Morbidelli v Resourceco Pty Ltd
[2010] SASC 107
•22 April 2010
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
MORBIDELLI v RESOURCECO PTY LTD
[2010] SASC 107
Judgment of The Full Court
(The Honourable Justice Bleby, The Honourable Justice White and The Honourable Justice Kelly)
22 April 2010
PROCEDURE - COSTS - JURISDICTION - PERSONS NOT PARTIES TO PROCEEDINGS
Appeal against an order of costs against a non-party to proceedings - plaintiff's action against the defendant failed comprehensively - Judge acted under the erroneous assumption that the appellant was a director of the plaintiff - appellant did not directly fund the litigation and did not control it - consideration of principles relating to circumstances in which it is appropriate to award costs against a non-party.
Held: not an appropriate case to order payment of costs against a non-party - appeal allowed.
District Court Act 1991 (SA) s 42; Supreme Court Civil Rules 2006 r 281(b), r 288(10(b), referred to.
Oxer v Astec Paints Australia Pty Ltd (2008) 254 LSJS 57; Vestris v Cashman (1998) 72 SASR 449; Australian Academy of Natural Medicine Pty Ltd v Walters [2003] SASC 56; Knight v F P Special Assets Ltd (1992) 174 CLR 178; Bischof v Adams [1992] 2 VR 198; McVicar v S & J White Pty Ltd [2007] SASC 199; Yates Property Corporation Pty Ltd v Boland (No 2) (1997) 147 ALR 685; Carborandum Abrasis Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757; B E Studio Ltd v Smith & Williamson Ltd [2006] 2 All ER 811, considered.
MORBIDELLI v RESOURCECO PTY LTD
[2010] SASC 107Full Court; Bleby, White and Kelly JJ
BLEBY J: I agree with the orders proposed by White J and with his reasons. I have nothing to add to those reasons.
WHITE J: The issue in this appeal is whether a non-party should have been ordered to pay the costs of the successful defendant in proceedings in the District Court.
Between 1997 and 10 February 2001, the plaintiff in the District Court proceedings TGM Civil Pty Ltd was engaged in the cartage of recycled concrete rubble. It supplied trucks and drivers for this purpose. Before 1997, Mr Tony Morbidelli had operated the cartage business as a sole trader. On the incorporation of TGM Civil, he became its sole shareholder and its sole director.
The appellant is his wife. She worked in the business attending to all aspects of its bookwork.
After TGM Civil ceased providing the trucking services in February 2001 it commenced proceedings against the defendant Resourceco Pty Ltd. It claimed damages for breach of contract and misleading or deceptive conduct by Resourceco, and asserted a promissory estoppel against it. TGM Civil’s claim against Resourceco failed comprehensively, with the trial Judge finding that the claims were misconceived. On the Judge’s findings TGM Civil did not have a contract with Resourceco at all but had been working under an arrangement with CSR Limited (trading as CSR Recycled Products); even if it did have a contract with Resourceco, a breach of that contract had not been proved; and even if a breach had been proved, TGM Civil had not proved any damage arising from the breach. The Judge also found that Resourceco had not engaged in misleading or deceptive conduct and that TGM Civil had not proved circumstances giving rise to an estoppel.[1] It is very evident that the Judge considered that TGM Civil had pursued its claim in the District Court unreasonably and that it should have been aware that it was doomed to fail.
[1] TGM Civil Pty Ltd v Resourceco Pty Ltd [2008] SADC 53.
Upon the dismissal of TGM Civil’s claim, Resourceco sought orders that Mr and Mrs Morbidelli be joined to the proceedings, that costs orders be made against them, and that TGM Civil and Mr and Mrs Morbidelli be ordered to pay its costs of and incidental to the proceedings on an indemnity basis. On 20 August 2008 the Judge made orders to that effect.[2]
[2] TGM Civil Pty Ltd v Resourceco Pty Ltd (No 2) [2008] SADC 109.
Mrs Morbidelli appeals against the order requiring her to meet Resourceco’s costs. She does not appeal against the order that those costs be indemnity costs: contending only that she should not have been ordered to pay any costs at all.
Neither TGM Civil nor Mr Morbidelli appeal against the costs orders made against them. It appeared to be common ground that TGM Civil is now insolvent.
In Oxer v Astec Paints Australia Pty Ltd[3] Debelle J held that an appeal against the refusal by a Master to order that a non-party pay the successful party’s costs of action did not require the Court’s permission under the former r 281(b) of the Supreme Court Civil Rules 2006.[4] The parties to the present appeal have proceeded on the same basis but on the hearing of the appeal, and out of an abundance of caution, Mrs Morbidelli did apply for this Court’s permission. Resourceco did not oppose the grant of permission. In those circumstances, and without deciding whether it is, strictly speaking, necessary to do so, I would grant Mrs Morbidelli permission to appeal.
[3] [2008] SASC 64; (2008) 254 LSJS 57.
[4] Now r 288(1)(b).
The decision that Mrs Morbidelli should be liable to Resourceco for its costs was a discretionary judgment. Despite the limited circumstances in which appellate courts will interfere with such judgments, I consider that the exercise of the discretion in this case did miscarry in a number of respects and that the appeal should be allowed. My reasons for that conclusion follow.
Relevant Principles
By s 42(1) of the District Court Act 1991 (SA), costs in proceedings in the Civil Division of the District Court are in the discretion of the Court, awarded against any person “whether a party to or a witness in the proceedings or not”.
The principles concerning the discretion to make a costs order may be made against a non-party have been canvassed in a number of authorities and, in this Court, in Vestris v Cashman[5] and Australian Academy of Natural Medicine Pty Ltd v Walters.[6] At one stage it was thought that, apart from cases involving solicitors, the power was principally to be exercised in those cases in which the non-party was the “real” party to the litigation[7] or had been guilty of some abuse.[8] However, it is now well recognised that the exercise of the discretion is not confined to cases of these kinds. In Knight v F P Special Assets Ltd Mason CJ and Deane J (with whom Gaudron J agreed) said:
For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.[9]
Thus, non-parties who have actively involved themselves in the litigation of an insolvent litigant, with some interest in its outcome, may properly be ordered to pay the costs of a successful defendant.
[5] (1998) 72 SASR 449.
[6] [2003] SASC 56.
[7] Ram Coomar Coondoo v Chunder Canto Mookerjee [1876] 2 AC 186 at 212.
[8] Knight v F P Special Assets Ltd (1992) 174 CLR 178 at 190.
[9] Ibid at 192-3.
A review of the authorities indicates that the following principles should govern the exercise of the power to award costs against a non-party:
(i)the discretion must be exercised judicially and in accordance with the general legal principles pertaining to costs;[10]
(ii)the general principle is that an order for costs is made only against a party to the litigation but there are circumstances in which considerations of justice may warrant an order for costs against a non‑party;[11]
(iii)it has been said that the power should not be exercised lightly[12] and that the circumstances in which it is appropriate to do so are “rare and exceptional”;[13]
(iv)such circumstances exist when there is some feature of the association or connection between the party to the litigation and the non-party, or between the non-party and the incurring of costs, which makes it just for the order to be made;[14]
(v)the mere fact that a non-party may have benefitted from the litigation if it was successful is not, by itself, sufficient for an adverse exercise of the discretion against that non-party;[15]
(vi)the mere fact that the non-party may have funded the legal costs of the unsuccessful party will not normally be sufficient.[16] However, as Knight v F P Special Assets illustrates, if a non-party funding the litigation had a financial interest in its outcome and involved itself actively in its commencement and conduct, the making of an order that it pay the costs of the successful party may well be appropriate.[17] That is because it would usually be unjust for such a person to be able to pursue its own interests without risk of a liability for costs should the proceedings fail or be discontinued;[18]
(vii)the existence and timing of any warning to the non-party that a costs order against him or her may be sought will usually be a very relevant consideration. That is in part because the non-party should not be taken by surprise after the conclusion of the litigation, and in part because the absence of any warning may have deprived the non‑party of the opportunity to exercise any influence over the continuance or compromise of the proceedings, or as to the manner in which it was conducted;[19]
(viii)the Court does not have to be satisfied of improper conduct of some kind by the non-party, but proof of such conduct may be very relevant to the exercise of the discretion;[20]
(ix)the availability of an order for security of costs at an early stage of the proceedings may be a strong argument for refusing to exercise the discretion to order costs against a non-party.[21] By the obtaining of security, a defendant sued by an impecunious plaintiff can protect itself in relation to costs. For this reason the fact that a successful defendant did not seek an order for security may be a very relevant consideration.[22]
[10] Ibid at 192, 203, 205.
[11] Ibid at 192; Australian Academy of Natural Medicine Pty Ltd v Walters [2003] SASC 56 at [22].
[12] Australian Academy of Natural Medicine Pty Ltd v Walters [2003] SASC 56 at [22].
[13] Vestris v Cashman (1998) 72 SASR 449 at 467.
[14] Ibid at 467; Bischof v Adams [1992] 2 VR 198 at 205.
[15] Bischof v Adams [1992] 2 VR 198 at 205; Vestris v Cashman (1998) 72 SASR 449 at 457.
[16] Vestris v Cashman (1998) 72 SASR 449 at 457; McVicar v S & J White Pty Ltd [2007] SASC 199; (2007) 249 LSJS 110.
[17] McVicar v S & J White Pty Ltd [2007] SASC 199 at [25]; (2007) 249 LSJS 110 at 112.
[18] Carborundum Abrasis Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757; Vestris v Cashman (1998) 72 SASR 449 at 457.
[19] Vestris v Cashman (1998) 72 SASR 449 at 468.
[20] Ibid at 457, 467; B E Studio Ltd v Smith & Williamson Ltd [2006] 2 All ER 811.
[21] Knight v F P Special Assets Ltd (1992) 174 CLR 178 at 191.
[22] Vestris v Cashman (1998) 72 SASR 449 at 457.
The Reasons of the Judge
The Judge’s reasons concerning costs did not for the most part distinguish between the respective positions of Mr and Mrs Morbidelli. He described both as directors of TGM Civil[23] and considered that both had financed the proceedings in the District Court through loans to the company, or by “forbearance from collecting money owed to one or other of them”.[24] The Judge considered that Mrs Morbidelli had conceded as much in her evidence at trial.[25]
[23] [2008] SADC 109 at [2].
[24] Ibid at [7].
[25] Ibid.
The Judge also considered that both Mr and Mrs Morbidelli would benefit if the litigation was successful, that each had had “a determinative role” in the decisions made to continue the litigation and, imprudently, to reject offers of settlement. The Judge said:
[9]It is equally true that both Mr & Mrs Morbidelli stood to gain financially if the litigation was successful. The loans to the company could have been repaid, the debts and outstanding salaries could also have been repaid, and Mr Morbidelli’s equity in the company would have increased substantially.
[10]Further, it is also true from that evidence that Mr & Mrs Morbidelli had a determinative role in the decisions made to continue the litigation, and, implicitly, to imprudently reject the offers of settlement made by the defendant. [Emphasis added]
The Judge returned to this topic later in his reasons when he said:
[21]The passages in the evidence of Mr & Mrs Morbidelli referred to above make it clear that they both agreed to institute and continue the proceedings, to fund the proceedings, and they would have derived a direct financial benefit if the proceedings had been successful. It was their joint decision to reject the offers of settlement made by the defendant. In doing so, they were acting as if they were parties to the proceedings and could have chosen to terminate them at any stage. [Emphasis added]
The Judge went on to hold that the two unsuccessful applications by Resourceco for the provision of security for costs prior to trial had “clearly put Mr and Mrs Morbidelli on notice that this defendant was holding them personally responsible for the litigation on the basis that it suspected that the plaintiff was insolvent” and that it was not possible for them to argue that they were unaware that they were personally at risk for costs in the litigation.[26]
[26] Ibid at [18].
In addition, the Judge noted that Mr and Mrs Morbidelli had been put on notice that an application would be made for an order that they personally pay the defendants’ costs by a letter from Resourceco’s solicitors of 23 July 2007. The Judge was satisfied that it had been sent as soon as practicable after Resourceco had become aware of material which would support such an application.[27]
[27] Ibid at [19].
Finally, the Judge rejected an argument which had sought to distinguish Mrs Morbidelli’s position from that of her husband:
[22]Mr O'Brien submitted that, particularly in relation to Kirsten Morbidelli, it would not be just to order her to pay costs because she did not control the plaintiff, she did not take part in the discussions between Mr Morbidelli and Mr Brown, and had no independent knowledge of the relevant facts.
[23]In my view, that submission is a little disingenuous. Mrs Morbidelli financed the litigation to the tune of several hundred thousand dollars, and the litigation would not have been possible if she had not. To that extent she was in control. Further, if she chose to blindly accept her husband’s word for what happened, in the face of clearly contradictory objective evidence, then it is just that she should be personally liable for the costs of the action.
Consideration of Appeal
The Judge’s decision involved the exercise of a discretion. The usual appellate restraint in interfering with a discretionary decision therefore applies. This Court should not interfere with the Judge’s decision unless satisfied that he made some error of principle, or failed to have regard to a relevant consideration, or took into account an irrelevant consideration. Even if no error of these kinds can be established, the Court may still intervene if satisfied that the decision is so unreasonable that it must have been infected by some error even if it is not possible to identify the particular error.
In my opinion, the Judge’s reasons reveal a number of misapprehensions on his part which indicate that the discretion has miscarried.
Directorship
In the first place, the Judge was mistaken in thinking that Mrs Morbidelli was a director of TGM Civil. Mrs Morbidelli has not at any time been an office holder of the company, whether as director or secretary. This was confirmed by Mr Morbidelli in his cross-examination at trial.[28] Mrs Morbidelli did work for TGM Civil but this was office work doing “all the bookwork, invoicing, chasing up money, banking, pretty much everything as a role in the office I would say”.[29]
[28] T224, line 7.
[29] T558, line 20.
This mistake is significant because it appears to underpin the Judge’s conclusions about Mrs Morbidelli’s control of the litigation and the extent of her decision-making in relation to it.
Extent of Funding of the Litigation
As can be seen from the passages in the Judge’s reasons quoted above, he attached considerable significance to what he considered to be the funding of the litigation by Mrs Morbidelli, saying that she had “financed the litigation to the tune of several hundred thousand dollars, and that the litigation would not have been possible if she had not”.
The evidence did disclose that Mrs Morbidelli had lent substantial sums to TGM Civil, but not that she had done so to finance the litigation, let alone that she had done so to the tune of several hundred thousand dollars. Mrs Morbidelli was able to make the loans because she was the owner of the family home which provided the security for loans she obtained from financiers. Mrs Morbidelli’s loans to TGM Civil are shown in the following table:
Date
Amount
14/4/2000
$6,656
16/8/2000
$20,000
19/10/2000
$27,500
5/1/2001
$16,000
13/2/2001
$20,000
24/8/2001
$3,500
31/8/2001
$5,000
8/8/2002
$15,000
29/1/2003
$7,876
9/4/2003
$40,500
12/11/2003
$80,000
17/2/2004
$5,000
24/2/2004
$6,000
24/3/2004
$5,000
12/10/2004
$3,000
25/2/2005
$15,000
31/3/2005
$4,000
9/6/2005
$90,156
Less amount repaid:
$100,000
Total owing:
$270,188
A number of points can be made about these loans. First, the first four loans were made to TGM Civil while its arrangement with CSR was still current and the fifth ($20,000) only three days after that arrangement ceased. It is inherently unlikely that those loans had anything at all to do with the proceedings in the District Court. A further two loans were made to TGM Civil well before the commencement of the District Court proceedings on 4 June 2002 and the timing of those loans also makes it unlikely that they were made in connection with the commencement or continuation of the proceedings. Thirdly, Mrs Morbidelli’s last loan was made on 9 June 2005, more than two years before the commencement of the trial in the District Court.
The financial statements of TGM Civil for the financial years ending on 30 June in 2001, 2002, 2003 and 2004 indicate that the amounts which it spent on legal expenses in those years ($4,362, $4,766, $16,505 and $13,105 respectively)[30] were well less than the amounts which it had borrowed from Mrs Morbidelli. This indicates that the amounts which TGM Civil was borrowing from her must have been used, at least predominantly, for other purposes.
[30] Case Book vol 1, p 483.
The affidavit from a legal secretary employed in the firm of Windevere Bellman, the solicitors who acted for TGM Civil in the District Court proceedings, showed that TGM Civil had incurred costs and disbursements totalling $308,040.21. Of that sum, $197,709.97 was still owed to the solicitors, indicating that they had been the significant financiers of the litigation. None of the payments (totalling $110,249.24) to Windevere Bellman on account of costs had been made by Mrs Morbidelli. At best only some of those amounts could have originated in the loans from Mrs Morbidelli.
In short, the documentary evidence, and the implications which can be drawn from it, do not justify the Judge’s conclusions about Mrs Morbidelli’s financial support of the litigation.
Resourceco submitted that the Judge’s conclusions were instead supported by the oral evidence. However an analysis of the evidence does not support that submission.
In her cross-examination, Mrs Morbidelli said that she made the loans to the company at the request of her husband and because it was clear to her that TGM Civil needed the funds to make loan repayments on vehicles which it had leased or hired.[31] When asked how much of the total of approximately $380,000 lent by her to TGM Civil had been used for the funding of the District Court proceedings, Mrs Morbidelli answered “Well I would say none from my home”.[32] She also said that she had not herself deposited money with the company’s solicitors and that all she had done from time to time was to give money to her husband for the use of the company.
[31] T609, line 35-T610, line 5.
[32] T612, line 7.
Later in the cross-examination Mrs Morbidelli gave the following evidence:
Q.Would there be a correct position that you and your husband have discussed from time to time putting money into the company to fund these proceedings?
A.From my house?
Q.From anywhere.
A.I suppose, I suppose, I don’t know, no.
Q.Well, I don’t want you to suppose. Are you saying to his Honour that you have no idea that the funding –
A.The money we lent most of the time was to pay back loans for vehicles, ATO debt, majority of it was vehicles over the years. You know, we had a whole heap of vehicles that we had to pay loans on.
Q.You see your husband’s evidence was that the company has been funding this litigation out of loans, including loans from you. You can’t disagree with that, can you?
A.No.[33]
In my opinion, that evidence does not support the conclusion that Mrs Morbidelli made loans to TGM Civil to enable it to continue the District Court proceedings. Rather it suggests that Mrs Morbidelli was lending money to the company so that it could meet its liabilities generally. Even if monies advanced by Mrs Morbidelli were in fact used in connection with the prosecution of the District Court proceeding, it does not follow that she was providing the funding for that purpose.
[33] T613, line 24-T614, line 1.
The evidence of Mr Morbidelli does not provide a secure foundation for the Judge’s conclusions in this respect either. In his cross-examination, Mr Morbidelli acknowledged that monies which he himself had lent to the company were used to pay its creditors and its legal expenses.[34] The cross-examination then continued:
Q.And for that purpose you used your own money and your wife has lent her own money to the company?
A.Correct.[35]
That question which elicited this answer is ambiguous in that it does not indicate whether the cross-examiner was referring to one or both of the two purposes for which Mr Morbidelli himself had lent money to TGM Civil and, insofar as it refers to the monies lent by Mrs Morbidelli, does not make plain whether the purpose enquired after was that of the company as borrower, or of Mrs Morbidelli as lender.
[34] T422, lines 1-13.
[35] T422, line 14.
Later, in the cross-examination Mr Morbidelli was asked:
Q.So is this the case, that this action is being funded by loans from yourself and your wife?
A.Correct.[36]
This evidence appears to be more in the nature of a conclusion about the source of the funds in fact being used by TGM Civil to meet its legal expenses, rather than evidence of the purpose of Mrs Morbidelli in lending monies to the company.
[36] T423, line 24.
Mr Morbidelli did say that from time to time he had asked his wife to provide him with further funds so that he could continue the action[37] but that evidence fell well short of establishing that she was a significant financier of the litigation, let alone that she had financed it to “the tune of several hundred thousand dollars”.
[37] T452, lines 1-8.
In my opinion, the oral evidence does not support the Judge’s view about Mrs Morbidelli’s role in financing the litigation, and does not contradict the inferences to be drawn from the documentary evidence. I add that it was not suggested that Mrs Morbidelli had provided a form of security to Windevere Bellman in relation to its costs.
Resourceco put an alternative submission. This was to the effect that Mrs Morbidelli had effectively financed the litigation by forbearing from calling in her loans. It submitted that if she had called in the loans, TGM Civil, being insolvent, would have been wound up and it is unlikely that a liquidator would have continued the litigation.
While I accept that Mrs Morbidelli must have forgone calling in her loans, I do not accept the submission. The forbearance from calling in the loans allowed TGM Civil to “stay alive”, but that is quite different from a positive funding of the litigation. Resourceco did not point to any authority in which passive conduct, such as forbearance from calling a loan, had been regarded as relevant to, let alone sufficient to enliven, the discretion to award costs against a non‑party.
I conclude therefore that the Judge was in error in concluding that Mrs Morbidelli had financed the litigation by lending money to TGM Civil for that purpose and, in particular, that she had done so, “to the tune of several hundred thousand dollars”.
Control of the Litigation
Mrs Morbidelli submitted that the Judge had been wrong to conclude that she and her husband had jointly made the decisions about the commencement and continuance of the litigation and in particular, that it had been their “joint decision” to reject the offers of settlement made by the defendant.
Resourceco submitted that aspects of the cross-examination of each of Mr and Mrs Morbidelli supported the Judge’s conclusion. In relation to Mr Morbidelli, Resourceco pointed to the following cross-examination:
Q.Insofar as the decision has been made to continue, to either commence or continue with these proceedings, is that a decision that has been made between you and your wife Kirstin?
A.Right.
Q.And that was so right from the start, wasn’t it?
A.Right.
Q.And she has lent her money into these proceedings right from the start.
OBJECTION: MR O’BRIEN OBJECTS.
…
Q.The decision to bring the proceedings was a decision made between you and your wife, correct?
A.More on my behalf, yes.
Q.You just agreed to the proposition a moment ago, do you want to change your evidence?
A.She supported the action, yes.[38]
There is an ambivalence about this evidence. On one view it can be read as indicating that a joint decision was made by Mr and Mrs Mobidelli regarding the commencement or continuance of the proceedings but on another view, Mr Morbidelli appears to be saying that the decision or decisions were really made by himself but “supported” by his wife. The latter view of the evidence is consistent with Mr Morbidelli’s earlier affirmative answer to the cross-examiner’s question that “all the decisions that have been made in this action have been made by you”.[39] It is also consistent with the evidence from Mr Morbidelli more generally indicating that he was the decision-maker for the company, for example, in relation to the obtaining of loans from financial institutions, or the purchase or leasing of trucks.[40]
[38] T451, lines 7-16, lines 30-35.
[39] T424, line 10-12.
[40] See for example his cross-examination at T351-2, 354, 358, 361, 383-4.
Mrs Morbidelli’s evidence about her involvement in the general conduct of TGM Civil’s business was to similar effect saying that her husband would talk to her about matters such as the purchase of vehicles but that she “would not have a lot of involvement in regard to it”.[41]
[41] T606, lines 22-26.
In relation to her involvement in the decision-making concerning the litigation in the District Court, Mrs Morbidelli gave the following evidence in cross-examination:
Q.In relation to the commencement and the continuation of this action to this court here today, it’s the case, isn’t it, that the decisions in relation to that have been made between you and your husband Tony jointly?
A.Decisions relating to?
Q.Commencing the proceedings, funding them and bringing them to court.
A.I would say my husband.
Q.Your husband’s evidence was that both of you [made] that decision together.
A.We discussed it, yes.
Q.You agreed to it, didn’t you.
A.Most definitely.[42]
It can be seen that in this evidence Mrs Morbidelli did not agree that she and her husband jointly made the decisions in relation to the litigation. Instead she said, in effect, that her husband was really the decision-maker but that they had discussed the litigation and that she had agreed to the commencement and continuance of the proceedings. The tenor of the evidence indicates that Mrs Morbidelli acquiesced in her husband’s decisions rather than considering and determining, jointly with him, what should be done.
[42] T614, lines 21-33.
The Judge did not, in either his principal judgment or in his judgment concerning costs, make any adverse finding concerning the credibility or reliability of Mrs Morbidelli. There does not seem to be anything implausible about her evidence about the manner in which decisions were made concerning TGM Civil’s affairs. On the contrary, it is consistent with the other evidence in the trial as to the way in which decisions concerning the company’s affairs were made. In all these circumstances, I do not consider that it was open to the Judge to regard Mrs Morbidelli as an active participant in the litigation, or as controlling its conduct.
Quite apart from that, there is no evidence at all to support the Judge’s conclusion that Mr and Mrs Morbidelli had made a joint decision to reject the two offers of settlement made by the defendant. Neither gave any evidence at all on that topic. It cannot be inferred, in my opinion, from the relationship of husband and wife, or from the probability that they discussed between themselves from time to time aspects of the litigation, that they had made “a joint decision” in relation to the offers of compromise.
As noted earlier, the Judge’s conclusion about Mrs Morbidelli’s decision-making role in TGM Civil appears to have been influenced by his misunderstanding that she was a director of the company.
Absence of Warning
The solicitors for Resourceco wrote to each of Mr and Mrs Morbidelli on 23 July 2007 putting them on notice of Resoureco’s intention, in the event it successfully defended the proceedings, to seek non-party costs orders against them. This letter was sent on the sixth day of the trial, after Mr Morbidelli had given his evidence but before Mrs Morbidelli had given hers.
It seems that the Judge did not regard the lateness of the written warning as being significant. He noted that the letter had been written within days of the evidence elicited in the cross-examination of Mr Morbidelli and noted that it would have been difficult for Resourceco to have learnt of the matters disclosed in Mr Morbidelli’s evidence earlier.
On the appeal, counsel for Mrs Morbidelli emphasised the importance of the giving of an early warning to the exercise of the discretion to award costs against a non-party. I referred earlier in these reasons to the principles regarding the importance of a warning. In the present case, counsel submitted that the absence of an earlier warning to Mrs Morbidelli was a cause of unfairness because she had not been alerted to the possible consequences for her at a time when it may have been possible for her to exert some influence on her husband in relation to the litigation.
Counsel for Resourceco submitted that its applications for security for costs made on 10 September 2002 and 29 September 2005 respectively, and the proceedings associated with those applications, had, by themselves, served to put each of Mr and Mrs Morbidelli on notice that Resourceco may seek a non-party costs order against them. By this means Resourceco sought to avoid the implications which may otherwise have arisen from the lateness of its warning.
In support of this submission, counsel referred to two authorities. In Yates Property Corporation Pty Ltd v Boland (No 2),[43] Branson J made a non-party costs order on the basis that Mr Yates had been in effective control of the unsuccessful plaintiff, had given all significant instructions in relation to the proceedings, and had a real and personal interest in the subject of the litigation. In the course of her reasons, Branson J considered the significance of the fact that the respondents had not made any application for security for costs and said:
In my view, such failure is a matter which, along with other matters, may appropriately be taken into account on an application of this kind. Where a company which is apparently without means to pay an order for costs in favour of a respondent initiates litigation, the appropriate course will ordinarily be for such respondent to seek an order for security for costs: see Knight’s case per Dawson J at CLR 204. Those who stand behind the company may then make a decision, ordinarily at an early stage, as to whether to make the financial commitment necessary to allow the litigation to proceed.[44]
In my opinion, Branson J was not suggesting in this passage that the making of an application for security for costs operates by itself to warn those who stand behind a litigant that a non-party costs order may be sought against them. Her Honour was indicating only that early applications for security allow persons in such a position to make a decision at an early stage in the proceedings as to whether to provide the funding so as to permit the litigation to continue.
[43] (1997) 147 ALR 685.
[44] Ibid at 695.
Next, counsel referred to the reasons of Olsson J in Vestris v Cashman.[45] After referring to the importance of applications for security for costs being made promptly, Olsson J said:
To express the concept in another fashion, common fairness dictates that a defendant seeking to place a non-party at risk of an order for costs must, either by bringing a timely application for security or, alternatively, at least by letter advising the defendant’s intention, place the non-party on notice of that risk, so that the non-party will not, in effect, be lulled into a false sense of security and ambushed, when it is too late for it to reflect as contemplated in Yates Property Corporation Pty Ltd v Boland.[46]
Counsel submitted that in this passage Olsson J was to be understood as indicating that the bringing of an application for security for costs was a means of putting a non-party on notice that a non-party costs order may be sought. I respectfully disagree. I understand Olsson J to be doing no more than emphasising the desirability of defendants taking action at an early stage of the proceedings, whether by way of application for security or by letter of warning to the non-party, in order to gain the costs protection which they seek. His Honour was not intending to convey that adopting the former course was a means of giving notice of a possible application for the latter.
[45] (1998) 72 SASR 449.
[46] Ibid at 458. See also the reasons of Lander J at 472.
That construction of the reasons is strengthened by the consideration that the question of whether a warning has, or has not, been given is essentially a question of fact. It is not readily to be supposed that either Branson J or Olsson J were intending that an issue of fact, which may vary according to the circumstances of each case, should be resolved by a form of reasoning which is unrelated to the facts.
Accordingly, I do not consider that it can be said that the making of the two applications for security were sufficient by themselves to put Mrs Morbidelli on notice that an application for an order for non-party costs would be made.
Looking at the circumstances of Resourceco’s two applications for security, it cannot reasonably be concluded that Mrs Morbidelli was in fact on notice of the prospect of an application for non-party costs. There is no evidence at all that Mrs Morbidelli took any part at all in either application, let alone that she was aware that either application had been made, or was aware of what was put to the Court in relation to them, or was aware of their outcome. In my opinion, it cannot be inferred from the husband/wife relationship that she must have been aware of either application, let alone of the implications of each application.
I add that there is no basis at all upon which it could be said, as submitted by Resourceco, that Mrs Morbidelli had misled the District Court as to her financial position at the time it heard the second security for costs application. The fact of the matter is that Mrs Morbidelli did not put any evidence before the District Court at that time, nor cause any submissions about her financial position to be made on her behalf.
On the appeal, counsel for Resourceco conceded that by the time that the second application for security for costs was made on 29 September 2005 Resourceco did know sufficient about Mrs Morbidelli’s financial assistance to TGM Civil to have justified warning her that an application for an award of non‑party costs may be made. Resourceco did learn more in the cross‑examination of Mr and Mrs Morbidelli at trial but it could, had it chosen, have given notice earlier. Insofar as the Judge appears to have held that Resourceco could not reasonably have given notice earlier, that conclusion is mistaken. The lateness of the notice given on 23 July 2007 therefore counted against the making of an order for payment of costs by Mrs Morbidelli.
Conclusion Concerning Judge’s Exercise of Discretion
For the reasons given above, I consider that the Judge’s decision is affected by the four identified errors. These are significant errors and require the Judge’s order to be set aside so that the discretion can be exercised afresh.
Re-exercise of Discretion
The Judge found, correctly, that Mrs Morbidelli did have a financial interest in the outcome of the District Court proceedings. Unless TGM Civil was able to recover an award of damages in the proceedings, it was almost inevitable that it would not be able to repay to Mrs Morbidelli the substantial amounts which she had advanced to it to fund its operations.
On the other hand, the evidence does not warrant the conclusion that Mrs Morbidelli was controlling the litigation or conducting it with her husband as though it was their own. It cannot be concluded that she, with her husband, made the decisions to commence or continue the litigation, or to reject the reasonable offers of settlement made by Resourceco. Mrs Morbidelli had provided significant financial assistance to the company but not for the purpose of funding the litigation, and very little of the monies she had advanced can in fact have been used for that purpose. I have given my reasons earlier for concluding that her forbearance from calling in her loans did not amount, in a relevant sense, to the provision of financial assistance to TGM Civil.
Resourceco did not give any warning to Mrs Morbidelli, until well into the trial, that it would seek an order for non-party costs.
In my opinion, in this combination of circumstances, it should not be said that this is one of the rare and exceptional cases in which an order for payment of costs by Mrs Morbidelli as a non‑party was appropriate.
Conclusion
Accordingly, I would grant permission to appeal and would allow the appeal. I would vary the order made by the Judge on 20 August 2008 by deleting Mrs Morbidelli’s name from the list of persons from whom Resourceco is entitled to recover its costs of the District Court proceedings.
KELLY J: I agree with the orders proposed by White J and the reasons he has given.
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