Heath v Greenacre Business Park Pty Ltd

The costs judgment

1. After outlining the issues raised by the pleadings, his Honour summarised the effect of the affidavit evidence served by the Lessee in support of the defence and cross claim. The affidavits asserted that during the negotiations preceding entry into the lease, there were no construction vehicles or construction workers visible at the adjacent Bunnings site but, shortly after the Lessee moved into the leased premises, its operations were continually obstructed as a result of the construction activities that had started on the Bunnings site: at [4].
2. His Honour noted the Lessee's allegations contained in a letter dated 25 November 2011, which the appellant deposed had been sent to the respondents. This letter asserted that since the Lessee moved into the premises in September 2011, its trucks had encountered significant entry and exit access issues to the site and that this meant that it had not been able to service customers with agreed delivery timeframes. The letter continued, further asserting that, as a result, the Lessee had lost customers and incurred increased costs in providing services to them and that, consequently, its business in New South Wales was rendered unviable: at [5]. Later in his reasons at [8], his Honour noted, without making any finding, the respondents' evidence that the letter dated 25 November 2011 allegedly sent to it was never received.
3. His Honour found that the effect of the respondents' affidavits in reply to the defence and cross claim is to "show, convincingly" that:

• construction on the Bunnings site was well under way at the time of the negotiations for the lease to the Lessee. Reference was made to the photographic evidence of the Bunnings construction site at the time of those negotiations (in August 2011), which his Honour found: convincingly shows that the matters deposed to in the affidavits of Mr Heath and Mr Biggs, on this aspect of the case, were false: at [6];
• the work being done on the Bunnings site did not cause interruptions to or obstruction of access to the leased premises in the way claimed by the appellant and Mr Biggs. Reference was made to evidence given by former employees of the Lessee who worked in its Sydney depot and also to evidence given by the manager of an adjoining site: at [7].

1. His Honour also referred, without making any express findings, to evidence from a former employee of the Lessee (Ms Yasna Barrett), that the loss of customers' business had nothing to do with asserted access problems to the Greenacre site, but was due to the unavailability of trucks to carry freight for its customers: at [9]. (It is common ground that his Honour's reference to emails sent by Ms Barrett being exhibited to the appellant's affidavit was an error. The two emails were exhibited to Mr Biggs' affidavit. However, the error is not material, as the emails which were both dated 16 November 2011, were addressed to each of the appellant and Mr Biggs, among others).
2. His Honour referred to the Lessee's failure to provide the security for costs of $75,000 ordered on 1 October 2011, and observed that it appeared from the liquidator's report (attached to the notice to creditors of 5 November 2014), that the Lessee will be unable to pay any part of the rent the subject of the plaintiffs' claim or any costs: at [13].
3. At [17], his Honour referred to authorities for the proposition that the power under s 98 of the Civil Procedure Act to make costs orders against non-parties, is to be exercised only in exceptional circumstances, that is, outside the ordinary run of cases, and is a power to be exercised sparingly: FPM Constructions Pty Ltd v City of the Council of the Blue Mountains [2005] NSWCA 340 (FPM Constructions) at [210], [214]; May v Christodoulou [2011] NSWCA 75; 80 NSWLR 462 at [107] - [116]; and Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103].
4. At [18], his Honour accepted that whilst the categories of cases which may attract the exercise of the power to make costs orders against non-parties are not closed, they often satisfy some, if not a majority, of the criteria identified by Basten JA in FPM Constructions at [201], namely: (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.
5. His Honour continued at [19]: But it is clear in my view that costs orders against a non-party, whether director or solicitor, would be warranted where the unsuccessful party is a person or entity of straw and where the conduct of the litigation by the non-party in question is improper. Maintaining a claim or a defence on a knowingly false basis is improper conduct that warrants the exercise of the power. The same conduct justifies the making of a costs order on the indemnity basis.
6. His Honour concluded at [20]: I am satisfied that the defence and cross claim were propounded on a basis that Mr Heath knew to be false. It may be observed that he has not taken up the opportunity to appear to defend his conduct. Nor were any affidavits served in response to the affidavits served by the plaintiffs that "convincingly challenged the accuracy of the facts deposed to by Mr Heath and Mr Biggs". In my view, an order should be made that Mr Heath personally be liable for the plaintiffs' costs, and the costs for which he should be liable should be assessed on the indemnity basis. I also think that the plaintiffs should not be further delayed by having to have their costs assessed. Pursuant to s 98(4)(c) of the Civil Procedure Act, the Court may make an order to the effect that the party to whom costs are to be paid is to be entitled to a specified gross sum instead of assessed costs. This is a proper case for the exercise of that power.
7. In assessing a specified gross sum, his Honour found that "[b]ut for the delinquent conduct on the part of the [Lessee's] director, the [Lessee] should have consented to judgment": at [21]. Accordingly, he reduced the gross sum claimed by the respondents to exclude the costs that they would, in any event, have had to incur in order to obtain judgment against the Lessee, being the costs of preparing, filing and serving the statement of claim. His Honour also made a number of other adjustments and ultimately discounted the amount claimed to $187,173 as indicated above.
8. No separate order for costs was made by his Honour in relation to the respondents' notice of motion seeking a costs order against the appellant. It is apparent from the transcript that this amount took into account solicitors' costs and counsels' fees of the hearing on 17 November 2014.

Relevant legislation

1. Section 98(1) of the Civil Procedure Act, provides as follows: 98 Courts powers as to costs (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.
2. It is well-established that the terms of s 98 are sufficient to confer on the court a general power to make orders against non-parties: Knight v FP Special Assets Ltd [1992] HCA 28; 174 CLR 178 (Knight).
3. UCPR , r 7.1(2)(a) provides that a company: may commence and carry on proceedings in any court by a solicitor or by a director of the company. For the purposes of the Civil Procedure Act and the UCPR, "carry on proceedings" includes defend proceedings: Civil Procedure Act, s 19(2).
4. In the case of proceedings in the Supreme Court, sub-rule (2)(a) is qualified by sub-rule (3) which authorises a company to commence proceedings by a director only if the director is also a plaintiff in the proceedings.
5. UCPR r 7.2(1) requires that a person who commences or carries on proceedings in the Supreme Court or the District Court as a director of a company must file with the originating process, notice of appearance or defence, as the case may be, an affidavit as to his or her authority to act in that capacity, together with a copy of the instrument evidencing that authority. The affidavit made by the director must contain a statement to the effect, among other things, that "the director is aware that he or she may be liable to pay some or all of the costs of the proceedings": UCPR r 7.2(2)(a)(iv). As already indicated, the appellant made an affidavit in accordance with r 7.2 on 10 June 2014.

Issues on appeal

1. The amended notice of appeal raises two grounds of appeal which are connected. One is that his Honour erred in finding that the defence and cross-claim were propounded on a basis that Mr Heath knew to be false. The other is that his Honour erred in finding that the conduct of the appellant was improper conduct which warranted the exercise of the Court's power to make a non-party costs order against the appellant.

The impropriety finding

1. As the costs order involved the exercise of the s 98 costs discretion, to succeed on appeal the appellant needed to demonstrate error in the House v The King sense. Such error may be demonstrated if the primary judge acted on a wrong principle, made a material error of fact, or failed to have regard to material considerations or reached a conclusion which was, on the facts, "unreasonable or plainly unjust": House v The King [1936] HCA 40; 55 CLR 499 at 505; Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 at [45] (Heydon JA; Sheller JA and Studdert AJA agreeing).
2. In the present case, the appellant relies upon a material error of fact which is said to have vitiated his Honour's discretionary decision. The asserted error is his Honour's finding that the appellant knew that the Lessee's defence and cross-claim were propounded on a false basis.
3. The appellant accepted in this Court that the evidence of the respondents was overwhelmingly against the Lessee's case, which would have been dismissed at a trial. The appellant's essential contention is that it does not follow that the appellant was aware that the evidence that he gave in his affidavit was not true, or that the allegations in the Lessee's pleadings were not true. The appellant contended that this remained the position even after receipt of the respondents' reply affidavits.
4. The argument on appeal proceeded by reference to the appellant's knowledge of three key factual allegations which were the subject of affidavit evidence from Mr Biggs. The allegations were: 1. there was no sign of a proposed Bunnings Warehouse when Mr Biggs inspected the Greenacre site on 9 August 2011 (the Bunnings construction issue); 2. that the Greenacre site was constantly obstructed by Bunnings construction related trucks and other trucks when the Lessee was in occupation (the obstruction issue); and, 3. that the obstructions were the cause of truck delays resulting in freight movement delays in the conduct of the Lessee's business which in turn caused loss of customers and closure of the NSW operations of the Lessee (the loss of customers issue).
5. The respondents say that these allegations were all proved to be false by the respondents' reply affidavits. This makes it necessary at this point to outline in a little more detail the Lessee's evidence concerning these critical allegations.

The Lessee's affidavit evidence 1. Bunnings construction issue

1. The affidavit evidence of Mr Biggs was that he visited the Greenacre site with Mr Moroney of Colliers, the respondents' agent, on 9 August 2011. Mr Biggs said that, at that time, the area now occupied by the Bunnings store was a clear site and there was no signage on site to suggest that it was a future Bunnings store. Mr Biggs did not see any construction activity on the future Bunnings site, nor any construction vehicles or workmen on that site. Mr Biggs said that he raised with Mr Moroney the question of site restrictions on the large B-double vehicles accessing the property and the hours of operation. He said that Mr Moroney telephoned him the following day and informed him that he had spoken to the owner, Mr Sam Harb, who told him that to his knowledge there were no site restrictions on large vehicle access or hours of operation.
2. Mr Biggs requested Mr Bill Walker, the Lessee's NSW State Operations Manager, to also inspect the Greenacre site. Mr Biggs said that shortly after 11 August 2011, Mr Walker confirmed to Mr Biggs that he had inspected the site and recommended it. He also said that Mr Walker did not mention the Bunnings site, any actual or planned construction activity at the front of the Greenacre site, or that he had observed any construction activity or any congestion at the site. Mr Biggs said that, had he known that there were construction works planned for the Bunnings site, he would not have considered the Greenacre premises as a possible depot for the Lessee, and would not have recommended the premises to the appellant.
3. In his affidavit the appellant confirmed that he had asked Mr Biggs in July 2011 to find alternative premises for the Lessee in Sydney. The appellant, who resided in Melbourne, did not inspect the Greenacre site before the Lessee entered into the lease. He said that he relied upon the recommendation of Mr Biggs, who made no mention of the Bunnings site. The appellant's evidence was that Mr Biggs first mentioned the Bunnings site "sometime" in September 2011". The respondents did not contend that this was prior to the Lessee entering into the lease on 2 September 2011. (b) Obstruction issue
4. The affidavit evidence of Mr Biggs was that, within a week or two of relocating the Lessee's Sydney depot from Yennora to Greenacre, it became apparent that there was considerable congestion on the common access road of the Greenacre premises in the mornings, and sometimes during the day. He attributed that congestion to vehicles working on the Bunnings site. He said he became aware of these access difficulties from discussions with Mr Walker, Ms Barrett and other members of staff working at the Lessee's Sydney depot. He added that he also became aware of access problems as a result of conversations with customers and transport contractors. He referred to one conversation with Mr Matthew Barbuto of The Freight Consultants in September 2011 who complained about congestion difficulties at the Greenacre premises.
5. Mr Biggs stated that the access problems had a knock-on effect in causing significant delays with interstate and local distribution vehicles getting into and leaving the Greenacre premises in a timely manner. He stated that the access delays were often 30 to 60 minutes, and sometimes longer. He said that the Lessee's delivery in full and on time substantially deteriorated and service and lead times from the Sydney depot to other states were also adversely affected due to late departures.
6. Mr Biggs gave evidence of a meeting he attended on 16 November 2011, together with the appellant, and Mr Harb of the respondents, at Mr Harb's office at Greenacre. He said the access difficulties were raised by the appellant and Mr Harb responded that he was aware of the proposed construction activity for the Bunnings site, but did not tell the Lessee as he did not think that it would impact it.
7. The appellant did not give direct evidence of observing the obstruction and congestion problems at the Greenacre premises. He referred in his affidavit to the Lessee's documents which showed a reduction in the level of delivery of freight in full and on time for Lennons Transport Services during July and August 2011 of 96% to September, October and November 2011 of 82.5%, 76.5% and 78.5% respectively. Lennons Transport Services were the primary contractor into and out of the Greenacre premises, as shown on the Lessee's "DIFOT %" report. In addition, the appellant exhibited copies of daily worksheets for Lennons Transport Services, containing handwritten notes referring to problems with access to the common access road and the leased premises. On their face these documents supported the Lessee's allegations concerning access problems.
8. The appellant also gave evidence of the alleged 16 November 2011 meeting with Mr Harb. The appellant's account of the discussion at this alleged meeting was in substantially the same terms as that given by Mr Biggs. (c) Loss of customers issue
9. The appellant's affidavit evidence was that the impact of the Bunnings construction, and the reduced and interrupted access to the Greenacre premises was detrimental to the Lessee's customers because of its reduced DIFOT service levels. The appellant said that the Lessee lost 61 customers between September and December 2011. This was confirmed by the Lessee's customers' records. Further, the appellant said that the viability of the New South Wales operation was significantly affected by the loss of customers as the net profit of approximately $22,000 and $25,000 in July and August 2011 respectively was followed by an "exponentially increasing net loss for the months of September, October and November 2011".

Consideration of the knowing falsity of Lessee's allegations

1. As already mentioned, the appellant does not cavil with his Honour's findings at [6] and [7] (referred to at [21] above), that the respondents' reply affidavits "convincingly show" the contrary to the appellant's allegations on the Bunnings construction issue and the obstruction issue. Nor does the appellant cavil with his Honour's implicit rejection at [20] of the Lessee's case that the loss of customers was as a result of any access or congestion problems at the Greenacre premises.
2. The argument advanced by the appellant relied upon the important difference between the rejection of a person's evidence and a finding that a witness had deliberately given false evidence. The High Court said in Smith v NSW Bar Association at 286 that "something more than mere rejection of a person's evidence is necessary before there can be a positive finding that he or she deliberately lied in the giving of that evidence".
3. It was common ground that it is necessary to consider the state of the appellant's knowledge at two relevant time periods. One is when the appellant verified the Lessee's pleadings and made his affidavit in November 2013. The other is after receipt of the respondents' reply affidavits in March/April 2014. In this regard, it needs to be emphasised immediately that his Honour was not afforded the benefit of the detailed analysis of the evidence that was provided by the appellant in this Court, the appellant having chosen not to attend the hearing below.

Appellant's knowledge at November 2013

1. The respondents submitted that the finding at [6] relating to the Bunnings construction issue should be read as a finding of "knowing falsity". It is appropriate to proceed on this basis, there being no other express findings of knowing falsity of the Lessee's allegations, which would support the finding of impropriety at [20] (set out at [27] above). So much was accepted by counsel for the respondents.
2. As Smith v NSW Bar Association makes clear, it does not follow from the rejection of the Lessee's evidence on the three issues identified above that the appellant himself gave deliberately false evidence in his affidavit or otherwise knew of the falsity of the Lessee's allegations with respect to those matters, when verifying the amended pleadings in November 2013. Significantly, the appellant had not inspected the Greenacre premises before the Lessee took possession on 2 September 2011. As counsel for the respondents fairly accepted, it is possible that the appellant believed the Lessee's allegations concerning the Bunnings construction issue, having spoken to and seen the affidavit of Mr Biggs.
3. The same may be said in relation to the obstruction issue. The Lessee's evidence showed a significant decline in its service levels after relocating its Sydney depot to the Greenacre premises in September 2011. What was in issue was the cause of that decline. The Lennons Transport Services daily worksheets, which were exhibited to the appellant's affidavit, contained frequent references to access problems, congestion and delays at the Greenacre premises over the months of September to November 2011.
4. Further and importantly, counsel for the respondents ultimately accepted in oral argument that the evidence did not establish that the appellant gave knowingly false evidence in his affidavit of November 2011 relating to either the Bunnings construction issue or the obstruction issue. In this Court, the respondents' contention that the appellant knew of the falsity of these two allegations, was limited to the period after the appellant received the respondents' reply affidavits in March and April 2014. It follows that his Honour's finding at [6], that the appellant's affidavit was false on the Bunnings construction issue, must be set aside.
5. As to the loss of customers issue, the respondents maintained the contention they advanced before the primary judge; that the appellant's affidavit of November 2013 was knowingly false. The respondents pointed to the communications sent by the Lessee to customers and staff on 22 November 2011 (which were signed by the appellant). These communications stated that, following a review of its operations, the Lessee was restructuring its business and closing its Sydney, Brisbane and Perth depots because those depots were not financially viable. The respondents argued that it should be inferred, in relation to the Sydney depot, that the appellant knew that the Lessee's financial problems were unrelated to the obstruction issue.
6. There are difficulties with this submission. The first is that his Honour did not make any specific findings as to the cause of the closure of the Greenacre premises.
7. The second difficulty is that the subject of the Lessee's announcement to its customers and staff on 22 November 2011 was the restructuring of the Lessee's business nationally following a review conducted after the recent acquisition of the business from Total Care Transport. It is unsurprising that such announcement did not detail the reasons for the lack of financial viability of each of the depots identified for closure.
8. The evidence is insufficient, in my view, to enable an inference to be drawn that the appellant knew that the loss of customers at the Greenacre premises between September and November 2011 was unrelated to the obstruction issue. Such a serious finding of knowing falsity should not be made in the absence of clear and compelling evidence.
9. It follows, as counsel for the respondents seemed to accept, that his Honour's findings at [6] and [20] involved a material error of fact as to the appellant's knowledge of the falsity of the Lessee's allegations, at least at the time the appellant made his affidavit. This error vitiated his Honour's discretionary decision as to costs, since the gross sum costs assessed by his Honour related to the period from the time of service of the statement of claim in June 2012.

Appellant's knowledge after March/April 2014

1. The respondents contended that after receipt of the respondents' reply affidavits in March/April 2014, the appellant should have realised the falsity of the Lessee's allegations, or that the appellant did in fact realise that falsity.
2. The contention that the appellant should have realised the falsity of the Lessee's allegations, raises a different case from that advanced by the respondents before his Honour which was one of "knowing falsity".
3. Dealing first with the knowing falsity case advanced before his Honour, it is often the case that parties serve affidavits which give starkly conflicting evidence. However, it does not follow from the ultimate rejection of one party's evidence, that either the solicitor for the party, or the person giving instructions on behalf of the party, knew of the falsity of evidence which was rejected.
4. In this case, the appellant, as the Lessee's CEO and CFO located in Melbourne, was undoubtedly reliant on what he had been told by others such as Mr Biggs and Mr Walker, concerning the Greenacre premises both prior to and after entering into the lease. The respondents point to the photographic evidence in their reply affidavits as casting significant doubt on the evidence of Mr Biggs that he did not observe any construction activity on the Bunnings site when he inspected the Greenacre premises on 9 August 2011, two days prior to the date. That may be accepted. However, it is possible that Mr Biggs was either obtuse or confused when he inspected the Greenacre site. It was a large site and he was not familiar with it. Aside from the photographic evidence, there was conflicting evidence given by Mr Biggs, and Mr Collier, the respondents' leasing agent, concerning an alleged express representation about unimpeded access to the Greenacre premises.
5. As to the obstruction issue, the Lessee's documents showed the loss of customers and the declining profitability of the Greenacre premises between September and November 2011. The critical issue is whether the appellant knew that this was not as a result of the obstruction issue. It was not suggested that the appellant was ever informed that Mr Biggs had recanted his evidence.
6. Nor was it submitted that the appellant realised from the respondents' reply affidavits that the handwritten notes on the Lennons Transport Services daily worksheets concerning access and congestion problems, were not genuine. Counsel for the respondents put the submission no higher than that the reply affidavits should have indicated to the appellant that there had been some "doctoring" of the records held by the Lessee. That submission was made in the absence of evidence which directly challenged the veracity of the handwritten notes on those records referring to access and congestion problems. I do not consider that a nil response by Lennons Transport Service to a subpoena calling for production of daily worksheets containing details of access and congestion problems, or the recollections of former, potentially disaffected, employees of the Lessee establishes that the handwritten notes on the Lessee's records had been concocted, let alone that the appellant should have drawn that conclusion.
7. As to the loss of customers issue, the respondents pointed to the evidence given by an employee of the Lessee (Ms Barrett) that the delay in moving goods was due to the non-payment of hauliers who refused to move the freight because they remained unpaid by the Lessee. The respondents contended that the appellant, as the Lessee's CEO and CFO, would have been aware that this was the true reason for the loss of business at the Sydney depot between September and November 2011.
8. The difficulty with this argument is that the evidence given by Ms Barrett concerning the reason for the delay in moving goods at the Greenacre premises in November 2014, is not necessarily inconsistent with the appellant believing that there were also access problems at the Greenacre premises commencing in September 2104, as asserted by Mr Biggs and recorded in the Lennons Transport Services daily worksheets.
9. Importantly, it was not submitted that the falsity of Mr Biggs' affidavit was so obvious from the respondents' reply affidavits, that an inference should be drawn that the Lessee's solicitors also behaved inappropriately by remaining on the record for two months after the service of the respondents' reply affidavits commencing in March 2014. It can be reasonably assumed that those solicitors, consistently with their obligations as officers of the court, kept under review whether or not there was a proper basis for the Lessee maintaining the allegations in the defence and cross-claim. In addition, s 56(4) of the Civil Procedure Act required that the Lessee's solicitors must not, by their conduct, cause the Lessee, as a party to civil proceedings, to be in breach of the duty identified in s 56(3), that is, to assist the Court to facilitate the just, quick and cheap resolution of the real issues in the proceedings: see s 56(1).
10. If it was so obvious from the respondents' reply affidavits that the Lessee's allegations were false, it could be expected that those solicitors would have given advice to that effect to the Lessee by no later than the directions hearing on 30 April 2014. It could also be expected that if such advice had been given but not accepted, those solicitors would have refused to continue to act if the Lessee did not give instructions to consent to judgment by that date. That this had not occurred by 30 April 2014, and that the Lessee's solicitors continued to act for a little over a further two weeks after that date is of some significance.
11. One further matter should be mentioned. It concerns the disputed meeting between the appellant, Mr Biggs, and Mr Harb at Greenacre on 16 November 2011. The primary judge referred to the conflict in the evidence of the appellant and Mr Harb without making any findings. A rejection of the appellant's evidence concerning this disputed meeting may have led to a finding that the appellant lied on another occasion, such as when verifying the defence and cross-claim: cf, Smith v NSW Bar Association at 268. That, however, was not the way in which the respondents put their case, either before the primary judge or in this Court. Nor did the respondents urge this Court to make any findings regarding the disputed meeting or the letter dated 25 November 2011 which the appellant said he sent to Mr Harb confirming the discussions at that alleged meeting.
12. In my view, his Honour's finding at [20] of knowing falsity of the Lessee's allegations cannot be supported and should be set aside.

Unreasonably maintaining the Lessee's defence and cross claim after March/April 2014

1. Ultimately in oral argument, the respondents fell back on their alternative contention that the appellant should have realised that the respondents' reply evidence was virtually incontrovertible, and can be taken to be aware that the Lessee had not filed evidence to contradict it. The argument ran that the appellant's conduct in managing the proceedings on behalf of the Lessee after receipt of the respondents' reply evidence was so unreasonable that it should attract a personal costs order.
2. Notably, the respondents did not file a notice of contention seeking to uphold his Honour's decision on this ground. This would have been futile since this argument accepted that the costs order made by his Honour could not be upheld in respect of the appellant's conduct in propounding and maintaining the Lessee's defence and cross claim prior to March/April 2014. This argument is addressed below in the context of this Court re-exercising the costs discretion.
3. In summary, the appellant has shown that his Honour's costs discretion miscarried because of a material error of fact in finding at [20], that the appellant knew of the falsity of the Lessee's allegations in the defence and cross-claim. The same error affected his Honour's finding at [6], that the appellant knew of the falsity of the Lessee's allegations concerning the Bunnings construction issue at the time he gave his affidavit in November 2013. That error is sufficient to set aside his Honour's costs decision and necessitate the re-exercise of the costs discretion.

Re-exercise of the costs discretion

1. Where the exercise of a discretionary power has miscarried, it may be appropriate to remit the proceedings to the primary judge for re-exercise of the power according to law. In the present case, neither party requested that the proceedings be remitted. The appellant did not seek to rely upon any evidence should this Court re-exercise the costs discretion. Nor did the respondents contend that his Honour declined or failed to make any findings of fact sought by the respondents. In these circumstances, this Court should reconsider the respondents' motion for a non-party costs order against the appellant under s 98(1) of the Civil Procedure Act.
2. In May v Christodoulou at [111], Sackville AJA pointed out that the criteria identified by Basten JA in FPM Constructions (at [210]) (set out at [26] above), are not intended to be and cannot be exhaustive and that other factors may bear on the exercise of the discretionary power in a particular case. What needs to be emphasised is that the exceptional jurisdiction to make a non-party costs order is only to be exercised where, in the circumstances of the case, the interests of justice require that such an order be made: see Yu v Cao [2015] NSWCA 276 at [137] and [139]: "Exceptional" in the context of the exercise of the non-party costs jurisdiction 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.
3. There is a further consideration. Care must be taken not to apply the criteria identified by Basten JA in FPM Constructions mechanically. This is because as Basten JA observed (at [214]), it will often be the case that a non-party, be it a company officer or solicitor, will be active in the conduct of litigation and obtain some direct or indirect financial benefit from its success. His Honour continued (at [214]): Careful attention is required as 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.
4. In the present case, there is no issue as to the role played by the appellant in the proceedings. The appellant caused the Lessee to defend the proceedings and propound a cross-claim seeking substantial damages against the respondents. When the Lessee's solicitors ceased to act in mid-May 2014, the appellant took over the conduct of the appellant's defence and cross-claim which he continued to assert in the face of the respondents' reply evidence and the absence of evidence from the Lessee to contradict it.
5. The appellant continued to actively manage the proceedings for the Lessee at least up until 29 September 2014, when the directors of the Lessee appointed a voluntary administrator. The appellant attended the directions hearings on 30 May 2014 and on 13 June 2014. On the later date, he sought an order for a mediation, which took place on 8 July 2014 with the appellant representing the Lessee. The mediation was unsuccessful. It was followed by the respondents' application filed 13 August 2014 seeking security for costs and dismissal of the Lessee's cross-claim, which was listed for hearing on 30 September 2014. The appellant indicated by email on 29 September 2014, that he would not be appearing the next day: [2015] NSWSC 1353 at [14]. Had the Lessee consented to judgment by 30 May 2014, the respondents would have avoided the further costs which they incurred up to and including the final hearing on 17 November 2014.
6. The appellant was a director and secretary of the Lessee and its largest unsecured creditor. It is common ground that the appellant had an indirect interest as a shareholder in the Lessee. The ASIC search reveals that Heathco Pty Limited held a 39 percent shareholding in the Lessee. The appellant also had an interest in the outcome or subject matter of the proceedings in the sense that if the cross-claim were successful, he stood to gain because it may result in a return to him in his capacity as the Lessee's largest creditor.
7. It can also be inferred that from at least 30 May 2014 the Lessee, if not impecunious, was facing significant financial difficulties in meeting its own costs of the litigation, let alone those of the respondents' costs, should the Lessee be unsuccessful. This inference arises from the following matters. First, the administrator's report to creditors on 9 October 2014 noted that the Lessee had lost a significant part of its business during 2013, and that the assets of the Lessee had been sold to a related entity on 1 December 2013. Secondly, having told the Court on 30 May 2014 that the Lessee was waiting on funds to arrive within the next two to three weeks to decide whether or not to defend the case, the appellant did not subsequently suggest that any funding was ever forthcoming for the Lessee. As Robb J noted in his reasons when dealing with the application for security for costs on 1 October 2014, the appellant "has not provided any specific confirmation to the court, or to the plaintiff, as to whether it has funds to contest the hearing": [2014] NSWSC 1353 at [46]. Thirdly, as Robb J also noted (at [49]) the appellant "did not deny that the [Lessee] was impecunious; but instead he asserted that the [respondents] were responsible for the [Lessee's] financial difficulties." As already noted the Lessee failed to provide security for costs as ordered on 1 October 2014.
8. The absence of evidence from the appellant before his Honour explaining his decision to maintain the Lessee's defence and cross-claim after receipt of the respondents' reply affidavits is significant. This is because it is necessary to evaluate the evidence "according to the proof which is in the power of one side to have produced, and in the power of the other to have contradicted": Blatch v Archer (1774) 1 Cowp 53 at 65; 98 ER 969 at 970 (Lord Mansfield).
9. In my view, the appellant as a director of the Lessee had no reasonable prospect of defending the proceedings or succeeding on the cross-claim in the face of the respondents' reply affidavits, which the Lessee had not sought to contradict. Further, the appellant acted irresponsibly as a director of the Lessee in not accepting the inevitable by consenting to judgment no later than 30 May 2014. Instead, he allowed the risk of a likely costs order against the Lessee to continue unabated, with the consequence that the quantum of the Lessee's potential liability increased, as did the likelihood that costs would be awarded against it on an indemnity basis. The inevitable occurred when the liquidator of the Lessee consented to an order for costs against the Lessee on an indemnity basis on 17 November 2014.
10. Making allowance for the appellant being a non-lawyer, and affording him a reasonable period in which to consider the respondents' reply evidence, make further enquiries and seek legal advice, in my view, the appellant acting reasonably should have been in a position to assess and conclude that the defence and cross claim had no reasonable prospects by no later than the directions hearing on 30 May 2014. The appellant's conduct in maintaining the proceedings after that date was so unreasonable that he should be required to pay the respondents costs from that date to the final hearing on 17 November 2014.
11. Acting unreasonably by prolonging litigation with no reasonable prospects also warrants an indemnity costs order: Colgate-Palmolive Pty Ltd v Cussons (1993) 46 FCR 225 at 233-234. No argument was advanced by the appellant to the contrary.
12. Nor was any argument advanced by the appellant that the appointment of the voluntary administrator on 29 September 2014, or the liquidator on 31 October 2014, in any way affected the appellant's responsibility for the respondents' costs incurred after 29 September 2014. In any event, if the appellant had acted reasonably and caused the Lessee to consent to judgment by no later than 30 May 2014, the respondents would not have incurred any further costs after that date.
13. The respondents submitted that their costs incurred prior to the date when it became unreasonable for the appellant to maintain the proceedings, should be included in any costs order against the appellant (excluding the costs of the preparation of the filing and service of the original statement of claim). They characterised the appellant's conduct in maintaining the Lessee's defence and cross claim after the Lessee's solicitors ceased to act in mid-May 2014, as an "adoption" of those allegations with the consequence that the costs order should travel back in time and include the earlier costs incurred by the respondents in responding to the Lessee's allegations. However, contrary to the submission by counsel for the respondents, there is no analogy between the present case and the principles of ratification.
14. The focus in the present case is on the unreasonable conduct of the non-party in maintaining the proceedings which had no prospect of success. If such a finding is made, that conduct cannot be said to be the cause of the successful party incurring costs at an earlier time before it was unreasonable for the non-party to maintain the proceedings.
15. The adoption argument can be tested another way. If the Lessee, acting reasonably, should have consented to judgment by no later than 30 May 2011, and had done so, the circumstances would not have attracted a non-party costs order against the appellant. Yet, the respondents' adoption argument, if accepted, would have the unusual consequence that a non-party costs order based on the appellant's unreasonable conduct from 30 May 2011, would travel back in time and put the respondents in a better position as against the appellant, than if they had obtained an earlier judgment against the Lessee. There is no warrant for that outcome. The non-party costs order should only relate to the period of time during which the non-party is found to have acted, relevantly, unreasonably in maintaining the Lessee's defence and cross-claim. Here, in my view, that date commences on 30 May 2014.
16. The respondents did not press their claim for a gross sum costs order, if this Court re-exercised the costs discretion. In the circumstances, the assessment of quantum should be left to the agreement of the parties, or if they cannot agree, the usual costs assessment process.

Leave to appeal

1. The respondents did not oppose the grant of leave to appeal, if required, should the appellant demonstrate error in the House v The King sense. For the reasons given, error has been established because his Honour made a material error of fact which vitiated the exercise of the costs discretion. There would be an injustice for the appellant if this error was left uncorrected. Accordingly, there should, to the extent necessary, be a grant of leave to appeal.

Costs in this Court

1. The appellant has succeeded on the appeal, but has not had complete success in avoiding liability upon the re-exercise of the s 98 costs discretion.
2. The terms of s 98(1) of the Civil Procedure Act are set out at [31] above. UCPR r 42.1 qualifies s 98 by providing a general rule that costs follow the event, unless it appears to the Court that some other order should be made as to the whole or any part of the costs.
3. It has been said that underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in the way that is fair in regard to what the Court considers to be the responsibility of each party for the incurring of costs: Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121] (Hodgson JA, Mason P agreeing).
4. In Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72 at [69], McHugh J referred to the traditional exceptions to the usual order as to costs as focussing on disentitling conduct of the successful party. His Honour explained that, "misconduct" in this context means misconduct relating to the litigation, or the circumstances leading up to the litigation. He gave a number of examples where the Court may properly depart from the usual order as to costs. One example given by McHugh J is where the successful party succeeds on a point not argued before a lower court. The present case is in point. Here, the appellant did not appear before the primary judge to contest his liability for costs as a non-party.
5. In my view, each party should bear their own costs of the leave application and the appeal. In reaching this view, I have taken into account that the appellant's success on appeal was not complete: on the re-exercise of the s 98 costs discretion, the appellant has been found liable to pay the respondents' costs of the proceedings but for a lesser period of time. In addition, the appellant has only succeeded on a point not argued below, having failed to appear to contest the respondents' motion seeking a personal costs order against him.

Orders

1. For the reasons given, I would propose the following orders: 1. Extend the time for filing of the summons for leave to appeal to 10 February 2016 and otherwise dispense with service of the summons; 2. To the extent necessary, grant leave to appeal; 3. Appeal allowed; 4. Set aside order 6 of the primary judge made on 17 November 2014 and in lieu thereof: 5. Order that the appellant, Nicholas Heath, pay the plaintiffs' costs of the proceedings below from 30 May 2014 on an indemnity basis; 6. No order as to costs of the appeal with the intent that each party should bear their own costs of the leave application and the appeal.
2. LEEMING JA: I agree with the orders proposed by Gleeson JA, and, subject to what follows, with his Honour's reasons.
3. First, I agree with what Gleeson JA has said as to the question of leave. In circumstances where both parties proceeded, until shortly before the hearing, on the basis that Mr Heath enjoyed an appeal as of right, this is a case where there should if necessary be a grant of leave, and there is no occasion for this Court to determine the question whether leave is required.
4. Secondly, no submissions were advanced by the respondents that Mr Heath should not be permitted to advance submissions which were not advanced before the primary judge. Instead, the respondents sought to answer Mr Heath's criticisms as to the findings made by the primary judge on their merits. Given the seriousness of the findings adverse to Mr Heath and the approach taken by the respondents, the appropriate course is not to curtail the submissions advanced by Mr Heath for the first time on appeal. Nothing in these reasons should be taken to endorse the approach adopted by Mr Heath, which was to choose to not appear before the primary judge and seek to raise on appeal a series of submissions which had never been put to the primary judge. Nor should the course adopted in this appeal be regarded as standing in the way of a more circumscribed approach in some future case.
5. Thirdly, I agree for the reasons given by Gleeson JA that the finding that Mr Heath had knowingly maintained and propounded a false claim cannot stand. That conclusion turns upon the much more detailed submissions received by this Court, which were not made to the primary judge.
6. Finally, I agree with Gleeson JA, for the reasons given by him that it was unreasonable for Mr Heath to maintain his company's defence and cross-claim after the reply evidence had been served. I agree with the re-exercise of discretion as to costs proposed by Gleeson JA, and with the orders he proposes as to the costs of this appeal.

Amendments 09 March 2016 - [29], [36], [38], [90] 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: 09 March 2016