Ipex ITG Pty Ltd (in liq) (receivers appointed) v Victoria
[2014] VSCA 315
•4 December 2014
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2011 0034
| IPEX ITG PTY LTD (ACN 007 433 623) TAKAPANA INVESTMENTS PTY LTD (conducting proceedings nunc pro tunc) | First Appellant (First Cross-Respondent) |
| and | |
| JOEL SCHWALB | Second Cross-Respondent |
| v | |
| STATE OF VICTORIA | Respondent (Cross-Appellant) |
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| JUDGES: | NEAVE, SANTAMARIA and KYROU JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 6 October 2014 |
| DATE OF JUDGMENT: | 4 December 2014 |
| MEDIUM NEUTRAL CITATION: | [2014] VSCA 315 (1st Revision: 9 December 2014, updated coversheet) |
| JUDGMENT APPEALED FROM: | Ipex ITG Pty Ltd (in liq) v Victoria [No 2] [2011] VSC 39 |
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COSTS – Whether judge erred in failing to make a costs order against a non-party – Whether the judge made an error of law, acted on a manifestly wrong view of the facts, or if the conclusion reached in applying the law to the facts was not reasonably open – Whether in the circumstances of the case the exceptional remedy of a non-party order justified – Appeal allowed.
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| APPEARANCES: | Counsel | Solicitors |
| For the appellants | Mr A W Sandbach with Mr D B Clough | AJH Lawyers |
| For the respondent | Ms G L Schoff QC with Ms R L Enbom | Mr A Mazzone Victorian Government Solicitor’s Office |
NEAVE JA
SANTAMARIA JA
KYROU JA:
The question which arises on this appeal[1] is whether a trial division judge should have made a non-party costs order against Mr Joel Schwalb for costs incurred by the State of Victoria, in proceedings between Ipex ITG Pty Ltd (‘Ipex’) and the State.[2]
[1]Leave to cross-appeal against the failure to make a costs order against Mr Schwalb was granted by Tate JA and Macaulay AJA on 6 May 2011: Ipex ITG Pty Ltd v Victoria [2011] VSCA 134. Ipex unsuccessfully appealed against the decision, of Sifris J, that it was not entitled to recover damages from the State of Victoria: see Ipex ITG Pty Ltd v Victoria [2012] VSCA 201. The Bench hearing the substantive appeal ordered that the cross-appeal be heard by a reconstituted Court.
[2]Ipex ITG Pty Ltd (in liq) v Victoria [No 2] [2011] VSC 39 (‘Reasons’).
The circumstances which gave rise to the appeal can be briefly described as follows. Ipex, an information technology company, commenced proceedings against the State of Victoria in 2002 (‘the State of Victoria case’) and against Melbourne Water Corporation (‘the Melbourne Water Corporation case’) in 2003.[3] In the State of Victoria case, which was heard by Sifris J, Ipex alleged there had been deficiencies in a tender process relating to the supply of information technology services. In the Melbourne Water Corporation case, which was heard by Byrne J, Ipex made a claim for extra payments which were said to be owing to it under a contract with Melbourne Water Corporation.
[3]Ipex ITG Pty Ltd v Melbourne Water Corporation [No 6] [2009] VSC 571. The proceedings against Melbourne Water Corporation were originally commenced in the Federal Court and later transferred to the Supreme Court.
At the time Ipex commenced these proceedings, its issued shares were wholly owned by Takapana Investments Pty Ltd (‘Takapana’). Takapana held its property as trustee under a discretionary trust for members of the family of Mr Schwalb, who was both an object of the discretionary trust and one of two directors of Takapana.
In 2003, Takapana sold its shares in Ipex to another company, Volante Group Ltd (‘Volante’). The sale agreement provided that Takapana would indemnify Volante for costs incurred in the litigation and that Takapana would be entitled to the proceeds of that litigation (if any). Ipex was ultimately unsuccessful in its claims in both cases.
On 10 October 2008, prior to the trial in the State of Victoria case, Master Daly (as she then was) ordered that security for costs be provided in the amount of $102,800, which was paid on 26 February 2009.[4]
[4]Noted by Efthim AsJ in Takapana Investments Pty Ltd v Sherman (Unreported, Supreme Court of Victoria, Efthim AsJ, 28 July 2009) [16].
Ipex was placed into liquidation in 2008. After Byrne J had completed the hearing of the proceedings against Melbourne Water Corporation, but before judgment had been handed down, Takapana sought leave to continue both proceedings nunc pro tunc in the name of Ipex.
During the hearing of that matter, Efthim AsJ asked Senior Counsel for Takapana about the person or persons who would benefit if the litigation succeeded. Senior Counsel said that the proceedings were for the benefit of Takapana and that ‘Mr Schwalb stands behind Takapana’.[5] He also said that in the Melbourne Water Corporation case, the Corporation had written to every member of the Schwalb family and to Takapana to put them on notice that if it was successful, it would be seeking a costs order against each of them.[6]
[5]Transcript of Proceedings, Takapana Investments Pty Ltd v Sherman (Supreme Court of Victoria, 5802 of 2009, Efthim AsJ, 11 August 2009) 524.
[6]Ibid.
Efthim AsJ gave leave to continue the proceedings on 28 July 2009, on the condition that Takapana agreed to indemnify Melbourne Water Corporation and the State of Victoria for any costs orders that might be made in their favour if they successfully defended the proceedings against them.[7] On 14 August 2009, Efthim AsJ made orders to that effect.
[7]Takapana Investments Pty Ltd v Sherman (Unreported, Supreme Court of Victoria, Efthim AsJ, 28 July 2009) [88].
Under the heading ‘Other Matters’ in the orders, his Honour noted that:
Prior to granting the relief sought, the plaintiff was required to agree to indemnify Melbourne Water Corporation and the State of Victoria for any costs awarded in their favour in current proceedings in the Court which have been brought by Ipex ITG Pty Ltd against them. The plaintiff has undertaken to pay any costs orders that may be awarded to Melbourne Water Corporation and the State of Victoria.
The plaintiff has not satisfied the Court that it has the means to support the undertaking. It is the trustee of a discretionary trust with a paid up capital of three dollars.
The plaintiff is seeking to conduct litigation in the name of a company which is in liquidation. If it is able to take the benefits of any litigation if the litigation is successful, it must also pay the costs if the litigation is unsuccessful. The undertaking given by the plaintiff must have meaning.
Takapana was ordered to indemnify the State of Victoria in respect of costs already incurred or that might thereafter become payable in relation to the proceedings and to provide security in the sum of $200,000 in support of that undertaking. The security was provided by cheque written on the trust account of Takapana’s solicitors, but there was no evidence as to the source of those funds.
On 18 August 2010, Sifris J ordered the provision of security to cover costs incurred in the State of Victoria case, noting that the effect of the earlier orders made by Master Daly and Efthim AsJ was to cover costs only until the first day of the trial. He ordered provision of security in the amount of $63,685.
In his reasons for granting leave to appeal against Sifris J’s refusal to make a costs order against Mr Schwalb personally, Macaulay AJA, with whom Tate JA agreed, noted that, as at 6 May 2011, Takapana had provided $366,485 in respect of the trial and $57,758.82 for its appeal.[8]
[8]Ipex ITG Pty Ltd v Victoria [2011] VSCA 134, [9] n 9. An amount of $1,998,800 had been provided as security in respect of the Melbourne Water Corporation case (trial and appeal).
The non-party cost order in the Melbourne Water Corporation case
In the Melbourne Water Corporation case, Byrne J made a non-party costs order against Mr Schwalb.
Byrne J observed that:
(a) In August 2009, Efthim AsJ was not satisfied that Takapana had the means to support its undertaking to pay Melbourne Water Corporation’s costs or the costs of the State of Victoria. [9]
(b) Mr Schwalb was the motivating force behind the Melbourne Water Corporation contract and the litigation based on it. It was Mr Schwalb who provided instructions to the Ipex lawyers. [10]
(c) Based on the evidence heard by Efthim AsJ, any evidence that might have been given by Mr Schwalb as to Takapana’s assets would not have been of any assistance to him.[11]
[9]Ipex ITG Pty Ltd v Melbourne Water Corporation [No 6] [2009] VSC 571, [49].
[10]Ibid [51].
[11]Ibid [58].
His Honour referred to the principles described in Knight v FP Special Assets Ltd[12] as applied by the High Court in Jeffery & Katauskas v SST Consulting Pty Ltd.[13]Byrne J observed that one of the situations in which it may be appropriate to make an order against a non-party is ‘where the non-party promotes and funds the proceeding brought by an insolvent company solely or substantially for his or her own benefit’.[14]
[12](1992) 174 CLR 178, 192 (‘Knight’).
[13](2009) 239 CLR 75, 94 [31].
[14][2009] VSC 571, [62].
His Honour said that:
(d) Mr Schwalb was one of two directors of Takapana. He was a decision maker with respect to the exercise of its discretionary powers and was also a beneficiary of the trust and a potential object of this discretion. Thus the ‘fruits of the litigation were his or substantially within his gift’.[15]
[15]Ibid [64].
(e) His financial involvement in the litigation had not been denied and nor had his active involvement in providing instructions to the Ipex lawyers.
(f) Takapana, as a company with $3 paid up capital, had not and had never had the resources to meet an order for costs out of its own funds. His Honour noted that it was likely that it had access to funds, but the source of these funds was not known. However, he considered that:
[g]iven the manner of the dealing with the proceeds of the sale of the Ipex shares, I consider it likely that these funds were sourced elsewhere from funds available to Mr J. Schwalb. On the slender evidence, and absent any evidence to the contrary, I so find.[16]
[16]Ibid [66].
On the basis of these findings, his Honour concluded that, in the Melbourne Water Corporation case, Mr Schwalb was not simply acting as a conscientious company director who was fulfilling his or her directorial duties in pursuing the claim. He ordered that Mr Schwalb pay any unsatisfied costs liability which Ipex had incurred to Melbourne Water Corporation.
On appeal, the decision of Byrne J was upheld. Mandie JA, who delivered the judgment of the Court, said that:
I further consider that the judge correctly applied that principle to the facts. In other words, the evidence showed that Mr Schwalb had played an active part in the conduct of the litigation and had an interest in the subject of the litigation. In my opinion, the fact that Takapana was a trustee of a family trust with a paid-up capital of $3 was prima facie evidence that Takapana, although not necessarily insolvent, was a man of straw. In the absence of evidence to the contrary, it could be safely assumed that Takapana had no assets of its own and at best some right of indemnity against any assets of the family trust. Further, as the family trust had the real financial interest in any fruits of the litigation, the evidence showed that Mr Schwalb had a sufficient interest in the fruits of the litigation to justify an order for costs against him because he, and no doubt other members of his family, were objects of the discretionary trust and he, along with the other director of Takapana, was in a position to determine any distribution to beneficiaries. [17]
[17]Ipex ITG Pty Ltd (rec and mgr apptd) v Melbourne Water Corporation [2012] VSCA 169, [74].
The refusal to make a non-party costs order in the State of Victoria case
After Takapana also failed in its claim against the State of Victoria, the State sought a similar order against Mr Schwalb. Sifris J, who made costs orders before the Court of Appeal handed down its decision in the appeal from the costs order made by Byrne J, declined to make an order against Mr Schwalb. He said:
First, the proceeding was not for the benefit of Mr Schwalb personally, but Takapana (although indirectly Mr Schwalb, and no doubt others, may benefit). Takapana is therefore liable for the costs. It gave an undertaking to such effect. The fact that Mr Schwalb in a practical sense ‘stands behind’ Takapana is not to the point and is not sufficient to render him personally liable. Something more is required.
Secondly, it has not been demonstrated that Takapana, despite its limited share capital, is unable to pay any costs order. It has paid substantial costs to date and paid into Court all amounts ordered by way of security for costs, Further, it is presumably entitled to a right of indemnity out of the assets of the trust which, it may be assumed, exceed $3.00.
Thirdly, the conduct of Mr Schwalb personally has not been such that he should be ordered to pay the costs personally. It is not to the point that he has been involved in providing instructions and taken an active role in the case. A director of a company is entitled, and perhaps even obliged, to be involved in the management and control of litigation - even to the extent of making tactical decisions - without necessarily being liable for any adverse costs order. Someone is required to give instructions on behalf of a corporate entity. Something more is required to render Mr Schwalb personally liable.[18]
[18]Reasons [9]–[11].
Sifris J noted that Byrne J had made an order that Mr Schwalb pay any unsatisfied costs liability in the Melbourne Water Corporation case, because Mr Schwalb had engaged in the litigation for his own benefit and was therefore the real plaintiff. He respectfully disagreed with that conclusion. In his view:
In any event, there is insufficient evidence of these matters and I am not prepared to simply ignore the corporate and trust form and structures. Awarding costs personally against an individual non-party is an exceptional remedy and should only be used in the clearest of cases. Simply put, the proceeding was not solely or substantially for Mr Schwalb's benefit and he was not, in a real sense, the true plaintiff.
Further and in the circumstances it is not, in my opinion, in the interests of justice that Mr Schwalb be personally liable for the costs or any unsatisfied costs liability. If he was an excluded beneficiary with no prospect of any fruits of the litigation he would not be liable simply because as a director of Takapana he pursued the litigation with vigour and stood behind the litigation in the sense of providing instructions. I am not convinced that being a potential beneficiary (or having the ability to determine any distributions if this be the case) makes any real difference or is sufficient to underpin the critical basis of liability, namely a sufficient personal financial interest in the litigation.
Finally, I should say that this aspect of the case has caused me some difficulty. However, in the end a close connection with the case - as Mr Schwalb undoubtedly had - is not sufficient. The close connection must be such that in a real, direct and material sense Mr Schwalb should be regarded as the real party. For the reasons given the better view is that he is not.[19]
[19]Reasons [14]–[16] (citations omitted).
Grounds of appeal
The State of Victoria now appeals against that decision on the following grounds:
1. The finding of the learned primary judge that Mr Joel Schwalb did not have a sufficient interest in the outcome of the litigation such as would support an order for costs against him was against the weight of the evidence.
2.The finding of the learned primary judge that it had not been demonstrated that Takapana Investments Pty Ltd [did not have][20] the means to satisfy any cost orders made against it was against the weight of the evidence.
3.In accordance with principles of judicial comity, the learned primary judge should have made findings consistent with those of the Honourable Justice Byrne in Ipex ITG Ply Ltd v Melbourne Water Corporation [No 6][21] that Mr Joel Schwalb had funded the proceeding and that it was accordingly in the interests of justice that he be liable for the [State of Victoria’s] costs of the proceeding.
4.In determining that he would not make an order for costs against Mr Schwalb because he was not satisfied that Mr Schwalb was the ‘true plaintiff' in the proceeding, the learned primary judge fell into error and accordingly his discretion miscarried.
[20]The Amended Notice of Cross-Appeal as filed contained the word ‘had’. This was raised by the State at the hearing as a typographical error. The Court granted leave to the State to amend its pleading. Counsel for Mr Schwalb consented to the amendment.
[21][2009] VSC 571.
Submissions for Mr Schwalb
In his submissions Mr Schwalb’s counsel referred to the principle that a costs order against a non-party will only be made in exceptional circumstances, where it is in the interests of justice to do so. At the hearing of the appeal, he initially submitted that it is only in the interests of justice to make such an order where there has been some wrongdoing or sharp conduct by the non-party, such as where that person deliberately initiates proceedings through an insolvent company, so that costs orders cannot be enforced against him or her. There was no evidence that Mr Schwalb had engaged in sharp conduct.
After responding to questions from the Bench on that issue, counsel conceded that the wrongdoing of the non-party was not a threshold requirement for the making of an order against a non-party, but submitted that the absence of fraud or similar wrongdoing was a powerful reason for refusing to exercise the discretion to make a costs order against a non-party. He relied on the lack of evidence that Mr Schwalb had acted improperly.
Counsel submitted that Sifris J had correctly declined to make a costs order against Mr Schwalb because there was ‘not a scintilla of evidence’ that Mr Schwalb was ‘the real plaintiff’ or that he had promoted the proceedings for his own financial benefit or funded the proceedings by providing security for costs or otherwise. Nor was there sufficient evidence before Sifris J to justify a conclusion that Mr Schwalb was the real beneficiary of the fruits of the litigation or that his conduct was such that he should be ordered to pay the costs personally.
Counsel contended that the fact that orders for security for costs were made against Takapana was not an adequate foundation for the conclusion that Takapana did not have the funds to meet any costs order or that Mr Schwalb had provided the funds necessary to meet the orders made by Efthim AsJ. Further, he submitted that where security for costs has been provided, a costs order would not be made against a non‑party.[22] He submitted that when Mr Schwalb gave instructions for the proceedings and attended a mediation of the dispute, all he had done was to discharge his duties as director and that his Honour had correctly found that the ‘real plaintiff in [the proceeding] was Takapana’.[23]
[22]In support of that submission he relied on an obiter dictum of McHugh J in Knight (1992) 174 CLR 178, 217. McHugh J dissented on the central issue in the case, holding that the rules of the Supreme Court of Queensland limited the Court’s jurisdiction to making costs orders against the parties to the proceedings. The majority (Mason CJ, Deane, Dawson and Gaudron JJ) held that the Court did have power to make an order for costs against a non‑party.
[23]Reasons [13].
Counsel submitted that the fact that Byrne J had made an order against Mr Schwalb in the Melbourne Water Corporation case did not require Sifris J to exercise his discretion in the same manner. Sifris J had referred to the decision of Byrne J and had given reasons for declining to follow the approach of Byrne J. The evidence before him relating to the role of Mr Schwalb was different from the evidence before Byrne J, and Sifris J had held on the basis of that evidence that Takapana, rather than Mr Schwalb, was the real plaintiff.
Submissions for the State of Victoria
The State submitted that the evidence before Sifris J as to Mr Schwalb’s role in the litigation and the potential benefit which would be derived from it was identical in material respects to the evidence before Byrne J in the Melbourne Water Corporation case. Senior Counsel for the State submitted during the course of the hearing that the only difference in the evidence before Byrne J and Sifris J was that in the Melbourne Water Corporation case there was some evidence that Mr Schwalb had himself paid some costs relating to interlocutory matters and had made an offer to meet an order for security in the course of the proceedings.[24]
[24]Transcript of Proceedings, Ipex ITG Pty Ltd v Victoria (Supreme Court of Victoria, Court of Appeal, S APCI 2011 0034, Neave, Santamaria & Kyrou JJA, 6 October 2014) 12.
The decision of Byrne J had been affirmed by the Court of Appeal, after Sifris J had handed down his costs reasons in the State of Victoria case. Counsel submitted that Sifris J should have drawn the same inferences of fact as those made by Byrne J. The only inference that his Honour could have made from the very limited evidence before him was that Takapana, which was a $3 company, had no assets and was therefore ‘a man of straw.’
The orders made by Efthim AsJ had recorded that ‘the plaintiff has not satisfied the Court that it has the means to support the undertaking’. Neither Mr Schwalb nor Takapana had filed affidavits as to Takapana’s assets in either the Melbourne Water Corporation case or the State of Victoria case. In these circumstances his Honour had erred in finding that ‘there is evidence that Takapana has made substantial payments in relation to costs and security for costs.’[25] While there was evidence that payments had been made on Takapana’s behalf, there was no evidence that Takapana itself was the source of those funds.
[25]Reasons [6].
Mr Schwalb had played an active part in the litigation, by instructing solicitors, attending Court and being present at the mediation. Further, as one of two directors of the company, he had the power to control distribution of the proceeds of the litigation to the beneficiaries of the discretionary trust, of which he was an object.
The State also submitted that Sifris J had erred in law by wrongly suggesting that a non‑party could not be held liable for costs simply because of a close connection with the case and that it was necessary to show that the connection was such that in a ‘real, direct and material sense’[26] he or she was to be regarded as the real party in the litigation.
[26]Reasons [16].
The State contended that a sufficiently close connection could justify the making of a costs order against a non-party, even when that connection was an indirect one.
The principles
The decision to order costs against a non-party is a discretionary one, which will only be set aside on appeal if the principles in House v The King[27] are satisfied. Appellate courts are particularly reluctant to interfere with the exercise of the trial judge’s discretion in relation to costs orders.[28] It follows that Sifris J’s decision not to order that Mr Schwalb pay the State’s costs will only be set aside if Sifris J made an error of law, acted on a manifestly wrong view of the facts, or if the conclusion he reached in applying the law to the facts was not reasonably open to him.
[27](1936) 55 CLR 499.
[28]See for example Hanlon v Brooks (1997) 15 ACLC 1626, 1632 (Callaway JA); McFadzean v CFMEU (2007) 20 VR 250, 289 [150]; Peet Ltd v Richmond [2010] VSCA 71, [4] (Nettle JA, Neave JA agreeing).
In their joint reasons in Knight, Mason CJ and Deane J, Gaudron J agreeing, recognised a general category of cases in which a costs order would be made against a non-party:
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.[29]
[29](1992) 174 CLR 178, 192–3. In addition, Dawson J at 203 considered that the circumstances in which it would be appropriate to award costs to a non-party would necessarily be confined, but that is a matter for discretion not jurisdiction. See also Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75, 95 [32].
Dawson J said that:
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.[30]
[30](1992) 174 CLR 178, 202.
In Kebaro Pty Ltd v Saunders,[31] the Full Court of the Federal Court reviewed the English and Australian authorities on the circumstances in which non-party costs orders could be made. The Full Court noted, among other things, that:
·A non-party costs order is exceptional relief, although some categories of factual situations are now recognised as within the discretion, for example, the situation described by Mason CJ and Deane J in Knight[32] …
·Whilst such an order is extraordinary, 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; in the words of Callinan J, the non-party can fairly be liable if adjudged by its conduct, to be a real party to the litigation, even if not the real party.
…
When the whole course of authority is reviewed, it may be seen that it can be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in ‘critical’ and ‘important’ respects, albeit not the only such party. Callinan J so held in Arundel.[33] We propose to follow this reasoning, which is consistent also with the Full Court’s decision in Gore.[34]
[31][2003] FCAFC 5 (‘Kebaro’).
[32](1992) 174 CLR 178, 192–3.
[33]Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406.
[34]Kebaro [2003] FCAFC 5, [103], [111] (emphasis in original); Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429.
Conclusion
The mere fact that a different judge made different costs orders in similar circumstances cannot be the basis for setting aside the exercise of Sifris J’s costs discretion. The ground of appeal which alleges that for reasons of ‘judicial comity’ Sifris J should have made findings consistent with those of Byrne J in the Melbourne Water Corporation case should therefore be rejected.
On the other hand, the evidence before Byrne J and Sifris J as to Mr Schwalb’s role in the litigation, whether he would share in the fruits of successful litigation, and whether Takapana had the capacity to meet costs orders was virtually identical. The only difference was that there was evidence before Byrne J that Mr Schwalb had paid some of the costs of interlocutory proceedings in the Melbourne Water Corporation case and had made an offer to meet an order for security of costs in that proceeding. When asked to identify other differences between the evidence before Byrne J in the Melbourne Water Corporation case and before Sifris J in the State of Victoria case, counsel for Mr Schwalb did not do so.[35] It follows that, in the Melbourne Water Corporation case, the Court of Appeal upheld the non-party costs order made by Byrne J on the basis of facts which did not materially differ from those before Sifris J.
[35]Transcript of Proceedings, Ipex ITG Pty Ltd v Victoria (Supreme Court of Victoria, Court of Appeal, S APCI 2011 0034, Neave, Santamaria & Kyrou JJA, 6 October 2014) 59.
The dismissal of the appeal from Byrne J’s order does not amount to a holding that Byrne J was required to make a non-party costs order in the exercise of his discretion. Nevertheless, in circumstances where the facts were materially identical, the different order made by Sifris J may provide a basis for concluding that his Honour made an error of law or took a manifestly inaccurate view of the facts. We note that Sifris J did not have the advantage of having the reasons of the Court of Appeal in the Melbourne Water Corporation case and that he acknowledged that the role of Mr Schwalb as a potential beneficiary of the discretionary trust had caused him some difficulty.
In our opinion, Sifris J took too restrictive a view of the principles which determine when a non-party will be ordered to pay costs. We take that view for three reasons.
First, his Honour did not consider that Mr Schwalb’s position as a beneficiary of the discretionary trust, and the director of the trust company who may well have had the power to distribute the proceeds of the litigation to himself, was sufficient to justify the making of a costs order against him. In taking that approach we consider that his Honour inappropriately limited the categories of cases in which such orders may be made and wrongly limited the exercise of his discretion.
Secondly, his Honour also seems to have regarded it as necessary to show that the non-party must be ‘the real party’ to the litigation. In our view, his Honour took too restrictive a view in deciding whether Mr Schwalb took an active part in the litigation. In Kebaro the Full Court of the Federal Court observed that:
Although the phrase ‘played an active part in the conduct of the litigation’ was used in Knight, … the phrase is not a term of art and thus can have no technical meaning. … Further, as in the case of ‘the’, contrasted with ‘a’, real party issue, it is not, in our view, necessary to demonstrate that the non-party exclusively controlled the conduct of the proceedings. It is enough to point to its role as one of the actors in the scene in important and critical respects.
… the issue here is whether the conduct of the non-party is sufficiently closely connected with the prosecution of the litigation, so that the non-party may fairly be described as ‘a real party’ in ‘critical’ and ‘important’ respects.[36]
[36][2003] FCAFC 5, [113]–[114] (emphasis in original).
Thirdly, we consider that his Honour should have inferred that Takapana was ‘a man of straw’ which was incapable of meeting any costs orders made against it, without receiving funds from another source. In our view, it was not open to his Honour to infer that the amounts provided for security for costs were in fact paid out of the assets of Takapana, a $3 company. This was contrary to the concession by Senior Counsel for Takapana in the hearing before Efthim AsJ that ‘Mr Schwalb stands behind Takapana’. It was also contrary to the conclusion reached by Efthim AsJ that it was necessary to make an order for security for costs, because Takapana lacked the funds to support its undertaking to pay the costs of Melbourne Water Corporation and the State of Victoria. It could also be regarded as inconsistent with Sifris J’s order that Takapana provide security for costs, which must have been based on a view that Takapana would not be able to meet future costs orders which might be made against it.
While there is no direct evidence that the funding was provided by Mr Schwalb, we consider that the judge should have drawn an adverse inference from the fact that Mr Schwalb provided no evidence on matters relevant to the exercise of the discretion which lay within his knowledge alone. In the Melbourne Water Corporation case, Byrne J considered that Melbourne Water Corporation bore the onus of establishing the basis for making a non-party costs order. As we explain below, that view was incorrect. Nevertheless, Byrne J observed that:
No attempt was made on behalf of Mr J. Schwalb to offer any evidence as to the matters bearing on this issue. He swore a short affidavit on 25 September 2009 asserting only that his involvement was that of a director of Ipex and later of [Takapana]. This affidavit was not challenged. He was not cross-examined.
In the course of the hearing before Efthim AsJ, where one matter in issue was the ability of [Takapana] to support its proposed undertaking, his Honour put directly to counsel for [Takapana] the question whether their client had any assets. The exchange recorded in paragraph 35 of the affidavit of Jesse Sol Gleeson affirmed 16 September 2009 is disturbing. In response to the question, senior counsel for [Takapana] said this:
A -- Your Honour knows a number of things. First, Your Honour knows it has the proceeds of the sale of its shares.
Q -- What are they worth?
A -- $1.7 a share I'm told and over 50,000,000 shares.
In fact, passing over the fact that there were actually 25,520,692 Ipex shares sold, so that counsel must have been referring to the number of shares in Volante which were issued, it is not at all clear that [Takapana] ever owned these Volante shares. Most of them are not presently owned by [Takapana] or by any company in which Mr J. Schwalb holds a relevant interest. Finally, the present value of the shares in Volante (in liquidation) is not likely to be a cause for any confidence.
I accept the invitation of counsel for Melbourne Water to infer that any evidence that might have been given by Mr J. Schwalb upon these matters would not have been of assistance to his present cause.[37]
[37]Ipex ITG Pty Ltd v Melbourne Water Corporation[No 6] [2009] VSC 571, [56]–[58].
It may be that Sifris J was not prepared to draw a similar inference from Mr Schwalb’s failure to give evidence as to the source of Takapana’s funds or as to who would benefit if the litigation were successful because his Honour considered that the State of Victoria bore the onus of bringing the case within the categories of cases in which a non-party costs order may be made.[38] But in Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq),[39] which was decided after Sifris J delivered his costs decision, this Court held that there was no onus of proof in an application for the exercise of a discretion to make a costs order against a non-party.
[38]In his submissions of 27 March 2012, counsel for Mr Schwalb also assumed that the onus of proof lay on the party seeking the order.
[39][2014] VSCA 223 (‘Ballantyne’).
Re-exercising the discretion
The parties agreed that if error were found, this Court should re‑exercise the costs discretion. During the hearing, there was discussion as to whether in doing so, the Court could take account of matters included in an affidavit sworn on 19 September 2014 by Dominic Mazzone, the solicitor conducting the proceedings for the State. After some discussion, both counsel accepted that the Court could take account of the matters included in para 7 of the affidavit, which were as follows:
Accordingly, the State is now proceeding with a taxation hearing fixed for 1 December (the Cost Court has allowed 4 days) in respect of two bills of costs totalling $809,282.39. That amount does not include the costs of the appeal, which will be the subject of a separate summons for taxation. The bill of costs for the appeal is in the sum of $121,906.38. $424,243.82 has been paid by release to the State of monies paid by way of security for costs.
It was also agreed that the certified costs of Ipex’s special leave application to the High Court have now been paid.
We reach no conclusion as to whether the Court could take account of other matters included in that affidavit, as it is unnecessary to do so on the facts of this case.
In re-exercising the discretion we have had regard to two other matters. The first is the fact that security for costs in the proceedings was provided through Takapana. The failure of a party to make an application for security for costs is a factor which can be taken into account in considering whether a non-party costs order can be made.[40] Counsel for Mr Schwalb argued that where the converse occurs (that is where a party is ordered to provide security for costs) a non-party costs order should not be made. The only authority cited in support of that proposition is an obiter dictum of McHugh J in his dissenting judgment in Knight.[41] Assuming for the purposes of these reasons that the fact that security of costs has been provided is relevant to the exercise of the discretion, we would give it little weight here. Where an inference arises that Mr Schwalb was the source of the amounts Takapana provided as security, this is not a persuasive reason for the Court to decline to make a non-party costs order against him.
[40]In Ballantyne [2014] VSCA 223, [44] this appears to have been accepted as a matter relevant to the exercise of the discretion.
[41]In Knight (1992) 174 CLR 178, 191, Mason CJ and Deane J observed that ‘the availability of the remedy [of seeking security for costs] is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the “real party” at the end of the trial of an action.’
The second matter is that, in the written submissions made to Sifris J,[42] a complaint was made that the State did not warn Mr Schwalb of the possibility that it would seek a non-party costs order against him, if he proceeded with the litigation. This matter was not mentioned in his Honour’s reasons and we were not taken to any passage in the transcript which showed that counsel relied on the failure to give notice in his oral submissions to his Honour. There was no evidence before Sifris J as to any prejudice suffered because no such notice had been given.
[42]We were informed of this matter by counsel in response to a question from the Bench. The transcript was not included in the appeal book, but in the written submissions dated 27 March 2012, which appear to have been prepared before the Court of Appeal hearing on the substantive matter, there is no reference to the failure to give notice.
Where a party to litigation intends to seek an order for costs against a non‑party if the other party’s claim fails, the relevant non-party should be advised in time to give them the opportunity to consider whether to continue supporting the litigation.[43] However, the failure to give such notice is not a decisive factor, in the exercise of the discretion. The failure to give notice was not emphasised in the hearing before us and arose only after the Court raised the issue with Mr Schwalb’s counsel. Moreover, Mr Schwalb was presumably aware of that possibility because such notice had been given in the closely related Melbourne Water Corporation case.
[43]This appears to have been regarded as a relevant consideration in Ballantyne [2014] VSCA 223, [45].
We will draw like inferences to those drawn by Byrne J and endorsed by Mandie JA in the proceedings against Melbourne Water Corporation. That is, we would conclude that Mr Schwalb was closely connected to the litigation and would have had access to all or part of the fruits of the litigation if it had succeeded. Further, he was actively involved in the conduct of the litigation. He gave instructions to lawyers and attended the mediation. We would also infer that the State might well be deprived of the benefit of the costs orders made in its favour, if the non-party costs order were not made.
The failure to warn Mr Schwalb of the possibility that an order would be made against him is a matter of some concern, but is not a decisive factor in considering whether the discretion should be exercised.
For these reasons we would order that both Takapana and Mr Schwalb be liable for costs incurred by the State in this matter, with the costs to be taxed in the same manner as his Honour ordered.
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