Blazai P/L v Maclarens

The defendants' application for costs on an indemnity basis 6The defendants served 'walk away' Offers of Compromise on the plaintiff on 15 March 2011, 16 September 2011 and 7 May 2012. Each offer was to the effect that judgment would be entered in favour of the defendants and the parties would bear their own costs of the proceedings. 7It is common ground that each offer complied with the formal requirements under Rule 20.26 of the UCPR, in that it was stated to remain open for a period of 28 days from the date of the offer and it was stated to be made in accordance with Rule 20.26 of the UCPR. The rules specifically provide for 'walk away' offers (Rule 20.26(2) and Rule 42.15A of the UCPR). 8For an offer to be a genuine Offer of Compromise under the Rules, some real element of compromise must be involved in the offer: Tickell v Trifleska Pty Limited (1999) 25 NSWLR 353 at 355 and Regency Media Pty Limited v AAV Australia Pty Limited [2009] NSWCA 368 at [25] - [35]. A walk away offer may amount to a real compromise: Leichhardt Municipal Council v Green [2004] NSWCA 341 at [39]; Melchior & Ors v Sydney Adventist Hospital Limited & Anor (No. 2) [2009] NSWSC 65 at [8] and Hearse & Anor v Staunton & Ors [2011] NSWSC 1065. 9The assessment required is an objective one and may require reference to the ultimate outcome, but also to the circumstances known to the offeree at the time the offer was open for acceptance: Hancock v Arnold; Dodd v Arnold (No. 2) [2009] NSWCA 19 at [17]. 10The relevant Offer of Compromise was served on 15 March 2011. The plaintiff commenced the proceedings by Summons in August 2007 and on 15 May 2010 filed the Further Amended Statement of Claim (upon which it proceeded until the hearing began on 19 November 2012). Mr Loiero swore his initial and substantive affidavit on 8 July 2009. The defendants served Ms Novotny's affidavit of 2 November 2009 and Mr Maley's affidavit of 17 December 2010 on 17 December 2010. Ms Novotny deposed to her audit of the defendants' files in which she did not locate a single document which bore the same "received" stamp as the documents which Mr Loiero alleged, but the defendants disputed, were on the defendants' file at the time they were acting as his solicitors. Mr Maley's evidence as to the instructions he had received, including the documents which had been sent to him, conflicted with Mr Loiero's. 11It follows that, as at 15 March 2011, Mr Loiero ought to have appreciated that his evidence as to the contents of the file was seriously in contest and that his credibility was a substantial issue in the case. He also knew the true state of the file at the time he had collected it from Mr Maley and the changes he had made to it by way of addition and subtraction. He ought reasonably have appreciated that the defendants had expended substantial costs in preparing such evidence and that their offer to walk away from the proceedings involved an element of real compromise. 12I am satisfied that the 'walk away' Offer of Compromise made on 15 March 2011 was a genuine attempt to compromise the proceedings, which by that date were well advanced, and involved a real element of compromise. 13I do not consider there to be any exceptional circumstances that would justify a departure from the prima facie position which applies under Rule 42.15A, being that the defendants should receive their costs on the ordinary basis up to the end of 15 March 2011 and on an indemnity basis from the beginning of 16 March 2011 onwards.

The defendants' application for a costs order against Mr Loiero 14Section 98 of the Civil Procedure Act 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. 15The defendants submitted that my findings concerning Mr Loiero's role with respect to the plaintiff and his conduct in connection with the proceedings were sufficiently exceptional to enliven the jurisdiction conferred by s 98 to order a non-party to pay costs and to provide a proper basis for the discretion to make such an order. 16The defendants relied on the following matters in support of its application against Mr Loiero: (1)Mr Loiero was the sole director and shareholder of the plaintiff and accordingly had the right, which he exercised, to control the company. (2)Mr Loiero fabricated documents which he inserted into the defendants' file with a view to constructing a case against the defendants. (3)Mr Loiero destroyed documents with a view to enhancing the plaintiff's case against the defendants. (4)Mr Loiero gave false evidence in affidavits and orally in the proceedings, including relating to instructions he gave Mr Maley and documents which he sent to him. (5)The plaintiff's case was substantially based on Mr Loiero's evidence. 17The defendants referred to various authorities where the misconduct of the non-party in the context of the relationship between the unsuccessful party and the non-party was found to be sufficient to warrant an order for costs against the non-party. They particularly relied on Oasis Hotel Limited v Zurich Insurance Co. (1981) 124 DLR (3d) 455 (Oasis) and Naomi Marble and Granite Pty Limited v FAI General Insurance Company Limited (No. 2) (1999) 1 QdR 518 (Naomi Marble). 18The plaintiff opposed the application on three principal bases: (1)The defendants had not foreshadowed that an application for costs against Mr Loiero would be made until the reasons for judgment had been given; (2)no application for security for costs had been made; and (3)there were no exceptional circumstances which would warrant the making of the order. 19Mr Hammond relied on FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 (FPM) to characterise Mr Loiero's involvement as a director and shareholder of a company which was undoubtedly the proper plaintiff in the proceedings. He submitted that the defendants could have protected themselves by a security for costs application and, having failed to make one, ought not achieve the same result by a different route. 20I accept that at the time Mr Hammond made this submission he was not aware that Mr John Palasty, the fifth defendant, applied for security for costs on 15 April 2008. Upon his later bankruptcy Mr Palasty ceased to be an active party to the proceedings, which were stayed as against him. At the hearing of the application on 8-9 December 2008 before Smart AJ, it was established that the plaintiff was without funds and that it was unlikely that it would be able to meet a costs order. Smart AJ was satisfied, on the basis of Mr Loiero's evidence, that Mr Loiero was himself without funds and that accordingly any order for security for costs would stifle the proceedings. On that basis, Smart AJ dismissed the application for security for costs: Blazai Pty Limited v Maley [2009] NSWSC 50. 21Mr Hammond submitted, correctly, that the plaintiff's cause of action against the defendants had a different basis from its cause of action against Mr Palasty and that the prospects of success and bona fides of the proceedings were relevant considerations in an application for security for costs. However, he properly conceded that he could not point to any relevant distinguishing feature which would suggest that an application for security for costs by the defendants would have been granted, in light of the dismissal of Mr Palasty's application. 22No additional evidence was adduced on the costs application. The defendants first foreshadowed the application against Mr Loiero after my reasons had been published.

Relevant Principles 23Legislation in terms not relevantly distinguishable from s 98(1)(b) has been held to permit, in certain exceptional circumstances, a costs order to be made against a non-party: Knight v FP Special Assets Limited (1992) 174 CLR 178 (Knight). 24Because the statutory power is expressed in general terms, I am not bound by previous exercises of similar discretions. Nonetheless the cases provide guidance as to instances which have been found to warrant the exceptional exercise of the discretion to award costs against a non-party. In FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 (FPM) Basten JA, with whom Beazley and Giles JJA agreed, said at [210]: 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. 25Gobbo J in Bischoff v Adams [1992] 2 VR 198 (Bischoff) at 204, identified the need for a connection between the non-party and the proceedings. In that case costs were ordered to be paid by a non-party which had destroyed evidence that it knew to be crucial to the resolution of the dispute the subject of the proceedings. 26There are dicta that stress the importance of an antecedent application for security for costs before an order for costs will be made against a non-party principal of a company: see Shawnelle Pty Limited v SR Juice Pty Limited (20 August 1993, unreported, Federal Court, Gummow J). However, it is always a matter of discretion: Knight at 190-191. The importance of this factor is necessarily diminished where such an application was unlikely to be successful, as in Oasis at [30]. 27There are dicta to the effect that whether an application has been foreshadowed is germane to the exercise of the discretion: see the authorities cited in Offstage Support Association Inc 9894945 v Time of My Life Pty Limited (No 2) [2011] FCA 1183; 284 ALR 362, at [44]. However, there is no requirement for notice before the discretion to award costs against a non-party will be exercised. Indeed such a requirement would be inconsistent with the wording of s 98.

Application of principles to the instant case 28Factor (a) identified in FPM is present in the instant case. There is no evidence as to (b). 29As to (c), I consider that the conduct of the litigation was unreasonable and improper. Mr Loiero, the controlling mind of the plaintiff, knew that the documents which he testified had been sent to the defendants had not in fact been sent and had been fabricated with a view to improving the plaintiff's prospects of success in the proceedings. He also destroyed documents, which he knew to have been on Mr Maley's file when it was handed to him. He gave evidence which was false to his knowledge in his affidavit and orally. Had Mr Maley been less attentive or astute and had the defendants' solicitors been less meticulous in the investigation of the claim, Mr Loiero's tactics may well have succeeded. 30As to (d), there is some circumstantial evidence that Mr Loiero would benefit from the litigation if the plaintiff was successful since his wife gave evidence that she stood to gain and he was the sole shareholder. 31Although (e) was not established on the balance of probabilities before me, there was evidence that the plaintiff had entered into a Deed of Arrangement on 12 January 2006, following the appointment on 29 November 2005 of a voluntary administrator of the plaintiff. This matter, together with those to which Smart AJ referred, are sufficient for me to infer that there is a real prospect that the plaintiff will be unable to pay the defendants' costs of the proceedings. 32I make no adverse finding against the plaintiff's solicitors, who were bound by the instructions which I infer Mr Loeiro gave them as to the provenance of the documents. 33Mr Loiero's conduct is, in my view, of similar order to that of Ms Hunter, the plaintiff's managing director in Naomi Marble, of whom Shepherdson J said, at 546-547: In my view, where a person who is not a party to an action but who is in a position such as that occupied by Ann Hunter where as director she was in a position to manage and control the plaintiff and where that person improperly prosecutes what that person must have known was a false and fraudulent claim and where that person garnishes it with many assertions which to that person's knowledge are false and in so doing uses the proceedings of the Court as an instrument of that person's fraud and attempts to deceive the Court then it is my view that the Court would be failing its duty if it did not treat the case against that person as a non-party as exceptional and deserving of an order requiring him or her to pay the successful party's costs on an indemnity basis. 34The requirement for a connection between the non-party and the proceedings referred to in Bischoff is amply satisfied in the instant case. Indeed, the position is a fortiori with Mr Loiero since he was, unlike the non-party in Bischoff, the mind of the plaintiff and its sole human agent. 35Mr Loiero relied on authorities which demonstrate that the discretion has miscarried when an order for costs has been made against a non-party director who has "done no more than represent the company in the proceedings, even where the company has not been successful": May v Christodoulou [2011] NSWCA 75, at [94]; see also FPM. These authorities have no particular relevance to the instant case except insofar as they refer to cases where a director has behaved improperly or the conduct of the litigation has been unreasonable. 36I do not consider the defendants' decision not to apply for security for costs should deprive them of the order they seek against Mr Loiero where another defendant unsuccessfully applied for security. The defendants were not obliged to make an application, which was almost certainly doomed to fail, merely to enhance their prospects in the present application. 37The defendants' failure to foreshadow this application prior to the delivery of reasons for decision is a relevant factor: see, for example, Kebaro v Saunders [2003] FCAFC 5. However I do not regard it as sufficient to outweigh the factors in favour of the order. Further, Mr Loiero adduced no evidence to the effect that, had such an application been foreshadowed prior to the conclusion of the proceedings, he would not have caused the plaintiff to prosecute them. Indeed, his preparedness to give false evidence and fabricate documents is some indication that he would not have been influenced by such notice even had it been given. 38In all the circumstances, I am disposed to order Mr Loiero to pay the costs of the proceedings. The question remains whether the costs should be ordered on the ordinary basis or on an indemnity basis.

The defendants' application that any order for costs against Mr Loiero should be on an indemnity basis 39Costs may be awarded on an indemnity basis where there has been some conduct on the part of the person against whom the order is made which warrants a higher level of recovery than the ordinary basis. I consider this to be such a case. Mr Loiero has sought to deceive the court and has subjected the defendants to a spurious claim based on fabricated evidence and false testimony. Mr Loiero knew, in light of the findings referred to above, from the outset and certainly prior to the commencement of the proceedings that he had dishonestly constructed a false file which contained fabricated documents and which lacked relevant documents which were in it when Mr Maley handed it over to him. I consider it to be appropriate to order Mr Loiero to pay the costs of the proceedings on an indemnity basis. 40In these circumstances, I see no reason to limit the extent of the indemnity to the date on which the first offer of compromise was made.

Orders 41I make the following orders: (1)Order the plaintiff to pay the defendants' costs of the proceedings, including the costs of this application, on the ordinary basis until 15 March 2011 and on an indemnity basis thereafter. (2)Order Mr Loiero to pay the defendants' costs of the proceedings, including the costs of this application, on an indemnity basis.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 February 2013