Nedlands Pty Ltd & Anor v Chisholm & Anor (No.2) No. Scgrg-96-844 Judgment No. S471

[1999] SASC 471

NEDLANDS PTY LTD & ANOR v CHISHOLM & ANOR (No.2)
[1999] SASC 0471

Magistrates Appeal: Civil

WILLIAMS J.

1. The need for a supplementary order

1. On 29 October 1999 I published my reasons to support an order allowing, in part, the defendant’s appeal from a Master’s order seeking discovery of documents.  I then invited the parties to address me as to the formal orders.

2. In these reasons I dealt with one aspect of the matter upon the footing that a foreshadowed undertaking by the second plaintiff, Mr Heywood-Smith, or his solicitors, would make it unnecessary to pursue an issue as to discovery relating to the funding of the plaintiffs, or to determine a principle upon which I should act.  However, in the course of a subsequent hearing on 1 November 1999 to settle the orders, I was informed that the anticipated undertaking “...cannot be forthcoming”[see T.145].  Accordingly, before entry of my order, it becomes necessary for me to take the matter further in light of the altered circumstances. In the absence of the undertaking I will identify the principle which should be applied.

3. The form of order and its justification

1. It is not in dispute that the plaintiffs are being financially supported in the conduct of the action.  I have already expressed the view that in accordance with the principle in Knight & Anor v FP Special Assets Limited & Ors (Knight’s case) (1992) 174 CLR 178, the defendant, as a precaution, should be entitled to give notice to those who are maintaining the plaintiff.

2. In Knight’s case at 192-193 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.”

and at 203 Dawson J said:

“The circumstances in which it would be appropriate to award costs to a non-party would necessarily be confined, but that is a question of discretion, not jurisdiction. I should add that the discretion to award costs is to be exercised judicially so that a person against whom costs may be awarded must, if not a party, be brought before the court.  In many cases the convenient method of bringing him before the court would be to make him a party whereupon, even upon the appellants’ argument, any problem of lack of jurisdiction would disappear.”

1. The power of the Supreme Court to order costs against a non-party by virtue of the combined effect of ss5 and 40 of the Supreme Court Act 1935 (SA) was discussed in Vestris & Anor v Cashman & Anor (1998) 72 SASR 449 (Vestris’ case) per Lander J at 462.  The Court suggested that it would be prudent for early notice to be given to a non-party of an intention to claim costs in such circumstances.  At 458 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....”
   (Emphasis added).

At 467-8 Lander J said:

“Ordinarily the losing party to the litigation will be ordered to pay the successful party’s costs.  That statement is not without exceptions but those exceptions are not important here.

Usually there is no reason to think that anyone except the parties to the litigation should be responsible for the costs of the litigation: see Knight v FP Special Assets Ltd (at 192) per Mason CJ and Deane J.

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.

Whilst the circumstances to make an order for costs against a non-party will be both rare and exceptional such an order can be made without the moving party having to demonstrate any improper conduct of any kind on the part of the non-party.  An order for costs against a non-party is not dependant upon any improper conduct on the part of any party.  Of course in some cases improper conduct on the part of the non-party will be a relevant factor in the exercise of the discretion.

Whether it is just to make such an order involves the exercise of a discretion on the part of the trial judge: see Symphony Group plc v Hodgson [1994] QB 179 at 193. The discretion to make an order for costs against non-parties “must be exercised judicially and in accordance with general legal principles pertaining to the law of costs”: see Knight v FP Special Assets Ltd (at 192) per Mason CJ and Deane J.

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....”
(Emphasis added).

1. I note the decision of Hayne J in Helljay Investments Pty Ltd v DCT [1999] HCA 56 as a recent example of the application of Knight’s case. 

2. Against the background of these authorities, it is my opinion that procedurally the Court should facilitate the giving of a notice by letter from the defendant to the strangers who financially stand behind the plaintiff in the action.  The letter will warn these non-parties of the defendant’s intention, in due course, to claim costs against them if circumstances so justify.  The Court has power in the exercise of its inherent jurisdiction to ensure that justice is effectively administered.  If a party intends to seek an order against strangers which “common fairness dictates” should be the subject of early notice to them, then it is within the Court’s power to anticipate the situation in which joinder of strangers as parties may eventually become appropriate.  The Court may treat service of this preliminary notice as a procedural step which it should now facilitate if there are service difficulties.

3. In Devlin v Collins (1984) 37 SASR 98 at 112 White J quoted Professor Sir Jack Jacob:

   “The overriding feature of the inherent jurisdiction of the Court is that it is a part of procedural law, both civil and criminal and not a part of substantive law; it may be invoked not only in relation to parties in pending proceedings, but in relation to anyone, whether a party or not, and in relation to matters not raised in the litigation between the parties; it must be distinguished from the exercise of judicial discretion; and it may be exercised even in circumstances governed by rules of court....”

4. The procedure which I propose may also be justified under SCR4.02 which enables the Court to give directions where there is doubt as to the correct procedure to be followed.

5. The facts emerging upon appeal

1. The defendant claimed to be entitled to discovery of documents to enable him to give notice to strangers.  However, during the hearing of the appeal sufficient information has come forth to enable notices to be given.  It now appears:

   1...... That the plaintiffs are being maintained by non-parties. Mr Whitington QC, of counsel for the plaintiffs, has formally acknowledged this fact during the hearing before me.

   2...... That the Federal Court has authorised an agreement between the second plaintiff and two insurance companies, Royal and Sun Alliance and Lumley General Insurance.

   3...... That, as acknowledged by counsel during argument on 1 November 1999 (see T.147), the Official Trustee in Bankruptcy agreed in January 1996 to indemnify the plaintiffs but these arrangements are said to have been overtaken by events in February 1998 when the second plaintiff “made his own arrangements for funding”.

   4...... That a committee of inspection has been appointed by creditors of the bankrupt estate of GM Killington, now deceased.  The committee of inspection comprises three persons including Mr Ian Lawton.  There is evidence that Mr Lawton, or his interests, may be acquiring the interests of other creditors in Killington’s estate.  Pursuant to leave granted by the Federal Court, the Official Trustee, as trustee of the bankrupt estate, has been joined as a third party to the present proceedings.

   5...... It appears from a meeting of creditors of Killington held on 3 October 1996 that the Official Trustee had the support of certain indemnities from creditors. Mr Lawton provided a supplementary indemnity.

2. Based on these facts as known to me when I published my earlier reasons, I was prepared to make my order as proposed below (see s4). However, further information has kept emerging and the parties respectively sought an opportunity to bring it before me. I will treat that further information as relevant to the subject of costs. In other respects this information confirms with more detail the essential facts which were already before me. I will deal later with this further material (see s5).

3. The proposed order

1. I will refuse the defendant’s application, as appellant, to order discovery relating to the funding of the plaintiffs.  However, I am prepared to make an order, if the defendant wishes, nominating Mr Lawton and one of the insurers as representatives upon whom the defendant may serve notice for, and on behalf of, all non-parties who at any time in the past or in the future, may have provided indemnity or otherwise maintained the second plaintiff (whether directly or indirectly).  As part of such order I would direct that a copy of the notice be provided to Mr Heywood-Smith and the Official Trustee.  In this way I would expect the notice to come to the attention of all those who, from time to time, may be known as providing indemnity.  That notice, being akin to substituted service, should  provide an appropriate warning of the defendant’s proposed course of action.  Whether the indemnity provided to the Official Trustee by creditors is relevant to the principle in Knight’s case is a matter which will be reserved for argument in the event that someone seeks to take advantage of the notice.

2. To explain the procedure which has been followed a copy of these reasons should be served with the notice.  Close study of the remarks of Lander J in Vestris’ case, which I have quoted, will provide a guide as to the courses which may be available.

3. A continuation of argument

1. On 29 November 1999 [see T.116] Mr Gray QC, on behalf of the defendant, sought my leave to refer to an additional document, namely a letter dated 30 January 1996 from the Official Trustee in Bankruptcy.  Mr Gretsas, on behalf of the Official Trustee, sought to be heard and later drew my attention to an affidavit filed on behalf of the Official Trustee on 5 November 1999.  Whilst observing that I would have to draw a line as to the additional material which I should receive on appeal, I allowed counsel to develop their submissions so that I could properly assess the situation.  I received further argument on 9, 10 and 25 November 1999.

2. The additional material was as follows:

   (a).... A letter dated 30 January 1996 from the third party, the Official Trustee, to the second plaintiff providing an indemnity for costs.  The Official Trustee notes that he has:

   .................. “...received indemnities from creditors who have proved debts to the extent of $483,000.  He says “Accordingly I am in position as the major shareholder in the company to indemnify you to commence proceedings against Chisholm for recovery.”

   (b)An affidavit sworn and filed on 5 November 1999 on behalf of the Official Trustee which provides details of the Official Trustee’s indemnity arrangements with Nedlands’ liquidator in terms of a deed dated 3 September 1996.  The affidavit sketches the history of the indemnity until Nedlands’ liquidator initiated arrangements through an insurance broker to cover the plaintiffs’ risks associated with the litigation.  The Official Trustee asserts that as from 2 February 1998 his agreement to indemnify the liquidator of Nedlands has been superseded by other arrangements.  It is of course possible, at least in theory, that these arrangements might break down.

3. The Official Trustee’s affidavit generated its own dispute as the defendant claimed to be entitled to inspect the further documents referred to in the affidavit.  The Official Trustee volunteered to make certain material available but the defendant was not satisfied.  This was a case to which SCR59.03 should be applied and I refused to allow the matter to be canvassed further.  I had previously refused to allow cross examination upon the affidavit.  The defendant’s enquiries were ranging far beyond that which was required for the fair disposal of the issue before me.

4. In fact, the letter of 30 January 1996 and the above affidavit added little to the essential facts already before me when I handed down my earlier judgment.

5. The defendant sought to bring two further applications namely:

   (1)... an application to amend the defence to allege maintenance of action.

   (2)... an application to join further parties.

6. I have declined to deal with those applications.  In accordance with practice, the applications should be brought before a Master in the first instance.

7. Official Trustee’s objection to the proposed order

1. On 9 November 1999 I intimated to counsel the form of order which I had in mind to facilitate the giving of a notice by the defendant in accordance with Knight’s case.  I invite counsels’ further submissions.

2. The Official Trustee takes issue with my foreshadowed order insofar as a step be sanctioned for the purposes of exposing the Official Trustee’s indemnifying creditors to a potential liability for costs.  Mr Gretsas contends that it is contrary to principle that the defendant should be entitled to look beyond the Official Trustee in respect of any claim for costs.  Mr Gretsas argues that it is the Official Trustee’s responsibility to protect himself and ensure that he has sufficient means to meet any contingent liability.  Mr Gretsas contends that the Official Trustee may have available to him indemnities from creditors, he may resort to the assets of the bankrupt estate or he may rely upon funding from the Commonwealth pursuant to the Bankruptcy Act 1966 (Cth) s30(5) (see also s18A).

3. Mr Gretsas contends that the exposure of the Official Trustee to an order for costs in this action is a separate and distinct issue from the Official Trustee’s right to be indemnified from the sources mentioned above.  Counsel for the Official Trustee relies upon the statement of the Full Federal Court in Adsett v Berlouis& Ors (Adsett’s case) (1992) 109 ALR 100 at 109:

   “The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted  or defended by the trustee is a matter distinct from the trustee’s entitlement to recoupment out of the bankrupt’s estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation.”

4. The Official Trustee acknowledges that he may be liable for costs not only as a litigant, but he may also be personally liable if he leads others to institute proceedings (see re Bryant; Ex parte Gordon (1889) 6 Morrell 262 at 266.)

5. The Official Trustee claims that the indemnifying creditors of the bankrupt estate are completely protected from the present litigation and any adverse order as to costs which may be made.  Mr Gretsas further contends that the indemnifying creditors can only be called upon to reimburse the Official Trustee in the administration of the bankrupt estate, and that this is a matter separate and distinct from the present litigation.

6. The lastmentioned proposition is expressed too widely.  There may be circumstances, perhaps unlikely, where a stranger who is an indemnifying creditor of the Official Trustee may be subject to a costs order when it would be unfair to impose that burden upon the Official Trustee and the funds to which he generally has recourse.  If an indemnifying creditor with crucial personal knowledge of Mr Killington’s affairs were, for his own purpose, to paint a deliberately misleading picture to a meeting of Killington’s creditors, so as to generate costs in the action which otherwise would have been avoided, Knight’s case might be available to ensure that justice was achieved.  The discretion is extremely wide and it is undesirable that I should attempt to define the amplitude of that discretion.  However, it should not be overlooked that it will be a rare and exceptional case in which such a costs order may be anticipated against a person who is not a party (see Aiden Shipping Ltd v Interbulk Ltd [1986] AC 965).  The example which I have used of costs being generated is hypothetical.  There is no evidence of anything untoward in this respect.  It is as well that everyone is aware in principle of the way in which the defendant may seek to argue as events unfold.

1. The defendant contends that this case is unusual. Mr Gray QC has arguably demonstrated the possibility of the intermingling of interests of those who stand behind the plaintiffs and the third party.  Whether the defendant will eventually make out such an assertion or even be in a position to pursue it is not established.  There is no evidence that anyone has acted in a way likely to attract a costs order upon the principle of Knight’s case.  However, Mr Gray QC has demonstrated how the strings might be pulled behind the scene and he wants to be in a position to protect his client’s interests as to costs if his fears are made out in a rare and exceptional case.

2. There is at least one interest amongst the indemnifying creditors which has the capacity to be exercised in a way which might be called into question at the end of the day.  Upon the facts of the case it is convenient that the notice be given to indemnifying creditors generally.  However, this is not to suggest that the indemnifying creditors, by virtue of that status, have anything to fear in terms of a costs order.  The principle in Adsett’s case is well recognised, but that does not stand in the way of the application of Knight’s case if the conduct of intermeddling strangers so justifies.

3. Mr Gretsas submits that the principle as to the trustees’ personal liability for any order for costs is a corner stone to bankruptcy law.  He contends that the service of a Knight’s case notice would only cause mischief so far as the indemnifying creditors are concerned. He says that these creditors, acting prudently, would be forced to seek independent legal advice regarding the ramifications of any such notice.  In my opinion it is desirable that anyone who is connected with litigation should be aware of the wide powers of the Court to scrutinise and call to account the actions of strangers despite the fact that they do not appear as parties.  At the same time, it should be acknowledged that it will be a rare and exceptional case in which such a power is exercised.  In an evidentiary sense, I have adopted a low threshold as sufficient to justify the defendant in seeking to give notice to those who stand behind the second plaintiff and the Official Trustee.  I disagree with the submissions made on behalf of the Official Trustee.  I am prepared to make an order in the terms proposed in s4 of these reasons.