanski, Mr Ross said:
John
Can I get Frank Singh – Bestway Group to phone you regarding your access queries or could you phone him please on 0403 222 766.

By email dated 13 March 2007 from Gdanski to Mr Ross, Gdanski said:
Need evid
John Gdanski.

By email dated 14 March 2007 from Mr Ross to Gdanski, Mr Ross said:
John
I really want to sort this out, however not I’m sure specifically what evidence you need or more so what evidence we can be [sic] provide to facilitate.
The only way we can identify what details you require will be as I have suggested for you to briefly discuss your requirements with Frank Singh and then we will see if he can provide these satisfactory confirmations for you.

(h)Despite being invited to speak with Mr Singh, Gdanski cannot recall whether he spoke to Mr Singh at this time or later on;
(i)In around late March 2007, the Plaintiff purchased the property from Parkland without any condition concerning access and relocation of the easement. Fetter Gdanski, of which Gdanksi was a principal, acted as solicitors for the Plaintiff in connection with the purchase;
(j)On or about 22 March 2007, Gdanski and Chilelli, together with other representatives of the Plaintiff, met with Council officers to discuss a proposed development of the Property and planning matters. Gdanski had a further meeting and discussions with Council officers the following week;
(k)From July 2007 until February 2014, Gdanski and Chilelli were directors of the Plaintiff and directly and indirectly were shareholders of the Plaintiff through their corporate entities, Beside Pty Ltd and Hoodline Pty Ltd respectively;
(l)In late October 2007, Gdanski, Chilelli and Murray Ness of Hellier McFarland, the Plaintiff’s town planning expert, met with a senior urban planner at the Council to discuss the development plans for the Property;
(m)In 2008, there were negotiations between the Plaintiff and Palms and correspondence between their legal advisers in relation to a requested rear easement on the Neighbouring Property which was ultimately unsuccessful. Fetter Gdanski and Gdanski acted for the Plaintiff in these negotiations;
(n)Throughout 2008 and 2009, the Plaintiff and Hellier McFarland, on behalf of the Plaintiff, engaged with the Council on a number of occasions concerning the Plaintiff’s development plans for the Property;
(o)From July 2011 until February 2014, Gdanski and Chilelli were the sole directors of the Plaintiff;
(p)On 18 May 2012, the Plaintiff entered into a contract of sale to sell the Property to the first and second defendants for $2.3 million (the “2012 contract of sale”). Sackville Wilks, of which Gdanski was a director, acted for the Plaintiff in connection with the sale. The 2012 contract of sale did not disclose the fact the easement was obstructed or refer to any issue concerning the positioning of the easement. Gdanski signed the 2012 contract of sale on behalf of the vendor. The section 32 vendor’s statement annexed the plan of subdivision and said:
1. RESTRICTIONS
Any easement, covenant or other similar restriction affecting the property (whether registered or unregistered):
1.1 Description – As set out in the attached copies of title documents and other documents;
1.2 Particulars of any existing failure to comply with their terms are as follows:
- As far as the Vendor is aware, there are none.
2. PLANNING & ROAD ACCESS
Details of any planning instrument affecting the land are contained in the attached certificate.
There is access to the property by road.
(q)The Plaintiff did not carry out a survey at the time. A survey in all likelihood would have revealed that the easement was obstructed;
(r)On 20 June 2012, the First and Second Defendants notified the Plaintiff of an obstruction to the easement on the Neighbouring Property and reserved the right to rescind the 2012 contract of sale on the basis of misrepresentation and a failure to disclose the obstruction to easement;
(s)In the period between late June 2012 and September 2012, the Plaintiff engaged in correspondence separately with the First and Second Defendants and Palms. The open correspondence with Palms foreshadowed relief seeking demolition of the building which was obstructing the easement and in the without prejudice correspondence passed on proposals from the First and Second Defendants. Gdanski gave instructions to send this correspondence;

However, I am not satisfied that Palms had any reasonable basis for not proceeding with an application for security for costs at a much earlier time, in April of 2013.

This is a matter which bears directly upon the interests of justice in the present application by Palms for a non-party costs order against Gdanski and Chilelli and clearly favours the Respondents.

Notice of Application for Non-party Costs

Whether any failure to give a warning is a factor counting against the making of an order depends on the circumstances of the particular case.[88] It may amount to a material consideration depending on the facts under consideration. In Yates v Boland,[89] the Full Federal Court observed:

Whether such a requirement [the need for a warning] arises in a particular case depends on the facts and circumstances of the individual case. The necessity to warn a non-party of an intention to claim costs is not a principle applicable in every case in which costs are sought against a non-party. Rather it may be a material consideration depending on the situation disclosed in the case under consideration.[90]

[88]Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563.

[89][2000] FCA 1895.

[90]At [34].

As to the rationale behind the giving of a warning, it has been said that it provides the non-party with an opportunity to:[91]

(a)be joined in the proceedings and thereby have the capacity to influence the proceedings;
(b)protect itself by making an offer in accordance with the rules; or
(c)terminate the proceedings by way of discontinuance, negotiation, payment or otherwise.

[91]Vestris v Cashman (1998) 72 SASR 449, 468 (Lander J).

Palms submitted that non-party costs applications against the respondents were expressly foreshadowed in Court shortly after the Plaintiff went into liquidation.

However, the position is that Palms was represented by counsel before Daly AsJ at the directions hearing on 12 May 2014. At the hearing, counsel for Palms foreshadowed the making of a non-party costs order against Gdanski, and the two firms associated with Gdanski, namely Sackville Wilks and Rockwell Olivier. No application against Chilelli was foreshadowed.

In the circumstances, I am satisfied that Gdanski, at least from 12 May 2014, was put on notice by Palms that a non-party costs application against him was within the active contemplation of Palms.

However, and in contrast, no such notice was given to Chilelli which is in evidence.

This factor too serves to distinguish the position of Gdanski from that of Chilelli.

Conduct of the Proceedings by Gdanski

As earlier noted, an order for costs against a non-party is not dependent upon, but can take into account, any improper conduct by the non-party.[92]
[92]Vestris v Cashman (1998) 72 SASR 449, 467 (Lander J).

Four issues emerge as relevant to Gdanski arising from his conduct of the Proceeding.

The first is whether the prospects of success in the Proceeding were so low that they ought never to have been brought; the second is the degree to which the efforts of Gdanski to settle the Proceeding ought to have any and what bearing on the question as to whether, in the interests of justice, a non-party costs order ought to be made against him; the third is alleged delay in prosecuting the Proceeding caused by the Plaintiff at the hands of its solicitor and guiding hand, Gdanski; the fourth is the failure on the part of Gdanski to discover documents concerning and arising from the sale in September 2014 which were of clear relevance to the issues in the Proceeding of alleged losses, security for costs and proportionate liability.

As to the prospects of success of the Proceeding, in the absence of a trial, where the merits could have been appropriately evaluated, I am not in a position to be positively satisfied on the balance of probabilities, that the Proceeding was devoid of prospects of success to the point where it should never have been brought or maintained as against Palms.

Accordingly, this factor is discounted from consideration for the purposes of application of the Knight principles, and whether Gdanski should be subject to a non-party costs order.

As to the efforts of Gdanski to settle the proceedings, I accept that he did take reasonable steps to negotiate this outcome from time to time in the course of acting as solicitor for the Plaintiff. There is evidence that counsel for the parties, including counsel briefed by Gdanski, were in active discussions to settle the Proceedings from November 2013 to early 2014.

As such, Gdanski’s conduct of the Proceeding, at least in this respect, was consistent with the overarching purpose of s 7 of the CPA which, by s 7(2)(b) prescribes “agreement between parties” as one of the means by which the overarching purpose of the Act provided for under s 7(1) may be achieved.

In consideration of this application for a non-party costs order against Gdanski, I give some weight to his efforts to achieve a resolution of the Proceeding by agreement of the parties, consistently with s 7(2)(b) of the Civil Procedure Act 2010.

As to the alleged delay in prosecuting the Proceeding on the part of the Plaintiff, the evidence establishes that between October 2013, when a trial date was fixed and various pre-trial steps were ordered, and May 2014, the only active step taken to progress the proceeding by the Plaintiff was the provision of a draft Court Book index in April 2014, several weeks late.

However, I do not take the view that there was any material delay in the conduct of the Proceeding caused by Gdanski which ought to have any bearing on the non-party costs application pressed against him. In particular, I am not satisfied that non-compliance on the part of the Plaintiff with some Court orders is of such gravity and persistence as to amount to a factor which should be held against Gdanski in consideration of this application, particularly in the light of the settlement discussions which were taking place during this period.

As to discovery, the Civil Procedure Act 2010 and the common law impose obligations on all participants in litigation, including their lawyers, to disclose the existence of discoverable documents. Section 26 of the Act provides for an ongoing overarching obligation for the duration of the civil proceeding to disclose to each party the existence of all documents that are, or have been, in that person's possession, custody or control— of which the person is aware and which the person considers, or ought reasonably consider, are critical to the resolution of the dispute.

The documents concerning the 2013 contract of sale for the Property dated 27 September 2013 pursuant to which the Plaintiff entered into to sell the Property to Traian Iurescu for $2.1 million, including most relevantly the contract of sale, were directly relevant to the issues of alleged losses allegedly suffered by the Plaintiff claimed and pleaded in the Proceeding. Gdanski, as the solicitor for the Plaintiff and with knowledge of the sale, failed to discover these documents to Palms, in breach of his overarching obligation to do so under s 26.

I am satisfied that Chilelli had no knowing involvement in this conduct.

However, this is a factor of relevance which I take into account against Gdanski.

Conclusion on the Interests of Justice

As is clear from the above analysis of the factors relevant in this case on the issue of the interests of justice, some factors go one way, others the other way.

All of the circumstances established by the evidence are to be considered and weighed in deciding whether the interests of justice justify an order for costs against a non-party in application of the Knight principles. In approaching this task I have sought to evaluate the evidence as a whole in order to fairly determine where the interests of justice lie. The method is not dissimilar to the consideration of circumstantial evidence in a civil case as described by Tadgell JA in Transport Industries Insurance Co Ltd v Longmuir[93] where His Honour observed:

The evidence is to be evaluated as a whole in order fairly to consider whether the party bearing the onus of proof has established what is ultimately sought to be proved. The object of the exercise of evaluation is to discover whether the evidence paints a picture reflecting real life, rather than to place a tick or cross against paragraph after paragraph of torpid pleading. A true picture is to be derived from an accumulation of detail. The overall effect of the detailed picture can sometimes be best appreciated by standing back and viewing it from a distance, making an informed, considered, qualitative appreciation of the whole. The overall effect of the detail is not necessarily the same as the sum total of the individual details.

[93][1997] 1 VR 125, 141; cited with approval by the Court of Appeal of Victoria in Nolan v Nolan[2004] VSCA 109, [120–121] in the joint judgment of Chernov and Eames JJA (Ormiston JA concurring).

After standing back and making an informed decision, taking into account and giving due weight to my findings on the relevant matters, and making qualitative appreciation of the whole, the interests of justice call for a non-party costs order to be made against Gdanski but not as against Chilelli.

Application of Knight Principles - Conclusion

On the application of the Knight principles, I am satisfied that Gdanski should be ordered to pay the costs ordered to be paid in favour of Palms by the Plaintiff, 1165 Stud Road as a consequence of its discontinuance of the proceeding.

Application against Rockwell Olivier

The application against Rockwell Oliver was advanced on the principles set out in Flower & Hart, r 63.23 of the Rules and breaches of the CPA giving rise to liability under s 29.

General Position of Rockwell Olivier

The evidence establishes that Gdanski brought the litigation file in relation to the Proceeding with him from Sackville Wilks and thereafter continued to manage the file in the Proceeding on behalf of the Plaintiff and direct the course of the litigation on behalf of the Plaintiff.

Gdanski is a senior legal practitioner with 20 years’ experience. He came to Rockwell Olivier as a successful lawyer with some 30 to 40 clients and approximately 100 files, about half of which were litigation files. In these circumstances I accept that it was not unreasonable for Rockwell Olivier to have not conducted a detailed investigation into the facts and the merits underpinning Gdanski’s files. Rockwell Olivier was entitled to trust that Gdanski had administered these files in accordance with the Civil Procedure Act 2010 and would continue to do so, and I am not satisfied on the evidence that Rockwell Olivier should have proceeded otherwise.

Rockwell Olivier was on the record for only 7 ½ months of the life of the proceeding (with a Christmas break intervening) before the Plaintiff was placed into liquidation and the proceedings were discontinued. During that period of time settlement discussions were occurring, offers were being exchanged, and an extension of time was being sought to the interlocutory timetable and the joinder of further parties was being contemplated (a course to which some parties had consented).

Rockwell Olivier is an incorporated legal practice, being a corporation that engages in legal practice in Victoria under Part 2.7 of the Legal Profession Practice Act 2004. As such, Rockwell Olivier was not at all material times a partnership within the meaning of the Partnership Act 1958 (Vic) by the operation of s 5(2) of that Act.

Gdanski was an employee of the corporation Rockwell Olivier. He was not a legal practitioner director of Rockwell Olivier within the meaning of s 2.7.10 of the Legal Profession Practice Act 2004.

No relevant delay

As observed earlier, the evidence establishes that between October 2013, when a trial date was fixed and various pre-trial steps were ordered, and May 2014, the only active step taken to progress the proceeding by the Plaintiff was the provision of a draft Court Book index in April 2014, several weeks late.

However, I do not take the view that there was any material delay in the conduct of the Proceeding caused by Rockwell Olivier which ought to have any bearing on the non-party costs application pressed against the corporation. As I have found in relation to Gdanski on this issue, I am not satisfied that non-compliance on the part of the Plaintiff with some Court orders during this period, is of such gravity and persistence as to amount to a factor which should be held against Rockwell Olivier in consideration of this application, particularly in the light of the settlement discussions which were taking place during this period.

Flower & Hart

In relation to the Flower & Hart principles, Palms submits that Rockwell Olivier continued an action against Palms with substantially no worthwhile prospects.

True it is that Rockwell Olivier sought no report from Gdanski (or anybody else) in relation to the Proceeding at the time it came to the firm.

However, Rockwell Olivier, as a corporate entity, was entitled to assume that there was no irregularity with the file. In particular, the corporation was entitled to assume that Gdanski, as a practising solicitor, was in a position to continue to act for the Plaintiff and assume that there was no material conflict of interest in him continuing to act in the matter.

Further, in circumstances where the Proceeding was commenced by Gdanski under the regime of the CPA, the corporation was entitled to assume that the Proceeding had sufficient merit to justify its continuance

Again, in the absence of a trial, where the merits could have been appropriately evaluated, I am not in a position to be positively satisfied on the balance of probabilities that the Proceeding was devoid of prospects of success to the point where it should never have been brought or maintained as against Palms.

I find that there was nothing in the conduct of Rockwell Olivier in relation to the Proceeding which could justify an order that it pay all or some of the costs of Palms under the principles of Flower & Hart.

Alleged Breaches of the CPA

In relation to the CPA, Palms submits that Rockwell Olivier has breached the overarching obligations to only take steps to resolve or determine the dispute (s 19), to cooperate in the conduct of a civil proceeding (s 20), not mislead or deceive (s 21), to use reasonable endeavours to act promptly and minimise delay (s 25) and to disclose the existence of discoverable documents (s 26). Palms relies on the following matters:

(a)Mr Gdanski was both an officer of the Plaintiff (who signed the overarching obligations certificate) and the principal solicitor on the record for the Plaintiff;
(b)the Plaintiff’s and Mr Gdanski’s knowledge that Palms was relying on earlier assurances as to the net equity in the Property meeting any adverse costs order;
(c)whilst Rockwell Olivier was on the record, the Property was re-sold, the transfer effected and proceeds from the sale distributed pursuant to a contract of sale dated 27 September 2013;
(d)the details and documents concerning this re-sale were not disclosed by Gdanski or Rockwell Olivier;
(e)the details of the re-sale were relevant to both the security for costs issue and to the Plaintiff’s claimed losses in the proceeding; and
(f)the complete lack of progress in this proceeding and no attempts to communicate with Palms’ lawyers or to extend the time for compliance with various interlocutory steps as described in the previous paragraph.

In these circumstances, Palms submits that Rockwell Olivier has breached a number of overarching obligations under the CPA.

It is claimed by Palms that these breaches resulted in Palms incurring substantial legal costs in continuing to defend the claims and not issuing an earlier security for costs application against the Plaintiff. This may have resulted in much of its legal costs from late 2013 being avoided.

Palms submits that in these circumstances, the Court should order that Rockwell Olivier pay at least some of Palms’ costs arising out of Rockwell Olivier’s breaches.

However, as earlier found, the application of Palms founded on s 29 of the CPA, is barred by the operation of s 30 of the Act.

Accordingly, for the purposes of making a non-party costs order, the alleged breaches of the overarching obligations under the CPA, per se, are not relevant to the founding of any claim for such costs against Rockwell Olivier, by reason of my finding that the application purportedly made under s 29 of the Act is incompetent by the operation of the time limit in s 30.

For this reason, the application for a non-party costs order against Rockwell Olivier based on s 29 of the CPA fails.

Rule 63.23 Supreme Court Rules

In relation to r 63.23, Palms submits that Rockwell Olivier has caused costs to be incurred by Palms improperly or without reasonable cause because of Rockwell Olivier’s failure to act with reasonable competence and expedition. Palms relies on the following matters:

(a)Mr Gdanski was an officer of the Plaintiff and the solicitor with the carriage and conduct of the proceeding on behalf of the Plaintiff;
(b)from October 2013 to May 2014, the only active step taken by the practice to progress the proceeding was providing a draft Court Book index in April 2014 which was several weeks late;
(c)Rockwell Olivier did not disclose matters concerning the sale and settlement of the Property in 2013 nor the fact of liquidation in early April 2014;
(d)Rockwell Olivier did not seek any extension of time to comply with various pre-trial orders;
(e)the Plaintiff failed to comply with orders for the provision of evidence; and
(f)Rockwell Olivier then filed a notice of discontinuance and a notice of ceasing to act on 19 May 2014.

Conclusions as to Non-Party Costs Order Against Rockwell Olivier Under Rule 63.23 Supreme Court Rules

It is well established that, where a costs order is sought against a lawyer under r 63.23 of the Rules, the claimant needs to show a causal connection between the lawyer’s conduct and the particular financial loss which is sought to be recovered.[94]
[94]Byrne v Sefton Health Authority [2002] 1 WLR 775, 783, Hudspeth v Scholastic Cleaning and Consultancy Services Pty Ltd & Ors (No 8) [2014] VSC 567, [161].

However, Palms has failed to show any causal link between Rockwell Olivier’s alleged breaches and specific costs which have been incurred.

It is accepted that, in the period from 4 October 2013 to 29 August 2014, Palms incurred legal costs of approximately $134,000.

It is also accepted that Palms incurred substantial legal fees in defending claims which did not proceed. As earlier found, between 7 September 2012 and 29 August 2014 ABL rendered accounts to Palms for legal work undertaken on its behalf in the Proceeding totalling $301,303. Palms paid these fees.

However, it has not been established that these costs would have been avoided, had, for example, the Plaintiff advised Palms of the sale of the Property on or about 27 September 2013. It is possible that Palms, in these circumstances, would have made an immediate application for security for costs upon receipt of the notification. I am not satisfied, on the balance of probabilities, that this would have occurred, particularly given the delay between 4 March 2014, when Palms discovered the Property had been sold and 1 May 2014, when the application for security for costs was issued, nearly two months later. Whether and when Palms would have made such an application had it been advised earlier of the sale, and the outcome of such an application had it been made, and critically, whether further costs would have been avoided, even if the application was successful, is left clouded with conjecture.

I find that there was nothing in the conduct of Rockwell Olivier, as an incorporated legal practice, in relation to the Proceeding which could justify an order that it pay all or some of the costs of Palms under r.63.23 of the Rules.

Further, I apply the following approach to r 63.23 in this case, which was discussed in Kenny & Anor v Gippsreal (No 2):[95]

Having dismissed the application insofar as it was founded on s 29 of the CPA by reason of non-compliance with the statutory time limit under s 30, in my opinion, it would work to circumvent the very clear statutory requirements under the CPA if an applicant was in effect permitted to maintain the very same case to found a non-party costs order against lawyers, but do so under r 63.23 of the Rules.
To my mind, a powerful, and in this case an insurmountable, element in the exercise of the discretion under r 63.23, is the necessity to comply with the statutory requirement of s 30 of the CPA and prevent the force and effect of that provision being undermined by application of a Rule of a Court in the manner urged by the applicant. The proper administration of the CPA and the protection of the regime of checks and balances established in Part 2.4, calls for this approach.

[95]Kenny & Anor v Gippsreal (No 2) [2015] VSC 737, [51]-[52].

When this approach is applied to the very similar facts of the present case it is clear that the discretion should be exercised against making an order under r 63.23 on a similar basis.

Costs on an indemnity basis

Palms submits that the costs orders against the non-parties in this proceeding should be awarded on an indemnity basis because:

(a)their conduct caused costs to be incurred unnecessarily and loss of time to the Court and to the other parties; and
(b)there were a number of attempts to resolve the Proceeding through Calderbank offers each of which was rejected by the Plaintiff unreasonably.

Whether to allow costs on an indemnity basis is in the discretion of the Court.[96] The exercise of the discretion is generally exceptional, being reserved for cases where the losing party has engaged in unmeritorious or deliberate or high-handed or other improper conduct such as to warrant the court showing its disapproval and preventing the successful party being left out of pocket.[97]
[96]See Supreme Court Act 1986 (Vic), s 24(1).
[97]Australian Guarantee Corp Ltd v De Jager [1984] VR 483, 502.

In my opinion, Gdanski engaged in relevant misconduct in acting on behalf of the Plaintiff when, well knowing of the existence of the document and, I infer, well understanding its relevance to the issue of damages in the Proceeding or being in a position where he ought to have understood its relevance, he failed to discover the contract of sale of the Property which was entered into on 27 September 2013.

This was the first obvious example where his conflict as the solicitor for the Plaintiff on the one hand and his interest in the Plaintiff as its director and, through associated companies, his interest as a shareholder on the other, more than likely inhibited him from exercising sound forensic judgment and providing independent advice to his client, to which it was entitled.

Further, it will be recalled that it was between 28 February 2013 and 2 April 2013, that ABL, on behalf of Palms, and Gdanski of Sackville Wilks, on behalf of the Plaintiff, corresponded on the issue of security in the “security for costs correspondence”. Central to the assurances given to Palms through ABL by Gdanski, that the Plaintiff had sufficient assets to meet any costs order against it, was its ownership of the Property and its value as an asset. In the circumstances, the failure of Gdanski to disclose to Palms the sale of the Property on or shortly after 27 September 2013, in my opinion, amounted to sharp practice on his part, no doubt also a product of a judgment clouded by his conflict of interest.

For this reason, I will order that Gdanski pay the costs of Palms of the Proceeding on an indemnity basis from 27 September 2013.

In the course of the Proceeding there were three Calderbank offers made by Palms to the Plaintiff:

(a)offer dated 20 February 2013 for the Plaintiff to pay Palms’ costs in the amount of $30,000 (excl. GST);
(b)offer dated 15 May 2013 for the Plaintiff to pay Palms’ costs in the amount of $45,000.00 (plus GST); and
(c)offer dated 31 March 2014 for the Plaintiff to pay Palms’ costs in the amount of $130,000 (incl. GST).

Reasons were provided in the second and third of the offers as to why the Plaintiff’s claims would fail and why the offer should be accepted. None of these offers was accepted by the Plaintiff.

It is well accepted that the existence of a Calderbank offer is a factor to be taken into account in the Court’s discretion with respect to costs. The principles in relation to Calderbank offers were summarised in Hazeldene’s Chicken Farm Pty Ltd v WorkCover Authority (No 2).[98] In considering whether the rejection of a Calderbank offer was unreasonable, the Court usually takes into account the stage of proceeding, the period allowed for acceptance, the extent of the compromise offered, the offeree’s prospects and the clarity of the offer.
[98][2005] VSCA 298.

However, although the three Calderbank offers were made by Palms to the Plaintiff, no Calderbank offers were made to any of the non-party respondents to this application, including Gdanski and Chilelli.

Although Gdanski knew of the Calderbank offers made to the Plaintiff company, Chilelli did not know of them.

I reject the relevance of the Calderbank offers to the present application because:

(a)I am not satisfied that it was not unreasonable for the Plaintiff to have rejected the offers made on 20 February 2013 and 15 May 2013;
(b)None of the Calderbank offers was directed to any of the non-party respondents to this application, and there is no proper basis for costs orders to be made against them founded on non-acceptance of these offers when they were not then put on notice of any non-party costs application proposed to be made against them, until, in the case of Gdanski, he was put on notice at the hearing before Daly AsJ on 12 May 2014, well after the expiry of the last of the three Calderbank offers; and
(c)In any event, and on other grounds, I have found that Gdanski should pay the costs of Palms on an indemnity basis from 27 September 2013, for the reasons earlier discussed.

Orders

The following orders will be made:

1. John Gdanski, the respondent to the summons issued by the Third Defendant dated 22 December 2014, is ordered to pay the costs of the Third Defendant of the Proceeding up to and including 27 September 2013 on a standard basis and thereafter on an indemnity basis.

2. The summons issued by the Third Defendant dated 22 December 2014 as against Renato Chilelli and Rockwell Bates Pty Ltd (an incorporated law practice trading as “Rockwell Olivier”) is otherwise dismissed.

I will hear the parties on the orders which should be made as to costs.

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[2015] VSC 735

18 December 2015