MONEY TREE MGNT SVS P/L v THE DEP COMM OF TAXATION

DOYLE CJ: Money Tree Management Services Pty Ltd ("Money Tree") issued a summons claiming an order setting aside a statutory demand for the payment of a debt representing unpaid income tax, penalty and penalty interest. In support of its summons Money Tree filed an affidavit sworn by Ms Mathew, a director of Money Tree, which set out at some length constitutional arguments upon the basis of which the order was sought. Very broadly, the argument for Money Tree was that both the Income Tax Assessment Act and the appointment of the Deputy Commissioner of Taxation ("Commissioner") were invalid.

Those arguments were rejected by me, and the application to set aside the statutory demand dismissed. My reasons for doing so are in my earlier decision: Money Tree Management Services Pty Ltd v The Deputy Commissioner of Taxation (No 1) [2000] SASC 54.

At the time of dismissing Money Tree's summons I ordered that Money Tree pay to the Commissioner his costs of the summons on an indemnity basis pursuant to rule 101.07(6)(e). This order was made on the basis that it should have been clear to Money Tree, or at least to its advisers, that the submissions put were manifestly untenable and that there was no prospect of the proceedings being successful.

The Commissioner has applied to join the solicitor for Money Tree, Mr Peter Kerin, and the Institute of Taxation Research Pty Ltd ("ITR") as parties to these proceedings, and asks that costs orders be made against them. The Commissioner asks that those costs orders also be on an indemnity basis

The power of the Supreme Court to award costs is a broad one. The decision in Vestris v Cashman (1998) 72 SASR 449 demonstrates that it includes the power to award costs against non-parties. Nevertheless, it is a power that is to be exercised with caution and restraint. As a general rule, only the parties to the litigation will be made responsible for the costs of that litigation and the circumstances in which it will be just to order costs against a non-party will be rare and exceptional: Vestris at 467. I shall deal with the applications as they relate to ITR and to Mr Kerin separately.

ITR is an organisation that promotes arguments of the type advanced by Money Tree in support of its summons. It appears to be the practice of ITR to provide those arguments to taxpayers in exchange for a fee. It produces and distributes circular newsletters and other promotional material with titles such as "Is the ATO Illegal?" and "Taxation is now Optional". Substantially the same arguments as appear in that promotional material were advanced before me on behalf of Money Tree. Similar arguments have been put to courts in various contexts on a number of occasions: see for example Helljay Investments Pty Ltd v Deputy Commissioner of Taxation [1999] HCA 56; (1999) 166 ALR 302; (1999) 74 ALJR 68; Joosse v Australian Securities & Investment Commission [1998] HCA 77; (1998) 159 ALR 260; (1998) 73 ALJR 232; Professional Nominees Pty Ltd v Walsh (1998) UnRep Qld CA 5591 and Deputy Commissioner of Taxation v Levick [1999] FCA 1580; (1999) 168 ALR 383. Those arguments have been rejected on each occasion, being variously described as "groundless", "manifestly untenable", "confused", "nonsense" and "an abuse of process".

Ms Mathew, a director of Money Tree, gave evidence before me. Ms Mathew entered into a "Consultancy and Research Agreement" with ITR. That agreement provides that ITR will provide research to Money Tree, and to any adviser nominated by it, in consideration of fees to be paid by Money Tree to ITR. Money Tree has paid ITR the sum of $6,000. Ms Mathew said in cross-examination that the $6,000 was a flat fee to be paid to ITR in lieu of a 15% "success fee". It is not clear from the terms of the agreement whether this is in fact so. It may be that Money Tree would have been obliged to pay to ITR 15% of any tax saved had its application been successful. For reasons that will become clear, I do not consider that it is necessary to determine the meaning of the agreement.

It was ITR that recommended that Ms Mathew instruct Mr Kerin to act as solicitor for Money Tree. It was also ITR that paid Mr Kerin's fees.

In addition to the oral evidence given by Ms Mathew and Mr Kerin, a number of affidavits were filed and admitted as evidence. Documents exhibited to those affidavits show that ITR wrote to the Australian Taxation Office ("ATO") on behalf of Ms Mathew on several occasions describing itself as her "authorised agent". A letter sent to the ATO by Ms Mathew stated that she had appointed ITR as her "consultant" for taxation matters. Again, it is not necessary to determine the precise nature of this relationship. I include this information only to demonstrate that ITR has had a close relationship with Money Tree in connection with the conduct of these proceedings.

It is plain that ITR is closely involved in the action in this Court, and that Ms Mathew, and indeed Mr Kerin, have acted according to advice and information given to them by ITR. Not surprisingly Ms Mathew conceded in cross examination that the arguments put forward in support of Money Tree's summons were not her own, but had been provided to her by ITR.

In those circumstances, the Commissioner submitted that a costs order should be made against ITR on the basis that it was significantly involved in the matter and was to be regarded as the 'real litigant', or alternatively on the basis that it had provided legal arguments to Money Tree and as such stood in the same position as a solicitor, advising and assisting Money Tree. In advancing both arguments, the Commissioner emphasised the potential benefit it said ITR stood to obtain in the form of a 15% success fee.

It is convenient to deal with each of those arguments in turn.

In Knight v FP Special Assets Ltd (1992) 174 CLR 178 the High Court held that costs may be awarded against those persons who are the 'real parties' to the litigation. That situation has most often arisen in the context of a receiver or other creditor standing behind an insolvent company. Mr Slattery, counsel for the Commissioner, sought to argue that the present case was analogous to cases like Knight and that ITR should be seen as the 'real litigant' in this dispute. I do not agree with that submission. Money Tree is not a merely nominal litigant. While it is arguable that ITR stood to receive a direct financial benefit if the litigation was successful, the primary benefit would have been realised by Money Tree. In those circumstances I do not consider that ITR is properly described as the 'real litigant'.

The Commissioner also submitted that costs could be awarded against any party who professes expertise and formally advises a party in relation to litigation. That is, any person who could be seen to be acting in the role of a solicitor. Mr Slattery argued that it is the giving of advice or assistance in relation to a case which is spurious and which has no chance of success which makes the adviser liable to a costs order, not the status of the adviser as a solicitor or counsel. I likewise reject this submission as a basis for the costs order being made against ITR. If Mr Slattery's argument on this point were to be accepted it would encompass the case of a solicitor acting on a contingency fee basis where the client has no understanding at all of the prospects of success and upon whom the client is completely dependent for advice as to whether the matter should proceed.

Nevertheless I am satisfied that the two categories identified by counsel for the Commissioner do not define the outer limits of the court's power to order costs against non-parties but are merely illustrative of circumstances in which it has previously been thought appropriate to do so. Those categories are neither rigid nor closed: Symphony Group plc v Hodgson [1994] QB 179 at 192. The discretion may also properly be exercised where there has been a sufficiently serious abuse of the court's process to justify such an order: Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 202 Dawson J:

"The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court." [my emphasis]

In my view there has been an abuse of process by ITR in encouraging the commencement and continuation of this action when it should have been clear that the prospects of success, in light of cases such as Helljay and Joosse, were non-existent: see Professional Nominees Pty Ltd v Walsh (1998) UnRep Qld CA 5591 at [2] and [12] and Deputy Commissioner of Taxation v Levick [1999] FCA 1580; (1999) 168 ALR 383 at 390:

"[W]here the case advanced is so hopeless that it can have no real chance of success there is, in the broad sense an abuse of process and this will be so because it can then readily be inferred that the case was not put forward for the purposes of vindicating any right or making out any defence, but for some other ulterior purpose ..."

In the present case, I am satisfied that the purpose behind the proceedings must have been simply to delay the Commissioner for as long as possible, by pursuing arguments that were known to be spurious and that were doomed to fail.

The abuse of process in this case is compounded by the unbalanced, and at times plainly inaccurate, manner in which ITR represented the legal position to its 'clients' in the promotional material distributed by them.

In so deciding I accept that an order for costs against a non-party will not be justified on the grounds only that the proceedings were doomed to fail. The Court must be satisfied that in the circumstances there has been an abuse of process. In reaching the conclusion that the ITR's conduct does amount to an abuse of process I adopt the observation of the Court of Appeal of England in Ridehalgh v Horsefield [1994] Ch 205 at 234 that while:

"[i]t is not entirely easy to distinguish by definition between the hopeless case and the case which amounts to an abuse of the process, ... in practice it is not hard to say which is which ..."

As I have said, it is unclear whether ITR has a direct financial interest in the success of this litigation. The terms of the agreement between Money Tree and ITR do not make it clear whether a 15% success fee is also to be paid to ITR. This uncertainty is of no consequence. It is clear that the non-party against whom costs are sought need not have a financial interest in the outcome of the proceedings: Diamond v Baulkham Hills Shire Council [1999] NSWCA 277 at [7].

The cases in this area consistently emphasise the need to warn the non-party that an order for costs will be sought against it. Such warning provides the non-party with the opportunity to be joined as a party and thus participate directly in the proceedings or, alternatively, to cause the proceedings to be discontinued or otherwise resolved. The non-party against whom the order is sought must not, to borrow the words of Olsson J in Vestris at 458, "be lulled into a false sense of security and ambushed, when it is too late for it to reflect".

An affidavit sworn by the solicitor for the Commissioner establishes that written notice was given to the ITR of the Commissioner's intention to seek an order for costs against it, by letter dated 8 November 1999. It appears from affidavits of service dated 9 November 1999, 7 December 1999 and 7 January 2000 that ITR was formally served with (among other things) a subpoena issued on 9 November 1999 requiring ITR to attend at the hearing of Money Tree's application and to produce certain documents relevant to the proceedings; with the Commissioner's application of 6 December 1999 seeking costs against ITR and with the Commissioner's submissions on costs filed on 14 December 1999.

It also appears from affidavits tendered at the hearing that ITR was advised by letter dated 15 February 2000 that the application for costs against ITR was to be heard before me on 1 March 2000 and again by facsimile on the evening of 1 March 2000 that the hearing would continue on 2 March 2000.

ITR did not appear before me. Mr Fitzgibbon appeared on behalf of Money Tree, Ms Mathew and Mr Kerin but did not have instructions to appear on behalf of ITR. Nevertheless, he indicated that he had in his a possession a letter from ITR stating that it did not propose to attend because no conduct money had been paid in relation to the subpoena. I did not see that letter. I am, however, prepared to infer from Mr Fitzgibbon's remarks that ITR was aware of the proceedings but declined to attend on the basis that no conduct money had been forthcoming.

I am satisfied that ITR was given adequate notice of the Commissioner's intention to seek orders that it be joined as a party to these proceedings and that it pay the Commissioner's costs on an indemnity basis.

In my view ITR has a real and continuing connection with this litigation and has engaged in conduct amounting to an abuse of the Court's process. In those circumstances, and given that ITR was adequately forewarned by the Commissioner that he intended to apply for costs against it, I consider that it is appropriate to make the orders sought against ITR.

I turn now to the orders sought against Mr Kerin. Mr Kerin is the instructing solicitor for Money Tree. It was on ITR's recommendation that Ms Mathew instructed him to act on behalf of the company. The precise relationship between Mr Kerin and ITR is not altogether clear, although it is appears that his role in this litigation has been a largely passive one. The constitutional arguments ultimately contained in Ms Mathew's affidavit were provided to Mr Kerin by ITR in electronic format from which he produced Ms Mathew's affidavit. Aside from minor grammatical and formatting changes, Mr Kerin conceded that he did not alter or contribute to those arguments in any way. There is nothing inherently objectionable in that process provided that Mr Kerin turned his mind to the arguments that were being advanced in that affidavit in order to be in a position to advise his client.

It became clear from Mr Kerin's own evidence that he did not fully understand the arguments contained in Ms Mathew's affidavit. Of itself, this does not call for criticism of Mr Kerin. It is easy to envisage situations in which the finer points of an argument to be advanced by counsel will not be fully appreciated by the instructing solicitor. The special expertise of counsel is, in many cases, the primary reason for their being retained. Were it not for an additional matter to which I will refer shortly, I would not have faulted Mr Kerin for not appreciating that the argument had no prospects of success.

It is clear, however, that Mr Kerin did not adequately turn his mind, if indeed he did at all, to the relevant law and facts: De Sousa v Minister for Immigration, Local Government and Ethnic Affairs [1993] FCA 146; (1993) 41 FCR 544; White Industries (Qld) Pty Ltd v Flower & Hart (a firm) [1998] FCA 806; (1998) 156 ALR 169 at 239. He conceded that he had not read the relevant authorities, apart from having 'skim read' the decision in Joosse and possibly part of Helljay. This is despite at least some of those authorities having been drawn to his attention in correspondence from the ATO. Indeed on at least one occasion the ATO provided Mr Kerin with a copy of the case to which the ATO drew his attention. Even a cursory reading of those cases would have disclosed that the arguments had been variously described as "spurious", "manifestly untenable", "nonsense" and "an abuse of process" and that the arguments provided to Ms Mathew by ITR were utterly hopeless. They were not lengthy cases and it would not have required much time, effort or skill for Mr Kerin to have read and understood them.

In those circumstances I find that Mr Kerin should have realised that the prospects of success before this court were virtually non-existent and that the chances of success even on appeal were minuscule. Indeed Mr Kerin conceded that he knew the case would fail.

That knowledge meant that Mr Kerin had a duty to advise Ms Mathew that her chances of succeeding were extremely poor and that she would be exposing Money Tree to the risk of orders for substantial costs by pursuing the application. I consider that a failure by Mr Kerin to provide such advice would constitute a serious dereliction of duty on his part and could amount to serious misconduct such that an order for costs against him personally might be justified: White Industries v Flower & Hart. I do not say that such an order would necessarily be justified, because care must be exercised in the use of such a power against a party's solicitor. The courts must take care that the threat of a costs order against a solicitor is not used as a tactic in litigation: Levick at 389 and Re Bendeich (No 2) [1994] FCA 1504; (1994) 53 FCR 422 at 426-427. I do not imply that that has occurred here.

However, although Ms Mathew gave evidence that suggested that she was not provided with any advice of this nature from Mr Kerin, she declined to waive legal professional privilege with the result that Mr Kerin himself was unable to give evidence on this topic. Nor was Ms Mathew's evidence on this point entirely clear. It would not be fair to award costs against Mr Kerin when Ms Mathew's refusal to waive privilege meant that he could not rebut her evidence. In such circumstances Mr Kerin must be given the benefit of the doubt: Orchard v South Eastern Electricity Board [1986] 1 QB 565 at 572 and Ridehalgh v Horsefield [1994] Ch 205 at 237.

I therefore dismiss the application for costs so far as it relates to Mr Kerin. I likewise refuse to order that he be joined as a party.

In reaching the decision that it is appropriate to award costs against ITR I am conscious that there was no evidence to suggest that Money Tree would be unable to satisfy the order for costs made against it. This raises the question of whether it is appropriate to make an order for costs against a non-party in circumstances where the party to the litigation is not shown to be impecunious. This in turn raises the question of the purpose for which the court is empowered to order costs against a non-party.

If the jurisdiction to award costs against a non-party is purely compensatory then there would appear to be little basis for such an order in this case. In circumstances where there is no suggestion that costs cannot be met by the party to the litigation, the primary reason for such an order is to punish the non-party for conduct deemed inappropriate by the Court.

I consider that an order may, in appropriate circumstances, be made against a non-party for reasons which are punitive in nature. In reaching this conclusion I am mindful of statements in some of the cases that the jurisdiction is primarily compensatory rather than punitive or disciplinary: see for example White Industries v Flower & Hart at 229:

"The primary object of the jurisdiction is to reimburse to a party to proceedings costs which that party has incurred because of the default of the practitioner, that is to say it is a jurisdiction which is compensatory rather than punitive or disciplinary. ... The judgments in Myers v Elman are not consistent particularly in relation to whether the relevant jurisdiction is compensatory or punitive but subsequent cases have proceeded on the basis that the jurisdiction is compensatory." [references omitted]

The inconsistency in Myers v Elman [1940] AC 282 referred to above, arises from the difference in the approach adopted by Viscount Maugham (with whom Lord Russell of Killowen concurred) and that adopted by Lord Atkin and Lord Wright. The former started from the proposition that the jurisdiction is primarily compensatory, the latter from the proposition that it is not merely punitive. Both approaches have been adopted in subsequent cases. As to the former approach see: Edwards v Edwards [1958] P 235 at 248 and Mauroux v Soc Com Abel Pereira da Fonseca SARL [1972] 1 WLR 962 at 970. As to the latter approach see: Currie & Co v The Law Society [1977] 1 QB 990 at 997-998.

To the extent that it is necessary to do so, I would depart from the dicta in those cases which take the view that the jurisdiction is only, or primarily, compensatory and respectfully adopt the approach of Lander J in Vestris. His Honour there set out a number of factors to be taken into account in determining whether an order for costs against a non-party is justified: at 468. One such factor is whether the party who would otherwise usually be liable for costs can meet an order for costs. His Honour made it plain that none of the factors identified, including the ability of the usual party to meet the costs order, would of themselves necessarily be decisive. This approach accords with that adopted by the High Court of New Zealand: Carborundum Abrasives v BNZ (No 2) [1992] 3 NZLR 757 at 765. I would likewise adopt that approach. In many cases the fact that costs will not be met otherwise than by an order against a non-party will strengthen the case for such an order. Nevertheless I do not consider that it is a factor to be elevated to the status of a prerequisite.

For those reasons, I order that ITR be joined as a party to the proceedings and that ITR pay to the defendant its costs of the proceedings on an indemnity basis. I dismiss the defendant's application insofar as it relates to Mr Kerin.