Gadd v New Wave Aerospace Pty Ltd (No 2) - [2020] SADC 166

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Interlocutory Application)
GADD & ORS v NEW WAVE AEROSPACE PTY LTD (No 2)
[2020] SADC 166
Decision of His Honour Judge O'Sullivan
27 November 2020
ARBITRATION - COSTS - ARBITRATOR'S FEES
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - COSTS - PARTIES AND NON-PARTIES - NON-PARTIES GENERALLY - DIRECTOR OF COMPANY
The applicants seek a costs order against a non-party - Stephen Lindsay Gordon Marks (“Mr Marks”).
Mr Marks is the respondent’s sole director and shareholder.
In March 2019 Mr Hugh McPharlin was appointed as arbitrator to determine financial issues in the proceedings. The trial of matters not referred to the arbitrator was held in May 2019.
The arbitrator published an Award (“First Award”) on 21 June 2019 in which some of the determinations were qualified (“qualified determinations”). The Court delivered its reasons on 31 January 2020 in which it adopted those of the arbitrator’s determinations that were not qualified. The applicants submitted that the Court should proceed to finalise the qualified determinations itself. The respondent, who was represented by Mr Marks at the arbitration and the trial, submitted that the First Award should be adopted or that the qualified determinations should be remitted to the arbitrator for further determination. The qualified determinations were remitted to the arbitrator.
The arbitrator published a second Award (“Second Award”) on 18 June 2020. By interlocutory application filed 30 June 2020, the applicants applied to the Court to adopt the Second Award. The respondent, represented by Mr Marks, opposed the application.
The applicants have paid the arbitrator's fees.
Prior to argument on whether the Second Award should be adopted by the Court as part of its judgment, the respondent was placed into voluntary liquidation such that the proceedings were stayed. Consequently, the Second Award has not been adopted by the Court as part of its judgment.
In an interlocutory application filed 30 July 2020, the applicants sought, amongst other things, an order that Mr Marks pay the arbitrator’s fees for publishing both Awards.
Although not adopted, in his Second Award the arbitrator found that the respondent had paid the sum of $1,429,922 out of the respondent’s bank accounts into which the applicants (and others) had paid to related entities money for outgoings related to the maintenance and operation of the Marina run by the respondent. This figure was reduced to $658,166 after adjustment for related party loan accounts and non-cash profit distributions.
The circumstances in which in the exercise of discretion a Court might order a non-party to pay costs discussed and applied.
Held: That Stephen Lindsay Gordon Marks pay to the applicants the sum of $207,240.40 such sum representing the payment made by the applicants for Mr McPharlin’s fees of and incidental to his First and Second Awards.
Corporations Act 2001 s 500(2); District Court Act 1991 s 42(1), referred to.
Knight v FP Special Assets Ltd (1992) 174 CLR 178; Price v BW & RD Smart [2020] SASCFC 2; Vestris & Anor v Cashman & Anor (1998) 72 SASR 449; Bischof v Adams [1992] 2 VR 198; Bob Jane Corporation Pty Ltd v Barrot FT Pty Ltd (No 2) (2012) 113 SASR 25; FPM Constructions Pty Ltd v Council of The City of Blue Mountains [2005] NSWCA 340; Dunghutti Elders Council (Aboriginal Corporation) RNTBC and Others v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) and Another (2012) 200 FCR 154; Gadd & Ors v New Wave Aerospace Pty Ltd [2020] 7; Boscaini Investments Pty Ltd v Corporation of the City of Kensington and Norwood [1999] SASC 327; Aiden Shipping Co Ltd v Interbulk Ltd (The Vimeira) (No.2) [1998] 1 AC 965; Kebaro Pty Ltd v Saunders [2003] FCAFC 5; Minister for Transport, Infrastructure and Local Government v New Wave Aerospace Pty Ltd [2020] SASC 37, considered.

GADD & ORS v NEW WAVE AEROSPACE PTY LTD (No 2)
[2020] SADC 166
Introduction

This is an application by the applicants for an order that a non-party, Stephen Lindsay Gordon Marks (“Mr Marks”) pay some or all of its costs of the Action.
Background
On 7 March 2019 the Court, with the consent of the parties, ordered that Mr Hugh McPharlin, Chartered Account, be appointed Arbitrator to determine a number of financial issues arising in the proceedings.
The trial of matters not referred to Mr McPharlin proceeded in this Court in May 2019.
Mr McPharlin published his Award on 21 June 2019 (“First Award”).
On 12 August 2019, as part of the trial, the parties addressed the Court on whether there was good reason why the First Award should not be adopted by the Court as part of its yet to be published judgment.[1]
[1] 12 August 2019, T701.1-702-6.
The applicants submitted that since some of Mr McPharlin’s determinations in the First Award were qualified (the ‘qualified determinations’), those determinations should not be adopted by the Court.
The respondent, after some inconsistency, submitted that the totality of the First Award should be adopted by the Court.[2]
[2] 12 August 2019, T741.6-744.6.
On 31 January 2020, the Court delivered its reasons[3] in which I declined to adopt those of Mr McPharlin’s determinations in his First Award which he had qualified. I also found[4] that based on Exhibit P34, in breach of the term of the underleases, the respondent had transferred from its Marina bank accounts during the period 2014/2015-2017/2018, sums totalling $600,998.75 to related entities (‘unauthorised payments’). That money was taken from money the applicants and other underlessees had paid into the respondent’s Marina bank accounts as their respective contributions to outgoings related to maintenance and operation of the Marina.
[3] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7.
[4] Ibid, [307]-[332].
Notwithstanding the finding that the unauthorised payments had been made by the respondent to related entities, at a directions hearing held on 3 February 2020, the Court did not enter that sum as a judgment or make a declaration to that effect because of the qualified determinations which, depending on the final position Mr McPharlin reached on those determinations, may have had some bearing on that figure. The Court did however, make a number of other declarations including that the respondent was in breach of the terms of the Headlease and that the Marina is not in good, safe, sound and serviceable operating repair and condition.
On 28 February 2020, the parties addressed the Court in relation to the qualified determinations. The applicants submitted that the Court itself should finalise the qualified determinations which it had declined to adopt. Mr Marks, who appeared for the respondent as its sole director, opposed that course, submitting the First Award should be adopted by the Court in full as part of its judgment but if not adopted in full, he agreed that the qualified determinations should be remitted to Mr McPharlin.[5]
[5] T9.3-16; T11.37-12.23; T19.12-14; T29.16-30.3; T43.11-44.2; T44.32-36; T45.16-25; T47.29-31; T48.14-37; T49.7-50.4; T52.15-53.7; T57.1-8.
In the course of the hearing on 28 February 2020, the question of Mr McPharlin’s costs was raised.[6] I indicated to Mr Marks that ordinarily, costs follow the events and that if successful in getting an order as to costs, the applicants would likely look to the respondent to reimburse them for the fees they paid to Mr McPharlin.
[6] T61.6-62.36.
On 28 February 2020, the Court ordered the qualified determinations be remitted to Mr McPharlin, as Arbitrator, for his final determination on those issues.
Mr McPharlin published his Second Award on 18 June 2020 (“Second Award”).
In his Second Award, Mr McPharlin found that the respondent had paid the sum of $1,429,922 out of the respondent’s Marina bank accounts into which the applicants (and other underlessees) had paid money for outgoings related to the maintenance and operation of the Marina to related entities. He found that after adjustment for related party loan accounts and non-cash profit distributions (credit balances)[7], that figure reduced to $658,166.
[7] Second Award dated 18 June 2020, [5.50]-[5.58].
At a directions hearing held on 26 June 2020 the applicants submitted that Mr McPharlin’s Second Award should be adopted in full as part of the Court’s judgment. Relying on the First and Second Awards, the applicants sought judgment in the sum of $636,180.71.[8]
[8] 26 June 2020, T6.2-23; (Note at T6.20 it would seem that the word ‘reinvestment’ should be ‘reimbursement’).
The respondent, who was again represented by Mr Marks as its sole director, opposed the Court adopting Mr McPharlin’s Second Award. He informed the Court that the respondent had retained Mr Brian Morris, an expert forensic accountant, and intended to retain Senior Counsel.[9]
[9] 26 June 2020, T9.33; T10.8-17.
Orders were made on that occasion requiring the respondent to file and serve by 17 July 2020 its written submissions in opposition to the Court adopting Mr McPharlin’s Second Award. I listed argument for 31 July 2020.
Towards the end of the hearing on 26 June 2020, Mr Marks asked the Court to review order 5 made on 3 February 2020 relating to the respondent making any demands or legal proceedings against underlessees who were not part of the action.[10]
[10] 26 June 2020, T13.4-15.
The following exchange took place between me and Mr Marks in relation to that issue:
QHIS HONOUR:    There are a couple of things. First of all, as I understand, New                 Wave Aerospace is no longer in possession of the marina?
AMR MARKS:      That's right, these accounts were - yes.
QHIS HONOUR:    Is the company solvent?
AMR MARKS:     Yes.
QHIS HONOUR:    It is still trading?
AMR MARKS:     Yes.
QHIS HONOUR:    What I will do, Mr Marks, I will adjourn that question to 31                    July. I will deal with it at the same time, I can't make a decision   now I need to hear submissions from Mr Lazarevich.
On 30 July 2020, the applicants filed an Interlocutory Application[11] in which they applied for orders that:
1The Court adopt the Second Determination (sic Award) of Mr McPharlin dated 18 June 2020;
2That judgment be entered in favour of the applicants in the sum of $709,331;[12]
3That the respondent pay interest to the applicants in the amount fixed by the Court;
4That the respondent and Mr Marks pay the costs of the applicants in respect of the determinations by Mr McPharlin in the sum of $207,240.40;[13]
5That the respondent and Mr Marks pay the costs of this action to be agreed or taxed.
[11] FDN156.
[12] The calculation of that sum is found in the Twenty-Seventh Affidavit of the applicants’ solicitor, Peter David Pedler (27^th Pedler Affidavit) sworn 28 July 2020, FDN151.
[13] Twenty-Seventh Pedler Affidavit, [30]-[32].
At the hearing on 31 July 2020, the respondent was represented by Counsel and had recently instructed another firm of solicitors. The respondent’s Counsel applied for an adjournment to allow the respondent’s new solicitors to obtain instructions and assist the respondent with the next step in the proceedings. Those steps included retaining a different forensic accountant on the basis that it seemed Mr Morris had a conflict, notwithstanding Mr Marks informing the Court on 26 June 2020 that Mr Morris had been retained.
On 31 July 2020, the Court noted that although the respondent was ordered to file and serve its written submissions by 17 July 2020 identifying the basis upon which it asserted good reason existed for the Court not to adopt Mr McPharlin’s Second Award as part of its judgment, no written submissions had been filed nor any explanation provided as to why that was the case.
I observed at that hearing that Mr Marks’ conduct (given he was the sole director of the respondent and had been representing the respondent) was unacceptable given that the matter had been listed for hearing on that day, some five weeks previously.[14]
[14] 17 July 2020, T9.32-10.7; T10.18-28.
A further timetable for submissions was made and the application adjourned for argument to 17 August 2020.
On 17 August 2020, the Court was informed that on the previous Friday, the respondent had been placed into voluntary liquidation.
As a consequence of the respondent being placed into voluntary liquidation, the proceedings are stayed by the operation of s 500(2) of the Corporations Act 2001 and Mr McPharlin’s Second Award has not been adopted by the Court.
At the hearing on 17 August 2020, the applicants referred to their interlocutory application filed 30 July 2020 and pressed their application for costs against Mr Marks as a non-party. The applicants’ application for a costs order against Mr Marks personally was listed for argument on 18 September 2020.
Mr McPharlin’s Fees
During the course of this matter, money has been deposited into the Suitor’s Fund by the applicants in amounts representing a percentage of their contribution as underlessees to the Marina outgoings and other expenses which the respondent alleged was due.
Mr McPharlin’s fees for producing his First and Second Awards total $207,240.40.[15] Those fees have been paid by the applicants directly and from money paid into the Suitor’s Fund by the applicants.
[15] Twenty-Seventh Pedler Affidavit, [30]-[32].
Documents relied upon
At the hearing on 18 September 2020 the applicants relied on the Twenty-Seventh Affidavit of Peter David Pedler sworn and filed 28 July 2020 as well as their written submissions.
Mr Marks was represented and relied on his written submissions.
As a result of a matter that arose during the course of argument, at the conclusion of the hearing, by consent, the Court made orders that Mr Marks file and serve an affidavit exhibiting various trust deeds which were to be identified by the applicants. That affidavit was filed on 12 October 2020 (“Marks affidavit”).[16] The applicants provided supplementary written submissions in relation to the material exhibited by Mr Marks in the Marks affidavit,[17] following which Mr Marks filed and served a further affidavit sworn 22 October 2020.[18]
[16] FDN170.
[17] FDN175, 23 October 2020.
[18] FDN174.
Principles
In Knight v FP Special Assets Ltd[19] a defendant against whom judgment had been entered was placed into liquidation. The plaintiff applied for a non-party costs order against the sole director and shareholder of the defendant company, which was the trustee.
[19] (1992) 174 CLR 178, 192-193.
Much of the decision was directed at whether there was power to make an order for costs against a non-party to litigation, however on the issue of whether an order for costs against a non-party should be made, Mason CJ and Deane J said:
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 recognized that it may be appropriate for such an order to be made.
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 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.
In Price v BW & RD Smart,[20] the Full Court of the Supreme Court of South Australia considered the question of the circumstances in which a non-party to litigation may be ordered to pay the costs of a party to the litigation.
[20] [2020] SASCFC 2.
A Master of the Supreme Court had considered an application by a company, then known as Hay Direct Australia Pty Ltd (“Hay Direct”) to set aside a statutory demand that had been issued against it by the applicants, BW and RD Smart (“Smart”). The Master reserved his decision however two days later Hay Direct was placed into administration. The Master delivered reasons in which he indicated he would reduce the amount sought by Smart in the statutory demand by approximately one-third. On the question of costs, the Master ordered that the appellant Price, who was a director of Hay Direct, pay the Smart’s costs of the action.
The Full Court considered the authorities dealing with this issue. Nicholson J with whom Kelly and Blue JJ agreed, referred to Vestris & Anor v Cashman & Anor[21] where Lander J said:
The circumstances in which it is just to order costs against a person who was not a party to the litigation will be both rare and exceptional: see Aiden Shipping Ltd v Interbulk Ltd (at 980) per Lord Goff of Chieveley. If the order for costs which is sought against a non-party is in lieu of, in substitution for or complementary to an order for costs against a party, the circumstances for making such an order will not arise unless there is some connection or association between the party to the litigation and the non-party against whom the order for costs is sought. The connection must be of a kind that makes it just to make an order for costs in that the connection must be material to the question of costs: see Bischof v Adams [1992] 2 VR 198 at 205.
[21] (1998) 72 SASR 449, 467.
Bischof v Adams[22] was a matter where a trial between the parties was extended significantly by the conduct of the non-party who had destroyed evidence when the non-party could foresee the effect of it on the length of the litigation. Gobbo J, in considering the question of whether an order for costs against a non-party to litigation should be made said:[23]
The review of the authorities provides only limited guidance as to the approach to exercise of discretion in a case like the present which does not fit within prior categories or decisions. It can, however, be said in light of the dicta in the Burns Philp Case that there is an obligation to find a connection between the non party and the proceedings. Given that there must at least be a connection between the non party and the proceedings, what form must this connection take?
It is not practicable to lay down a set of parameters in advance for there may be cases where the interests of justice support an order for costs even though the connection is slender. Thus if a witness deliberately refuses to answer to a subpoena and thereby causes the case to be adjourned and so increases costs to the parties, I would have thought that it was very much arguable that he should bear these extra costs. There would seem to be no connection in the ordinary sense of that word between that witness and the proceedings, beyond the fact that he was a potential witness. It may be said, however, that there is a causal connection between the non party and the incurring of the costs, a matter that bears directly on the justice of whether he should be made to pay costs that he has caused to be incurred.
Again, there may be cases where the connection is significant but not material to the issue of costs. Thus a person may benefit greatly from a particular proceeding but may not have any real part in supporting the proceeding.
The most convenient course is, in my view, to look at both factors in considering the connection between the proceedings and the non party, namely, the connection between the non party and the proceedings and secondly, the causal connection between the non party and the costs.
I have concluded that, without limiting myself to these two matters, I should take both factors into account in any exercise of discretion. The connection must be real and direct and it must be material to the issue of costs. The mere fact that a person may benefit from the litigation will not, without more, suffice.
[22] [1992] 2 VR 198.
[23] Ibid, pp 204-205.

Nicholson J also considered Bob Jane Corporation Pty Ltd v Barrot FT Pty Ltd (No 2)[24] and the discussion by Kourakis J (as he then was) of the circumstances and indicia which might give rise to an order against a non-party for costs. Kourakis J[25] referred to Knight v FP Special Assets Ltd[26] and the characteristics that had been identified by Mason CJ and Deane J in that decision and which I have set out above before setting out his reasons for dismissing the application.[27] Central amongst those reasons was that his Honour did not consider the defence of the proceedings by the defendant was unreasonable.
[24] (2012) 113 SASR 25.
[25] Ibid, [23]-[25].
[26] (1992) 174 CLR 178, 192-193.
[27] (2012) 113 SASR 25, [36]-[44].
Nicholson J also considered FPM Constructions Pty Ltd v Council of The City of Blue Mountains[28] where Basten JA (with whom Beazley JA and Giles JA agreed), after referring to Knight v FP Special Assets Ltd, observed that cases in which non-parties had been ordered to pay costs satisfied a number of criteria, namely:
(i)The unsuccessful party to the proceedings was the moving party and not the defendant.
(ii) The source of funds for the litigation was the non-party or its principal.
(iii) The conduct of the litigation was unreasonable or improper.
(iv)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.
(v)The unsuccessful party was insolvent or could otherwise be described as a person of straw.
[28] [2005] NSWCA 340, [210].
Basten JA continued[29] by saying that the criteria identified in Knight v FP Special Assets Ltd:
… 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 run 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.
[29] Ibid, [214].
Nicholson J also considered Dunghutti Elders Council (Aboriginal Corporation) RNTBC and Others v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) and Another.[30]
[30] (2012) 200 FCR 154.
In that matter, the Registrar of the Aboriginal and Torres Strait Islander Corporation was the respondent to an appeal brought by Dunghutti Elders Council (Aboriginal Corporation) RNTBC against an order of the Federal Court of Australia dismissing the Corporation’s proceedings seeking a declaration that an act performed by the Registrar was invalid.
Prior to the appeal the Australian Government Solicitor, who was acting for the Registrar, wrote to the solicitor acting for the Corporation expressing the view that the appeal was devoid of merit, that a significant proportion of money held on trust for the benefit of the Dunghutti people will be spent on financing the litigation and that in the event the appeal was unsuccessful, the Registrar may seek an order that the directors of the Corporation pay the respondent’s costs of the proceedings personally.
Ultimately, the Court dismissed the appeal and the Registrar brought an application for costs to be paid by the directors personally.
On the issue of making an order for costs against a non-party, the Full Court of the Federal Court said:[31]
The Court has power to make an order for costs against a non-party where the non-party is connected with the unsuccessful party to the proceeding, and has caused that party to start, continue or prosecute the proceeding in circumstances where the non-party’s conduct makes it just and equitable that the non-party be visited with an order for costs in favour of the successful party either in addition to such an order against the unsuccessful party or in substitution for such an order. As Gobbo J said in Bischof v Adams, a statement which the Full Court has approved, the categories of cases are not closed.
[31] Ibid, [88].
On the question of the making of an order for costs, the Court continued:[32]
Although an order for costs is discretionary, a successful party generally can expect to be compensated for that party’s costs: Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 at [25] per Gleeson CJ, Gummow, Hayne and Crennan JJ. Costs usually follow the event: Ritter v Godfrey [1920] 2 KB 47. An order for costs is made because the successful party has been put to expense which that party would have avoided if the litigation or particular application had not been brought. The order for costs seeks to compensate the successful party for that result and for the costs to which that party has been put. The order is not in any sense meant to be a penalty; costs are awarded to indemnify a successful party in litigation, not to punish an unsuccessful party: Latoudis v Casey (1990) 170 CLR 534 at 542 per Mason CJ; Oshlack v Richmond River Council (1998) 193 CLR 72 at [1] per Brennan CJ.
[32] Ibid, [93].
Applicants’ Submissions
The applicants seek an order for either the costs of the action or payment of the costs paid by them to Mr McPharlin for his First and/or Second Awards in the sum of $207,240.40. They do so on 10 grounds which I consider in more detail later in these reasons:
i.First, they submit that they were successful on most, albeit not all of the issues at trial and that it was likely they would have received a monetary judgment in their favour had Mr McPharlin’s Second Award been adopted by the Court as part of its judgment.
Although they did not receive a monetary judgment, nevertheless the applicants submit that they demonstrated successfully that they were overcharged significantly for outgoings, that Mr Marks was dishonest and in particular that money was diverted to related entities of Mr Marks leaving the Marina in a sub-standard condition.
I say immediately that the fact that the applicants were overcharged for outgoings, the adverse credit findings against Mr Marks and the fact that the Marina was left in a sub-standard condition are matters which, on the basis of the authorities to which I have referred, I consider are not relevant as to whether the orders the applicants seek against Mr Marks should be made.
However, I consider that the finding that in breach of the terms of the underlessees money was transferred out of the Marina’s bank accounts to related entities in which Mr Marks had at least an indirect, if not direct benefit is a relevant factor insofar as it demonstrates Mr Marks’ interest in the litigation;
ii.Second, Mr Marks is a director of the respondent which at all material times during the litigation was insolvent or there is reason to suspect it was insolvent at those times. The solvency or otherwise of the respondent is a relevant factor and I deal with this issue below;
iii.Third, Mr Marks played an active role in the litigation including by representing the respondent at trial. I consider this to be a relevant factor and again, I deal with this issue below;
iv.Fourth, Mr Marks’ conduct increased the cost of litigation by:
a)   Causing adjournments because of changes in representation, lack of representation, lack of discovery, and delays in providing expert reports and financial information;
b)     Running arguments with no prospect of success and where he was dishonest; and
c)   Making various applications for payments for monies in circumstances where the respondent was not entitled to them.
The factors set out in sub-paragraph (a) insofar as complaint is made about lack of discovery and delays in providing expert reports and financial information are relevant. I do not accept the factors set out in sub-paragraphs (b) and (c) are relevant in the circumstances of this matter.
v.Fifth, the respondent did not share in any of the costs of the arbitration.
Following the First Award the applicants were concerned about paying for the costs of the Second Award with no likelihood of recovery from an insolvent respondent. Nonetheless Mr Marks submitted that the qualified determinations should be sent back to Mr McPharlin for the purposes of his Second Award.
The applicants submit they were placed in a difficult position by Mr Marks, given he was the controlling mind of the respondent, in that if the applicants did not proceed to the Second Award after I published my reasons but instead chose to discontinue the action, they were exposed to the risk of an application for costs against them.
On the other hand, if they did proceed to the Second Award then they would at least at first instance have to pay Mr McPharlin’s costs of the Second Award with the risk of not being able to recover them.
I consider this to be a relevant factor;
vi.Sixth, it can be inferred that the poor state of the respondent’s record keeping contributed to the high cost of the arbitration.
In his First Award Mr McPharlin observed that the standard of record keeping by the respondent was low.[33] It seems to me, given the complexity of this matter generally and in particular in relation to the financial issues that arose, a very significant amount of work was required to understand the financial web that existed and of which Mr Marks is the central character.
[33] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [317]; First Award, p 28.
I consider this to be a relevant factor;
vii.Seventh, Mr Marks obtained a personal benefit from the applicants’ money paid for outgoings associated with the Marina. I deal with this issue below but I indicate that I consider that to be a relevant factor insofar as it demonstrates Mr Marks’ interest in the litigation;
viii.Eighth, entities related to Mr Marks obtained the benefit of the applicants’ money paid for the purposes of Marina outgoings. That is certainly the case with Krause Motors and Incospec. I consider this to be a relevant factor because it is apparent that in a number of cases Mr Marks, at least, had a contingent interest in the continued business operation of those entities;
ix.Ninth, serious credit findings were made against Mr Marks. I do not consider that factor, by itself and without more, to be relevant in the circumstances of this case. The authorities make it clear that the behaviour must have contributed to the increased costs of the litigation. I deal further with this issue below; and
x.Tenth, Mr Marks should not have put the applicants to the cost and expense of having to run the litigation. He should have made appropriate concessions or put the respondent into liquidation at a far earlier point in time.[34]
In my view, the respondent, directed as it was by Mr Marks, was entitled to defend at least part of the proceedings. I also deal with this issue below.
[34] Applicants’ Written Submissions, [2.1]-[2.10].
Further, the applicants invite the Court to infer that the reason for leaving the decision to place the respondent into voluntary liquidation to 14 August 2020 was that Mr Marks was trying to find a valid reason for the Second Award not to be adopted. Although at the directions hearing on 26 June 2020, Mr Marks informed the Court that the respondent was solvent and was still trading, there may be many reasons why the decision to place the respondent into voluntary liquidation was made.[35] I am not prepared to draw that inference in the circumstances.
[35] 26 June 2020, T13.4-15.
The applicants submit further that the late decision to place the respondent into voluntary liquidation has deprived them of the opportunity of asking the Court to adopt the Second Award as part of its judgment as a result of the operation of s 500(2) of the Corporations Act 2001. That may be so but the applicants can apply for leave to proceed against the respondent and/ or prove in the liquidation. I do not consider this factor to be a relevant consideration.
Mr Marks’ Submissions
Mr Marks submits that no order should be made against him on seven grounds:
i.First, the applicants claim has not yet been made out. The Court has not adopted the Arbitrator’s Second Award and the outcome of the application cannot be assumed;
ii.Second, the applicants do not have a cost judgment against the respondent company in the proceedings nor an Award against the respondent for the costs of the Arbitration. Those costs orders cannot be assumed and the applicants have not sought leave to take that step in the litigation;
iii.Third, there was no warning given to Mr Marks that the applicants would bring an application for an order that he pay the applicants’ costs personally;
iv.Fourth, awarding costs against a non-party is exceptional;
v.Fifth, the application does not satisfy the basics for a non-party costs order described by the Full Court in Price v BW & RD Smart[36];
vi.Sixth, non-party costs are made against the real party in claims brought by a named party. The policy for non-party cost orders is that the real party should not seek to benefit from the named party’s claim without risk of an adverse personal costs order. Mr Marks submits that there is no relevant benefit to him, that the claim was brought against the company and the company was brought into the proceedings and is not a claimant. As such, the order sought is incongruous with policy; and
vii.Seventh, the submissions about the company, other companies with whom Mr Marks is associated and Mr Marks himself misbehaving commercially before the commencement of the action is misguided for a number of reasons. First, the conduct was necessarily the behaviour of the respondent and not of Mr Marks otherwise he would have been the party to the litigation. Second, because the company was defending a claim, Mr Marks could not benefit from the litigation.
[36] [2020] SASCFC 2.
Consideration
The District Court has a discretion to order costs against a non-party pursuant to s 42(1) of the District Court Act 1991 which provides:
42—Costs
(1)Subject to subsection (2) and the rules, costs in any proceedings in the Civil Division will be in the discretion of the Court and may be awarded against any person (whether a party to or a witness in the proceedings or not).
The proviso that the section is subject to subsection 2 is of no relevance to the issue before the Court.
Although there are many authorities dealing with the exercise of the discretion to award costs as between parties to litigation[37] I keep in mind that the authorities to which I have referred above dealing with the exercise of the discretion to award costs against a non-party make it clear that the circumstances in which it is just to order costs against a non-party to the litigation will be both rare and exceptional.[38] Further, if the order for costs sought against a non-party is in lieu of, in substitution for or complementary to, an order for costs against a party, the circumstances of making such an order will not arise unless there is some connection or association between the party to the litigation and the non-party. That connection must be of a kind which makes it just to make such an order and the connection must be material to the question of costs.[39]
Is there an ‘event’?
[37] See for example A, DC v Prince Alfred College Inc (No 2) [2016] SASCFC 27, [5]-[13].
[38] Vestris & Anor v Cashman & Anor (1998) 72 SASR 449, 467 per Lander J.
[39] Ibid.
Mr Marks’ first ground of opposition is that there is “no event”. Mr Ross-Smith of Counsel, who appeared for Mr Marks, submits that the applicants’ claim has not yet been made out and in particular, the Court has not adopted the Arbitrator’s Second Award. He submits the outcome of the application to adopt that Award cannot be assumed.
Whereas it is correct to say that no monetary judgment has been entered in favour of the applicants, in my reasons published 31 January 2020[40] I determined that the total amount paid from the respondent’s bank accounts to related entities from September 2014 to 30 June 2018 was $600,998.75.[41] At the directions hearing on 3 February 2020 I declined to make a declaration at that stage about the transfer of the sum of $600,998.75,[42] noting that this question had been referred to the Arbitrator and may be influenced by further consideration.
[40] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7.
[41] Ibid, [289]-[332], [479]-[480].
[42] 3 April 2020, T15.6.
Nonetheless I made a number of other declarations on that day.
In Boscaini Investments Pty Ltd v Corporation of the City of Kensington and Norwood[43] Debelle J considered an application for costs by a party where the issue had become moot. In that matter, the plaintiff had applied for orders invalidating and setting aside resolutions of Council however, before the matter could be heard the Council rescinded their resolutions such that no issue remained. The plaintiff applied for an order to recover its costs.
[43] [1999] SASC 327.
His Honour considered a number of authorities[44] and said:[45]
In cases where the issues have become moot, the applicant has effectively achieved its goals, and it is reasonable to conclude that it succeeded because the proceedings were commenced and it had reasonable prospects of success, the applicant might recover its costs… An instance is R v Gold Coast City Council; ex parte Raysun Pty Ltd [1971] QWN 13. In that case the applicant granted an order nisi calling upon the respondent to show cause why a writ of mandamus should not issue to compel the Council to determine an application before it for approval of road and drainage plans. After the order nisi had been granted, the Council considered the application and granted it. The Full Court held that it was not necessary to determine the merits of the matter as a condition precedent to an order for costs. The court concluded that the prosecutor had reasonable grounds to complain of the Council’s failure to consider its application and had an arguable case to support the issue of a writ of mandamus. The prosecutor was granted costs up to the time it was informed of the Council’s decision to grant the application. Plainly the Court was influenced by the fact that the prosecutor’s actions were justified and that it had reasonable prospects of success. It was reasonable to conclude that the Council’s decision had been prompted by the order nisi.
[44] Ibid, [15].
[45] Ibid, [14]-[22].
In my reasons I found that:[46]
The payment of Outgoings does not represent a pool of money which the defendant is able to use for purposes not associated with Marina Outgoings as it wishes. On a proper construction of clauses 2.2 of the Underleases and clauses 2.8 and 4.12 of type A and type B respectively, the defendant is obliged to use the monies advanced by each Underlessee as its share of Outgoings for the purposes of Outgoings and only Outgoings. The use, by the defendant, as to what it refers to as “robbing Peter to pay Paul with the loan accounts”[47]is not an appropriate use of Underlessees’ funds. Irrespective of whether money is repaid or not, by using the money for purposes other than Outgoings, the defendant is in breach of the terms of the Underleases.
Self-evidently, had the defendant not transferred out of its accounts net payments in the sum of nearly $601,000 over the four financial years in question, then those funds would have been available to carry out essential maintenance on the Marina. When viewed against Mr Centofanti’s estimate of carrying out remedial work of $272,080.51,[48] it is immediately apparent that far from being able to fund repairs because of alleged non-payments on the part of the Underlessees, any inability to fund repairs and maintenance by the defendant was due to the defendant using Underlessees’ money for other purposes.
[46] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [317]-[328].
[47] T511.32-512.18.
[48] Exhibit P20.

Boscaini dealt with the rescission of resolutions and although this matter is quite different factually, quite apart from the declarations that were granted, I consider that the applicants’ prospects of success in obtaining a monetary judgment in excess of $600,000 were substantial and that they effectively achieved their goals.
In reaching that view I do not proceed on the basis that the Second Award would be adopted by the Court as part of its judgment, however I do proceed on the basis of my findings which have established that on the basis of the bank statements alone,[49] in breach of the terms of the underlessees, the defendant had made payments in the sum of $600,998.75 to related entities during the period September 2014 to 30 June 2018.
The applicants do not have a cost judgment against the respondent company in the proceedings or in the arbitration
[49] Exhibit P34.
Mr Marks’ second ground is that because the applicants do not have a cost judgment against the respondent in the proceedings nor an award against it for the costs of the arbitration, those costs orders cannot be assumed and the applicants have not sought leave to take that step in the litigation. The gravamen of that submission is that because the respondent is in liquidation and no costs orders have been made, no order that a non-party pay costs can be made.
I do not accept that submission. Such orders arise in circumstances where the party to the litigation is either insolvent or a man of straw and it follows that in those circumstances it may well be that no order can be made against the party to litigation. Hence the application for an order against a non-party. In my view, the fact that the applicants do not have a cost judgment against the respondent in the proceedings or in the award is not a reason not to make an order for costs against Mr Marks.
No warning given
Mr Marks’ third ground of opposition is that there was no warning given to him that an application against him would be made personally.
The applicants accept that a factor (but not a requirement) to be taken into account in an application such as this, is whether the non-party received a warning that costs would be sought against the non-party.
I note that on 28 February 2020, during the course of argument, I explained to Mr Marks that if the applicants paid for the Arbitrator and they were successful in obtaining an order as to costs then they would seek reimbursement from the respondent for the Arbitrator’s fees, a proposition that Mr Marks understood.[50]
[50] 28 February 2020, T61.7-62.36.
In Vestris & Anor v Cashman & Anor,[51] Lander J said:[52]
It is not desirable to lay down any rules which would fetter the exercise of a trial judge to make such an order but some guidance as to the exercise of the discretion can be obtained from the decided cases.
In exercising the discretion regard would be had to whether the non-party could have been joined as a party earlier in the proceedings and thereby obtained the protection of the rules of court; whether the non-party has had any warning that an application for costs against that party would be made; whether, in those circumstances, the non-party could have applied to be joined in the proceedings and thereby had the capacity to influence the proceedings or the non-party could have protected itself by making an offer in accordance with the rules; whether if a warning had been given the non-party could have terminated the proceedings by discontinuance, negotiation, payment or otherwise; whether the party who would otherwise be usually liable for costs can meet an order for costs and if relevant the reason why that party cannot meet an order for costs; whether it was apparent at any earlier stage in the proceedings, and if so when, that the party could not meet costs; whether the moving party should have sought an order for security for costs; the relationship, if any, between the non-party and the party who would usually be liable for costs; whether the non-party has caused the proceedings; whether the non-party has funded the proceedings; whether the non-party stood to benefit by the litigation and if so how; whether the non-party had a direct or indirect financial interest in the litigation; and whether there has been any improper conduct on the part of the non-party.
None of the matters will necessarily be decisive. Indeed the presence of one or more of those matters does not inexorably lead to the conclusion that an order for costs should be made against a non-party. In Bischof v Adams the mere fact that a person may benefit from the litigation was not enough.
An order will be made against a non-party only if the justice of the case requires that an order be made.
[51] (1998) 72 SASR 449.
[52] Ibid, [468].
His Honour continued:[53]
Another factor which may and usually would be taken into account is whether the non-party against whom the application for costs is made has been given any warning at any time during the proceedings that such an application might be made in the event that the party now applying is successful.
It comes to a matter of justice and that will in part depend upon what notice has been given to the party against whom the application is now made and the form of that notice.
[53] Ibid, p 472.
In Vestris, Mr and Mrs Cashman were directors of the plaintiff company which was at all material times insolvent. The plaintiff company had sued the appellants unsuccessfully. An application by the appellants, as defendants, for an order that Mr and Mr Cashman pay their costs personally, was refused.
Ultimately the Full Court determined the question on the basis that the District Court, on the legislation as it then stood, did not have jurisdiction to make such an order. Accordingly, the observations of Lander J are obiter. However, they assist in identifying a number of important considerations in the exercise of the discretion and in particular as to whether if a warning had been given the non-party could have taken steps to terminate the proceedings by discontinuance, negotiation, payment or otherwise.
In this matter, the respondent was not in a position to discontinue but it was in a position to negotiate, disclose its full financial statements, provide other financial information, make a payment or otherwise deal with the applicants.
One of the factors Lander J refers to in the passage I have set out above relating to the exercise of the discretion is whether the non-party could have been joined as a party or applied to be joined as a party earlier in the proceedings and thereby obtain the protection of the rules of court. No application was made by Mr Marks but in my view an application by the applicants to join Mr Marks to the proceedings was not a consideration in this case because of the lack of the respondent’s financial information.
Mr Marks is clearly sophisticated in commercial matters. So much so is evident from his extensive use of companies and trusts. I do not consider that a warning, even if given to Mr Marks, would have changed the way he conducted the litigation on behalf of the respondent.
In all the circumstances, I do not consider that the absence of a warning is fatal to the applicants’ application. I make it clear however that I take the lack of warning into account when considering the exercise of my discretion.
Ordering costs against a non-party is exceptional
Mr Marks’s fourth ground is that the order sought is exceptional. I accept that submission and take it into account when considering the exercise of my discretion.
The application does not satisfy the basics for a non-party costs order – see Price v BW & RD Smart,[54] and the policy behind the non-party costs orders
[54] [2020] SASCFC 2.
Mr Marks’ fifth and sixth grounds rely on the Full Court decision of Price v BW & RD Smart and policy considerations.
Mr Marks submits that the underlying policy behind an order that a non-party pay costs is that the real party should not seek to benefit from a named party’s claim without risk of an adverse personal costs order. Mr Ross-Smith submits that Mr Marks has no relevant benefit from the litigation and in particular the company was brought into the proceedings and is not a claimant.
Whereas it is true that the respondent was brought into the litigation I do not accept that there is no relevant benefit to Mr Marks.
During the trial, Mr Marks gave evidence that since 2005 he has run marketing businesses, seafood businesses, a construction business and hotels. He said the construction business was “New Wave Constructions”. He said that the businesses he owned included those named Krause Motors and Incospec Pty Ltd, as well as many others. He said that between 2014 and 2018 (during the period the respondent held the Marina lease), he was involved in 22 companies.[55]
Trusts
[55] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [255].
A number of trust deeds were produced by Mr Marks in the Marks Affidavit.
Marina St Vincent Trust
The lease of the Marina was transferred to the respondent by a mortgagee exercising its power of sale on 30 September 2014.[56] There is no suggestion that in taking the transfer the respondent was doing so as a trustee.
[56] Exhibit P1, vol 1, p 141.
Nevertheless, Exhibit SM-17 to the Marks affidavit exhibits the discretionary trust deed which is dated 20 August 2014 for the New Wave Marina Services Trust. The trustee of that trust is New Wave Marine Services Pty Ltd, the sole director of which is Mr Marks.[57]
[57] Marks Affidavit, Exhibit SM-17, p 376.
Exhibit SM-4 to the Marks affidavit is an amendment deed to the New Wave Marina Services Trust dated 20 August 2014, which is dated the same date as the trust deed. In the amendment deed, the name of the trust is changed to the Marina St Vincent Trust. The trustee named in the amendment deed is the respondent. It is not clear to me how it is that the respondent replaced New Wave Marina Services Pty Ltd as trustee.
The trust deed identifies Mr Marks both as a capital beneficiary and as an income beneficiary.[58] It provides for the distribution of both income and capital to the beneficiaries in the discretion of the trustee.[59]
[58] See Schedules 1 and 2.
[59] Marks Affidavit, Exhibit SM-17, clauses 4, 6.
The definitions of income and capital beneficiary each includes ‘any corporation (not being the trustee) in which any of its shares or capital is beneficially owned by any of the persons or trusts described in clauses 1-8 of the Schedule’.
Mr Marks appears as the beneficiary in clause 1 of each of the Schedules.
Also included in each schedule as a capital or income beneficiary is:
8.each trust in which any of the persons described in clauses 1 to 7 of the Schedule is a beneficiary, present, contingent or prospective and which either is vested or will vest on or prior to the date described in clause 1.21.2 of the Deed;
The North Adelaide Property Trust
During the course of the trial Mr Marks was taken to Exhibit P22, a bundle of financial documents, which included a draft financial report for, amongst other entities, the Marks Family Trust and the North Adelaide Property Trust.[60]
[60] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [289]-[292].
Exhibit SM-2 to the Marks Affidavit is the trust deed for the North Adelaide Property Trust. That trust received part of the sum of $600,998.75 that was transferred from the Marina bank accounts to which I have referred above.[61]
[61] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [311].
The trust deed for the North Adelaide Property Trust reveals that the trust is a discretionary trust[62] and that the beneficiaries include the ‘specified person’ who in turn is defined as Mr Marks. The beneficiaries also include ‘any corporation of which any person described in this clause… is a director, officer or member’.[63] The trustee of the North Adelaide Property Trust is New Wave Group Pty Ltd the sole director and shareholder of which is Mr Marks.[64]
Incospec Pty Ltd
[62] Marks Affidavit, Exhibit SM-2, clause 3.
[63] Ibid, clause 2.3.
[64] Exhibit P1, vol 1, p 151.
Incospec Pty Ltd (“Incospec”) is a company of which Mr Marks is sole director and shareholder. Incospec was one of the companies to which the respondent transferred $233,069.04 during the period 2014/2015 to 2017/2018[65] from the respondent’s Marina bank accounts into which the applicants (and other underlessees) paid their contributions to Marina outgoings. The money was transferred to Incospec for the payment of, amongst other things, salaries of Incospec employees.
[65] Generally, see Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [289]-[332].
Exhibit SM-13 to the Marks Affidavit is the trust deed for the Incospec Trust which is dated 24 June 2015. The trust is discretionary[66] and pursuant to clauses 6 and 7, both capital and income can be distributed to the beneficiaries.
[66] Marks Affidavit, Exhibit SM-13, clause 5.
The Incospec Trust names Incospec Pty Ltd as trustee and the specified beneficiary as Mr Marks. The beneficiaries include Mr Marks, and any trust in which Mr Marks or other identified beneficiaries is a beneficiary. It also includes any corporation (including a corporation acting as a trustee) any of the shares or capital of which is beneficially owned by Mr Marks or others or by a corporation in which such a person or trust is a shareholder.[67]
[67] Exhibit SM-13, clause 2.5.
Incospec was placed into liquidation on 31 August 2017 and wound up pursuant to creditors voluntary winding up.[68]
Krause Motors
[68] Exhibit P2.
Krause Motors was another of Mr Mark’s businesses operated by a trust known as the Krause Motor Trust, the trustee of which became Germantime Pty Ltd (‘Germantime) on 20 August 2020.[69] Prior to Germantime, the respondent was the trustee.[70]
[69] The date of the deed appointing Germantime is obscured however the deed was stamped on 9 September 2014.
[70] Marks Affidavit, Exhibit SM-7.
The Krause Motors Trust was formerly known as the Incospec Aerospace and Defence Trust[71] but renamed the Krause Motors Trust by amendment deed dated 20 August 2014.[72]
[71] Marks Affidavit, Exhibit SM-3.
[72] Marks Affidavit, Exhibit SM-4.
Mr Marks said in evidence that he was the sole director and shareholder of Germantime.[73]
[73] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [301]-[306].
An ASIC extract showing the business name details for Krause Motors dated 29 April 2019 formed part of the evidence of the trial before the Court.[74] According to that extract, the holder of the business name Krause Motors as at 29 April 2019 was ‘the trustee for Incospec Aerospace and Defence Trust’.
[74] Exhibit P1, vol 1, p 157.
The capital and income beneficiaries of the Krause Motors Trust include Mr Marks.
Pursuant to clause 6 of the trust deed, the trustee may distribute income as well as capital to the beneficiaries.
In his evidence at the trial, Mr Marks agreed that salaries of the employees of Krause Motors were paid out of the respondent’s bank accounts into which the applicants and other underlessees paid their contributions to Marina outgoings.[75] The net sum transferred to Krause Motors was $151,094.55.[76]
[75] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [302].
[76] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [311].
In my reasons published 31 January 2020 I referred to an affidavit sworn by Mr Marks on 19 December 2018, in which he deposed that the payments to Incospec and Krause Motors, which he characterised as loans in that affidavit, were very unlikely to be recovered because both had been placed into liquidation.[77]
Germantime
[77] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [296]-[303].
Germantime also received payments totalling $108,651.77 from the respondent’s Marina bank accounts.[78] Germantime, amongst other trusts, is the trustee of the Germantime Trust.[79] The Germantime Trust appears to be a collection of other trusts.[80] It is a discretionary trust and includes Mr Marks as specified beneficiary as well as a beneficiary. Other beneficiaries include, amongst others, each trust in which Mr Marks is a beneficiary and any corporation (not being the trustee) any of the shares or capital of which is beneficially owned by various persons or trusts. It also includes any corporation of which any beneficiary is a director or member.[81]
[78] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [311].
[79] Marks Affidavit, Exhibit SM-5.
[80] Ibid.
[81] Ibid, clauses 2-3.
In my view, the cash that flowed from the respondent to Krause Motors and Incospec to pay the salaries of the employees of those organisations was, at least, to the indirect benefit of Mr Marks given his position in those companies as sole director and shareholder. That indirect benefit was the maintenance of both the continuing operation of the businesses and the capital and income which he, as a beneficiary of the relevant trusts had a contingent interest. The same consideration applies to the Germantime Trust.
More fundamentally, it is readily apparent to me from the evidence led at trial and my findings in the published reasons, that Mr Marks used the money paid into the respondent’s bank accounts by the underlessees as a source of cash to which he considered he had unfettered access to for the purpose of making payments to entities associated with him as he wished.[82]
[82] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [299]-[306].
Accordingly, on the basis of the matters I have set out above, I find that Mr Marks had an interest in the litigation.
Mr Marks’ conduct of the litigation
At an Interlocutory Hearing before Evans J on 4 September 2018,[83] Mr Marks appeared for the respondent in his capacity as its sole director. He made an oral application for permission to represent the respondent in the proceedings in that capacity. In so doing, Mr Marks confirmed to his Honour that he was the sole director of the respondent, controlled it and had authority to bind it.
[83] Interlocutory Application, 4 September 2018; T11.1-14, Application 3 May 2019 T7.3-8, Gadd & Ors v New Wave Aerospace Pty Ltd (Supra) [260].
On 24 September 2018, I heard argument on the respondent’s oral application. Once again, Mr Marks appeared for the respondent. The respondent relied on Mr Marks’ Fourth and Fifth Affidavits both sworn 7 September 2018.[84]
[84] FDN64, 65 respectively.
After considering the application I refused Mr Marks permission to represent the respondent.[85]
[85] Gadd v Ors v New Wave Aerospace Pty Ltd - Ruling 28 September 2018.
The matter was listed for trial to commence on 6 May 2019. On 3 May 2019, Mr Marks, who again appeared for the respondent in his capacity as its sole director, made a further application for permission to represent the respondent in the proceedings including at the trial. On that occasion I granted permission.
Mr Marks conducted the litigation on behalf of the company as its sole director. I do not accept the order sought does not satisfy the criteria for a non-party costs order as explained in Price v BW & RD Smart nor do I accept it is incongruous with policy.
Mr Marks’ behaviour
The seventh ground is that the conduct about which complaint is made is necessarily the behaviour of the respondent and not of Mr Marks otherwise he would have been a party to the litigation. I deal with Mr Marks’ conduct of the litigation below.
The criteria identified in Knight v FP Special Assets Ltd
As to the criteria identified in Knight v FP Special Assets Ltd.
The party to the litigation is insolvent or without substantial assets
It would seem the respondent is now insolvent, however I have no evidence of its insolvency prior to it being placed into liquidation although for the reasons I set out below I am to infer that prior to being placed into liquidation its asset position was tenuous.

In his oral application to represent the respondent heard on 24 September 2018, Mr Marks relied on his Fourth and Fifth Affidavits both sworn 7 September 2018.
In the Court’s ruling dated 28 September 2018,[86] the Court noted other than the bare assertion as to sums due, there was no other financial information put forward by Mr Marks.[87]
[86] Gadd & Ors v New Wave Aerospace Pty Ltd – Ruling 28 September 2018.
[87] Ibid, [15].
In contrast, in the Eleventh Affidavit of Peter David Pedler sworn 12 September 2018,[88] Mr Pedler exhibits as PDP-17 the unsigned financial statements for the Marina St Vincent Trust for the financial year ending 30 June 2016. Those financial statements were dealt with in my ruling.[89]
[88] FDN68.
[89] Gadd & Ors v New Wave Aerospace Pty Ltd – Ruling 28 September 2018 [19]-[23].
There were no signed financial statements produced for the Marina St Vincent Trust or the respondent for the 2017 or 2018 financial years produced on the application, at the trial before me, or in the Arbitration before Mr McPharlin.[90]
[90] First Award, dated 21 June 2018 [3.7], [3.8]; Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [110]-[114], [314]-[318].
I made the observation in my reasons that I gained the impression Mr Marks was content with both the low standard of the respondent’s financial record keeping and the non-production of financial statements as it enabled him to make the point the financial statements were either “amended” or “draft” and had not been produced.[91] In any event, the unsigned Marina St Vincent Trust financial statements for the 2015/2016 financial year in Exhibit PDP-17 showed a net profit in 2016 of $37,998.27 which was distributed to the Marks Family Trust.
[91] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [314]-[318].
The balance sheet for the Marina St Vincent Trust shows a total equity of $1,610,205. Under the heading ‘current assets’ are trade and other receivables totalling $480,340.50 of which $332,147 are loans due from both Incospec and Krause Motors both of which were irrecoverable as at 19 December 2018.[92] There is no information concerning the remaining debtor.
[92] Supra [103]; Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [296]-[303].
Of the non-current assets totalling $1,727,082, property, plant and equipment account for $1,708,899. Note 7 to the financial statements attributes a total value to land and buildings, which I assume is at the Marina, in the sum of $53,626, berths owned for rent or sale on a revaluation total $685,721, public berths on a revaluation as at 1 October 2014 have a total of $795,705 and the Wirrina Cove Headlease purchase is valued at $160,000 giving a total non-current asset position of $1.695 million.
On or about 17 March 2020 the State re-entered the Headlease.[93] The consequence is that even accepting the value of the assets in the 2016 balance sheet for the Marina St Vincent Trust in the sum of $2,231,512, $2,027,199 of that amount was no longer able to be realised from of the time the Government re-entered the lease.
[93] Minister for Transport, Infrastructure and Local Government v New Wave Aerospace Pty Ltd [2020] SASC 37, Lovell J.
Accordingly, notwithstanding that at the directions hearing held 26 June 2020 Mr Marks confirmed to the Court that the respondent was solvent, in circumstances where there were no financial statements available for the company for 2017/2018 and noting the respondent’s right of indemnity from the assets of the Marina St Vincent Trust, there is a significant prospect that the respondent was insolvent as at 26 June 2020.
I am unable to determine if that was the case prior to the State re-entering the lease but given the major assets of the trust were the Marina and its associated assets and the respondent’s ability to benefit from its right to indemnity from the Marina St Vincent trust were based on those assets the respondent’s asset position was at the least, tenuous.
I am conscious that the applicants allege insolvency on the basis that the respondent applied in September 2018 for Mr Marks to represent the respondent on the ground that the company could not afford to instruct solicitors. That of course does not equate with insolvency but it does raise questions as to the solvency of the company.
In any event, there is no doubt the respondent was insolvent as at 14 August 2020.
The non-party’s interest in the litigation
As to whether Mr Marks had an interest in the litigation, I have found above[94] that Mr Marks had an interest in the litigation. That interest was not just maintaining the cash flow to both Incospec and Krause Motors prior to their liquidation. As I have noted, he was the beneficiary of various discretionary trusts and thereby had a contingent interest in circumstances where at least in relation to the Incospec Trust and the Krause Motors Trust he was the sole director of the trustee companies who determined the distribution of income and/or capital.
[94] Supra [107].
In any event, I also consider he had an interest in the litigation because it suited his purposes as a director of various entities, Krause Motors and Incospec in particular, to have a pool of money available to transfer to related entities for purposes unrelated to the Marina, a process he admitted in cross-examination.[95]
[95] 10 May 2019, T511.25-572.18, Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [304].
On that basis I consider that there is a connection between Mr Marks and the litigation as that term was explained by Gobbo J in Bischof v Adams.[96]
Mr Marks’ role in the litigation
[96] [1992] 2 VR 198.
In Vestris & Anor v Cashman & Anor[97] Lander J observed that the connection must be of a kind that makes it just to make an order for costs in that the connection must be material to the question of costs (citing Bischof v Adams).
[97] (1998) 72 SASR 449, 467.
In his Twenty-Seventh Affidavit sworn 28 July 2020, the applicants’ solicitor, Peter David Pedler, deposed that in the course of these proceedings, the respondent has had a succession of solicitors act for him. As I have set out above, Mr Marks represented the respondent both at the trial of this matter and often, on interlocutory applications.
Adjourned trial dates
This matter was listed for trial to commence on 5 February 2018. The trial was adjourned as a result of the respondent’s late production of financial documents.[98]
[98] Interlocutory Hearings, 18 January 2018; 25 January 2018.
The trial was relisted in June 2018. That date was also adjourned on the application of the respondent due to the service of a Third Statement of Claim which in turn was consequent upon late disclosure of financial documents by the respondent. In fairness however, on review of the transcript, it seems there was a degree of delay by both sides.[99]
[99] Interlocutory Hearing, 2 May 2018.
The matter was again listed for trial, this time in October 2018.
On 12 September 2018, the trial was once again adjourned on the basis that financial statements had not been produced by the respondent for the financial years 2016/2017 and 2017/2018. Orders for production of those financial statements had been made previously on 7 September 2018 requiring discovery of them by on or before Friday, 21 September 2018. On 12 September 2018 that order was recalled and the respondent ordered to discover and produce to the applicants its financial statements for the 2016/2017 and 2017/2018 financial year by 10 December 2018.
On 12 December 2018, that time was extended further to 19 December 2018 and on 20 December 2018 extended still further to 31 January 2019. There was also delay on the part of the respondent in producing expert reports.
In my reasons published in this matter I set out the history of the production of the respondent’s financial statements noting its failure to produce them other than in draft form and I do not repeat it.[100]
[100] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [314]-[318].
Mr Pedler deposes in his Twenty-Seventh Affidavit that on each occasion the matter was adjourned at the request of the respondent, it had the consequence that the applicant’s costs have increased significantly. I accept that evidence.
Further, the issue of how the respondent dealt with money paid by the applicants and the other underlessees into the respondent’s Marina bank accounts as well as financial statements and other financial information was a major part of this case. Those matters were subject to the referral to Mr McPharlin as Arbitrator and also, in part, dealt with by the Court.
There is no doubt that Mr Marks played an active part in the litigation, indeed, he promoted himself as being able to assist the Court by having a knowledge of the respondent and its financial affairs.
As I have noted above, I entertain no doubt that the poor state of the respondent’s financial records suited Mr Marks’ purposes.[101]
[101] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [318].
I accept the applicants’ submission that the lack of financial information has contributed to the increased cost of the Arbitration. I also accept that the applicants’ continual attempts to obtain financial information, has come at significant cost.
Other criteria
The above three criteria – insolvency or without substantial assets, interest in the litigation and the non-party’s role in the litigation are matters identified by the High Court in Knight v FP Special Assets Ltd.
In FPM Constructions Pty Ltd & Another v Council of The City of Blue Mountains,[102] Basten JA identified further criteria in addition to those identified by the High Court.
[102] [2005] NSWCA 340, [210].
As to those criteria,
The unsuccessful party to the proceedings was a moving party and not the defendant
That is not the case here. However, in its defence of the proceedings, the respondent was represented by both solicitors and Counsel at various stages of the proceedings prior to the arbitration and the trial of the matter. It could well have conceded that it was using the underlessees’ money for other purposes unrelated to the maintenance and operation of the Marina prior to the substantive hearings.
The source of funds from the litigation was the non-party or its principal.
I have no evidence that the source of funds that the respondent used for the purposes of litigation was from the non-party.
The conduct of the litigation was unreasonable or improper.
The applicants make much of my adverse findings as to the credibility of Mr Marks. I make it clear that Mr Marks’ truthfulness or otherwise as a witness and my unwillingness to accept him as a witness of truth[103] does not bear on this application. The question is whether or not Mr Marks had an interest in the litigation and that the conduct of the litigation was unreasonable or improper.
[103] Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [325].
I consider that the conduct of the litigation by Mr Marks was at least unreasonable for the following two reasons:
First, as I have found above the state of the respondent’s financial information, for which Mr Marks as sole director was responsible, was entirely unsatisfactory and delayed these proceedings causing numerous adjournments.
As the controlling mind of the respondent, Mr Marks must have been involved in the various transactions about which complaint has been made. In particular, in cross-examination during the trial Mr Marks said:[104]
QIf Krause Motors was in a good financial position back in 2016-2017, then can you give his Honour an explanation as to why you would need to be paying the wages of staff at Krause Motors out of a bank account of Marina St Vincent, when the money going into that account is substantially made up of payments of the under-lessees towards outgoings.
AOf course. As I said before, it's robbing Peter to pay Paul with the loan accounts and the trust loan accounts - I'm sorry. There's no law against taking money out of one trust account to pay something that's owed to another entity. And it also happens in Krause Motors, if I purchased a vehicle that was a hundred odd thousand and had to pay for it, that would obviously tighten cashflow until we sold that vehicle. So money - it may have come in a lump, it may have been individual, individually to those employees and the business was actually sold to the sales manager and there is a ratchet clause in the agreement that I may purchase that business, 50% of that business, back. I needed time to deal with this issue and with a marriage breakdown and it was just a time that I felt I had to sell the business.
[104] 10 May 2019, T511.25-512.18; Gadd & Ors v New Wave Aerospace Pty Ltd [2020] SADC 7, [304].
I make it clear that the fact of the unauthorised payments, as I have defined that term, is not a reason to make an order for costs against Mr Marks. However, Mr McPharlin said in his First Award that the standard of the respondent’s record keeping was low. I have no reason to doubt that assessment and it is consistent with my own observation.
The applicants submit that the poor standard of the respondent’s financial information has increased the cost of the Arbitration and caused them to incur significant costs. I accept that submission. Further, I find that the presentation of that financial information by Mr Marks has both confused and extended the litigation.
Second, the fact that $600,998.75 has been transferred from the respondent’s accounts into which the underlessees’ contribution to outgoings was paid and applied to the benefit of other companies of which Mr Marks was not only a director but also a beneficiary of the trust operating those businesses, combined with what I consider attempts by Mr Marks to confuse the financial evidence indicates to me that the litigation was being defended for the purposes, in large part, of preserving the respondent’s access to a cash flow and in practice Mr Marks’ access to that cash flow.
Accordingly, I consider the conduct of the litigation by Mr Marks as the respondent’s controlling mind was at least unreasonable.
Conclusion
Basten JA, in the passages to which I have referred to above,[105] was at pains to emphasise that the power is only to be exercised in exceptional cases and that the criteria should not be applied mechanically. His Honour observed that careful attention is required to the conduct of the parties said to be involved and the nature of the ‘interest’ in its outcome or subject matter. In Aiden Shipping Co Ltd v Interbulk Ltd (The Vimeira) (No.2)[106] Lord Goff said:
In the vast majority of cases, it would no doubt be unjust to make an award of costs against a person who is not a party to the relevant proceedings. But, as the facts of the present case show, that is not always so.
[105] Ibid, [214].
[106] [1998] 1 AC 965, 980.
In Dunghutti, to which I have referred, the Full Court of the Federal Court, referring to Kebaro Pty Ltd v Saunders,[107] quoted from that judgment that ‘…the categories of case are not closed, although in order to warrant its exercise, a sufficiently close connection, or as Gobbo J expressed it, a “real and direct and ... material” connection with the principal litigation, must be demonstrated’.
[107] [2003] FCAFC 5.
The Court continued:
We think that the only precondition to the exercise of power would have to be that the non-party has a sufficient connection with the unsuccessful party and the litigation to warrant the Court exercising its jurisdiction. The connection between the non-party and the unsuccessful party and the litigation must be material to the question of costs: Vestris v Cashman (1998) 72 SASR 449 at 467 per Lander J.
Ultimately, the question is whether the Justice of the case requires that an order be made.
This matter may be broadly compartmentalised into two parts, albeit with some overlap. The first part concerned the terms of the lease and its proper construction. The second part concerned the financial issues which Mr McPharlin has considered.
I consider the question of the lease and the matters dealt with by the Court were, generally, matters where there were a number of legitimate questions for determination and the respondent was justified in contesting those issues.
The question of the financial issues however was quite a different matter and was a constant source of delay and confusion on the part of Mr Marks as the sole director and controlling mind of the respondent.
In all the circumstances, I do not consider that it is appropriate to order that Mr Marks pay the applicants’ costs of the action. However, I do consider that in all the circumstances the justice of the case requires that Mr Marks pay the applicants for payment of Mr McPharlin’s fees for preparation of his First and Second Awards in the sum of $207,240.40.
Accordingly, the order will be:
1That Stephen Lindsay Gordon Marks pay to the applicants the sum of $207,240.40, such sum representing payment made by the applicants for Mr McPharlin’s fees of and incidental to his First and Second Awards.