PM Works Pty Ltd v Management Services Australia Pty Ltd trading as Peak Performance PM

[2018] NSWCA 168

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

PM Works Pty Ltd v Management Services Australia Pty Ltd trading as Peak Performance PM [2018] NSWCA 168

Hearing dates:

24 July 2018

Decision date:

03 August 2018

Before:

McColl JA at [1];
Basten JA at [2];
Leeming JA at [3]

Decision:

1. To the extent that leave be necessary, grant leave to appeal.

 

2. Direct the applicants to file a notice of appeal in the terms of the draft notice of appeal in the White Book, and otherwise dispense with the requirements of service.

 3. Appeal dismissed with costs.

Catchwords:

COSTS – non-party costs order – sole director and shareholder caused plaintiff company to commence and maintain litigation – proceedings were dismissed with costs – primary judge refused application for non-party costs order – relevance of personal animosity on part of director to defendant – whether necessary to establish unreasonableness – whether exceptional circumstances established – leave granted but appeal dismissed

Legislation Cited:

Civil Procedure Act 2005 (NSW), ss 56, 98
New York Field Code 1848
Supreme Court Act 1970 (NSW), s 101(2)(c)
Supreme Court Rules 1970, Pt 52 r 4(2), Pt 52A r 4(2)
Uniform Civil Procedure Rules 2005, r 42.3
United States Federal Rules of Civil Procedure, r 17(a)

Cases Cited:

Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965
Arena Management Pty Ltd (Receivers and Manager Appointed) v Campbell Street Theatre Pty Ltd (2011) 80 NSWLR 652; [2011] NSWCA 128
Bob Jane Corporation Pty Ltd v Barrot FT Pty Ltd (No 2) (2012) 113 SASR 25; [2012] SASC 89
Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807; [2004] UKPC 39
FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340
Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348
Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34
Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75; [2009] HCA 43
Knight v FP Special Assets Ltd (1992) 174 CLR 178
Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66; [2008] HCA 42
Management Services Australia Pty Ltd v PMWorks Pty Ltd [2017] NSWSC 1743
Management Services Australia Pty Ltd v PMWorks Pty Ltd (No 2) [2018] NSWSC 336
May v Christodoulou (2011) 80 NSWLR 462; [2011] NSWCA 75
Mobbs v Vandenbrande and Wife, Late Youens Executrix of Price (1864) 4 B & S 904; 122 ER 698
Newell; Muriniti v De Costi [2018] NSWCA 49
Owners of the Ship “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404; [1994] HCA 54
Park Trent Properties Group Pty Ltd v Australian Securities and Investments Commission [2016] NSWCA 298; 116 ACSR 473
Selig v Wealthsure Pty Ltd (2015) 255 CLR 661; [2015] HCA 18
Snowside Pty Ltd as trustee for the Snowside Trust v Boart Longyear Ltd [2018] NSWCA 75
TGA Chapman Ltd v Christopher [1998] 1 WLR 12; [1998] 2 All ER 873
Wentworth v Wentworth (2001) 52 NSWLR 602; [2000] NSWCA 350
Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276

Texts Cited:

G Dal Pont, Law of Costs (3rd ed, LexisNexis, 2013)
W Holdsworth, History of English Law (vol 7, Methuen, 1952)

Category:

Principal judgment

Parties:

PMWorks Pty Ltd (First applicant)
Amit Banerji (Second applicant)
Management Services Australia Pty Ltd trading as Peak Performance PM (First respondent)
Paul Finnerty (Second respondent)

Representation:

Counsel:
M Cairns and L Hulmes (Applicants)
F Assaf and P Strickland (Respondents)

  Solicitors:
Resolve Litigation (Applicants)
Sparke Helmore (Respondents)

File Number(s):

2018/116618

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Equity – Commercial List

Citation:

[2018] NSWSC 336

Date of Decision:

16 March 2018

Before:

McDougall J

File Number(s):

2015/372170

Judgment

1. McCOLL JA: I agree with Leeming JA.

2. BASTEN JA: I agree with Leeming JA.

3. LEEMING JA: This application for leave to appeal, heard concurrently as if there had been a grant of leave, is from part of a judgment refusing an application by the successful defendants for a non-party costs order against the sole director and shareholder of the unsuccessful plaintiff.

Background

4. Mr Finnerty’s company, Management Services Australia Pty Ltd, trades as “Peak Performance PM” (“PPPM”). Mr Paul Finnerty is its sole director and shareholder. PPPM sued PMWorks Pty Ltd, originally contending that it had entered into a partnership with PMWorks, an allegation abandoned shortly before the final hearing, but ultimately alleging that there was an agreement which gave rise to fiduciary obligations on the part of PMWorks. For its part, until the commencement of the trial, PMWorks denied that there had been any agreement at all, a stance regarded by the primary judge as “plainly unreasonable”. PPPM’s claim was for breach of contract, breach of fiduciary duty or alternatively promissory estoppel, misleading and deceptive conduct or unconscionable conduct contrary to the Australian Consumer Law.

5. The subject matter of the agreement between PPPM and PMWorks was the provision of certain management training services to clients such as the Commonwealth Bank of Australia. The nature of those services and the way in which they were provided were summarised by the primary judge and are irrelevant for present purposes. The relationship between the two companies and the men who controlled them broke down in 2015, and proceedings were commenced in the Commercial List of the Equity Division later that year, on 18 December 2015.

6. There was some asymmetry in the parties to the litigation, insofar as PPPM joined the sole director and majority shareholder of PMWorks, Mr Amit Banerji, as the second defendant, while Mr Finnerty was not a party (there was no cross-claim by PMWorks and Mr Banerji). PPPM alleged that Mr Banerji had instigated and procured the breach of fiduciary duty, and was knowingly involved in the misleading and deceptive conduct and the unconscionable conduct.

7. PPPM provided $50,000 by way of security for costs in February 2016, and was ordered in July 2016 to provide an additional $130,000, which it did. No application for further security was made. Prior to the provision of any security, PPPM’s solicitors had advised, by letter dated 18 January 2016, that Mr Finnerty was “willing to provide an undertaking that he will be personally liable in respect of any costs order made against [PPPM] in the Proceedings”. That offer was not accepted. Had it been accepted, and the undertaking given, there would have been no application for a third-party costs order extending to Mr Finnerty, or this appeal.

8. The primary judge conducted a trial over six days in October 2017, and dismissed the proceedings by judgment delivered on 14 December 2017: Management Services Australia Pty Ltd v PMWorks Pty Ltd [2017] NSWSC 1743.

The primary judge’s decision refusing the on-party costs order

9. The issue of costs was heard and determined on the papers, in accordance with directions made when the principal judgment was delivered, and was the subject of a separate judgment: Management Services Australia Pty Ltd v PMWorks Pty Ltd (No 2) [2018] NSWSC 336. Much of the latter judgment dealt with issues other than the application against Mr Finnerty. Those matters led to a nuanced suite of orders, which were not wholly unfavourable to the unsuccessful plaintiff PPPM. In particular, carved out from the costs payable by PPPM were costs associated with large affidavits sworn by one deponent which were served on behalf of PMWorks but not ultimately read. Further, PMWorks was ordered to pay PPPM’s costs of considering and replying to those affidavits, and preparing cross-examination of that deponent.

10. On the only issue which has given rise to this application for leave, namely, the failure to make a non-party costs order against Mr Finnerty, it is convenient to reproduce the entirety of his Honour’s commendably concise reasons:

“Decision: the application against Mr Finnerty

46.   In my view, this application should fail. I accept, as Ms Cairns submitted, that Mr Finnerty is the guiding mind of PPPM. I am prepared to accept also that it was he who caused PPPM to commence the litigation and to conduct it to finality, and he who funded it. It is clear that Mr Finnerty would have benefited substantially from success. But to state those propositions does no more than state that PPPM is a company that Mr Finnerty caused to be incorporated for the purpose of conducting “his” management training business. They do not indicate why the veil of incorporation should be, not so much pierced, as rent in twain.

47.   To make the order sought with no more to justify it than the facts recited in the preceding paragraph would mean, in effect, that every entrepreneur in a similar situation would be exposed to the like risk. The power would become one exercised regularly and frequently, not sparingly. In my view, more must be shown to justify the making of the order.

48.   There is nothing in the facts to suggest that it would be just to deprive Mr Finnerty of the advantages of separate legal personality. It is unnecessary to decide whether, as Mr Assaf submitted, it is necessary to characterise Mr Finnerty’s conduct as unreasonable, before a third party costs order can be made against him. There is really nothing more than the fact that Mr Finnerty pursued his business through PPPM, caused PPPM to commence and prosecute to finality (subject to any appeal) litigation relating to that business, paid the costs of doing so, and stood to receive the benefits of doing so. For the reasons I have tried to explain, that does not seem to me to justify the exercise of the undoubted discretion to make the order sought.

49.   Were it necessary to characterise Mr Finnerty’s conduct as unreasonable, I would not accept Ms Cairns’ submission that it is appropriate to do so. There is nothing to show that Mr Finnerty (for example) proceeded in the teeth of advice that the claim was weak, or with knowledge that the claim was unlikely (even very unlikely) to succeed. I accept that the offer of compromise should have caused him, as the guiding mind of PPPM, to consider its prospects of success. There is however no evidence that he failed to do so; and a fortiori, no evidence that his decision to continue, in the face of the offer, was relevantly unreasonable. Hindsight analysis should not be applied for the purpose of characterising his conduct, retrospectively, in that way.

50.   I note further (although Ms Cairns did not refer to it) that, in answer to the defendants’ application for security for costs, Mr Finnerty undertook to put his personal assets at risk, and to accept joint and several liability for costs. However, that circumstance does not strike me as having any consequences favourable to the defendants. On the contrary, in my view, it tends otherwise. They did not accept Mr Finnerty’s offer. Instead, they pressed ahead with their application for security (and obtained it). It strikes me as being a little inconsistent to have taken that position, no doubt for perceived (although legitimate) advantage at one stage, and now to be seeking to resurrect the proposal in connection with costs.

51.   The application for a costs order against Mr Finnerty must fail.”

11. Those reasons reflected in large measure the way in which the application had been advanced before his Honour. The applicants had sought (by notice of motion filed on 7 February 2018) an order that Mr Finnerty be jointly and severally liable to pay any costs that the plaintiff was ordered to pay. Their submissions in support of that order comprised paragraphs 13-25 (slightly more than three pages) of submissions in chief dated 9 February 2018, and paragraphs 17-32 (slightly more than four pages) of submissions in reply dated 8 March 2018.

12. The submissions in chief stated that Mr Finnerty was the sole director and shareholder of the plaintiff and was thus “the only person who stood to benefit from any success in the litigation” and that he had “positioned himself to avoid the risk of any adverse costs order if (as transpired) the proceedings were unsuccessful”. The submissions recognised that such an order was only made in exceptional cases, but said that Mr Finnerty’s role was that of a person who caused the proceedings to be commenced and then controlled their conduct and acted in his own interests by litigating all the way to final hearing. The submissions relied upon the finding by the primary judge (at [33] of the primary judgment) that:

“Mr Finnerty has a clear and substantial stake in the outcome of the litigation. As I have said, he is the sole director and shareholder of PPPM. He accepted that the outcome of the litigation was vital to PPPM’s and his financial futures.”

13. It was submitted that the plaintiff was impecunious and that a costs order was justified because:

“(a) the plaintiff, as controlled by Mr Finnerty, was the moving party;

(b) the defendants have involuntarily had to meet and defend the proceedings for two years in the form that it was put against them (see paragraph 23 below); and

(c) without a non-party costs order making Mr Finnerty liable for their costs incurred in these proceedings, the defendants will be unable to recover them and will suffer loss.”

14. Paragraph 23 of the written submissions identified six ways in which, so it was said, Mr Finnerty had caused the defendants to incur costs. Those steps included (a) making a series of amendments to the list statements, including amendments shortly before and then during the final hearing; (b) advancing numerous causes of action, (c) voluminous evidence being served (Mr Finnerty was the only witness of fact for the plaintiff, and his affidavit comprised some 544 paragraphs spread over 151 pages, without annexures, with many volumes of exhibits); (d) issuing lengthy notices to produce and a subpoena with seven return dates, (e) the late abandonment, two business days before the final hearing, of the plaintiff’s case on partnership, and (f):

“Oppos[ing] the defendants’ application for $130,000 in security for costs, where the full amount was ordered by Ball J on 22 July 2016 (after a day of hearing) and the plaintiff was ordered to pay the defendants’ costs”.

15. In their submissions in reply, the applicants submitted that the ultimate question was “whether in all the circumstances it is just to make [a non-party] costs order”, and that it was not necessary to show that a non-party had acted unreasonably, although the applicants submitted that in this case Mr Finnerty had acted unreasonably by bringing and continuing the proceedings, referring to [34]-[35], [175] and [176] of the primary judgment. It was submitted that:

“Mr Finnerty was motivated to cause PPPM to commence these proceedings to satisfy a personal grievance he felt against Mr Banerji and PMWorks, and the way in which he caused PPPM to conduct the litigation … is consistent with his above-stated intention to engage in a long and drawn out litigation. This is in addition to his own evidence being skewed to benefit PPPM (and himself).”

16. Further submissions were made responding to Mr Finnerty’s submissions based on the security for costs which had been provided prior to the trial. Mr Finnerty contended that “it was always open to the defendants to seek additional security” in support of his submission that no costs order should be made against him. The applicants also denied that “something more” other than Mr  Finnerty being sole director and shareholder was required to make a non-party costs order, but added that:

“If there is a ‘something more’ criteria [sic] then it is satisfied by Mr Finnerty’s conduct in not making himself a plaintiff but standing behind the corporate plaintiff, where he was the only person who stood to benefit from any success in the proceedings, whilst simultaneously shielding himself from any liability for the defendants’ costs if the proceedings he caused to be brought were unsuccessful.”

The appeal to this Court

17. There is an unresolved question as to whether PMWorks and Mr Banerji require leave to appeal from the dismissal of that part of the notice of motion seeking an order that Mr Finnerty be made liable for the costs his company was ordered to pay. The liability considerably exceeds $100,000, but on one view the appeal is from the failure to make orders “as to costs only which are in the discretion of the Court” within the meaning of s 101(2)(c) of the Supreme Court Act 1970 (NSW) and for that reason requires leave. The uncertainty on this question was recognised recently in Newell; Muriniti v De Costi [2018] NSWCA 49 at [19]-[21]. Further elaboration is unnecessary, because the respondents took the constructive stance of consenting to the grant of leave if leave be necessary. Accordingly, the applicants having raised a question of principle, there should to the extent that leave is necessary be a grant of leave.

18. When as here a court is invited to make a discretionary decision, to which many factors may be relevant, it is incumbent on parties who contend on appeal that attention was not given to particular matters to demonstrate that the primary judge’s attention was drawn to those matters, at least unless they are fundamental and obvious: Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar (2008) 237 CLR 66; [2008] HCA 42 at [120]. Although it seems commonly to be overlooked, the principle is applicable to applications for costs, especially those determined on the papers: see for recent examples Snowside Pty Ltd as trustee for the Snowside Trust v Boart Longyear Ltd [2018] NSWCA 75 at [6] and Park Trent Properties Group Pty Ltd v Australian Securities and Investments Commission [2016] NSWCA 298; 116 ACSR 473 at [51] and [56].

19. There is a marked contrast between the submissions in this Court and those made to the primary judge. Rather than the slim submissions in writing in support of an application determined on the papers, the applicants relied on (a) their original submissions in support of leave, (b) full submissions filed after they were notified (at the first return date) that there would be a concurrent hearing, (c) written submissions in reply handed up at the commencement of the hearing, as well as (d) oral submissions which occupied half a day. Inevitably, there is a great deal in the submissions in this Court extending beyond those made to the primary judge.

20. The onus lies on the applicants to identify appellable error in respect of a decision made by a judicial officer who was eminently well placed to exercise the discretion, having seen Messrs Finnerty and Banerji being cross-examined as well as the way in which the trial was conducted. As noted above, the nuanced orders as to costs (to which this appeal does not extend) as well as various findings during the course of his reasons reflected his Honour’s criticisms of aspects of the conduct of both sides.

21. Rather than summarising the parties’ submissions in this Court, which would take rather longer than a summary of the submissions made to the primary judge, it will be convenient immediately to turn to the applicable principles and the grounds of appeal.

Applicable principles

22. The source of the power to make a non-party costs order is now found in s 98(1)(b) of the Civil Procedure Act 2005 (NSW). Section 98(1) provides:

“(1)  Subject to rules of court and to this or any other Act:

(a)  costs are in the discretion of the court, and

(b)  the court has full power to determine by whom, to whom and to what extent costs are to be paid, and

(c)  the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.”

23. Three matters follow from that conferral of power. First, the generality of s 98(1) engages the principle of construction stated in Owners of the Ship “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404 at 421; [1994] HCA 54:

“It is quite inappropriate to read provisions conferring jurisdiction or granting powers to a court by making implications or imposing limitations which are not found in the express words.”

24. Secondly, the question of jurisdiction or power to make a non-party costs order was resolved in the United Kingdom by Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 and in Australia by Knight v FP Special Assets Ltd (1992) 174 CLR 178. Knight dealt with rules of court which provided merely that costs were in “the discretion of the Court or judge” (resembling s 98(1)(a) without the expansion in s 98(1)(b)); Aiden Shipping dealt with a provision which closely resembled s 98(1). Both decisions held that the power extended to ordering a person who was not a party to pay costs.

25. Thirdly, some care must be taken when considering New South Wales authorities between 1993 and 2010. That arises from the fact that the conferral of power was expressed to be “subject to rules of court” and shortly after the High Court’s decision in Knight, the Supreme Court Rules were amended so as to provide that, save in certain exceptional cases, “the Court shall not ... make any order for costs against a person who is not a party” (Pt 52 r 4(2) and Pt 52A, r 4(2)). The explanatory memorandum provided that “[t]he object of the amendment ... is to restrict the power of the Court in making a costs order against a person who is not a party.” This Court held that that rule abolished several traditional categories of jurisdiction to make costs against non-parties as discussed in Knight: see Wentworth v Wentworth (2001) 52 NSWLR 602; [2000] NSWCA 350 at [162]-[164]. The rule in that limited form was continued when the Uniform Civil Procedure Rules commenced in 2005 as Pt 42 r 42.3. Subsequently, in response to the High Court’s decision in Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75; [2009] HCA 43, which held that the rule prohibited costs being ordered against a litigation funder, r 42.3 was repealed. The legislative history is summarised in Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd at [22]-[24] and Arena Management Pty Ltd (Receivers and Manager Appointed) v Campbell Street Theatre Pty Ltd (2011) 80 NSWLR 652; [2011] NSWCA 128 at [22]-[25].

26. The position in New South Wales since 2010 reflects that adopted in other Australian States. The Supreme Court (and other courts) may order non-parties to pay costs in accordance with the principles enunciated by the High Court in Knight and subsequently developed.

27. I turn to those principles. Part of the reasoning of the High Court in Knight was directed to nineteenth century decisions holding that the “real parties” in litigation could be directed to pay costs or provide security for costs. In a pre-Judicature system, where a beneficiary or an equitable assignee could not bring or be joined to an action, and where legal fictions were numerous, there was greater need for such powers. The reasons of Cockburn CJ and Blackburn J in Mobbs v Vandenbrande and Wife, Late Youens Executrix of Price (1864) 4 B & S 904; 122 ER 698 conveniently describe (a) the difficulty in an equitable assignee being recognised in a court of law, and (b) the development of fictions to support an action of ejectment. A fuller account of both may be found in W Holdsworth, History of English Law, vol 7 pp 10-15. The 19th century decisions cited in Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd at [34] are cases where a nominal defendant was a party to an action for ejectment and the “real party” was made liable for costs. Reforms throughout that century removed much of the need for this device, although interestingly the language of “real party” was picked up in the more radical reforms associated with the New York Field Code of 1848, and may be found now in r 17(a) of the United States Federal Rules of Civil Procedure (“An action must be prosecuted in the name of the real party in interest”).

28. Mason CJ and Deane J, after reviewing those and other exceptions, said in Knight at 189-190:

“Having regard to the variety and the nature of the circumstances in which an order for costs was made against a person who was not a party according to the record, we cannot accept that there was before the Judicature Acts a general rule that there was no jurisdiction to order costs against a non-party in the strict sense. It is plain enough that the courts from time to time awarded costs against a person who, not being a party on the record, was considered to be the ‘real party’.”

29. As will be seen below, the language of “real party” has continued in some of the modern Australian decisions on non-party costs orders. Most recently, the Victorian Court of Appeal described the threshold issue in an application for a non-party costs order as being whether the non-party is “a real party” to the litigation: Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348 at [69]. The distinction may be helpful including in cases where litigation is controlled by and conducted for the benefit of an insurer (for example, Selig v Wealthsure Pty Ltd (2015) 255 CLR 661; [2015] HCA 18) or a litigation funder (for example, Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd).

30. The principles governing the power to make costs orders directed to non-parties continue to be those developed under earlier forms of the rules. That appears from all of the cases in this Court relied on by the parties, namely, FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340, May v Christodoulou (2011) 80 NSWLR 462; [2011] NSWCA 75 especially at [106], Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 and Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34. In each of those appeals, the principles stated in Knight were applied to s 98(1) or its equivalent. No contrary submission was made in this Court.

31. In FPM Constructions, Basten JA, with whom Beazley and Giles JJA relevantly agreed, reviewed the judgments in Knight and concluded at [205] that there was no significant difference between the various majority judgments. No contrary submission was made in this Court.

32. Referring to the long-standing power to make an order for costs against a non-party which could be described as the “real party” to the proceedings, his Honour said at [206]:

“In the present case, it could not be said that FPM Constructions 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. That 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” (emphasis added).

33. In [210], Basten JA continued:

“It is clear that the categories of case which may attract the exercise of the power are by no means closed, nor should they be. Nevertheless, the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself.

34. Basten JA added at [214]:

“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 clearly tend to interact. Nor should it be forgotten that the power is only to be exercised in exceptional cases. In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis, so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the ‘interest’ in its outcome or subject-matter.”

35. It is thus quite plain that the “exceptional” nature of a non-party costs order means that courts must be astute not to permit its availability to expand to the general run of cases where non-parties have played an active role in unsuccessful litigation. It is important to bear that steadily in mind when considering the criteria which were identified in FPM (and which were prominent in the parties’ submissions in this appeal), which were identified at [210] as follows:

“What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria:

(a) the unsuccessful party to the proceedings was the moving party and not the defendant;

(b) the source of funds for the litigation was the non-party or its principal;

(c) the conduct of the litigation was unreasonable or improper;

(d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and

(e) the unsuccessful party was insolvent or could otherwise be described as a person of straw.”

36. In their application to the present case, criteria (a), (b) and (e) were made out. The primary judge rejected a submission that Mr Finnerty had conducted the litigation unreasonably, and that finding was not challenged in this Court. Hence it was natural that a deal of attention was given in the submissions on appeal to the “interest” of Mr Finnerty, to which I return below. But a non-party costs order is not warranted merely because a majority of those criteria are satisfied. That is readily demonstrated. Ultimately, as counsel for the applicants properly conceded during addresses in this Court, the mere fact that the sole director and shareholder of a company with limited assets of its own brings proceedings which fail and result in an adverse costs order does not of itself warrant making an order making the director liable for the company’s costs, even though criteria (a), (b) and (e) are made out. Were it otherwise, the jurisdiction would not be “exceptional”.

37. In May v Christodoulou, Sackville AJA, with whom Macfarlan JA agreed, allowed an appeal against an order that a director who had appeared as an advocate for his company pay the costs of the successful party. The appeal was allowed on the basis that it was not sufficient merely that (a) the company had been unsuccessful, (b) the director had signed an acknowledgment in the court forms that he might be liable to pay some or all of the costs of the proceedings, and (c) the conduct of the litigation by the director, who was not legally qualified, had (in the words of the trial judge) “left something to be desired” and “the case was somewhat prolonged by virtue of [his] conduct”. While the decision turns on its own facts, it illustrates the need to avoid a mechanical application of the criteria which inform the exercise of the power. Sackville AJA emphasised that a non-party costs order might be appropriate if the director “repeatedly and flagrantly ignores court directions”. Such conduct would be a contravention by the director of the obligation imposed directly upon him or her by s 56 of the Civil Procedure Act 2005 (NSW), which extends not merely to parties and their lawyers, but also to “any person with a relevant interest in the proceedings”, a term which is defined to mean persons who provide financial or other assistance to a party or who exercise direct or indirect control or influence over the conduct of the proceedings.

38. Handley AJA appears to have been inclined to treat directors who appeared for their companies as a special case. However, his Honour was in dissent. In any event, Handley AJA said that there was no reason to doubt the correctness of the decision in FPM. Without wishing to cast any doubt upon the correctness of the reasoning or outcome in May v Christodoulou, where a director personally conducts the litigation as advocate for his or her company, then (a) the conduct and advocacy may, in a case where the director is not a legal practitioner, not be accompanied by the professional and ethical obligations to which legal practitioners are subject, and (b) the Court will be better placed to determine whether the director’s role is one which warrants a non-party costs order being made.

39. Those and other authorities were reviewed by McColl JA in Yu v Cao at [136]-[156]. Her Honour reaffirmed (at [138]-[139]) that a non-party costs order is “exceptional”, noting in footnote 72 that the proposition “has been approved in numerous Australian authorities”. Her Honour reproduced what had been said by Lord Brown for the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807; [2004] UKPC 39 at [25], namely, that “exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense”. The applicants sought to apply that proposition to the position of Mr Finnerty. But the Privy Council was dealing with a professional litigation funder, and I do not read either his Lordship or her Honour to be dealing with the familiar case of a company with a single shareholder and director. There is nothing to indicate any departure from the emphasis in FPM and May as to the need to avoid the exceptional circumstances in which such an order might be available swallowing up the general rule that they were not. The non-party costs order in Yu v Cao was set aside. On the other hand, Heath v Greenacre Business Park Pty Ltd was a case where the director and Chief Executive Officer of the corporate party verified the defence, made an affidavit and represented the company, and did so in a way which was held to be unreasonable: at [86]-[93] and [106]. This Court in re-exercising the discretion considered that a non-party costs order was appropriate.

40. Although the applicants’ submissions to the primary judge did not mention most of those cases, it is plain that those principles were reflected in the reasons of the primary judge reproduced above. The gravamen of his Honour’s reasons was that Mr Finnerty was not found to have caused his company to have conducted the litigation unreasonably, and was no different from any other person who was the sole director and shareholder of an unsuccessful corporate litigant. That is to say, the primary judge considered that “something more” was required to take this case out of the ordinary run of cases.

41. In acknowledgement of the careful way in which the submissions of both parties were presented by Ms Cairns and Mr Assaf, I shall deal in more detail with the particular grounds of appeal and the submissions put in support of them.

Grounds 1, 2 and 4

42. Grounds 1, 2 and 4 of the draft notice of appeal were based on the reasoning of the primary judge at [46]. Grounds 1 and 2 asserted that the primary judge erred in finding that the application “should or must fail” by reference to certain findings of primary fact. Ground 1 maintained that there was error in refusing to make a non-party costs order in circumstances where Mr Finnerty (a) was the guiding mind of PPPM, (b) had caused PPPM to commence the litigation and to conduct it to finality, (c) had funded the litigation and (d) would benefit from its success, in circumstances where the primary judge had made the finding at [33] reproduced above. Ground 2 was essentially an elaboration of ground 1. The ground maintained that there was error in refusing the application for a non-party costs order on the basis of the matters in ground 1 together with the facts that (e) Mr Finnerty was the only witness of fact for PPPM, (f) PPPM was the moving party, (g) the litigation could not have been brought without Mr Finnerty funding it, (h) Mr Finnerty was the only person who stood to benefit from any success by PPPM in the litigation and (i) Mr Finnerty was far from a disinterested company director.

43. Ground 4 was that:

“The primary Judge erred in considering as relevant or determinative that the appellants needed to show ‘why the veil of incorporation should be ... pierced’ or made ‘rent in twain’, by a non-party costs order in the present case.”

44. In oral submissions, these grounds were elaborated by reference to Mr Finnerty having an extraneous “interest” above and beyond his role as director and shareholder. Relying upon the fourth criterion in FPM, it was said that Mr Finnerty had a separate “interest” in the litigation. Two aspects of that interest were identified. The first was his emotional involvement in the litigation, stemming from his falling out with Mr Banerji. The second was his economic interest, because he had lent some $350,000 to his company.

45. These grounds are not made out. First, neither ground 1 nor ground 2 attends to the limitations upon review of a discretion such as that exercised by the primary judge. The applicants correctly accepted that they bore the burden of establishing House v The King error. That burden is not discharged by pointing to the matters found by the primary judge and saying that the primary judge erred in finding that the application for a non-party costs order “should or must fail”.

46. Secondly, even if all of the matters on which reliance is placed in grounds 1 and 2 are taken together, they amount to no more than the ordinary case of a company with a sole director and shareholder. For many years, federal law has permitted that form of incorporation. In most instances, the director will be the guiding mind of the company, will have caused the company to have commenced and continued litigation, and inevitably will benefit from its success. In a large proportion of those cases, the sole director/shareholder will fund the company’s costs of that litigation. This does not take the case outside the “ordinary run of cases” to which reference is regularly made (see for example Dymocks at [25], Yu at [139], [161] and [184] and Heath at [80]).

47. That is to say, if the matters identified in ground 1 were of themselves sufficient to warrant a non-party costs order against the director, then the “carefully crafted exceptions” to the distinction between the corporation and the natural person who owned and controlled it would be set aside. That is not the law. Indeed, far from his Honour’s reasoning disclosing House v The King error, his Honour was bound to proceed as he did, regarding those matters as insufficient to warrant making an order.

48. Ground 2 takes the matter no further. In most such cases, where there are issues of fact, the sole director/shareholder will be a witness. The fact that Mr Finnerty was the only witness of fact does not take the case outside the “ordinary run of cases”.

49. The only other additional element in proposed ground 2 is that Mr Finnerty was “far from a disinterested company director”. This picks up the personal animosity between the two men. But it is not the law that a litigant should be punished because of an emotional investment in the litigation, still less that a non-litigant should bear the burden of a costs order. Personal animosity regularly accompanies some – perhaps much – litigation, as Kourakis J (as his Honour then was) observed in Bob Jane Corporation Pty Ltd v Barrot FT Pty Ltd (No 2) (2012) 113 SASR 25; [2012] SASC 89 at [39]. His Honour there rejected a submission that the personal animosity of the sole director of the unsuccessful franchisee should result in a non-party costs order. In such cases, the critical question is not the subjective state of mind of the person controlling the litigation, but whether the conduct is objectively unreasonable or improper.

44. Ground 4 must fail for the reasons already given. It is settled that something more, taking the case outside the ordinary run of cases, is required before the person owning and controlling a company is made liable for costs the company has incurred.

Ground 3

51. Ground 3 was directed to [47] and [48] of the reasons. This ground maintained that there was error in the primary judge proceeding on the basis that more needed to be shown to justify making an order and that the matters in [48] were insufficient.

52. Rather than disclosing error, those paragraphs recognise the force of what was said in FPM at [206] and [210] as to the need to respect the carefully crafted principles attending to the exercise of the power in a case such as this. This ground must also be assessed in light of the submissions which were advanced before the primary judge. The submissions were considerably less comprehensive than those made in this Court, and did not develop the point of which complaint is now made.

53. Moreover, even if all of the submissions in this Court had been made to the primary judge, I would not conclude there was error in declining to make orders rendering Mr Finnerty liable for the costs payable by his company. Although Mr Finnerty was central to the conduct of the litigation by his company, and was financially as well as emotionally involved, there is no finding that any aspect of it amounted to an abuse of process or even that he acted unreasonably. The primary judge was especially well placed in that respect, and declined so to find: see at [50]. There was no challenge to that aspect of his Honour’s judgment. To the contrary, it is clear that his Honour regarded both sides as contributing to certain excessive aspects of the litigation.

54. This ground is not made out.

Ground 5

55. The applicants maintained that the primary judge erred in “refusing to find ... that it was unnecessary to characterise Mr Finnerty’s conduct as unreasonable before a non-party costs order can be made against him in the present case”. The sense is clear enough, although there seems to be an additional negative in the ground as formulated. The challenge was to the fact that his Honour had found it unnecessary to decide whether it was necessary to characterise Mr Finnerty’s conduct as unreasonable. This was said practically to have had the effect of causing the refusal of the order. It was said that:

“57. This practical effect is supported by his Honour having explicitly stated (in his five paragraphs of reasons for refusing the non-party costs order sought) that evidence of Mr Finnerty having acted unreasonably would ‘provide the undoubted power’ to make the order sought. The applicants submit that for the reasons set out above with respect to Grounds 1 and 2, the power undoubtedly existed even absent a finding of unreasonableness (see Selig at [44]).

58. The policy argument that making a non-party costs order in this case would result in opening the floodgates to lift the corporate veil more broadly in future cases, is an irrelevant or extraneous factor or alternatively, it may be a factor but should not be the primary or determinative consideration and in finding it so, the Primary Judge fell into error.” (emphasis in original)

56. That submission cannot be accepted. Once again this was not a submission clearly advanced at first instance. Whether Mr Finnerty had acted unreasonably arose only in the submissions in reply, in response to his submission that it was necessary to demonstrate unreasonableness and that he had not caused PPPM to act unreasonably. The submissions in reply joined issue on both limbs of the submission, but it was not said that it was necessary to decide the first limb.

57. Next, the mode of reasoning adopted by the primary judge is familiar, and understandable in light of the way the issues had been framed by the parties’ submissions. In their submissions in reply, the applicants denied that there was a requirement of unreasonableness, relying upon what had been said in Selig v Wealthsure Pty Ltd at [44]-[45]. The judgment of French CJ, Kiefel, Bell and Keane JJ referred to the decision of the English Court of Appeal in TGA Chapman Ltd v Christopher [1998] 1 WLR 12; [1998] 2 All ER 873 which rejected a requirement of unreasonableness. I think the better view is that the decision of the High Court (whose judgment ordered the non-party QBE Insurance (Australia) Ltd to pay the appellants’ costs) is inconsistent with a requirement of unreasonableness, because there was no finding that the insurer’s conduct of the litigation had been unreasonable. This view is consistent with the statement of principle from Shin Kobe Maru referred to above. However, because the issue came before the primary judge only in submissions in reply, the respondents had no opportunity to be heard against what was said to flow from Selig v Wealthsure Pty Ltd. In such circumstances it was entirely appropriate, as well as being consistent with the incremental nature of curial decision-making, for the primary judge to decline to decide that question of law, on the basis that even if it were resolved favourably to the applicants, in its application to the facts of this case, they would not be entitled to the relief they sought.

58. This ground is not made out.

Other submissions

59. For completeness, I should address the submissions which were directed to paragraph 50 of the primary judge’s costs judgment, although it is unclear to which proposed ground of appeal they related. It was said that this paragraph did not fairly reproduce the context in which the applications for security for costs prior to trial fell to be determined.

60. Again, no appellable error is disclosed. Paragraph 50 was responding to submissions made to the primary judge, which included, as one of six ways in which Mr Finnerty was said to have caused the defendants to incur additional costs, that the respondents had opposed an application for further security of $130,000 ultimately ordered by Ball J on 22 July 2016, as noted above. It was not inappropriate for the primary judge to remark as to the inconsistency in the applicants complaining as to the intransigence of Mr Finnerty and his company in July 2016 arguing against the provision of security, when they themselves had declined to accept his offer to provide a personal undertaking for any adverse costs order some six months earlier.

61. It is unnecessary to address the interrelationship between the applications for security for costs which were made and granted, and the discretion to make a non-party costs order when it emerges, at the end of the hearing, that the security is inadequate. That issue is a large one (it is discussed by G Dal Pont, Law of Costs (3rd ed, LexisNexis, 2013), at [22.28]-[22.31].) In particular, the principles upon which an application for security for costs may be refused, including the risk of stultification, are distinct from those governing the making of a non-party costs order.

62. Nor is it necessary to consider whether and if so how the defined term “relevant interest” in s 56(5) of the Civil Procedure Act impacts upon the exercise of discretion in such cases, a matter touched on during the hearing, but as to which the Court did not receive full submissions.

Orders

63. For those reasons, the appeal should be dismissed. There is no reason why costs should not follow the event. I propose the following orders:

1. To the extent that leave be necessary, grant leave to appeal.

2. Direct the applicants to file a notice of appeal in the terms of the draft notice of appeal in the White Book, and otherwise dispense with the requirements of service.

3. Appeal dismissed with costs.

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Amendments

03 August 2018 - Coversheet - Texts cited, "Mathuen" changed to "Methuen"

[10] - first sentence, "made" changed to "make"

[30] - citation of Yu v Cao, 2016 changed to 2015

[37] - quoting Sackville AJA, "ignores the court directions" changed to "ignores court directions"

[57] - fourth sentence, "the decision of" added before "the High Court"

Decision last updated: 03 August 2018