Brand2Content t/as Franchise Works v Dalby

[2019] NSWCA 16

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Brand2Content t/as Franchise Works v Dalby [2019] NSWCA 16
Hearing dates:	9 July 2018
Decision date:	18 February 2019
Before:	Simpson AJA
Decision:	1. The costs of the appeal are to be assessed on the ordinary basis to 16 March 2018, and on an indemnity basis thereafter; 2. Adam Dalby is to pay the costs of the appeal.
Catchwords:	COSTS – Party/Party – orders against non-parties – factors relevant to exercise of court’s discretion to award costs against non-parties – whether in the interests of justice to order non-party common director of defendant/appellant companies to pay costs COSTS – Party/Party – indemnity costs – offer of compromise – UCPR 41.14
Legislation Cited:	Civil Procedure Act 2005 (NSW) Competition and Consumer Act 2010 (Cth) Copyright Act 1968 (Cth) Trade Marks Act 1995 (Cth)
Cases Cited:	Brand2 Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56 FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 Knight v FP Special Assets Limited (1992) 174 CLR 178 May v Christodoulou (2011) 80 NSWLR 462; [2011] NSWCA 75 Oz B & S Pty Ltd v Elders IXL Limited (1993) 117 ALR 128 Ren v Jiang [2014] NSWCA 1 Spalla v St George Motor Finance Ltd (No 8) [2006] FCA 1537 VMA Companies LLC t/as Corbis Global v Ridley Capital Holdings Pty Ltd [2016] NSWSC 1567
Category:	Costs
Parties:	Brand2Content t/as Franchise Works (Applicant) Adam Dalby (Respondent)
Representation:	Counsel: S Balafoutis/R Clark (Applicant) A J Justice (Respondent)     Solicitors: Origin Lawyers (Applicant) Osborn Law (Respondent)
File Number(s):	2018/72524
Decision under appeal	Court or tribunal: Supreme Court of NSW Jurisdiction: Equity – Commercial List Citation: [2018] NSWSC 56 Date of Decision: 7 February 2018 Before: Ball J File Number(s): 2018/349668

Headnote

[This headnote is not to be read as part of the judgment]

Brand2Content Pty Ltd (‘Brand2’) commenced proceedings in the Commercial List of the Supreme Court, claiming damages for breach of contract and misleading and deceptive conduct by contraventions of the Competition and Consumer Act 2010 (Cth) and other related legislation. The defendants were three companies. By cross-claim, an additional company was added as a fourth cross-claimant. Adam Dalby was a director of each of the defendant/cross-claimant companies. In February 2018, Ball J found in favour of Brand2, dismissed the cross-claim, and awarded Brand 2 damages.

In March 2018, the three defendant companies filed an appeal. Brand2 made an offer of compromise, which was not accepted. Before the appeal could be heard, two events occurred. First, the company that had been added as a cross-claimant was placed into members’ voluntary liquidation with debts in excess of $5m. Second, the appellant companies terminated the instructions of their solicitors. Brand2’s solicitors were advised, and sought on a number of occasions to make contact with the appellants directly via email, using an address that the appellants’ former solicitor had supplied. Receiving no response, Brand2 filed a notice of motion seeking dismissal of the appeal for want of due despatch. They advised the appellants, via the email address supplied, that the notice of motion had been listed for hearing on 9 April 2018. On that day, there was no appearance on behalf of any appellant. The appeal was dismissed for want of due despatch, and the appellants were ordered to pay Brand2’s costs of the appeal.

By a notice of motion Brand2 sought supplementary orders to the effect that

1.   the costs of the proceedings on appeal be paid on an indemnity basis; and

2.    Adam Dalby (who was not a party to the appeal) pay Brand2’s costs.

Held:

In relation to issue 1

(i) The circumstances are within UCPR 41.14. Brand2 was entitled to an order that costs be paid on an indemnity basis from the day following the date on which the offer of compromise was made [87]-[93].

In relation to issue 2

(ii) Despite the breadth of a court’s powers concerning the award of costs, in general, costs orders are only made against a party to the litigation. But there are circumstances where costs orders against a non-party will be in the interests of justice: [7]-[10].

Knight v FP Special Assets Limited (1992) 174 CLR 178 applied.

FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 considered and applied.

Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 referred to.

(iii)   (a) Adam Dalby was the source of funding for the appeal;

(b) the appellant companies were impecunious;

(c) Adam Dalby had an interest in the outcome of the appeal;

(d) the integrity of the corporate veil did not give licence to Adam Dalby to conduct the litigation on behalf of the appellants in such a way as to cause unnecessary expense to Brand2.

(iv)   It was in the interests of justice that a non-party costs order be made.

Judgment

1. SIMPSON AJA: Brand2Content Pty Ltd (“Brand2”) is the respondent to an appeal filed on 6 March 2018. On 9 April 2018 I made an order, ex parte, that the appeal be dismissed for want of due despatch. I also ordered that the appellants pay the costs of the proceedings.

2. By Notice of Motion filed on 16 April 2018 Brand2 seeks supplementary orders to the following effect:

(i)   that the costs of the proceedings be paid on an indemnity basis; and

(ii)   that Adam Dalby (who was not party to the appeal) pay Brand2’s costs.

Background

3. On 22 November 2016 Brand2 commenced proceedings in the Commercial List of the Supreme Court claiming damages for alleged breaches of contract and for misleading and deceptive conduct by contraventions of the Competition and Consumer Act 2010 (Cth) and related legislation. It named as the first to third defendants, respectively, Solar Australia Pty Ltd (“SA”), Get Off the Grid Pty Ltd (“GOG”) and Solar Australia Franchising Pty Ltd (“SAF”). The defendants were, and until 3 April 2018 continued to be, represented by Osborn Law.

4. The defendants filed a defence and cross-claim, and, later, an amended cross-claim in which a fourth cross claimant, Solar & Batteries Australia Pty Ltd (“SABA”) was added, as well as a second cross-defendant, Timothy Dixon. Various interlocutory steps were taken prior to the hearing of the claim, which commenced on 4 December 2017 before Ball J, and proceeded over that and the following three days. On 7 February 2018 his Honour delivered judgment in favour of Brand2 in the amount of $771,611 and dismissed the cross-claim. He ordered the defendants/cross-claimants to pay Brand2’s costs of the proceedings: Brand2 Content Pty Ltd t/as Franchise Works v Solar Australia Pty Ltd [2018] NSWSC 56. The defendants (to whom I will hereafter at times refer as the appellants) filed an appeal. On 28 March 2018 the hearing of the appeal was fixed for 28 June 2018. On the same day, by notice of motion, Brand2 applied for an order that the appellants provide security for costs. Before that application could be heard and determined, two events of significance occurred. On 29 March SABA was placed into members’ voluntary liquidation with debts in excess of $5m. On 3 April the appellants terminated the instructions of Osborn Law. Brand2’s solicitors (Origin Lawyers) were advised of the termination later that day. They sought, unsuccessfully, to contact the appellants at an email address supplied by Osborn Law. They then filed a notice of motion seeking dismissal of the appeal for want of due despatch: UCPR 12.7, 51.1(3) and (4). They advised the appellants, at the email address supplied, that the notice of motion was listed for hearing on 9 April 2018. On that day, there was no appearance on behalf of any appellant, and, as indicated above, I made the orders sought, that the appeal be dismissed and that the appellants pay Brand2’s costs.

5. As stated above, Brand2 now seeks orders that its costs be assessed on an indemnity basis, and that Adam Dalby pay the costs. Adam Dalby was a director of each appellant company, but was not himself a party to the proceedings either at first instance or on appeal. To explain the factual basis for these applications, it will be necessary in due course to supplement the background of factual matters set above. First, it is convenient to set out the legal basis on which an order for payment of costs may be made against a person who is not party to the proceedings.

Orders for payment of costs by non-party.

6. The power to order a person who is not a party to the proceedings derives from s 98 of the Civil Procedure Act 2005 (NSW), specifically subs (1) which provides:

“98   Courts powers as to costs

(1)  Subject to rules of court and to this or any other Act:

(a)  costs are in the discretion of the court, and

(b)  the court has full power to determine by whom, to whom and to what extent costs are to be paid, and

(c)  the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.”

7. Notwithstanding the breadth of s 98(1), as a general principle costs will be awarded only against a party to the litigation: Knight v FP Special Assets Limited (1992) 174 CLR 178 at p 192. That legislative provisions of this kind confer jurisdiction to make orders for payment of costs by non-parties was established by the decision of the High Court in Knight. The issue in Knight was whether the Supreme Court of Queensland had jurisdiction to make an order for costs against the receivers of companies which were unsuccessful parties to proceedings, the receivers themselves not having been parties. The grant of special leave to appeal to the High Court was confined to the issue of jurisdiction, and the Court was not concerned to consider the exercise of discretion in the courts below. The Court held, by majority, (Mason CJ and Deane J in a joint judgment, Dawson J and Gaudron J in separate concurring judgments, McHugh J dissenting) that under the relevant Queensland legislation, the Supreme Court did have the jurisdiction in question. That legislation, like s 98, conferred a general discretion on the court to award costs. It was accepted that the reasoning in Knight also applied to s 98(1), and that this Court has jurisdiction to order that a person who is not party to proceedings pay the costs.

8. Notwithstanding that the issue before the High Court was expressly confined to jurisdiction, there are passages in the judgments that throw light on the nature and extent of the discretionary powers conferred. Mason CJ and Deane J, having considered an argument against jurisdiction, said:

“The inevitable answer to arguments directed to limiting curial jurisdiction based on the supposition that the jurisdiction might lend itself to abuse is that the court will and should develop principles governing the exercise of the discretion which will ensure that the jurisdiction is not exercised in such a way as to give rise to abuse.” (at p 185)

9. Later, their Honours said:

“The conclusion that the wide words of [the legislation] should not be read down so as to preclude jurisdiction to make an order for costs against a non-party does not, of course, mean that a judge has an unfettered discretion to make any order that he or she chooses. The wide jurisdiction conferred by the rule ‘must be exercised judicially’ and in accordance with general legal principles pertaining to the law of costs” …

Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long established categories of case in which equity recognised that it may be appropriate for such an order to be made.

For our part, we consider it appropriate to recognise 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 part 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.” (at pp 192-193) (internal citations omitted)

10. Dawson J said:

“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 or where there has been a contempt or abuse of the process of the court. Even if the cases were confined to ejectment proceedings (and clearly they are not), the principle lying behind the ejectment cases is that the real litigant rather than the nominal party may be liable for costs.” (at p 202)

Gaudron J observed that powers conferred on a court are to be exercised judicially and in accordance with legal principle. (at p 205)

11. In FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 Basten JA, with whom Beazley JA, as her Honour then was, and Giles JA (in this respect) agreed, identified five criteria for the exercise of the jurisdiction that emerge from cases in which orders for payment of costs by non-parties have been made. In FPM the court was concerned with s 148B of the District Court Act 1973 (now repealed), the equivalent to s 98(1). At [210] Basten JA stated the criteria as:

“(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 fourth and fifth of these were drawn directly from the passage in Knight extracted above.

12. It would be a mistake to regard the criteria as a check list against which an application ought to be measured. And the list is not an exhaustive statement of relevant factors: see May v Christodoulou (2011) 80 NSWLR 462; [2011] NSWCA 75 at [96] and [111]. It would also be a mistake to regard any or all of the criteria as necessary factors before an order may be made. So much is clear from the passages extracted from Knight. The over-riding consideration is whether it is in the interests of justice to make the order. The FPM criteria are illustrative of circumstances that have, in past cases, been seen to justify an order that a person who was not a party to the proceedings nevertheless be held liable for the costs.

13. Nor is the language in which the criteria are expressed to be taken as prescriptive. The criteria are indicative and illustrative, reflecting decisions made in previous cases. They are a guide to circumstances of the kind that have permitted an order to be made against a non-party.

14. Each of the five criteria identified by Basten JA needs to be carefully evaluated lest, in the circumstances of the particular case, it be given weight to which it is not, on proper evaluation, entitled. There may be good reasons, for example, for a company officer to provide funds for litigation which a corporate litigant is unable to provide. It will frequently be the case that an officer of a company who takes responsibility for the management of the litigation is also the ultimate, or an ultimate, beneficiary of the litigation in the event that it is successful. That is certainly so where the director is a shareholder. Although orders are not infrequently made where the party to the proceedings is a company and the non-party sought to be made liable for the costs is a director or other officer, or shareholder, the availability of orders is not confined to corporate litigants. Orders can equally be made against an individual litigant in appropriate circumstances. And further, criterion (d) expressly acknowledges that the interest held by the non-party sought to be made liable need not be financial.

15. It is also to be recognised that, in the case of every corporate litigant, some one or more officers of the company must play an active part in the litigation, and make necessary decisions.

16. For these reasons, care needs to be taken where the corporate litigant is a single-director or a small company or where all or the majority of the shares are held by one or two individuals. In those cases, it is a practical necessity that the, or a, director or shareholder has a personal (often financial) interest in the outcome, is actively involved in the pursuit of the litigation and, sometimes, is required to provide funding to enable the litigation to be maintained. None of these circumstances alone, nor any combination of them, is necessarily sufficient to warrant an order.

17. “Mechanical” application of the criteria, against which Gleeson JA cautioned in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [81] (as had Basten JA in FPM) might suggest that an order ought to be made, where, in reality, the criteria (or some of them) are satisfied by reasons of the practical necessities associated with the corporate structure.

18. These points are well illustrated in the decision in Heath. The pared down facts in Heath were as follows. In June 2012 the defendant company was sued for arrears of rent on a commercial property. Mr Heath was a director of the company but was not a party to the suit. The defendant company cross-claimed against the plaintiffs. Mr Heath verified the pleadings filed on behalf of the defendant company. He also swore an affidavit in support of the defence and cross-claim, as did the defendant company’s former general manager. In March to April 2014 the plaintiff companies filed 12 affidavits in reply to the defendant company’s affidavits which disputed (“convincingly”, the primary judge found) the factual basis of the defence and the cross-claim. To that point the defendant company had been represented by a solicitor, but on 16 May 2014 that solicitor filed a notice of ceasing to act. Mr Heath took over the conduct of the proceedings, having filed, on 10 June 2014, an affidavit in accordance with UCPR 7.2 evidencing that he had been authorised by resolution of the directors of the defendant company to do so.

19. On 29 September 2014 the directors of the defendant company appointed an administrator, and, on 31 October 2014, the defendant company was placed in voluntary liquidation. The liquidator reported a dire financial position.

20. On 17 November 2014, the day fixed for hearing, the liquidator consented to a grant of leave to the plaintiff companies to discontinue their claim, and leave was given to them to proceed against Mr Heath on a notice of motion filed a week earlier seeking an order that he pay the costs of the proceedings. Mr Heath did not appear to defend that application.

21. The primary judge ordered that Mr Heath pay the plaintiff company’s costs of the proceedings; he did so on the basis of improper conduct on the part of Mr Heath. The improper conduct cited was knowingly persisting in a defence and cross-claim which relied on facts that were “convincingly” shown in the affidavits filed by the plaintiff companies, to be false.

22. This Court partially upheld an appeal by Mr Heath. It found that the evidence did not establish an important factual basis for the first instance decision, that is, that Mr Heath was aware of the falsity of the factual basis of the defence and cross-claim; the evidence did not establish that knowledge until he was served with the plaintiff company’s affidavits in reply to defendant company’s evidence on the cross-claim. The Court proceeded to exercise the discretion itself. Referring to the FPM criteria, Gleeson JA accepted that Mr Heath had played an active role in the proceedings, by causing the defendant company to defend the plaintiff companies’ claims and propound the cross-claim. After the defendant company’s solicitor ceased to act, he took over the conduct of the proceedings, continuing to assert the factual basis of the defence and cross-claim in the face of the plaintiff companies’ contradictory evidence. As a director and the largest unsecured creditor of the defendant company, and as a shareholder, Mr Heath had an interest in the outcome of the proceedings. The evidence permitted an inference that, at least from 30 May 2014, the defendant company was, if not impecunious, facing significant financial difficulties. From the date of service of the plaintiff companies’ affidavit evidence, Mr Heath behaved unreasonably and irresponsibly in not accepting the inevitable and consenting to judgment.

12. The court therefore substituted for the order made by the primary judge an order that Mr Heath pay the plaintiff company’s costs from 30 May 2014 (on an indemnity basis).

13. It seems to me to be clear from the reasons of Gleeson JA that it was the third FPM criterion – that the conduct of the litigation was unreasonable or improper – that was the essence of the decision in Heath. Indeed, Gleeson JA said:

“92.   The focus in the present case is on the unreasonable conduct of the non-party in maintaining the proceedings which had no prospect of success. If such a finding is made, that conduct cannot be said to be the cause of the successful party incurring costs at an earlier time before it was unreasonable for the non-party to maintain the proceedings.”

25. That unreasonable conduct was the basis for the decision may also be seen from the order ultimately made. Although, throughout the litigation, Mr Heath had an interest in the outcome, and had taken an active part in the proceedings, the order dated only from the commencement of the conduct found to have been unreasonable or irresponsible. While criteria (d) and (e) were satisfied, that was not sufficient to warrant an order that Mr Heath pay the costs from a time prior to the time when the conduct of the proceedings became unreasonable.

26. Among other things, Heath shows that the first of the FPM criteria (that the person against whom the orders are sought be the moving party) is not inflexible. The defendant company was not the moving party to the litigation, although it was the proponent of the cross-claim, which was, in substance, the reason for the order.

The contentions of the parties

27. It was Brand2’s contention that all five of the FPM criteria were satisfied. That four of the five criteria were made out was contested. The first, that the appellant companies were the moving parties in the litigation (the relevant litigation being the appeal) was not in dispute. It is then necessary to consider the evidence, and the competing positions of the parties, with respect to each of the four remaining criteria. As indicated above, that entails a more detailed consideration of the evidence.

28. The factual issues thereby raised are:

(i)   the source of the funds for the appeal: that is, whether (as Brand2 contends) or not (as Mr Dalby contends) Mr Dalby funded, or agreed to fund, the appeal;

(ii)   whether the conduct of the appeal was unreasonable or improper (and, if so, whether Mr Dalby was responsible for the unreasonableness or impropriety);

(iii)   whether Mr Dalby personally had a substantial financial or other interest in the outcome of the appeal;

(iv)   whether the appellant companies were insolvent or impecunious.

29. Brand2 relied on two affidavits sworn by Lisa Cox, a solicitor in the employ of its solicitors (Origin Lawyers), who had had the day to day carriage of the appeal proceedings. Mr Dalby relied on two affidavits affirmed by himself on 14 May 2018 and 28 June 2018, an affidavit sworn by Mr Simon Rutherford, a director of a firm of accountants engaged by the appellant companies, an affidavit sworn by Ms Karen Pilgrim, an accountant in the employ of that firm, and an affidavit sworn by Timothy Osborn (a director of Osborn Law).

30. Ultimately, few of the factual matters asserted in the affidavits were in issue, although the inferences to be drawn from those facts were disputed. Neither party sought to cross-examine any deponent. Since I am asked to draw some seriously adverse inferences against Mr Dalby, concerning his conduct and the motivation for his conduct, the absence of any cross-examination causes some difficulties. I am conscious that, on an interlocutory application, cross-examination is not as of right (Ren v Jiang [2014] NSWCA 1, per Leeming JA); however, leave can be and is sometimes given, and, it seems to me, that if a court is to be asked to draw inferences concerning motivation for the conduct of a witness that is a valid reason for leave to be, at least, sought. However, I am constrained to proceed in the absence of any opportunity to observe Mr Dalby, or to have his evidence tested.

The relevant facts

31. The following factual account, recorded so far as possible chronologically, is drawn from the affidavits of both parties. The three defendant companies in the primary proceeding were SA, SAF and GOG. SA is the principal trading company, and was trustee of the Solar Newcastle Unit Trust (“SNUT”). SA has never traded on its own account. The initial unit holder of SNUT was named as John Dalby and Adam Dalby as trustee for the Dalby Family Trust. Subsequently, it seems, they were replaced by Surf and Bali Pty Ltd, a company which was incorporated on 4 December 2017, and in which all shares are held by James Bruce Dalby (Adam Dalby’s brother).

32. Until a liquidator was appointed (on 3 May 2018) Adam Dalby held 90% of the shares in SA. He was one of two directors, the other being his father, John Dalby. SAF was incorporated in August 2015. Adam Dalby was one of two directors. Until 8 February 2018 he and John Dalby jointly held 80% of the shares in SAF. GOG was incorporated in January 2015. Adam Dalby and John Dalby were directors. Until 8 February 2018 Adam Dalby held 80% of the issued shares.

33. On 8 November 2017 the three defendant companies filed a cross-claim in the primary proceedings. Also party to the cross-claim was a fourth company, SABA. From 14 June 2017 Adam Dalby was a director of SABA, together with John Dalby, who had been a director since 2011. Until 8 February 2018 Adam Dalby held 90% of the issued shares in SABA. SABA apparently claimed an interest in the proceeding because, it asserted, on 1 July 2017, it had acquired the assets of SA, acting as trustee for SNUT. Brand2 disputed that such a transaction had taken place, or that it had been completed. It is unnecessary to resolve this factual dispute. The essential point that Brand2 seeks to make is that, even if an agreement was made for the transfer of SA’s business to SABA (as stated by Mr Dalby in his first affidavit), no written agreement was ever executed. One consequence of that is that a trade mark held by SA, and copyright in the business also held by SA could not have been effectively transferred: see Trade Marks Act 1995 (Cth) s 107(1) and Copyright Act 1968 (Cth) s 196(3). Mr Dalby did not dispute these assertions. SA ceased trading from about the date of the transfer. According to Adam Dalby’s evidence, the restructure resulted from advice given by his accountants and the purchase was at market value. An overdraft held by SA in the National Australia Bank was also transferred to SABA. The overdraft was (it seems clear from his affidavit) secured on Adam Dalby’s personal property.

34. On 1 December 2017 consent orders were made for security for Brand2’s costs associated with the cross-claim.

35. As indicated above, judgment in the primary proceedings was given on 7 February 2018 against all three appellant companies, and the cross-claim was dismissed. Osborn Law wrote to Adam Dalby to communicate the decision, saying (inter alia):

“1. On a preliminary review of the judgment it would appear that there are grounds for appeal, however, further consideration will need to be given to the strength of those grounds and commercial considerations. This can be discussed further tomorrow.” (Annexure F. p 109)

36. Apart from one other comment, that it was “open to argue” that one component of the damages awarded should have been significantly reduced, the solicitors (unsurprisingly, given that the letter was written on the day judgment was delivered) did not expand on any possible grounds of appeal or their prospects of success.

37. The following day, 8 February 2018, Adam Dalby lodged forms in the Australian Securities and Investment Commission recording that he and John Dalby had transferred their shares in GOG, SABA and SAF to Surf and Bali, which did not hold the shares beneficially. No information was provided as to the identity of the beneficial owner or owners.

38. On 2 March 2018 Adam Dalby entered, in his own name, into a costs agreement with Osborn Law with respect to the proposed appeal and a proposed application for stay of execution of the judgment. (In his affidavit, he said that this was done as director of the appellant companies, and it was his intention that the appellant companies would pay for and account for the costs of any appeal that eventuated).

39. On 6 March 2018 Osborn Law wrote to Brand2’s solicitors, advising of their intention to file an appeal, and asking that Brand2 refrain from seeking to enforce the judgment, failing agreement to which they would file a notice of motion seeking an order for stay of execution.

40. On 6 March 2018 a notice of appeal was filed. SABA was not a party to the appeal. On 12 March 2018, in response to a request for information from Brand2’s solicitors, Osborn Law wrote:

“We are instructed to seek a stay of the judgment on the basis that the defendants do not have capacity to pay. If necessary we will rely upon the enclosed financial documents. It is clear on any reading of the documents that our clients, including Solar and Batteries Australia Pty Limited, do not have capacity to pay.” (Tab 20)

41. Osborn Law included documents evidencing the financial position of SA ($100 in assets); SNUT (in 2017 a deficiency of $575,000, comprising largely, unpaid entitlements owing to the Dalby Family Trust, in February 2018 a deficiency in assets of 832,000, again largely comprising unpaid entitlements owing to the Dalby Family Trust); GOG ($100 in assets); SAF (in 2017, a deficiency in assets of $379,000, in 2018, a deficiency in assets of $380,000). Documents also showed debts owing by SNUT to other entities.

42. In light of the financial evidence, including the letter from Osborn Law stating that the appellant companies could not meet the judgment debt, Brand2 sought, initially by correspondence and then by notice of motion, that the appellant companies provide security for the costs of the appeal. On 16 March 2018 they nominated a figure of $52,500; Osborn Law responded, disputing the figure as excessive. They did not suggest an alternative or reduced figure. On 26 March Brand2’s solicitors responded with a reduced figure of $42,000, and indicated that if the appellant companies did not agree to the payment, they would file a notice of motion seeking orders. Osborn Law responded by saying that the appellant companies did not agree to pay the sum proposed.

43. On 28 March 2018 the appeal was listed for hearing on 28 June 2018, and directions given for the filing of a notice of motion seeking security for costs, with a view to a hearing on 16 April 2018. Later that day, Brand2’s solicitors filed such a notice of motion, together with a supporting affidavit.

44. On 29 March 2018 SABA was placed into members’ voluntary liquidation, with debts in excess of $5 million. Adam Dalby paid out the NAB overdraft. NAB was the only secured creditor of SABA.

45. 29 March 2018 was Easter Thursday. On the following Tuesday (3 April, the first working day after Easter) Adam Dalby terminated the instructions of Osborn Law. Osborn Law notified Brand2’s solicitors. Ms Cox telephoned her counterpart at Osborn Law to confirm the position and to seek an alternative contact address. The address given to her was:

[email protected]

46. Ms Cox sent an email to that address, asking if it was intended to prosecute the appeal. She received no reply. Thereafter she sent two further emails to the address, to which she received no reply.

47. From these circumstances, Brand2 urges that the following inferences should be drawn:

(i)   that Adam Dalby was the source of funds for the appeal;

(ii)   that Adam Dalby caused the appeal to be conducted in an improper or unreasonable manner;

(iii)   that Adam Dalby had a substantial financial interest in the outcome of the appeal;

(iv)    that the appellant companies were insolvent or impecunious.

The inferences sought follow the FPM criteria. I will deal with them in a different sequence.

(i)   was Adam Dalby the source of funding for the appeal?

48. The sole basis on which Brand2 relies to establish this criterion is the costs agreement between Osborn Law and Adam Dalby, by which Adam Dalby became personally liable for the costs of pursuing the appeal. Adam Dalby’s response was that the document was prepared by Osborn Law, that in signing the document he was acting as director of the appellant companies, and that he always intended that the appellant companies would meet the costs of the appeals. Moreover, he says that he has, in fact, made no payments. This last fact has little, if any, bearing on the question.

49. I have concluded that it is more likely than not that Adam Dalby was the source of funds for the appeal, although I accept that, were the appeal to be successful and the appellant companies in a position to repay, he would then have recovered the outlay. Apart from the obvious fact that the agreement was between Adam Dalby personally and Osborn Law, in circumstances where he was an experienced company director, and could be taken to have well known the implications of personal undertakings and obligations as distinct from corporate undertakings or obligations, the principal reason for my conclusion lies in the correspondence between Osborn Law and Origin Lawyers in which Osborn Law clearly exposed the fragile financial position of the appellant companies. It seems likely to me that Osborn Law would not have been prepared to incur the costs representing the appellant companies in the appeal unless Adam Dalby himself was prepared to provide funding. It is not without significance that a costs undertaking in relation to the primary proceeding was between the then defendant companies and Osborn Law.

50. The second FPM criterion is thus established.

(v)   were the appellant companies insolvent or impecunious?

51. The rigor with which it is necessary for an applicant for a non-party costs order to prove insolvency of the party does not emerge with any clarity from the authorities. The use of the non-specific alternative “man of straw” suggests that it was not envisaged by Mason CJ and Deane J in Knight that insolvency be demonstrated in the strict sense. Rather, it may be assumed that the focus is on the probability – not the certainty – that the party will be unable to meet a costs order if one is made. To support its contention that the appellant companies were in that position, Brand2 pointed to the financial documentation to which I have referred above. Also of relevance is the correspondence from Osborn Law stating in clear terms “our clients, including [SABA] do not have capacity to pay” the judgment sum. Adam Dalby did not dispute that SA and GOG lacked the financial resources to meet an adverse costs order. He did, however, assert that the evidence showed that SAF had sufficient assets to fund the appeal and was still trading. As of 5 April 2018 it had a credit balance of almost $87,000 in a bank account and, as at 28 February, had made a year to date profit of just over $48,000. He referred to VMA Companies LLCt/as Corbis Global v Ridley Capital Holdings Pty Ltd [2016] NSWSC 1567 in support of a proposition that the time at which the insolvency should be considered is the date of commencement of the proceedings and during the period of the litigation.

52. The balance sheet provides a more comprehensive picture of SAF’s financial position than the bank balance and the profit and loss statement. It showed a negative asset balance in excess of $830,000 with amounts owing to trade creditors of more than $500,000.

53. The submission based on the decision in VMA raises a question of the point of time at which insolvency is to be determined. Since the order sought is for payment by a third party of a costs obligation, which is the primary obligation of the party to the proceedings, it seems to me, logically, to be the time at which the order is sought or is made. That an office holder of the company causes or permits an insolvent company to persist in litigation may – almost certainly would – be relevant to the third FPM criterion. It throws no light on what is the relevant time for determining insolvency. That, in my opinion, is the time when the costs are to be paid.

54. I am satisfied that Brand2 has shown that the appellant companies were, if not insolvent, in financial straits that rendered recovery of a costs order against them, if one were made, unlikely.

55. The fifth FPM criterion is therefore established.

(iii)   did Adam Dalby personally have an interest in the outcome of the appeal?

56. Brand2 advanced three arguments in support of its assertion that Adam Dalby had an interest in the outcome of the appeal.

57. First, it sought to have drawn an inference from the anterior finding that he personally funded (or accepted liability for the funding of) the appeal. It cited as authority for this proposition Oz B & S Pty Ltd v Elders IXL Limited (1993) 117 ALR 128.

58. Secondly Brand2 relied on the corporate structure of the appellant companies. SA, which was the trading company, operated as trustee for the SNUT of which, in turn, the unit holder was John Dalby and Adam Dalby as trustee for the Dalby Family Trust. Adam Dalby was a beneficiary of that trust. Similarly, he and John Dalby held shares in GOG and SAF as trustees for the Adam Dalby Family Trust of which Adam Dalby was the principal beneficiary. The Adam Dalby Family Trust was a substantial creditor of SA, with the result that it had an interest in the outcome of the appeal. Other members of Adam Dalby’s family were also beneficiaries of both trusts.

59. Thirdly, Brand2 pointed to Adam Dalby’s history of causing transfers of assets between the various companies, including to SABA (which is not party to the appeal) but to permit certain assets to remain with the appellant companies. Should the appellant companies be placed in liquidation as a result of a failure of the appeal, his capacity to control those assets would be lost. That is an interest, and a substantial financial interest.

60. Adam Dalby attacked each of these arguments. In respect of the first, which relied on Oz B & S, he disputed the factual proposition on which the argument was based (that he was the source of funding for the appeal) and drew attention to factual differences in the circumstances of the two cases. I have already accepted that Adam Dalby did provide the funds for the appeal (or, more accurately, accepted liability to do so); in my opinion, that he was willing to do so is some evidence (not conclusive of itself, perhaps) that he had a personal interest in the litigation.

61. Adam Dalby also disputed the proposition that he was “the ultimate owner” of shares in the appellant companies. That somewhat overstates the effect of the submission made, which was that, as a beneficiary of the Dalby Family Trust and the Adam Dalby Family Trust, he had an interest in the value and financial position of the appellant companies, value and standing that would be diminished by an unsuccessful appeal, and enhanced by a successful one.

62. I accept that the corporate structure is such as to yield a conclusion that Adam Dalby did have a personal interest in the appeal. He was not a mere director of the appellant companies; it is a clear inference that the appellant companies, and SABA, were inter-related entities in which he and members of his family had substantial interests. In reaching this conclusion I have not overlooked that, in relation to each appellant company, there was a minority, apparently unrelated, shareholding. Some confirmation for the conclusion is to be found in the various movements of assets between the companies.

63. Adam Dalby also relied on [206] and [214] of FPM in which Basten JA said:

“206.   … Nor is the fact that [the non-party against whom an order was sought in that case] was the sole director and secretary of the company inconsistent with that conclusion. 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. A carefully crafted exception to the principle would overtake the principle itself were that the case.

…

214.   …The fact that it is entirely proper for legal practitioners to runs [sic] 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 criterion 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.”

64. This argument does not persuade me that Mr Dalby did not have an interest in the appeal; it is, I accept, relevant to the ultimate exercise of the discretion.

65. The fourth FPM criterion is established.

(iii)   unreasonable or improper conduct

66. As expressed in FPM, the criterion is that “the conduct of the litigation was unreasonable or improper”. Generally speaking, in order to attract a non-party costs order, it would be necessary that the unreasonable or improper conduct be brought home to the non-party against whom the order is sought. Given that it was Adam Dalby who apparently had control of the appeal litigation, that circumstance is established. That he had sole control of the appeal proceedings emerges as a clear inference from his own affidavit evidence.

67. Brand2 appeared to recognise the frailty of its case in respect of this criterion; it commenced its submissions by noting that this criterion was not an essential element of a case for a non-party costs order to be made. Nevertheless, it relied on four aspects of the manner in which the appeal had been conducted as evidence of unreasonable or improper conduct. These were:

(a)   the failure of the appellant companies to cooperate in Brand2’s application for security for costs “in circumstances where it was obvious that security would be sought and awarded”;

(b)   the failure of Mr Dalby to give any explanation for abandoning the appeal;

(c)   the failure of the appellant companies (through Adam Dalby) to file a notice of discontinuance once he had decided no longer to prosecute the appeal;

(d)   the conduct post-dating Osborn Law’s notice of ceasing to act and the failure of the appellant companies (through Adam Dalby) to provide a proper address for service after the termination of Osborn Law’s instructions.

(a)   security for costs

68. Mr Dalby did not take issue with the proposition, clearly articulated in Brand2’s submissions, that an order for security for costs was inevitable. Brand2 pointed to the evidence in Osborn Law’s correspondence of the impecuniosity of the appellant companies. It also pointed out, that while Osborn Law, on behalf of the appellant companies, disputed the initial quantification of the estimated costs, they did not offer a reduced sum. They did not respond, at least in any meaningful way, to Brand2’s later reduced offer, and instead effectively challenged Brand2 to make a formal application, with the further suggestion that the timetable for allocating a hearing date for the appeal be delayed. As a consequence of the appellant companies’ failure to cooperate, Brand2 incurred the costs of preparing a notice of motion and an affidavit in support. The appeal was abandoned before the application was heard.

69. The primary submissions made on behalf of Adam Dalby in response was that there is no impropriety in his conduct. However, the submissions went on (in my opinion somewhat tendentiously) to assert that, as Adam Dalby was not a party to the appeal, but merely a director of the appellant companies, he could not have given the consent required. That submission ignores the clear evidence that it was Adam Dalby who took responsibility for decision making in respect of the appeal. He stated that he gave instructions, as director, for the filing of the appeal, and gave a list of the considerations he took into account in making that decision. He also stated that, on behalf of the appellant companies, he terminated the instructions of Osborn Law, and that he decided to end the appeal. In no instance was there any suggestion that he conferred with any other director or shareholder of any of the appellant companies. His second affidavit is in this respect carefully worded. He said:

“8.   I spent the Easter week-end giving serious consideration to my health issues and my family and I decided that I no longer had any fight in me and that I would end the appeal.”

70. He went on to give an account of terminating the instructions of Osborn Law, saying that he wanted to concentrate his efforts in working with the liquidator of SABA. There was no suggestion that any other director or shareholder, or any other person, could be involved in the decision making process.

71. There is no doubt that the obduracy demonstrated by the failure to cooperate in the security for costs request was the cause of additional expense incurred by Brand2. I would not categorise the conduct of the appellant companies as “unreasonable” or “improper”. However, as I have suggested above, those terms are not prescriptive. It is not necessary that Brand2 bring the conduct within that description before a non-party costs order can be made. As was stated in Knight, the task is to examine the whole of the conduct of the proceedings, in order to determine what is in the interests of justice. The manner in which the appellant companies, through Adam Dalby, dealt with the security for costs issue is one factor to take into account in evaluating the application. Alone, it would be insufficient to justify an order.

(b)   no or inadequate explanation for abandoning the appeal

72. Brand2’s position on this point is curious. There is no obligation on a litigant to explain the reasons for abandoning the litigation. Failure to explain may, in appropriate circumstances, give rise to questions about the motivation for commencing the proceedings, and provide a basis for adverse inferences to be drawn; that is the submission advanced on behalf of Brand2, which urges an inference that Adam Dalby never intended to prosecute the appeals.

73. Adam Dalby did, in his affidavit filed on 28 June 2018, after Brand2’s submissions had been filed, provide some explanation for his decision to abandon the appeal. He said:

“7.   …I have been under a considerable amount of stress concerning the placing of SABA into liquidation which occurred on 29 March 2018 (the day before Good Friday). I had never been through the process of placing a company into liquidation before. I was very distressed at the thought of the employees of SABA losing their jobs. I was worried about my family’s financial future as I had always been the primary earner. I was concerned about the effect that this would have on my family, on my children. I had suffered depression and anxiety in the past and I was aware that my health was suffering.”

74. This is another area where cross-examination may have greatly assisted the decision making process. On their face, Adam Dalby’s explanations have some force. The explanations are cast in doubt by two circumstances: first, that by the time the appeal was abandoned, the appellant companies had been restructured in such a way as to protect assets; second, that the reasons Adam Dalby gave for commencing the appeal were dubious. He said that one reason was:

“20.   …

(a)   Osborn Law had provided advice that there were grounds to believe an appeal had real prospects of success and on the basis of that I, as a director of the Appellants, believed the Appellants had real prospects on the appeal. …”

75. That is significantly to overstate the position so far as it is disclosed in the evidence. The only advice concerning the prospects of success of an appeal of which there is evidence, was that given in the clearly tentative letter written on the day the primary judgment was delivered. Nowhere did that advice assert that an appeal had “real prospects” of success; the tenor was that greater consideration had to be given to the questions. There is no evidence of any further consideration or advice, or even discussion.

76. As against that, the notice of appeal specified the grounds on which it was proposed to rely, and Brand2 has not suggested that they were untenable or unarguable.

77. I do not regard the failure of Adam Dalby to provide an adequate explanation for abandoning the appeal as evidence of unreasonable or improper conduct in the appeal. Indeed, the failure to provide an explanation postdates all the conduct involved in the appeal, and, at most, could be seen to cast light on the reasons for its commencement. It is, however, a fragile basis for an inference that the appeal was commenced for improper motives.

(c)   failure to file a notice of discontinuance

78. Adam Dalby’s evidence was that he decided, over the Easter weekend (30 March-2 April) to end the appeal and advised his solicitor on the first working day after Easter (3 April). He accepted that “with the benefit of hindsight” he ought to have formally discontinued the appeal. He did not take that step, with the result that Brand2 incurred further costs in seeking the order that the appeal be dismissed for want of due despatch. While he did not oppose that order, Brand2 was represented and provided submissions in support of the order. Filing a notice of discontinuance would have obviated the need to take those steps.

79. Adam Dalby found it difficult to respond to Brand2’s submissions in this respect. His submissions were:

“One wonders how different this situation would have been. Is the suggestion that but for filing a notice of discontinuance there would be no application for non-party costs. On that basis there would have been an application for a non standard costs order under rule 42.19 of the Rules. Accordingly, would there have been any real saving as to time or cost?”

80. This advanced the argument not at all. The fact is that, once Adam Dalby had decided to “end” the appeal, and to terminate the instructions of Osborn Law, the proper course was at least to notify Brand2 of that decision. It will be remembered that, on hearing of the termination of Osborn Law’s instructions, Brand2’s solicitors had expressly sought, at the only address provided, an answer as to the intention of the appellant companies. They did not receive any response.

81. This is a fact that I take into account in the overall assessment of the conduct of the appeal. It is of some weight because it plainly resulted in additional expense to Brand2, which could readily have been avoided by appropriate notification.

(d)   conduct post-dating the termination of Osborn Law’s instructions

82. The only conduct of Brand2 relied on in this respect was the provision of an alternative address for service that failed to comply with the requirements of UCPR 4.5(1). Moreover, Brand2 submitted, the letters “fu” in the address appears to be “a vulgar acronym”. Adam Dalby offered no argument against that inference.

83. There is good reason to draw the inference that, in the use of the email address, Adam Dalby was taunting Brand2. Brand2 went onto submit that this, alone, resulted in the incurring of additional costs in the preparation of the application for dismissal. I do not accept that. In some cases, non-compliance with the rules concerning addresses for service may be the cause of additional inconvenience and expense, but that is not so in this case. Brand2’s communication to the email address, while not responded to, nevertheless resulted in unopposed orders.

84. I do not consider the conduct of the appellant companies, or of Adam Dalby, attracts the description “unreasonable or improper”. Nor do I consider that conduct must satisfy the description before it can be taken into account on an application such as the present. It is conduct that has had the result of increasing costs, in circumstances where the parties bearing the primary obligation for payment of the costs, will be unlikely to be in a position to meet the costs. It is a factor in the overall consideration of what is in the interests of justice.

Final considerations

85. Mr Dalby invoked the caution expressed by Basten JA in FPM concerning the need to maintain the integrity of the corporate veil. That is undoubtedly a significant consideration. However, in my opinion, the corporate veil ought not give licence to a director of a company to conduct litigation on behalf of the company in such a way as to cause unnecessary expense to the opponents, without recourse to the person responsible for the conduct. In this case Adam Dalby did, in my opinion, commence and conduct the appeal proceeding in such a way as to benefit himself (through the Dalby Family Trust and the Adam Dalby Family Trust) and the appellant companies, and to defeat the rights of Brand2. Several other of the FPM criteria are made out, as I have set out above, and support that conclusion.

86. It is in the interests of justice that a non-party costs order be made.

Indemnity costs

87. The submissions with respect to the application that costs be assessed on an indemnity basis were succinct.

88. Brand2’s application for an order that the costs be paid on an indemnity basis was based upon an offer of compromise made on 15 March 2018 (the appeal having been commenced on 6 March). The offer was to compromise all proceedings by substituting for the original judgment of $771,611.11 the amount of $661,000 and an order dismissing the appeal. The offer of compromise was not accepted.

89. The circumstances come within the provisions of UCPR 41.14 (made applicable to this Court by UCPR 51.48). Those rules provide that where an offer is made by a plaintiff (in the primary proceedings) but not accepted by the defendant, and the plaintiff obtains an order or judgment no less favourable than the terms of the offer, then, unless the court otherwise orders, the plaintiff is entitled to an order against the defendant that the costs be assessed on the ordinary basis up to the day following the day on which the offer was made, and thereafter, on an indemnity basis.

90. Brand2’s simple submission was that, since it had brought itself within the specified conditions, and since no reason had been advanced for the court to order otherwise, it was entitled to an order that the costs be so assessed.

91. Brand2 also submitted that, even apart from the statutory provisions, the circumstances set out above established unsatisfactory behaviour warranting an indemnity costs order. Reference was made to Spalla v St George Motor Finance Ltd (No 8) [2006] FCA 1537 at [31].

92. Adam Dalby did not address the question of indemnity costs in his written submissions. His counsel, at the conclusion of his oral submissions, merely opposed the order, there being, he submitted, no basis established in the evidence.

93. I reject that contention. It is clear that the offer of compromise alone is sufficient to warrant the orders sought. It is not necessary to address the other bases put forward on behalf of Brand2.

94. The orders I make are:

1.   The costs of the appeal are to be assessed on the ordinary basis to 16 March 2018, and on an indemnity basis thereafter;

2.   Adam Dalby is to pay the costs of the appeal.   

**********

Decision last updated: 18 February 2019