Permark International Interiors Pty Ltd v Amoveo Pty Ltd

[2013] VSC 563

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT GEELONG
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT

No. S CI 2010 07038

PERMARK INTERNATIONAL INTERIORS PTY LTD (ACN 126 585 886)	Plaintiff
v
AMOVEO PTY LTD (ACN 105 938 798)	First Defendant
and
PROCUTECH TARGETED SUPPLY CHAIN SOLUTIONS CO LIMITED	Second Defendant

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JUDGE:	CROFT J
WHERE HELD:	Geelong
DATE OF HEARING:	19 August 2013
DATE OF JUDGMENT:	25 October 2013
CASE MAY BE CITED AS:	Permark International Interiors Pty Ltd v Amoveo Pty Ltd & Ors
MEDIUM NEUTRAL CITATION:	[2013] VSC 563

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PRACTICE AND PROCEDURE – Costs – Discretion of the Court – Costs against a non-party – Directors of plaintiff company – Shareholders of plaintiff company – Litigation Funder – Plaintiff discontinued proceeding – Supreme Court (General Civil Procedure) Rules 2005, Order 63 – Supreme Court Act 1986, s 24 – Knight v F P Special Assets Ltd (1992) 174 CLR 178 – Vestris v Cashman (1998) 72 SASR 449 – Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685 – Manderson M & F Consulting v Incitec Pivot Ltd (No 3) [2011] VSC 441.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	No appearance
For the First Defendant	No appearance
For the Second Defendant	Mr J.B. Davis	Norton Gledhill
For Multitech Highways & Runways Pty Ltd (as trustee for the H & R Business Trust), DGC Industries Pty Ltd, and Wayne John Smith	Ms K.E. Foley	Radcliff Taylor Lawyers
For Perry Gourley	Mr P.H. Clarke	Whyte Just & Moore

HIS HONOUR:

1. By two summonses filed 22 May 2013 and 4 June 2013, the Second Defendant (“Procutech”) seeks orders that Perry Gourley (“Gourley”), Multitech Highways & Runways Pty Ltd (as trustee for the H & R Business Trust) (“Multitech”), DGC Industries Pty Ltd (“DGC”) and Wayne John Smith (“Smith”):

(a)       pay Procutech’s costs of and incidental to Permark’s application to amend, including the costs of 11 May 2012, which have been taxed and allowed in the sum of $6,510.00;

(b)      pay Procutech’s costs of and incidental to Permark’s application heard on 28 May 2012 on an indemnity basis, which have been taxed and allowed in the sum of $8,850.00;

(c)       pay Procutech’s costs of and incidental to Permark’s application heard on 28 August 2012 on an indemnity basis; and

(d)      pay Procutech’s costs of and incidental to this proceeding in addition to those costs referred to in paragraphs (a), (b) and (c) above.

(The two summonses will be referred to as, collectively, “the Applications”.)

Background

1. The Plaintiff (“Permark”) commenced this proceeding by writ and statement of claim dated 23 December 2010.  In summary, Permark’s statement of claim related to a failed joint venture project with the Defendants in relation to the development, construction and supply of packaged cabins to the retailer Bunnings for sale to the public. 

1. The statement of claim sought to advance a case against Procutech on the basis of:

(a)       confidential information provided by Permark (and the First Defendant (“Amoveo”)) in the course of developing the design, construction and presentation of the cabins for sale;

(b)      a joint venture agreement between Permark, Amoveo and Procutech with respect to the design, construction and presentation of the cabins for sale;

(c)       an agency agreement whereby Procutech would act as agent for Permark and Amoveo in their dealings with Bunnings regarding the supply of the cabins;

(d)      a prospective joint venture case raising fiduciary obligations binding on the parties; and

(e)       a quantum meruit claim or an unjust enrichment claim against Procutech for the benefits of Permark’s “efforts” with respect to the cabins. 

1. It became apparent through the course of the proceeding that Amoveo was joined as a defendant for the purpose of binding it to any determinations in this proceeding – particularly the taking of accounts.  Permark made no substantive claims against it. 

1. On 11 May 2012, I heard an application by Permark to amend its statement of claim.  I refused to grant leave to amend, and ordered that Permark pay Procutech’s costs of and incidental to the application to amend, including the costs of the day.

1. On 28 May 2012 I heard a further application by Permark to amend its statement of claim.  I again refused leave to amend.  On 28 August 2012 I ordered that Permark pay Procutech’s costs of and incidental to the application to amend on 28 May 2012 on an indemnity basis.[1]

   [1]See Transcript of 28 August 2012 (“Transcript”), p 104.

1. On 28 August 2012 I heard a third application by Permark to amend its statement of claim.  I again refused leave to amend.

1. On 22 October 2012 I heard a fourth application by Permark to amend its statement of claim.  Despite there being some difficulties with the pleadings, I granted leave to Permark to file and serve an amended statement of claim substantially in the form of the proposed second amended statement of claim dated 8 October 2012.  In my ruling, I stated:[2]

   [2]Permark International Interiors Pty Ltd v Amoveo Pty Ltd & Ors (Ruling No 1) [2012] VSC 522 at [4]-[10] (Croft J).

“4. … there are a number of difficulties with the proposed pleadings – even as sought to be explained by the affidavit of Mr Perry Gourley, a director of the Plaintiff. Nevertheless, speaking of the proposed pleadings as a whole I would not, if this were an application by Procutech for summary judgment or a strikeout application under s 62 of the Civil Procedure Act, or Order 23 of the Supreme Court (General Civil Procedure) Rules, respectively, accede to such an application at this stage.

5. More particularly, I am not satisfied, for the purposes of s 62 that the Plaintiff “has no prospects of success” or, for the purposes of Order 23, that no cause of action is disclosed. In any event, I would be of the view that, for the purposes of s 64 of the Civil Procedure Act, the proceeding should not be disposed of summarily because it would not be in the interests of justice to do so and also because the dispute is of such a nature that only a full hearing of the dispute is appropriate as it is, in all the circumstances, the only way of assessing the claims and factual bases relied upon in an informed and fair manner.

6.        Although the present situation is neither an application for summary judgment nor a strike out application by Procutech a consideration of the proposed pleadings from this perspective does inform the proper course with respect to the present application.

7.        I should, however, qualify my views with respect to the proposed pleadings as a whole with respect to the matters alleged and the claim made against Mr Gale.  The particular difficulties with respect to this pleading have already been discussed and it is sufficient for present purposes for me to indicate that if these pleadings had stood alone and Mr Gale was not, as it seems, closely connected with the defendant Procutech and likely to be closely involved in its defence of the Plaintiff's claims in any event, I would not grant leave for their filing in the present form.  Nevertheless, I am of the view that in all the circumstances any further delay and expense in relation to the settling or otherwise of this aspect of the pleadings is not justified or in the interests of any of the parties at this stage.  This does not mean, however, that in light of responsive and reply pleadings the difficulties with respect to this aspect of the pleadings, if they remain, may not justify a summary judgment or strikeout with respect to any claim or claims against Mr Gale.

8.        In terms of any pleading difficulties and prejudice more generally, I am satisfied that any prejudice that does occur to either of the defendants is able to be addressed adequately by costs orders and if necessary by resort to the range of remedies provided for under the Civil Procedure Act, particularly orders for costs and/or compensation under s 29 of that Act, against parties and others subject to the overarching obligations under that Act, including the legal practitioners. 

9.        Additionally it might be observed that the tortured process which the Plaintiff has allowed to occur in the development of its pleadings in these proceedings has not served it well.  Apart from causing unnecessary costs – which it has had to bear both on its own account and, as a result of various costs orders, also for the defendants –  it has produced material in the form of proposed pleadings, affidavits and annexures which are unlikely to assist its substantive case.

10.      For these reasons I will give leave for the filing of the proposed second amended statement of claim.  This leave does not, however, preclude any further application by the defendants with respect to deficiencies in the pleadings as may now exist or emerge during the ongoing process of pleading and discovery – but after those processes, particularly discovery, have been allowed to proceed to a point where resolution of deficiencies ought reasonably to have been addressed.”

1. In granting leave, I ordered that Permark pay Procutech’s costs of and incidental to Permark’s application heard on 28 August 2012 and that costs of the hearing on 22 October 2012 be costs in the proceeding.[3]

   [3]See the Orders of 12 October 2012; and Transcript of 12 October 2012, p 87.

1. On 9 November 2012 Procutech filed and served a request for particulars of the second amended statement of claim in accordance with the orders made on 22 October 2012.  The request sought detailed particulars of the work alleged to have been performed by Permark.  The request for particulars was due to be answered on 7 December 2012.

1. Permark did not file and serve a response to the request for particulars.  On 12 December 2012, Permark’s solicitors on the record, Harwood Andrews Lawyers, filed a notice of ceasing to act.

1. On 19 December 2012, Costs Registrar Conidi made orders in the Costs Court.  Registrar Conidi ordered that the costs of Procutech pursuant to the orders of:

(a)       11 May 2012 be taxed and allowed in the sum of $6,5100.00; and

(b)      28 August 2012 be taxed and allowed in the sum of $8,850.00.

1. On 16 January 2013, Whyte Just & Moore Lawyers, the new solicitors for Permark on the record, filed an notice of discontinuance on behalf of Permark.

The non-parties the subject of this application

1. Procutech now seeks costs orders against four non-parties to the proceeding –  Gourley, Multitech, DGC and Smith (collectively, “the Non-Parties”).

1. The application is based on the involvement of the Non-Parties to this proceeding.  Their involvement and interests in the litigation are fully discussed below.[4]  However, by way of summary;

   [4]See below, paragraphs 40 to 66.

(a)       Gourley and Smith are the two directors of Permark.[5]  They are also the directors of Multitech[6] (which is the trustee of the H & R Business Trust) and DGC.[7] 

[5]Gourley is and has been a director of Permark since its incorporation on 17 July 2007: see Exhibit SCS 1 to the Affidavit of Steven Charles Schultze sworn 16 May 2013 (“the Schultze Affidavit”).

[6]Exhibit AJG5 to the affidavit of Andrew John Green sworn 4 June 2013 (“Green Affidavit”).

[7]The shareholders of DGC are P. Gourley & Associates Pty Ltd and Pandoris Pty Ltd: see Exhibit AJG6 to the Green Affidavit.  The sole director and shareholder of P. Gourley & Associates Pty Ltd is Gourley: Exhibit AJG7 to the Green Affidavit.  The sole director and shareholder of Pandoris Pty Ltd is Smith’s wife, Mrs Debra Joan Smith: see the affidavit of Wayne John Smith affirmed 16 July 2013 (“Smith Affidavit”), paragraph 9 and Exhibit AJG8 of the Green Affidavit.

(a)       Multitech and DGC are entities that have loaned sums of money to Permark to enable it to conduct this proceeding.[8]  Multitech has directly paid legal costs for Permark in connection with this proceeding.[9]

(c) Permark Group Pty Ltd (ATF The Permark Group Trust) (“Permark Group”) has directly paid legal costs for Permark in connection with this proceeding,[10] and Gourley is the sole director and shareholder of this company which is subject to a Deed of Company Arrangement.[11] 

Another former director of Permark, Steven Schultze (“Schultze”), was not, however, subject to any application for a non-party costs order.

[8]Green Affidavit, paragraphs 5, and 8 to 10.

[9]Green Affidavit, paragraphs 6, 9 and 10.

[10]Green Affidavit, paragraphs 6 and 8.

[11]Green Affidavit, paragraph 14.

Costs against non-parties – general principles

Court’s powers to award costs against non-parties

1. Section 24 of the Supreme Court Act 1986 (Vic) (“the Supreme Court Act”) gives the Court full power to determine by whom and to what extent the costs of and incidental to the matters in the Court are to be paid.  This power is not restricted to costs between parties to the proceeding.  The power is sufficiently broad to authorise the Court to order that a person, who is not a party to the proceeding, pay the costs of a party to a proceeding.[12]  In Knight v FP Special Assets Ltd[13] (“Knight v FP Special Assets”) the High Court held that a rule of the Queensland Supreme Court Rules, which gives the Court the discretion to order costs in relation to its proceedings, was wide enough to permit a costs order to be made against a non-party to a proceeding.[14]

   [12]See, for example, Knight v FP Special Assets Ltd (1992) 174 CLR 178.

   [13](1992) 174 CLR 178.

   [14]The Second Defendant further submitted that s 24(1) of the Supreme Court Act is “even more explicit in its breadth than the Queensland Rule”: see Second Defendant’s submissions in support of applications for costs against non-parties dated 14 August 2013 (“Procutech Submissions”), paragraph 13.

1. The authorities also demonstrate that the making of a non-party costs order is exceptional.[15]  Smith, Multitech and DGC, in their written submissions, noted that:[16]

“14.     …the Courts have stated that “considerable caution” should be applied when dealing with an application for a non-party costs order.[17]  Such orders should only be made if appropriate in the interests of justice.[18]

[15]See Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103] (Beaumont, Sundberg and Hely JJ).

[16]Outline of Submissions of Wayne Smith, Multitech and DGC Industries dated 14 August 2013 (“Smith, Multitech and DGC Submissions”), paragraph 14.

[17]Symphony Group plc v Hodgson [1994] QB 179 at 193 (Balcombe LJ).

[18]See, for example, Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192 (Mason CJ and Deane J).

Factors to be considered in awarding costs against non-parties

1. In Knight v FP Special Assets, the High Court listed a number of factors which need to be considered before a non-party costs order can be made:[19]

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

For our part, we consider it appropriate to recognise a general category of case in which an order for costs could 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.” (emphasis added)

[19](1992) 174 CLR 178 at 192-3 (Mason CJ and Deane J).

1. With respect to the three factors contained in Knight v FP Special Assets, Procutech submitted:[20]

“14.     The three factors…are not prerequisites to an exercise of the discretion and none of the factors is necessarily decisive on its own.[21]  Further, the three factors should not ultimately be treated as separate and independent factors and each requires an evaluative assessment of interacting factors[22] and the discretion to make an order against a non-party is not confined to well recognised categories.[23]”

[20]Procutech Submissions, paragraph 14.

[21]Waivata Pty Ltd v New Millenium Publications Pty Ltd [2002] FCA 481 at [8] (Sundberg J).

[22]FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [214] (Basten JA).

[23]Bischof v Adams [1992] 2 VR 198 at 202-204 (Gobbo J); CE Heath Underwriting and Insurance (Australia) Pty Ltd v Daraway Constructions Pty Ltd (unreported, Supreme Court of Victoria, Batt J, 1 September 1995, BC9503967) at 2 (Batt J).

1. In Knight v FP Special Assets, Dawson J further said:[24]

“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.”

[24](1992) 174 CLR 178 at 202 (Dawson J).

Other discretionary factors

1. Other discretionary factors which may be considered by a court – and which are relevant for the purposes of this proceeding – include whether the applicant had made an application for security for costs from Permark and whether a notice or warning had been provided to the Non-Parties that an adverse costs order would be sought from them.  These factors are not, however, decisive but, where relevant, are matters to be considered.  These factors are linked to the notion of fairness, as indicated by Olsson J in Vestris v Cashman:[25]

“… 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 …”

[25](1998) 72 SASR 449 at 458 (Olsson J) (FC).

1. For these reasons a failure to apply for security for costs earlier in the proceeding may be significant in an application for a non-party costs order.  Thus in Knight v FP Special Assets Ltd, Mason CJ and Deane J said:[26]

“The availability of an order for security for costs at an early stage would, in many situations, be a strong argument for refusing to exercise discretion to order costs against the non-party, but discretion must be distinguished from jurisdiction.”

[26](1992) 174 CLR 178 at 191 (Mason CJ and Deane J).

1. However, a failure to make a security for costs application cannot be a decisive factor where the application is bound to fail.[27]  This is consistent with the provisions of the Civil Procedure Act 2010 which require an application of this kind to be brought upon a reasonable basis.

   [27]Vestris v Cashman (1998) 72 SASR 449 at 472 (Lander J).

1. As indicated by Olsson J in Vestris v Cashman,[28] courts may also look to whether the applicant has put the non-party on notice of the risk of an adverse costs order being sought against them.  As I said in Manderson M & F Consulting v Incitec Pivot Ltd (No 3):[29]

“…A significant aspect of Gore in the present context is in the observation that “[t]here may be a case for saying that, within a particular category, notice of intention to seek costs from a third party may be a necessary prerequisite, but probably it might be more appropriate to say that the question of the need for prior notice is no more than one of the many relevant matters that should be considered when considering an application for costs against the stranger to a litigation”.[30]”

[28](1998) 72 SASR 449 at 458 (Olsson J) (FC).

[29][2011] VSC 441 at [29] (Croft J).

[30]Gore (t/ as Clayton Utz) v Justice Corporation Pty Ltd (2002) 119 FCR 429 at 448, [52] (O'Loughlin, Whitlam and Marshall JJ).

Approach to the exercise of discretion

1. In Bischof v Adams,[31] Gobbo J rejected any attempt to constrain the Court’s discretion as to the circumstances in which costs orders against non-parties could be made to limited and specified types of cases.  His Honour said that taking such a line of inquiry:[32]

“…is a misleading one to the extent that it is founded on the proposition that a discretion that it is not confined by the terms of the statute must be exercised within the confines of past decisions. … It is implicit there is a wide untrammelled discretion.”

[31][1992] 2 VR 198.

[32][1992] 2 VR 198 at 201-2 (Gobbo J).

1. The authorities also indicate that the discretion, though broad, must be exercised with caution.  The authorities have been conveniently summarised as follows:[33]

   [33]G.E. Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths, 2013) at [22.17].

“…First, the court will only make a non-party costs order where the interests of justice justify a departure from the general rule that only parties to proceedings maybe subject to costs orders.[34]  Expressed another way, a non-party costs order will be made ‘when, in the circumstances of the particular case, it is just and equitable that a non-party pay the costs of a party to the litigation’.[35]

Second, given that in the bulk of cases it is unjust to award costs against a non-party,[36] the circumstances in which such an order will be made necessarily confined, as a question of discretion, not of jurisdiction.[37] Courts have cautioned that applications for costs orders against non-parties should be treated ‘with consideration caution’,[38] and granted only ‘sparingly’[39] and ‘when exceptional circumstances make such an order reasonable and just’.[40]  But the ‘exceptional’ threshold should not be seen to fetter the curial discretion and may mean no more than ‘outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense’.[41]

Third, being a discretion vested in a judge, it must be ‘exercised judicially and in accordance with general legal principles pertaining to the law of costs’.[42]  Like other costs orders made in the exercise of a curial discretion, the award must be made on principle, not in accordance with whim or private opinion, and usually in accordance with the outcome of the case.  Yet the judicial nature of the discretion also requires the judge to eschew fixed legal rules, and so the courts have branded it undesirable to lay down rules that would fetter that discretion.[43]  It inevitably comes down to a fact-specific inquiry informed by various relevant considerations.”

[34]Naomi Marble and Granite Pty Ltd v FAI General Insurance Company Ltd (No 2) [1999] 1 Qd R 518 at 544 (Shepherdson J).

[35]Vestris v Cashman (1998) 72 SASR 449 at 468 (Lander J).

[36]Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 at 980 (Lord Goff).

[37]Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 203 (Dawson J).

[38]Symphony Group plc v Hodgson [1994] QB 179 at 193 (Balcombe LJ); Metalloy Supplies Ltd (in liq) v MAK (UK) Ltd [1997] 1 All ER 418 at 422 (Waller LJ).

[39]Marriage of McAlpin (1993) 16 Fam LR 888 at 896 (Nicholson CJ and Maxwell J (FC)); Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406 at 413 (Callinan J). See also Marriage of Pagliarella [No 3] (1994) 122 FLR 443 at 447 (Hannon J) (Fam Ct) (‘The circumstances in which the discretion to award costs against a non-party should be exercised should … be confined and orders only made in very clear cases’).

[40]Murphy v Young & Co’s Brewery plc [1997] 1 All ER 518 at 531 (Phillips LJ). See also Re Land and Property Trust Co Ltd plc [1991] 1 WLR 601 at 604 (Nicholls LJ); Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 203 (Dawson J); Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 at 764 (Tompkins J) (HC); Separate Representative v J H E and G A W (1993) 16 Fam LR 485 at 508 (Nicholson CJ and Fogarty J (FC)) (‘special circumstances’); O’Neill v De Leo (1993) 2 Tas R 225 at 230 (Green CJ); Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 at 424 (Millett LJ) (‘rarely appropriate’); Re JJT (1998) 195 CLR 184 at 189 (Gaudron J); Flinn v Flinn [199] 3 VR 712 at 760 (the court); Naomi Marble and Granite Pty Ltd v FAI General Insurance Company Ltd (No 2) [1999] 1 Qd R 518 at 544 (Shepherdson J); FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWSCA at [214] (Basten JA, with whom Beazley and Giles JJA concurred); Sanelli v Acee Victoria Pty Ltd (No 2) [2012] VSC 190 at [5] (Mukhtar AsJ).

[41]Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 at [25] (Lord Brown). See also Cf Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232 at 239-40 (Morritt LJ) (who considered that an exceptional case in this context ‘is one to be recognised by comparison with the ordinary run of cases not defined in advance by reference to any further characteristic’: at 240); European Ltd v Revenue and Customs [2011] E@HC 948 (Ch) at [15] (Proudman J).

[42]Knight v F P Special Assets (1992) 174 CLR 178 at 192 (Mason CJ and Deane J).

[43]Vestris v Cashman (1998) 72 SASR 449 at 468 (Lander J) (FC).

Costs orders against non-party directors of a company

1. The question whether costs should be ordered against a non-party has arisen in a number of other cases in relation to the liability of officers of unsuccessful corporate litigants to pay the costs of the other party or parties.  Procutech referred to a number of decisions where courts have made costs orders against a principal director and shareholder of a company party to the proceedings:[44]

   [44]Procutech Submissions, paragraphs 16-19.

“16.     Australian Courts have made cost orders against a principal director and shareholder of a company which is a party [to] the proceedings in a number of cases.  For example, in Oz B and S Pty Ltd v Elders IXL Ltd (1993) 117 ALR 128 the principal director and shareholder of the applicant was ordered to pay the respondent’s costs because:

(a)       the applicant was impecunious and unable to pay the respondent’s costs;

(b)       the director acted at all times alone and without any consultation with or [sic] decision of the other directors;

(c)       nothing was presented to suggest that anyone other than the director was interested in the case at all; and

(d)      the Court inferred that the director must have spent his own money to fund the case and he would hardly have done so unless he had a special personal interest in the litigation and could gain an individual benefit from its success.[45]

[45]Oz B and S Pty Ltd v Elders IXL Ltd (1993) 117 ALR 128 at 130 (Einfeld J).

17.      In Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685, the Federal Court was satisfied that, having regard to the three factors described in Knight’s case, a controlling director and shareholder of the applicant should be ordered to pay the respondent’s costs. The applicant was regarded as a “man of straw”; the director had played an active part in the conduct of the litigation and provided all significant instructions; and he and the trustee of his family trust were the only shareholders of the applicant and so had a real and personal interest in the subject of the litigation.

18.      In Jacara Pty Ltd v Perpetual Trustees WA Ltd (2000) 185 ALR 463, the Federal Court ordered that the sole director and shareholder of the applicant pay the respondent’s costs for the following reasons:

(a)       as sole director and shareholder he was taken to have been responsible for the initiation and maintenance of the proceeding;

(b)       he was present in court throughout the hearing and was the applicant’s principal witness;

(c)       the Court inferred that he funded the application himself; and

(d)      the Court inferred that he had a direct personal interest in the outcome of the application and stood to benefit from its success.

19.      In Waiviata Pty Ltd v New Millenium Publications Pty Ltd [2002] FCA 481, the Federal Court ordered that a director of the applicant along with the sole shareholder of the applicant pay the costs of a firm of solicitors in defending a conflict of interest application in the event the applicant failed to pay those costs within a certain time. Applying the factors from Knight’s Case the Court held that the applicant was insolvent, the director played an active part in the conduct of the litigation, and he and the sole shareholder had an interest in the subject matter of the motion.[46]

20.      Courts have also made orders against non-parties who did not have any financial interest in the litigation and gave financial assistance to the unsuccessful party for the purposes of the litigation.[47]”

[46]Waiviata Pty Ltd v New Millenium Publications Pty Ltd [2002] FCA 481 at [7] (Sundberg J).

[47]See, for example Singh v Observer Ltd [1989] 2 All ER 751.

1. Another example is provided by FMP Constructions Pt Ltd v Council of the City of the Blue Mountains[48] where the local council claimed damages for breach of contract.  The sole director of the defendant company was the only witness and the litigation was held to have been “effectively run for his benefit”. At first instance, costs were awarded against the sole director.  The decision was reversed by the New South Wales Court of Appeal.  Basten JA (with whom Beazley and Giles JJA agreed), referred to the High Court decision in Knight v FP Special Assets and warned that the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself.  His Honour said:

“The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will not clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success…Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the interest in its outcome or subject matter.”

[48][2005] NSWCA 340.

1. Applying the criteria to Mr Yazbek, the sole director of the relevant company,

   
   

   Basten JA said:[49]

“In the present case, it could not be said that FPM Construction was merely a nominal party or that Mr Yazbek was the “real party” to the proceedings. No doubt it is true, as his Honour found, that Mr Yazbek was the driving force behind FPM Constructions and was its representative for the purposes of the litigation. This does not mean, however, that the benefit of the proceedings brought by FPM Constructions for progress payments, in law, flowed to anyone other than FPM Constructions, nor that the company was other than the proper defendant in proceedings brought by the Council. Nor is the fact that Mr Yazbek was the sole director and secretary of the company inconsistent with that conclusion. Were it otherwise, the corporate veil, would in effect, be nullified at the very point at which it provides protection against personal liability for the shareholders and directors. The carefully crafted exceptions to the principle would overtake the principle itself were that the case.”

[49][2005] NSWCA 340 at [206] (Basten JA).

1. An order for the payment of costs by a non-party should always be seen as exceptional.  In Guss v Geelong Building Society (in liq)[50] Ashley J stated:[51]

“The Court’s power to award costs under s 24(1) of the Supreme Court Act is wide enough to order that costs be paid by a non-party. Focussing upon the general situation – that is, putting the circumstances raised by r 63.23 to one side – it may be said that such an order is always exceptional. In the vast majority of cases it would be unjust to make an award of costs against a non-party.”

[50][2001] VSC 288.

[51][2001] VSC 288 at [7] (Ashley J).

1. The exceptional nature of a non-party costs order was emphasised by the Full Court of the Federal Court in Kebaro Pty Ltd v Saunders:[52]

   [52][2003] FCAFC 5 at [103] (Beaumont, Sundberg and Hely JJ).

“103In our opinion, the authorities establish, on the foregoing analysis, the following propositions:

* 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 at 192 - 193. The width of the jurisdiction is illustrated by a recent English decision that there can be circumstances in which it would be appropriate to order costs in favour of a non-party against a party (see Individual Homes v Macbreams Investments, 23 October 2002, High Court of Justice Chancery Division at 8).

* 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.”

1. Similarly, Muir J rejected an application for a non-party costs order against a sole director and shareholder of the unsuccessful corporate party to a proceeding in Rushton (Qld) Pty Lt v Rushton NSW Pty Ltd.[53]  In doing so, Muir J emphasised that the fact that the sole director and shareholder was the ultimate decision maker was not necessarily decisive:[54]

   [53][2004] QSC 47.

   [54][2004] QSC 47 at [12]-[15] (Muir J).

“12.In my view the mere fact that a person is the sole director and shareholder of an unsuccessful litigant corporation will not, without more, suffice to justify a costs order against that person. And that is so even if the person was a corporation’s sole, principal or ultimate decision maker in relation to the litigation.

13. To conclude otherwise would be to ignore the principle that costs orders against non-parties are “exceptional” and ought be made only is appropriate in the interests of justice. The control of a corporate litigant by a director who is also its sole or majority shareholder is an unremarkable occurrence. It is sanctioned by a long established legislative framework which recognises that a company has an independent legal personality distinct from that of its members and that neither members nor directors, as a general proposition, are personally liable for its acts or defaults.

…

15. A reluctance to ground non-party costs orders merely on the circumstances of sole ownership and control of the defendant corporation is evident in Taylor v Pace Developments Ltd (1991) TLR 228 (CA) in which it was observed that the controlling director of a one-man company was inevitably the person who caused the costs of the litigation to be incurred, by causing the company to defend the proceedings. In that context Lloyd LJ noted –

‘But it could not be right that in every such case he should be made personally liable for costs, even if he knew that the company would not be able to meet the plaintiff’s costs should the company lose its case.

That would be far too great an inroad on the principle of limited liability. In the great majority of cases the directors of an insolvent company, which defended proceedings brought against it, should not be at personal risk.’”

1. It is clear from the authorities that more is needed than findings and reasoning that because a director was the driving force in the company’s litigation and that any benefit flowed to the director, the director should therefore be seen as being the real litigant.  The actual conduct of the party to the proceeding is also important in deciding whether to exercise the discretion to award costs against a non-party.

1. In Bischof v Adams[55] the Court discussed the need to look at a number of interrelated factors.  Gobbo J said:[56]

   [55][1992] VR 198.

   [56][1992] VR 198 at 205 (Gobbo J).

“…there may be cases where the connection is significant but not material to the issue of costs. Thus a person may benefit greatly from a particular proceeding but may not have any real part in supporting the proceeding.

The most convenient course is, in my view, to look at both factors in considering the connection between the proceedings and the non party, namely, the connection between the non party and the proceedings and secondly, the casual connection between the non party and the costs.

I have concluded that, without limiting myself to these two matters, I should take into account in any exercise of discretion. The connection must be real and direct and it must be material to the issue of costs. The mere fact that a person may benefit from the litigation will not, without more, suffice.”

1. In Manderson M & F Consulting (a firm) v Incitec Pivot Limited (No 3),[57] I considered an application for a special non-party costs order against directors of corporate trustees in partnership, who had failed in the course of protracted attempts to plead a case for breach of confidence.  Having regard to the principles of limited liability and separate legal personality, I said:[58]

“Clearly, like any corporate entity, the corporate partners of MMFC can only “think and act” through natural persons. Consequently, it was unsurprising that Manderson and Karis were the directing minds of MMFC in the conduct of the litigation. There is, however, no evidence that the litigation was conducted in a way that was unreasonable or improper. At all times throughout the proceeding, MMFC was represented by reputable solicitors and by senior counsel with very substantial experience and expertise in relation to intellectual property matters. Each version of the statement of claim of drafts were put forward by MMFC signed by one of these senior counsel (or with drafts indicating that one of these senior counsel would sign). There is no suggestion that any of these senior counsel acted otherwise than with absolute professional propriety and in accordance with their obligations as senior counsel in signing a statement of claim or appearing in support of a proposed statement of claim which was indicative of their intention to sign. In these circumstances, and where MMFC was the proper plaintiff to the proceeding, the making of a costs order against Manderson and Karis would have the effect of setting aside the effect of the separate legal personality of the corporate partners of MMFC as corporate entities and put at risk of personal liability directors and, possibly, other officers of these corporations who conducted the litigation on their behalf. For these reasons, I am of the opinion that it would not be appropriate to make any costs order against Manderson or Karis.”

[57][2011] VSC 441.

[58][2011] VSC 441 at [37] (Croft J).

First factor – insolvent person or man of straw

1. Procutech does not seek costs against Permark as a party to the proceeding.  Procutech submitted that Permark is a “man of straw”.  Procutech submitted that Permark:[59]

   [59]Procutech Submissions, paragraphs 22-29.

(a)       has paid up share capital of $3.00 and it does not appear to have any cash or assets;

(b)      had to borrow funds to pay its legal costs of the proceeding;

(c)       did not generate a profit on any of the projects it worked on which were the subject of these proceedings;

(d)      did not have available funds to pursue this litigation and discontinued the proceeding; and

(e)       failed to comply with a statutory demand served on it on 17 January 2013,[60] which gives rise to the statutory presumption of insolvency pursuant to s 459(2)(a) of the Corporations Act 2001 (Cth) within three months of the failure to comply with the statutory demand.

Procutech further submitted that it had not commenced a winding up application as it has little prospect of recovering its costs of such application or any payment towards the judgment debts.

[60]See the affidavit of Lauren Michelle Buckley sworn 29 May 2013 (“Buckley Affidavit”), paragraph 11.

1. Gourley’s written submissions sought to address a number of aspects of these Procutech submissions.  First, it was submitted that “there is no credible evidence of insolvency or that Permark was made of ‘straw’, either at the commencement of the proceeding and until, at least, after the making of the special costs Order on 22 October 2012.”[61]  This appears to be directed to the argument that Multitech and DGC had been funding Permark’s litigation as Permark had been a “man of straw” for the period of the proceeding.

   [61]Outline of Submissions on behalf of Perry Gourley dated 15 August 2013 (“Gourley Submissions”), paragraph 7.1.1.

1. Gourley also submitted that “if Permark fell within the first element … then its financial position was substantially and adversely affected by Procutech’s conduct which was the subject of the proceeding … that is a matter relevant to the interests of justice and the Court’s exercise of its discretion.”[62]  Gourley’s submissions in this respect are, in my opinion, without any basis.  This is because by the time the proceeding was discontinued, all that had occurred was a resolution of sorts of the tortured process of Permark’s pleading to which reference has been made.  Consequently, it could not be said that any conduct by Procutech could be characterised as “substantially and adversely affecting” Permark’s financial position.  So even if Procutech’s conduct were relevant in connection with this factor, all that it had done was to insist on the proper conduct of the proceeding by Permark – which it was entitled to do.  In any event, Procutech’s conduct is not relevant to this first factor.

   [62]Gourley Submissions, paragraph 7.1.7-7.1.8.

Conclusion on first factor

1. In any event, it does not appear to be contested that at the stage when Procutech’s Applications were made, Permark was an insolvent person, a “man of straw”.  As Procutech submitted, no affidavit material was filed by the Non-Parties to the effect that Permark was other than insolvent at the date of the Applications.

Non-Parties’ involvement in the conduct of the litigation

Gourley

1. It is not controversial that Gourley played an active part in the conduct of the litigation – Gourley conceded as much.[63]  However, the real question in this respect is the level of Gourley’s involvement. 

   [63]Gourley Submissions, paragraph 7.2.

1. Procutech submitted that Gourley “was responsible for the initiation of the proceeding, for giving instructions to it and for the day to day conduct of it.”[64]  In support of this submission, Procutech contended:[65]

   [64]Procutech Submissions, paragraph 39.

   [65]Procutech Submissions, paragraphs 35-38.

(a)       the proceeding was commenced at Gourley’s suggestion[66] and pursuant to his instructions;[67]

[66]Schultze Affidavit, paragraph 15; and the affidavit of Perry Gourley sworn on 22 July 2013 (“Gourley Affidavit”), paragraph 23.5.

[67]Schultze Affidavit, paragraph 16; and Gourley Affidavit, paragraph 23.9.

(b)      Gourley was Permark’s point of contact for its former solicitors, Harwood Andrews Lawyers, as he is named as the client in the relevant costs agreement;[68]

[68]Exhibit SCS4 to the Schultze Affidavit.

(c)       Gourley loaned $500 to Permark in October 2011, shortly before the sum of $561 was paid to Harwood Andrews Lawyers;[69]

[69]Exhibit AJG2 to the Green Affidavit; and see also statement number 29 in Exhibit AJG3 to the Green Affidavit.

(d)      Gourley has sworn two affidavits (and an affidavit of document) for Permark in these proceedings;

(e)       during the period of the proceeding and during the period leading up to their commencement, the other directors of Permark did not play a similar role to that of Gourley.  In contrast to Gourley’s role, the other founding member of Permark, Schultze,[70] had no control over the conduct of the proceeding,[71] and it was Gourley who instructed Permark’s solicitors to commence the litigation.[72]  Further, Smith, it was said, had no involvement in the day to day conduct of the proceeding as this was left to Gourley;[73] and

(f)       Gourley attended all meetings with the solicitors and barristers acting for Permark and was the person responsible for the proceedings.[74]

[70]A director of Permark from 17 July 2007 until 14 January 2013: see Schultze Affidavit, paragraph 1.

[71]Schultze Affidavit, paragraph 18.

[72]Schultze Affidavit, paragraph 16.

[73]Smith Affidavit, paragraph 20; and Gourley Affidavit, paragraphs 23.9, 23.36 and 26.2.

[74]Smith Affidavit, paragraphs 19 and 22.

1. Moreover, Schultze deposed that it was Gourley who proposed discontinuing the proceeding.[75]

   [75]Schultze Affidavit, paragraph 28.

1. Gourley conceded that he played an active part in the conduct of the proceeding.  However, he submitted that his role in the litigation was similar to that of Schultze and Smith, and that this was not an instance where Permark, through Gourley, was embarking on a frolic of its own, merely with the concurrence of Schultze and Smith.[76]  Further, Gourley said that “the commencement, and conduct, of the proceeding was taken responsibly by all Directors, and having regard to the interests of Permark, and, ultimately the shareholders”.[77]  In regard to this point, Procutech submitted that, based on the evidence of Smith,[78] Gourley had implied actual authority by acquiescence from the Board to act as necessary with respect to the proceeding.[79]

   [76]Gourley Submissions, paragraph 7.2.5.

   [77]Gourley Submissions, paragraph 7.2.6.

   [78]Smith Affidavit, paragraph 9.

   [79]Transcript, pp 25-6.

1. Moreover, Gourley submitted that there was no foundation for any allegation that the proceeding was commenced without any reasonable basis or was a proceeding which Gourley was conducting upon his own interests.  Gourley’s counsel submitted that the proceeding was a result of a consensus between Gourley, Schultze and Smith.[80]  Gourley submitted that the evidence also created an impression that Schultze spent many hours providing information to the solicitors.[81]

   [80]Transcript, p 68. 

   [81]Transcript, p 69 referring to Exhibit PG2 to the Gourley Affidavit.

1. Further, it was submitted that:[82]

   [82]Gourley Submissions, paragraphs 9.1-9.5.

“9.1     Gourley did not have any legal training[83] or fully understand the pleading issues;[84]

[83]Gourley Affidavit, paragraph 12.

[84]Gourley Affidavit, paragraph 23.30.

9.2      the proceeding was commenced, conducted and supported by Schultze, Gourley and Smith, at least until the 22 October 2012 costs Order;[85]

[85]Smith’s role in the conduct, other than financing, was to a lesser extent than that of Gourley and Smith.

9.3      experienced Counsel was/were retained, and pleaded Permark’s claim/s;

9.4      on 9 October 2012, Permark’s solicitors signed a proper basis certification in respect of the proposed 2nd amended Statement of Claim (and, it is assumed, in respect of the preceding Statements of Claim);

9.5      Permark’s solicitors told Gourley that Permark had a “good case”, or words to that effect, and did not ever inform Gourley to the contrary.[86]”

[86]Gourley Affidavit, paragraphs 26.10 and 26.11.

Smith

1. Smith was a director of Permark from 18 June 2012 to 8 March 2013.[87]  Although Procutech conceded that Smith did not have day to day conduct of the proceeding,[88] it submitted that from when he was appointed as a director of Permark, he was informed of the proceeding and kept up to date as to its progress.[89]  Procutech also submitted that Smith, prior to being appointed a director, was consulted about decisions that needed to be made which led to instructions being given by Gourley to Harwood Andrews Lawyers.[90] 

   [87]Smith Affidavit, paragraph 10.

   [88]Procutech Submissions, paragraph 38.

   [89]Procutech Submissions, paragraph 40.

   [90]Procutech Submissions, paragraph 41 referring to the Smith Affidavit, paragraph 20; and Gourley Affidavit, paragraphs 23.36 and 26.9.  See also Transcript, p 28.

1. Smith’s counsel submitted that he was not, however, actively involved in the litigation.[91]  In his affidavit, Smith described his involvement in the proceeding:[92]

   [91]Transcript, pp 87-8.

   [92]Smith Affidavit, paragraphs 20-22.

“20.     During the life of the proceedings I had very little personal involvement in it.  I did not make decisions in the course of the proceedings.  Gourley would provide me with updates from time to time; however these updates were general in nature.  For example, in relation to the progress of the proceeding, I recall being told about milestone events (such as a directions conference being held) but without any real detail as to what had taken place or what orders had been made.  Gourley would also advise me on occasion when an invoice had been rendered by Harwood Andrews Lawyers, or tell me in a general way about his complaints about Harwood Andrews Lawyers.  Gourley did not consult me with any great detail about decisions that needed to be made but Gourley impressed upon me that we had to keep going and it would keep costing to get the outcome.

21.      I recall receiving letters from Harwood Andrews Lawyers on several occasions in relation to these proceedings.  I believe these letters contained brief updates.  However, I recall that these seemed to me to be vague in nature and did not contain detail as to the day to day conduct of the litigation.

22.      In the course of the proceedings I only attended one meeting, very early on, with Chris Northrop, barrister for Permark, at which I was assured that the proceedings would be successful.  I made no comments at this meeting and just listened.  Gourley attended all other meetings with the solicitors or the barristers acting for Permark.  Gourley was responsible for all of this.”

1. Smith’s recollection accords with Schultze’s affidavit evidence; that when Schultze asked Smith to update him on the case, Schultze was told by Smith that “he knew nothing about the case and that he was not being included in discussions with the solicitors”.[93]

   [93]Schultze Affidavit, paragraph 19.

1. Procutech’s submissions focussed on the fact that, notwithstanding Smith’s lack of active involvement with the litigation, no steps were taken with respect to the litigation without consultation with him.  It was also suggested that an email sent by Smith to Permark’s solicitors[94] indicated knowledge of the proceeding from the start and difficulties that arose subsequently[95] - though in my view the email does not lend any further weight to Procutech’s submissions.

   [94]Exhibit 1 – Email from Wayne Smith to Richard Anderson sent 05/12/12 at 7.01pm.

   [95]Transcript, p 66.

Multitech and DGC

1. Procutech emphasised that Multitech and DGC had contributed substantial sums of money towards Permark’s legal costs in the proceeding,[96] and submitted that without their involvement (and of the Permark Group) it is probable that the litigation could not have been pursued by Permark.

   [96]Procutech Submissions, paragraph 43.

1. Gourley submitted that there is no credible evidence that Permark was of “straw” from the commencement of the proceeding until at least 22 October 2012, when I made a special costs order against it.[97]  The basis of this contention, as appears from Gourley’s submissions, is that Permark was not of “straw” because it had access to funds via Multitech and DGC;[98]  thus Permark’s funding position was dependent upon whether it could obtain any further loans from Multitech and DGC.[99]

   [97]Gourley Submissions, paragraph 7.1.1.

   [98]Gourley Submissions, paragraph 7.1.2.

   [99]Gourley Submissions, paragraphs 7.1.6.

Conclusion on second factor

1. The upshot of Procutech’s submissions is that not only did the Non-Parties have an involvement in the litigation, but exercised some degree of control.[100]

   [100]Transcript 23.

1. In my view, although there is inconsistent evidence as to the levels of Gourley’s involvement, it is clear that he played a major role in providing instructions to Permark’s lawyers in relation to the proceeding.

1. Smith, in my view, had little involvement in the proceedings.  Until his appointment as a director of Permark on 18 June 2012, Smith’s relationship with Permark stemmed from his friendship with Gourley[101] and the fact that Pandoris Pty Ltd (a company which Smith’s wife was director and sole shareholder of) was also a shareholder of Permark.  These relationships explain why Smith involved himself financially in the litigation and suggested to Gourley that $40,000 from Multitech’s funds be used to fund the litigation.[102]  Aside from merely involving himself financially, Procutech submitted that he had some level of personal involvement.  Procutech’s counsel placed some emphasis of Smith attending the early meeting with Permark’s counsel[103] and submitted this demonstrated Smith wanted to be “involved in the decision-making process so as not to demur” and that without his involvement the proceeding would not have gotten off the ground.[104]  Further, Procutech submitted that Smith’s control of the litigation was also tied to the fact that he could have stopped providing the loans to Permark.[105]  That said, I accept Smith’s evidence that his involvement in the proceeding was minimal.  It would be unusual for director of a company (Multitech) which loans moneys to another (Permark) to fund litigation to be completely ignorant and unaware of the progress of the litigation.  Accordingly, I see nothing out of the ordinary with respect to Smith’s involvement with the proceeding as set out in his affidavit.[106]  Once he was appointed a director he was, in fact, under a duty to ensure that he be aware and updated as to the progress of the litigation.[107] 

   [101]Smith Affidavit, paragraph 5(a).

   [102]Smith Affidavit, paragraph 15.

   [103]Smith Affidavit, paragraph 22.

   [104]Transcript, pp 28-9.

   [105]Transcript, p 33.

   [106]See above at [47].

   [107]See the relevant director’s duty provisions under the Corporations Act 2001 (Cth).

1. With respect to the two companies, Multitech and DGC, it appears that they were only involved in the sense of providing the loans to Permark.  However, Procutech’s counsel submitted that these companies were the alter ego of Smith and Gourley, respectively, and that they (the companies) would ultimately decide whether or not the proceeding would continue.[108]  In my view, this argument is difficult to accept given the separate legal identity afforded to corporate entities and the risk of unnecessarily piercing the corporate veil.[109]

   [108]Transcript, pp 23 and 32-3.

   [109]See the discussion below, paragraph 79.

Third factor – the Non-Parties’ interest in the litigation

Gourley

1. Procutech’s submissions focussed on Gourley having a substantial economic interest in this proceeding and that he “effectively funded the proceeding himself.”[110]  The evidence of Schultze indicated a belief that Permark “was being solely funded by Gourley to bring his proceeding.”[111]  Additionally, Schultze deposed that:[112]

   [110]Procutech Submissions, paragraph 44.

   [111]Schultze Affidavit, paragraph 17.

   [112]Schultze Affidavit, paragraphs 27 and 28.

“27.     [Permark] has not itself paid any of the legal costs incurred to [Harwood Andrew Lawyers] in relation to this proceeding.  …  

28.      Further, I do not believe that [Permark] has ever had the financial capacity to itself pay any of the legal costs incurred to [Hardwood Andrew Lawyers] in relation to this proceeding or to meet any orders for costs that might be made against it in this proceeding.”

1. In support of this submission, Procutech referred to the following:

(a)       In an email from Gourley to Schultze, Gourley said he was personally owed over $100,000 from funds lent to Permark;[113]  though this is disputed by Gourley on the basis the $100,000 was owed by Permark,[114] not being funds which he had personally loaned to Permark.  Procutech submitted that whether this money was loaned by Gourley himself personally or through Permark Group, he nevertheless had an interest in seeing Permark recover damages in the proceeding as he was a sole director and shareholder of Permark Group.[115]

(b)      Gourley personally contributed $500 to Permark’s legal fees.[116]

[113]Procutech Submissions, paragraph 44.  See also Schultze Affidavit, paragraph 22(b) and Exhibit SCS5 to the Schultze Affidavit.

[114]Gourley Affidavit, paragraphs 23.27-23.28.

[115]Procutech Submissions, paragraph 44.  See also Transcript, pp 34-5.

[116]Procutech Submissions, paragraphs 35 and 44.

1. Procutech further submitted[117] that Gourley’s personal economic interest in the proceeding is clear from Gourley’s email to Schultze, where he said:[118]

“The reality is that the opportunity to receive remuneration, expenses and hopefully profit fully lies with [Permark] being successful in its action against Amoveo/Procutech.  All focus and effort should be levelled squarely at this task.”

Procutech contended that the reference to “remuneration” in the email meant remuneration to be paid to Gourley personally (including salary and director’s fees).[119]  Gourley’s counsel submitted that this statement should not carry significant weight as it is, in effect, no different from the position with any other proprietary company, in that where a company derives a benefit from litigation, the funds flowing to the company would have to be first used to repay debt, and then it may or may not declare a dividend.[120]

[117]Procutech Submissions, paragraph 45.

[118]Schultze Affidavit, paragraph 22(c) and Exhibit SCS5 to the Schultze Affidavit.

[119]Procutech Submissions, paragraph 46 relying on Exhibit PG2 to the Gourley Affidavit.

[120]Transcript, p 70.

1. Gourley accepted that he had an interest in the litigation in the sense that he was a director and shareholder of Permark, and having worked on the project which was the subject of the proceeding.[121]  However, Gourley submitted[122] that his interest was not a special personal interest and ought to be distinguished from the cases relied upon by Procutech.[123]  As a matter of evidence, Gourley deposed that he did not personally fund the litigation and that Permark borrowed from Multitech, DGC and the Permark Group;[124] though the loans were “no strings” except that they were to be repaid in due course, and that there was no entitlement to the fruits of the proceedings.[125] 

   [121]Gourley Submissions, paragraphs 7.3 and 7.3.1.

   [122]Gourley Submissions, paragraphs 7.3.2-7.3.3.

   [123]See also Transcript, p 71.

   [124]Gourley Affidavit, paragraphs 23.12, 23.13 and 23.36.

   [125]Gourley Affidavit, paragraph 23.14.

Smith

1. Procutech submitted that Smith has a personal financial interest in the proceeding on the basis of his various positions in Permark, Multitech and DGC.[126]  It was said that:[127]

“Any benefits received by Permark as a result of the proceeding would have resulted in benefits to him, by way of the payment of a salary and/or director’s fees from Permark, in his capacity as a shareholder in Multitech and in his capacity as the husband of the sole shareholder in Pandoris, via benefits to DGC and to Permark.”

[126]Procutech Submissions, paragraph 47. See also above paragraph [15].

[127]Procutech Submissions, paragraph 47.

Multitech and DGC

1. Procutech submitted that Multitech and DGC were effectively litigation funders for Permark.  Further, given that the loans they made to Permark could only be recovered if the proceeding were successful,[128] they had a financial interest in the outcome of the proceeding.[129]

   [128]Exhibit SCS5 to the Schultze Affidavit.

   [129]Procutech Submissions, paragraph 48.

1. The Green Affidavit contains a number of exhibits[130] which Green deposed to as indicating that:[131]

(a)       The H & R Business Trust (trading name for Multitech)[132] lent Permark $41,855.24 between 22 March 2011 and 16 January 2013; and

(b)      DGC lent Permark $30,244.20 between 18 October 2011 and 25 July 2012.

[130]Exhibits AJG-2 and AJG-3 to the Green Affidavit.

[131]Green Affidavit, paragraph 5.

[132]Green Affidavit, paragraph 9.

1. There can be no dispute that Multitech and DGC provided funds to Permark for the purposes of conducting its litigation,[133] though the evidence of Gourley suggests that these funds were provided as a loan and were to be repaid in due course.[134]

   [133]Outline of Submissions of Smith, Multitech and DGC dated 14 August 2013, paragraph 32 and referring to Smith Affidavit, paragraphs 5(d)(i) and 17.

   [134]Gourley Affidavit, paragraphs 23.14 and 26.13.

Conclusions on third factor

1. I do not think that there can be any doubt that the Non-Parties had a financial interest in the litigation.  At the very least, they stood to have any loans they made to Permark repaid if Permark had been successful in the proceeding.  However, Gourley’s interest in the proceeding went beyond the recovery of any loan moneys made to Permark and included the enjoyment of any potential damages flowing from the proceeding to him as a shareholder of Permark.

1. Procutech’s counsel conceded that financial benefit alone is not enough to warrant a costs order against non-parties to a proceeding, but submitted that it is an indicia of the Court’s discretion.[135]  Further, Procutech’s counsel referred[136] to the decision of Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors (No. 2) (New Zealand)[137] where the Privy Council observed that the authorities suggested a non-party costs order, generally speaking, should not be made against pure litigation funders.[138]  Procutech’s counsel submitted that Multitech and DGC cannot be considered as pure funders because they have the “same arms and legs as Permark”.[139]  The argument that followed was that whilst at first glance it could be said the funds lent by Multitech and DGC were loans, a closer examination – notwithstanding the corporate veil and corporation structure considerations – would lead to the conclusion that it was an arrangement whereby the individuals connected with Multitech and DGC (Gourley and Smith) would in fact “be getting their money back” in the sense of receiving, effectively, remuneration and payment as shareholders of Permark if the litigation was successful.[140]

   [135]Transcript, p 40.

   [136]Transcript, pp 43-4.

   [137][2004] 1 WLR 2807.

   [138][2004] 1 WLR 2807 at [25] (PC).

   [139]Transcript, p 44.

   [140]Transcript, pp 45-6.

1. Nonetheless, I accept the submissions made on behalf of the Non-Parties that some focus needs to be also placed on whether Permark itself was to gain from the proceedings.  In this regard, counsel for Smith, Multitech and DGC referred to the decision of Lansen v Minister for the Environment and Heritage (No 3)[141] in support of the proposition that relevant exceptional circumstances generally only arise where the plaintiff party is not the real litigant and is merely lending its name to the proceeding as a cover.[142]  In my view, Permark was not merely lending its name to the proceeding, and there was no suggestion that the proceeding brought – despite its unfortunate history – was an abuse of process.  The evidence indicates that the loans made by the Non-Parties to Permark were properly documented and were to be repaid.  Further, Gourley’s and Smith’s interests in Permark being successful with the claim, as either directors or shareholders of Permark, are not exceptional.

   [141](2008) FCA 1367.

   [142]Transcript, pp 90-2.

Other discretionary factors

Failure of Procutech to apply for security for costs

1. Gourley also contended that a costs order ought not to be made against him on the basis that Procutech failed to make an application for security for costs.[143]

   [143]Gourley Submissions, paragraph 12.1.

1. Procutech’s explanation for its failure to make an application for security for costs or to warn the Non-Parties of a possible application for non-party costs orders against them was that Procutech’s director, Gary Gale (“Gale”), believed, at all times before the proceeding was discontinued, that Permark was of substance and would have no difficulty meeting any orders for costs made against it in the proceeding.[144]

   [144]Procutech Submissions, paragraph 49 referring to the affidavit of Gary Stephen Gale sworn 14 August 2013 (“Gale Affidavit”), paragraph 3.  See also Transcript of 19 August 2013, p 4.

1. In his affidavit Gale deposed:[145]

   [145]Gale Affidavit, paragraphs 2 and 3.

“2.      I was not aware of the inability of the plaintiff to meet any costs orders in this proceeding until after the plaintiff failed to comply with the statutory demand for payment of debts dated 17 January 2013…

3.        On a number of occasions after the commencement of the proceeding Mr Green of Norton Gledhill raised with me the possibility that it might be appropriate to apply for the plaintiff to provide security for costs.  On each occasion I told Mr Green in effect that I believed the plaintiff was of substance and that it would have no difficulty meeting any order for costs that might be made against it in this proceeding.  I had been initially introduced to Perry Gourley of the plaintiff by a customer of Procutech’s, Julie Jungblood, who had been a guest in Gourley’s home in the past and had informed me that he was a wealthy and successful businessman who had been in business for many years.  In early 2010 Procutech’s general manager, Ms Shouchung Cai, and I visited the plaintiff’s factory in Geelong and met with Gourley and Steven Shultze.  The plaintiff’s business appeared to be well established and successful and a number of Geelong business contacts of mine subsequently vouched for both Gourley and the plaintiff.  Accordingly, I did not instruct Mr Green to make any application for the plaintiff to provide security for costs.”

1. Relying on this evidence, Procutech submitted its circumstances were the same as those in Yates Property Corp Pty Ltd v Boland (No 2).[146]Although Gale’s evidence was uncontested, I think there are some serious questions as to its plausibility.

   [146](1997) 147 ALR 685. See Transcript, p 60.

1. Counsel for Gourley submitted that little weight should be given to Gale’s evidence.[147]  Aside from it being clear that Gale knew Procutech’s solicitors thought it may be appropriate to apply for security for costs, there is no clear evidence as to what Procutech in fact knew about Permark’s financial position.[148]  Certainly, as it was submitted, there was no indication of what, if any, searches were conducted by Procutech or its legal representative in relation to Permark’s financial position.[149]  Counsel for Smith, Multitech and DGC made the point that the lack of detailed evidence in Gale’s affidavit as to whether any documentation with respect to Permark’s financial position was considered or whether any searches were conducted meant that there was no reasonable basis for determining whether a security for costs application should or should not be made.[150]

   [147]Transcript, p 76.

   [148]Transcript, p 77.

   [149]Transcript, p 99.

   [150]Transcript, pp 101-2 referring to Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685 at 695. (Branson J).

1. Despite Procutech’s solicitors raising a number of times the possibility that it might be appropriate to make a security for costs application and that Permark was a $3 company, Gale did not instruct Procutech’s solicitors to proceed with the application on the basis that he visited Permark’s factory and thought it was “well established and successful” and that Permark’s business had been vouched for by a number of his Geelong business contacts.  In terms of enquiries, that is, in my view, quite insufficient.  As indicated, evidence has not been adduced that any relevant financial papers of Permark or ASIC records were considered.  The lack of evidence in this respect leads me to conclude that Gale’s conduct in making the necessary enquiries to be inadequate and that his decision to not instruct Procutech’s solicitors to make a security for costs application was unreasonable in all the circumstances.

Failure of Procutech to provide notice to Non-Parties

1. There is evidence that, on 19 February 2013, Procutech’s legal representatives put Gourley on notice that Procutech intended to apply for non-party costs orders against him and others unless agreement was made to pay Procutech’s costs of the proceeding.[151]  The letter[152] is addressed to Gourley, Smith and Multitech.[153]  However, as the written submissions for Smith, Multitech and DGC observed,[154] “the letter was sent after the proceeding was discontinued, meaning that notice was not given to Mr Gourley, Mr Smith, or Multitech during the substantive life of the proceeding that there was a risk Procutech might seek non-party costs orders against them.”

   [151]Buckley Affidavit, paragraph 12.

   [152]Exhibit LMB-3 to the Buckley Affidavit

   [153]As well as another entity, Multitech Floors Pty Ltd.

   [154]Smith, Multitech and DGC Submissions, paragraph 24.

1. There is no evidence that any notice of this kind was provided prior to this date.  The Gale Affidavit does not explain why no notice was provided to the Non-Parties that a possible costs order might be sought again them, except that Gale seems to have been satisfied that there was no need for a security for costs application.  The nature of the information which passed between Gale and Procutech’s solicitors is not known, so it is unclear whether there was any consideration or instructions given at all with respect to the provision of such a notice to the Non-Parties.  Based on the current evidence – or lack of it – there can be no criticisms of Procutech’s solicitors’ conduct in this regard.  However, the lack of notice, on current evidence, is a critical matter going to whether Gale’s conduct was reasonable,[155] which has been discussed above.[156]

   [155]Transcript, p 107.

   [156]See above, paragraph 72.

Conclusions

1. As the authorities previously discussed emphasise,[157] any order for a payment of costs by a non-party requires exceptional circumstances. 

   [157]See above, paragraphs 16 to 35.

1. Procutech submitted that the circumstances in these proceedings are exceptional for the following reasons:[158]

“21.     …Permark brought three unsuccessful amendment applications before finally obtaining the Court’s leave.  It was then unwilling or unable to answer a request for particulars of its amended pleading and instead chose to discontinue this proceeding without any explanation.  Properly advised, Permark must at all times have known that there were problems with its case.  However, Gourley and Smith caused, and entities controlled by them facilitated Permark to press on with the proceeding regardless of the problems, causing Procutech to incur significant legal costs.”

[158]Procutech Submissions, paragraph 21.

1. Smith, Multitech and DGC submitted that:[159]

   [159]Smith, Multitech and DGC Submissions, paragraphs 15 and 38.

“15.     …Procutech’s application against Mr Smith, Multitech and DGC appears to be made on the basis that Mr Smith (through Multitech and DGC) partially funded the litigation.  However, “[m]erely funding an action for a party is not normally sufficient to justify a non-party costs order against the funder.”[160]  More is required.[161]  For example, a non-party costs order might be made where the non-party has not only funded the litigation but has also promoted and it has done so “solely or substantially for his or her own benefit”.[162]  Put another way, in order to succeed in its application, Procutech must do more than simply point to the fact that Mr Smith, Multitech or DGC funded the litigation by Permark.

[160]G.E. Dal Pont, Law of Costs (2nd ed, LexisNexis Butterworths, 2009) at [22.47].

[161]See, for example, Lansen v Minister for the Environment and Heritage (No 3) [2008] FCA 1367 at [15] (Mansfield J).

[162]Ipex ITG Pty Ltd v Melbourne Water Corporation (No 6) [2009] VSC 571 at [62] (Byrne J).

…

38.      …The application is misconceived, as it appears to be premised on the mistaken notion that a costs order can be made against a non-party solely on the basis that the non-party funded (or was involved in funding) litigation for a company that would not otherwise have been able to fund the litigation.  Mr Smith (on his own behalf, and on behalf of Multitech and DGC) does not dispute that funds were lent to Permark to enable litigation to be carried out against Amoveo and Procutech.  However, the case law makes clear that this fact alone is not sufficient to warrant the making of a non-party costs order.”

Smith, Multitech and DGC also placed some emphasis on the fact that Procutech had not made an application for security for costs or had given notice to non-parties that adverse costs orders would be sought against them.  They submitted:[163]

[163]Smith, Multitech and DGC Submissions, paragraphs 16-17.

“16.    Even if Procutech demonstrates a sound evidentiary foundation for its application against Mr Smith, Multitech and DGC (which this outline of submissions will demonstrate it has not), the Court should take into account other factors in determining whether to exercise its discretion to award costs against these non-parties.  In the context of this proceeding, two are of particular relevance: first, the availability of an order for security for costs; and second, whether the non-parties were warned of the risk of an adverse costs order.  As to the first, “the availability of an order for security for costs at an early stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party”.[164]

17.     As to the second, “the courts will inquire into whether the non-party had any warning that an application for costs against it would be made”.[165]  In Manderson, for example, Croft J held that the non-parties were entitled to be put on notice of the intention to pursue a costs order against them.[166]”

[164]Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 191 (Mason CJ and Deane J), quoted with approval by Croft J in Manderson M & F Consulting v Incitec Pivot Ltd (No 3) [2011] VSC 441 at [41].

[165]G.E. Dal Pont, Law of Costs (2nd ed, LexisNexis Butterworths, 2009) at [22.24].

[166]Manderson M & F Consulting v Incitec Pivot Ltd (No 3) [2011] VSC 441 at [41] (Croft J).

1. Gourley submitted that the costs order sought against him should not be made as Procutech’s application “is an attempt to breach the corporate veil, and is not an ‘exceptional’ case for the imposition of a non-party costs order.”[167]

   [167]Gourley Submissions, paragraph 13.

1. As indicated in the authorities to which reference has been made, the piercing of the corporate veil in applications of this kind is not a step to be taken lightly.  The separate legal personality of corporate entities is long established and serves many purposes which are beneficial to both society and the economy.  Thus, apart from in exceptional cases, a corporate party rather than its human agents will bear any adverse costs consequences in litigation.  Legal systems, such as ours, reconcile preservation of the separate legal personality of corporate entities and interests of adverse parties to corporate plaintiffs by providing machinery in the litigation process whereby an adverse party may seek security for costs against a corporate plaintiff. 

1. It is not necessary in the present circumstances to consider the detail of the requirements with respect to applications for security for costs or whether, had such an application been made by Procutech, it would have been likely to be successful.  In my view it is, however, reasonable to conclude that, on the basis of the material before the Court, there would have been a reasonable basis for Procutech to have made such an application; though one might anticipate a number of defensive matters being raised in opposition by Permark.  In my opinion, for the reasons indicated, Procutech has not provided any reasonable basis for its decision not to make such an application – a procedure provided to protect litigants, in appropriate circumstances, from the situation in which it now finds itself.  Even if a security for costs application had been made by Procutech unsuccessfully, it would have served to focus the minds of all parties on the issue it sought to address and would have elicited evidence as to Permark’s financial position.  This would have enabled Procutech, at the very least, to warn the Non-Parties of its intention to make the present application. 

1. As to the conduct of the proceeding itself, by Permark, I do not regard that as unreasonable or improper in any relevant sense, in terms of the authorities to which reference has been made.  The developments which did occur were regrettable and unfortunate; and in this respect Procutech submitted that costs it incurred flowed from the internal inefficiencies in Permark’s development of its case and should be borne by the Non-Parties.[168]  The proceeding arose out of commercial dealings involving Permark and there is no basis for finding it was not commenced bona fide or involved any ulterior purpose in using a limited liability corporate vehicle as a shield against adverse orders, for costs or otherwise.    Permark was a real party to the dispute the subject of the proceeding;  in spite of the difficulties in articulating its claim.

   [168]Transcript, p 14.

1. Further, Permark commenced the proceeding having engaged a firm of solicitors and also counsel for this purpose.  Having regard to the proper basis certification under the Civil Procedure Act which was provided by its then retained solicitors with respect to the proceeding, it may be inferred that Permark commenced and conducted the proceeding with the benefit of legal advice.  As appears from the history of the proceeding – as has been summarised[169] – the matter did not progress as might have been expected, but the reasons for this are not matters presently relevant.  By its nature, litigation produces winners and losers, and the fact that the losses may occur as a result of a failure or failures in interlocutory stages – as has occurred here – does not, without more, sound other than in costs consequences for the losing party;  at least as between the litigation parties.  There may, of course be other consequences for those advising the losing party;  but I only include this observation for completeness and to avoid ambiguity in the present context.  It is not indicative of any view on my part in this respect.

   [169]See above, paragraphs 2 to 13.

1. In the present circumstances, I am of the opinion that Permark’s failure to succeed in pursuing its claim as a result of its losses at interlocutory stages and subsequent discontinuance does not have consequences for the Non-Parties in terms of costs liability.  In my view, the material before the Court and the submissions made against them do not establish exceptional circumstances in any relevant sense.  Rather, the evidence establishes that the directing mind, or minds, of Permark and those less directly involved in the conduct of the proceeding were doing no more than would be expected of its human agents, particularly having regard to their duties as directors.  Additionally, it is entirely unsurprising, and unexceptional, that these human agents stood to benefit directly or indirectly from success in the proceeding or that some individual or their corporate entities were funding the proceeding, directly or indirectly, having regard to the nature of Permark as a commercial entity, a private company.

Orders

1. For these reasons, the applications will be dismissed and I will hear submissions on the question of costs.