PPK Willoughby Pty Ltd v Baird

Supreme Court of NSW|2022-08-29|Before: Harrison J, Corp Pty J

PPK Willoughby Pty Ltd v Baird [2021] NSWCA 212 PPK Willoughby Pty Ltd v Baird [2021] NSWCA 312 Townsend v Townsend (No 2) [2001] NSWCA VMA Companies LLC T/as Corbis Global v Ridley Capital Holdings Pty Ltd [2016] NSWSC 1567 Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685; [1997] FCA 760 Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 Category: Costs Parties: PPK Willoughby Pty Ltd (Plaintiff) David Baird and others (2nd to 106th Defendants) Representation: Counsel: T Faulkner SC with J Jaffray (Applicant/Defendant) A P Cheshire SC with E Lambert (Respondent/Plaintiff)

Judgment

HIS HONOUR: By an amended notice of motion filed in court on 29 August 2022, the defendants seek the following orders: (1) The costs orders made by the Court on 9 December 2020 be vacated and the plaintiff pay the defendants' costs of the proceedings on: (a) an ordinary basis up until 25 July 2016 and thereafter on an indemnity basis; (b) alternatively, on an ordinary basis up until 17 March 2018 and thereafter on an indemnity basis; (2) Four non-parties, namely PPK Group Limited (PPK Group), SMN Holdings Pty Ltd (SMN), Phillip Street Properties Pty Ltd (Phillip Street) and G.R.G. Finance Pty Ltd (GRG), be jointly and severally liable for the defendants' costs of the proceedings on: (a) an ordinary basis up until 25 July 2016 and thereafter on an indemnity basis; (b) alternatively, on an ordinary basis up until 17 March 2018 and thereafter on an indemnity basis; and (3) Pursuant to UCPR 41.3, 41.8 and 41.11, the deposited funds paid into Court by the plaintiff as security for costs pursuant to the Orders made by Harrison J on 11 December 2018 be withdrawn and paid to the defendants' solicitor, together with any interest accrued thereon; (4) The plaintiff, PPK Group, SMN, Phillip Street and GRG pay interest on any costs awarded to the defendants, such interest to be calculated at the rate prescribed under UCPR 36.7 from the date or dates on which the costs concerned were paid in accordance with ss 101(4) and 101(5) of the Civil Procedure Act 2005.
Order (3) is not in contest. On 10 February 2022, the plaintiff and the third parties were ordered to file and serve any evidence upon which they proposed to rely in response to the motion but have not done so. All parties have provided written submissions on the motion. The defendants relied upon the supplementary affidavit of Alexander Boyd Haslam sworn on 24 August 2022 and the considerable material exhibited to that affidavit. Mr Haslam was not cross-examined on that affidavit. In addition, a thorough working knowledge of the background to the proceedings referred to and described in my decision on the defendants' application for security for costs, the decision of the Court of Appeal dealing with that question, my decision in the principal proceedings and the decision of the Court of Appeal dealing with that determination are assumed for the purposes of these reasons.

Indemnity costs

The principles that apply to an application for an order for the payment of costs on an indemnity basis following the service of an offer proposing a compromise are well understood and require no restatement by me.

From 28 June 2016

The defendants seek indemnity costs from 28 June 2016 upon the basis of a "without prejudice save as to costs" letter dated 27 June 2016 that was sent to the plaintiff's solicitors. That offer remained open until 25 July 2016 at 5.00pm and was not accepted by the plaintiff. The defendants made the following submissions.
The offer contained detailed reasons why the defendants considered that the plaintiff's case was without merit. The offer identified why the Court would not find that the defendants' conduct caused the plaintiff to suffer any loss. Relevantly, the offer stated that: 1. The proceedings commenced in 2012, and since that time, the defendants had sought further and better particulars of the plaintiff's alleged loss, to which inadequate responses were provided, issued notices to produce seeking documents supporting the plaintiff's alleged loss, to which the plaintiff largely objected, and sought discovery of documents evidencing, and relevant to, the plaintiff's alleged loss. 2. The particulars and documents provided and discovered by the plaintiff went only to one head of damage, namely the costs of additional expert reports, being tax invoices of YSCO Geomatics totalling $22,551.10 and Cardno totalling $15,422, a total of less than $40,000. As such, even if the plaintiff were successful, cost consequences under UCPR 42.34 would apply. 3. The defendants noted that the plaintiff's alleged loss as pleaded covered numerous other heads of damage, including loss of opportunity to tender and investment elsewhere, costs of delay in the development of the properties including interest and increased construction and development costs including rates and taxes. However, the plaintiff had not produced any documents evidencing or quantifying those alleged losses and did not otherwise seek to quantify them. The offer stated that "The … defendants strongly suspect that this is because [the plaintiff] has not suffered, and will not suffer, any loss due to purchasing the properties, developing them and then selling the residences constructed thereon".
Despite the difficulties outlined in the offer, including in relation to damage and quantum, the defendants offered to resolve the proceedings in the sum of $80,000 inclusive of costs. The offer was made in accordance with the principles enunciated in the decisions of Calderbank v Calderbank [1975] 3 All ER 333 and Messiter v Hutchinson (1987) 10 NSWLR 525 and was made on behalf of all defendants. It also included an offer that the defendants would forego various costs orders which they had in their collective favour, the quantum of which exceeded $40,000.
The defendants submitted that the factors identified in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [12] favoured the award of indemnity costs having regard to the plaintiff's rejection of the offer: "[12] In Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435 the Court of Appeal (Warren CJ, Maxwell P and Harper AJA) identified the factors relevant to determining whether the rejection of an offer was unreasonable as including the following: '(a) the stage of the proceeding at which the offer was received; (b) the time allowed to the offeree to consider the offer; (c) the extent of the compromise offered; (d) the offeree's prospects of success, assessed as at the date of the offer; (e) the clarity with which the terms of the offer were expressed; (f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it'."
The defendants emphasised the following matters.
While the first offer was made early in the proceedings, they had nevertheless been on foot since 2012. The plaintiff had by then amended its statement of claim several times, and had had four years to obtain clear instructions on the nature and quantum of the damages that had been pleaded. However, the plaintiff's particulars of loss remained unchanged since 2012.
Even though in July 2016 the plaintiff had not yet sold all the houses constructed on the land, it was in a position to estimate the value of the unsold properties, and to determine whether it would make a profit or loss on the development. Consistently with this, on 31 August 2016, the plaintiff's solicitor advised that it held title to six properties with a combined value of $14 million. There is no reason to suppose this or similar information was not available to the plaintiff a few weeks earlier before the first offer expired in July.
In these circumstances, the plaintiff had sufficient information to know that it could not establish any trading losses as a head or damage, or indeed any delay costs (such costs being subsumed in whether the plaintiff made a profit on the development). This is reflected in my principal judgment.
All the heads of damage identified in the plaintiff's further amended statement of claim filed on 20 February 2015, except for delay costs, were ultimately abandoned by the time the hearing commenced in 2019. As such, the difficulties identified in the offer in relation to those heads of damage were implicitly accepted by the plaintiff in abandoning those claims.
A reasonable time was allowed for the plaintiff to consider the offer. The offer was expressed simply and clearly. The offer put the plaintiff on notice that if it was not accepted, the defendants would rely upon it in respect of any application for costs of the proceedings, including costs of an indemnity basis.
The defendants submitted that the offer was a genuine compromise and that it was unreasonable for the plaintiff not to accept it. The defendants submitted that I should order that the plaintiff pay their costs on an indemnity basis on and from 25 July 2016 when the offer expired.

Alternatively from 17 March 2018

The defendants relied upon a second letter dated 16 March 2018 sent to the plaintiff's solicitors. It made an offer of $500,000 plus costs that remained open until 13 April 2018 at 6.30pm. It was not accepted. The defendants made similar submissions with respect to this offer.
For example, considerable detail was also given in the second offer as to the reasons why the defendants considered that the plaintiff's case was without merit. It reiterated reasons for why a court would not find that their conduct caused the plaintiff to suffer any loss. The second offer included statements that the precise basis upon which the plaintiff was putting its claim for loss was still unclear. Its counterfactual position that, had it known of the stricter flood development controls on the land it would have either not tendered for the purchase of the land at all or tendered for it at a lower purpose price, meant that, if accepted, the plaintiff would never have acquired the land.
The second offer stressed that by proceeding with the acquisition of the land, the plaintiff made a significant profit, and was not in a worse position but for the allegedly misleading or deceptive conduct. On the contrary, the plaintiff was in a better position as it made a profit. It has in the circumstances suffered no loss. The offer also said that if there was a delay due to the defendants' conduct, that delay actually operated to the plaintiff's advantage, as during the development of the land, property values in the area increased.
Despite these identified difficulties, the defendants offered to resolve the proceedings by paying the plaintiff $500,000 plus costs. The offer was made in accordance with the principles enunciated in the decision of Calderbank v Calderbank and others as earlier described. The defendants had by this time incurred costs and disbursements in the sum of $235,392.
The defendants submitted again that the factors identified in Miwa at [12] tended in favour of an award of indemnity costs. In particular, the plaintiff by then had the benefit of comprehensive discovery as well as its expert accounting report from Michael Potter and the expert report of Tony Samuel in response. Mr Samuel's report identified numerous problems with the calculation of damages in Mr Potter's report and with the adequacy of key assumptions made by him.
The plaintiff had sold the last of its properties on the land by 20 October 2017. It was therefore by then armed with sufficient information to understand that it had made an overall profit from the development and could not maintain a claim for trading losses or delay costs as they were brought fully to account in the assessment of whether the plaintiff made an overall loss (or profit) from the development.
The plaintiff was also unable to establish a Potts v Miller loss, a case involving the development of land for a profit that involved comparing the costs resulting from acquiring the land in reliance upon the negligent advice with the receipts or gains from the acquisition: Potts v Miller (1940) 64 CLR 282. In that case, the acquisition of the land was the cause both of the costs and the gains: Manwelland Pty Ltd v Dames & Moore Pty Ltd (2002) ASAL 55-074; [2001] QCA 436. Properly advised, the plaintiff can be assumed to have been aware of the relevant legal position. On the correct Potts v Miller analysis, it should have been obvious that no loss had been sustained. My principal judgment was to this effect.
By the time of the second offer, the proceedings had been on foot for about 6 years. A reasonable time was allowed to consider it. It was expressed simply and clearly. The offer put the plaintiff on notice that if it was not accepted by the plaintiff, the defendants would rely upon it in respect of any application for costs of the proceedings, including costs on an indemnity basis.

Third party costs orders

The defendants provided the following summary of the relevant principles which I take to be uncontroversial. References in these reasons to third parties and non-parties should be taken as interchangeable.
The power under s 98(1) of the Civil Procedure Act 2005 extends to making a costs order against a non-party: Yu v Cao (2015) 91 NSWLR 190; [2015] NSWCA 276 at [136]. The decision to order costs against a non-party is an exercise of the Court's discretionary power. It is unfettered: there is no onus of proof in the application for the exercise of the discretion: Ipex ITG Pty Ltd (in liq) (receivers appointed) v Victoria (No 2) [2014] VSCA 315 at [45]. Even so, there is an established category of case where the power may be exercised. In Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 192-193; [1992] HCA 28, Mason CJ and others said this: "Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made. See the discussion in Oasis Hotel, ibid, at pp 458-459. For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."
A case will fall within the established category if three elements exist, namely: 1. the party is a man of straw; 2. the third party has an interest in the subject of the litigation; and 3. the third party has played an active part in the conduct of the litigation.
In such a case, a costs order may be made against the third party if the interests of justice require.
In Knight v FP Special Assets, Dawson J (at 202) referred to a costs order being made against the "effective litigant standing behind an actual party". There is no significant difference between the approach of Dawson J and that of the Chief Justice. Both approaches direct attention to the "real party": FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340 at [205]. Reference to the "real party" is to be understood as a reference to a real party, even if not the real party: Ipex ITG Pty Ltd v Victoria (No 2) at [36]. In that case, the Court held that a non-party who was a beneficiary of a discretionary trust and director of the trust company that "may well" have had the power to distribute the proceeds of litigation to himself should be ordered personally to pay the costs of proceedings unsuccessfully brought by the trustee: Ipex at [41]. Ultimately it is a question of the interests of justice: Brand2Content t/as Franchise Works v Dalby [2019] NSWCA 16 at [12].
The defendants submitted that this case falls clearly within the category of cases referred to in Knight v FP Special Assets. Costs orders should be made against each of the third parties as the interests of justice require.
The plaintiff is "a man of straw". It was uncontroversial in 2018 that the plaintiff was impecunious: PPK Willoughby Pty Ltd v Baird [2018] NSWSC 1889 at [10]. That was evidently still the case in 2021 when it was ordered to provide security for the costs of its appeal: PPK Willoughby Pty Ltd v Baird [2021] NSWCA 212 at [3]. Although the appeal was dismissed in August 2021, the plaintiff has still not complied with the order that it pay the defendants' costs at first instance, nor the order that it pay the costs of the appeal.
That position shows no prospect of changing. The plaintiff was incorporated as a $2 special purpose vehicle to act as trustee of the Willoughby Market Gardens Purchaser Unit Trust in order to bid for the property, purchase and develop it. An inference of its impecuniosity is supported by its failure to lead evidence to the contrary.
Each of the third parties had an interest in the outcome of the litigation. The third parties which have been named in the application are all beneficiaries of the trust structure set up to undertake the Willoughby development.
As trustee of the purchaser trust, the plaintiff has no financial interest in the trust property, including the claims that were made in these proceedings, other than to receive proceeds and distribute them as profit to the beneficiaries. The litigation was no less a part of the project than the building of the houses.
There is nothing to indicate any subsequent change in these arrangements. The third parties' continued interest in the subject matter of the litigation is confirmed by the plaintiff's failure to adduce any evidence to the contrary. The third parties have taken the same approach.
Each of the third parties has played an active part in the conduct of the litigation. In addition, all four of the third parties have been involved in funding the litigation. In the case of SMN, Mr Napoli directed proceeds from the development to the conduct of this litigation which would otherwise have increased the profits from the project. SMN was entitled to 10% of those profits and therefore has indirectly contributed to the funding of the litigation.
The two Graeme Webb companies and PPK Group Limited have foregone additional profits through their respective entitlements to a share of the funding trust's 80% share of the project profits. Further, loan arrangements were entered into between the purchaser trust and the funding trust pursuant to which the funding trust lent money to the purchaser trust to facilitate the purchase and development of the property. Absent any evidence to the contrary, it may be inferred that any additional funding required for the litigation against the defendants was provided the same way. Such matters are within the third parties' knowledge and should be addressed by evidence if disputed: see Ipex at [44].
The defendants also contend that, apart from these considerations, it is in the interests of justice that costs orders be made against the third parties in this case. First, the defendants were not the moving party and therefore had no control over the commencement or subsequent conduct of the litigation.
Secondly, the defendants were wholly successful in the litigation but will be prejudiced if no such orders are made against the third parties. If the plaintiff fails to satisfy the costs order made against it, it is doubtful that the defendants will be able to pursue recovery from the beneficiaries of the purchaser trust. As trustee, the plaintiff is likely to have a right to indemnification out of the assets of the trust, but no such assets exist now that the Willoughby development has been completed and all the houses sold. Clause 20.3 of the trust deed provides that the beneficiaries of the trust have no personal liability to indemnify the trustee.
Thirdly, even if the plaintiff did have a right of indemnification against the beneficiaries of the purchaser trust, the defendants would be confronted with a lengthy, expensive and uncertain path in order to seek to recover its costs by that means. That may include placing the plaintiff into liquidation and funding the liquidator to sue on the indemnity, first against SMN and the trustee of funding trust. If still not satisfied, the defendants may in turn have to place SMN and the trustee of funding trust into liquidation and sue their respective beneficiaries on any indemnities those trustees may have. Nothing could be hoped to be achieved by such a course that would not be achieved by costs orders directly against the third party beneficiaries now. Exercising the discretion to make those orders now would give effect to the overriding purpose of facilitating the just, quick and cheap resolution of the real costs issue as required by s 56(1) and (2) of the Civil Procedure Act.
Fourthly, the trust structure of the plaintiff placed the ultimate beneficiaries of the purchaser trust and the funding trust so that they could fund the plaintiff when they chose, and benefit from the profits when they chose, without a liability for costs. For example, the plaintiff's solicitors were paid. In interlocutory affidavit evidence, those solicitors deposed to having incurred legal expenses during the proceedings of which some $1.403 million had been paid. It was uncontroversial in the security for costs application that the litigation had been, and would be, funded by third parties associated with the plaintiff if necessary.
Fifthly, between 2016 and 2017, the plaintiff disposed of the last of its properties and paid out $6 million to the funding trust. This was four years after the litigation had been commenced. The money could have been retained to meet future costs liabilities but it was not. At the security for costs application in 2018, the plaintiff led no evidence establishing its liquidity. Relevantly, I found that there was no issue in the proceedings that the plaintiff was "currently only supported by sympathetically interested third parties on an ad hoc basis as the circumstances require" (at [26]). It was also agreed that the plaintiff would not be able "to satisfy an adverse costs order … without external assistance" (at [26]). These matters were in fact "plainly established on the defendants' evidence".
Sixthly, the third parties have been aware of the possibility of third party costs orders being made against them if the plaintiff were unsuccessful. This is apparent from the successful security for costs applications made by the defendants in 2018. A security for costs application enables those who stand behind a corporate plaintiff to make a decision as to whether to make the personal financial commitment necessary to allow the litigation to proceed: see Branson J in Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685 at 695; [1997] FCA 760; Gore v Justice Corp Pty Ltd (2002) 119 FCR 429; [2002] FCA 354 at [47]-[48]. The fact that those standing behind the plaintiff made the significant decision to fund the (not-insignificant) security for costs demonstrates that they were willing to take on the costs burdens of the plaintiff: see Ipex at [49].
During the security for costs hearing on 6 December 2018, counsel for the plaintiff made the following concession: "GREEN SC: The question of security and the question of paying a costs order are of course two distinct matters … That is quite a different consideration to one where, if the plaintiff brought and continued proceedings and then was unsuccessful and an order was made for it to pay costs, there would be rights given and rights exist to the present defendants, assuming the unthinkable, and the plaintiff is unsuccessful in whole or in part. HIS HONOUR: I'm assuming the unthinkable. GREEN SC: Yes. There are available measure available to the defendants to seek to secure their costs and those standing behind the plaintiff and involved with the plaintiff would obviously have some case to answer potentially in relation to those circumstances. So it is not fair to say it is a do or die moment."
The plaintiff clearly appreciated the likelihood of a third party costs application if it were unsuccessful in the proceedings. Yet, with that knowledge, it continued with the litigation. It may be inferred that the plaintiff and those standing behind it were content to take the risk of such an application.

Interest

The defendants claim interest on any costs awarded at the rate prescribed under UCPR 36.7.

Plaintiff's submsisions

The plaintiff uncontroversially accepted that indemnity costs can be ordered as a consequence of non-acceptance of a Calderbank offer and acknowledged the defendants' reliance on the principles in Miwa indicating that the questions are whether the offer of compromise was genuine and whether it was unreasonable for the plaintiff not to accept it.
The plaintiff emphasised, however, that an unaccepted offer that was reasonable does not automatically give rise to a presumption in favour of awarding "post offer" costs on an indemnity basis: Commonwealth v Gretton [2008] NSWCA 117 at [43]; Leichhardt Municipal Council v Green [2004] NSWCA 341 at [19], [46]-[47]. This absence of any such presumption emphasises the width of the costs discretion, and the unusual character of an indemnity costs order: see Jones v Bradley (No 2) [2003] NSWCA 258 at [5]-[9]; Black v Tomislav Lipovac bhnf Maria Lipovac (1998) 217 ALR 386; [1998] FCA 699 at [218]; Gretton at [44]-[45], [117].
The plaintiff also referred to the factors identified in Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298 as being relevant to the determination of whether the rejection of an offer was reasonable.

The first offer

The six Hazeldene factors should be considered collectively in the circumstances of each case. Three merit particular consideration: the stage of the proceedings when the offer was received, the extent of the compromise offered and the plaintiff's prospects of success at that date.
The first offer was made early in the proceedings. The plaintiff's affidavits of Simon Napoli and Graeme Webb, both dated 25 June 2016, were sworn or affirmed only two days earlier. The defendants were yet to file any evidence at all.
The extent of the compromise offered will always be a relevant factor in determining the reasonableness of the offeree's rejection. In Miwa at [14], Basten JA said this: "[14] The extent of the compromise offered will always be a relevant factor in determining the reasonableness of the offeree's rejection. In Robb Evans & Associates an offer in compliance with the UCPR, r 20.26, involved an effective amount (after deducting a sum as to which there was no dispute) of less than $2,000 to settle a claim in excess of $800,000. The Court stated: '[20] ... If the offer were based on a legal assessment of the likelihood of success in an amount in excess of $800,000, the claim should have been struck out as frivolous and vexatious. It ultimately failed in this Court, but could not, on any view, be so categorized. It is implausible that the appellant so categorized it in quantifying his offer. [21] If the appellant had carried out a commercial evaluation, rather than a pure legal assessment of the likelihood of success, he would undoubtedly have concluded that, even if ultimately successful, he would be unlikely to recover many thousands of dollars of costs incurred if the litigation proceeded. A commercially based offer would have taken that matter into account. This offer clearly did not. ... [23] ... The amount offered, beyond that amount which was not in dispute, is properly characterized as trivial or contemptuous. It does not engage the costs consequences provided by r 42.15'."
The first offer was for $80,000 inclusive of costs. Where an offer includes no real element of compromise, or is for a contextually nominal amount, it will not result in the variation of the usual costs order: Townsend v Townsend (No 2) [2001] NSWCA 145 at [5]; Herning v GWS Machinery Pty Ltd (No 2) [2005] NSWCA 375.
By the time of trial, the plaintiff's claim for damages included a Potts v Miller claim of $12,750,002 and a claim for "delay costs" for a 167 day delay period, quantified at $5,253,227. The claim also included a number of other heads of damage even though only the claims for the Potts v Miller loss and "delay costs" ultimately proceeded.
The plaintiff contends that it had insufficient information to know that it could not establish any trading losses or delay costs. While the issue of trading losses was ultimately abandoned, the Potts v Miller losses and delay costs issues remained live and were contentious both at first instance and on appeal: PPK Willoughby Pty Ltd v Baird [2021] NSWCA 312. At [71], Leeming JA accepted the plaintiff's view that Manwelland did not establish a general rule on this issue. His Honour's finding at [75]-[81] largely turned on the issue of the true value of the land. There was significant legal complexity to this issue and the plaintiff's ultimate failure does not mean that its prospects of success were other than reasonable: see Miwa at [19].
Taking into account the early stage of the proceedings, the amount in issue and the at least reasonable prospects (at that time), an amount of $80,000 was not a genuine offer of compromise and it was not unreasonable for the plaintiff not to accept it.

The second offer

The second offer was made following a mediation between the parties, conducted on 19 February 2018. While it is accepted that the evidence had progressed, the offer was made before completion of the main joint expert reports, which were heavily relied upon by the parties during trial.
The second offer was for $500,000 plus costs. The loss claimed at the hearing was in excess of $18,000,000. Once again, where an offer includes no real element of compromise, or is for a contextually nominal amount, it will not result in the variation of the usual costs order: Townsend v Townsend (No 2) at [5]; Herning v GWS Machinery Pty Ltd (No 2).
The plaintiff maintained that by the time of the second offer, its prospects of success had not changed. Taking into account the stage of the proceedings, the amount in issue and at least the reasonable prospects (at that time), an amount of $500,000 plus costs was not a genuine offer of compromise and it was not unreasonable for the plaintiff not to accept it: Miwa at [19].

Third Parties

There is no dispute that the Court has the power, in the form of an unfettered discretion, pursuant to s 98(1) of the Civil Procedure Act to make a non-party costs order: VMA Companies LLC T/as Corbis Global v Ridley Capital Holdings Pty Ltd [2016] NSWSC 1567 at [11]. However, a non-party costs order will only be made in exceptional circumstances and the jurisdiction is to be exercised sparingly: Knight v FP Special Assets Ltd at 203; Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406; [2001] HCA 26 at [34]; May v Christodoulou (2011) 80 NSWLR 462; [2011] NSWCA 75 at [107]-[116].
It is a high bar to pierce the corporate veil or deprive the plaintiff and its related entities of a separate legal personality: see FPM Constructions v Council of the City of Blue Mountains at [206].
A merely close relationship between the unsuccessful party and the non-party is not sufficient to justify a costs order against it: May v Christodoulou at [80]-[93], in which no order was made against a director who conducted proceedings for a corporation.
In FPM Constructions, during a lengthy consideration of the principles articulated by the High Court in Knight at [201]-[214], Basten JA at [210] set out the criteria, all or the majority of which would usually need to be satisfied for the making of a non-party costs order: (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.
These criteria are not intended to be and cannot be exhaustive and "care must be taken not to apply [them] … mechanically": Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [80]-[81]. In PM Works Pty Ltd v Management Services Australia Pty Ltd (t/as Peak Performance PM) [2018] NSWCA 168 at [36], Leeming JA highlighted that a non-party costs order "is not warranted merely because a majority of those criteria are satisfied". In that case, the Court declined to award non-party costs even where a director (in that instance a sole director) or directors caused a company to commence and continue litigation, funded the company's costs of such litigation and stood to benefit from its success.
The plaintiff submitted that factors (b), (c) and (d) are problematic for the present application for a non-party costs order and weigh against exercising the discretion to make it.
The plaintiff is the corporate trustee of both the purchaser trust and the PPK Willoughby Funding Unit Trust. The plaintiff generally accepts the summary of the structure of both trusts contained in the defendants' submissions.
The plaintiff contended that the defendants' claim that by "foregoing profits" each of the third parties has been "involved in funding the litigation" is misconceived. Foregoing trust distributions, interest payments or loan repayments to the investors and beneficiaries, including the third parties in varying capacities, is very different to actively funding the litigation. Based on "foregone profits" alone, the third parties cannot be said to have played an active part in the conduct of the litigation. An analogy can be drawn with the position of a shareholder of a corporation who, without additional action, cannot be held responsible for the actions of the company as a legal entity. In the present circumstances, there was no choice to be made by the beneficiaries or investors: it was the plaintiff's decision as trustee of the purchaser trust to commence and carry on the proceedings.
Instructions provided by the plaintiff for the conduct of these proceedings were almost exclusively given by Graeme Webb, in his capacity as a director from 8 November 2011 to 25 January 2021. The plaintiff itself was the effective litigant in these proceedings and is the entity that is liable for costs. Funding, conducting and controlling the litigation, by itself, is generally not sufficient to warrant a non-party costs order: PM Works at [10].
The defendants had an available remedy in the case of the plaintiff's impecuniosity, namely seeking security for costs, of which they took advantage. The fact that they did not seek adequate security is not a reason to order costs against a third party.
Once again, the defendants sought and obtained security for costs. This ought to weigh against the exercise of a discretion to order non-party costs pursuant to s 98 of the Act.
In summary, the plaintiff submitted that neither of the defendants' offers was a genuine offer of compromise, or a Calderbank offer. The plaintiff is the real litigant in these proceedings, in its capacity as trustee of the purchaser trust, with appropriate actions taken by its directors in commencing and carrying on the litigation. None of the third parties was an active funder of, or participant in, the litigation. A non-party costs order is not appropriate in such circumstances.

Indemnity costs

In my opinion, the first offer can be easily disposed of. The offer was for the sum of $80,000 inclusive of costs. Those costs have not been estimated for my assistance in this application, but I am prepared to assume that they would in all likelihood easily have exceeded that amount of the offer. Even taking account of the fact that the defendants surrendered their entitlement to favourable costs orders already made, the defendants' invitation was a desultory offer in the circumstances and did not amount to a genuine compromise of the litigious risks as they must then have appeared at that time.
The second offer was different. Conspicuously, it was made on a plus costs basis so that the amount in question was not likely to have been swamped by legal fees. The litigation was also two years older by then so that the parties' respective abilities to assess the plaintiff's prospects of success must correspondingly have improved. Somewhat presciently, the second offer drew the plaintiff's attention to the frailty of its claim in the following terms: "4. If, in the unlikely event that the Court finds that our clients did have some form of obligation to your client, and that obligation was breached and relied upon by your client (all of which is denied), your client has not demonstrated that it has suffered any loss due to our clients' conduct, or at all. The precise basis on which your client puts its claim for loss is not clear; however, what is clear is that: (a) your client's counterfactual position is that, had it known of the stricter flood development controls on the Land it would either: (i) not have tendered for the purchase of the Land; or (ii) tendered for the Land at a lower price. Due to the evidence provided by the Crown defendants, the effect of (b) would unquestionably have been that your clients would not have acquired the Land; and (b) your client was a special purpose vehicle created for the purchase of the Land. It appears to be that your client's claim that, that by proceeding with the acquisition of the Land in circumstances where it was subject to flood development controls, or greater flood development controls than expected, it suffered loss and damage; however, that is not so. By proceeding with the acquisition, your client made a significant profit. In essence, your client is asserting that it has suffered less of a profit; however, this confuses the relevant concepts. Any additional costs and the delay costs were all a necessary part of the project and obtaining the profit. Damages are not assessed on the basis of a calculation as if any misrepresentation had not been made or no breach occurred; they must instead be assessed on the basis that the misrepresentation had not been made and/or the contravening conduct not occurred [sic]. Your client is not now in a worse position given that it made a profit; it has suffered no loss: BHP v Steuler; Protec v Steuler [2014] VSCA 338; Henville v Walker (2001) 206 CLR 459. 5. In any event, your client has benefitted from the delay purportedly caused by our clients' impugned conduct due to an overall increase in property values in Willoughby between the date upon which the development of the Land would have allegedly been completed and the various lots on-sold and the date upon which the actual sale of the various lots occurred."
Despite the potentially confusing way in which the assessment of loss was said to be calculable, the citation of authority must be taken to have clarified what the defendants' solicitors meant.
The defendants were successful before me in the proceedings upon the basis that the plaintiff had suffered no loss or, in what amounted to the same thing, could not establish that it had suffered any loss. I approached the determination of the defendants' liability on that narrow but obvious basis. As long ago as 2018 it was just as obvious that the plaintiff had suffered no loss, or was unable to establish that it had suffered any loss. It is difficult to see what more the defendants could or should have done in the circumstances to alert the plaintiff to the proposition that whatever breach of duty or misrepresentation it could prove, it was no worse off.
The defendants' offer reiterated the fact that the defendants were "concerned as to the costs of these proceedings." By the middle of 2018, the plaintiff owned nothing of value: all of the land had by then been sold. The defendants' successful application for security for costs decided by me at the end of that year was a practical reaffirmation of that concern.
As the plaintiff's submissions observe, the second offer was made following an unsuccessful mediation. The plaintiff also contends that the parties' main expert reports had not by then been obtained, suggesting that a proper assessment of the possible outcome of the proceedings could not at that time be made. However, that submission cannot realistically achieve traction if the plaintiff knew enough about its case and where the parties' competing contentions lay, and if the plaintiff felt sufficiently equipped to attend a mediation and take a position about the wisdom of proceeding with the litigation or not as the case may be. The proceedings had been on foot for six years by then. It was not unreasonable for the defendants to operate upon the assumption that the plaintiff knew, or ought to have known, sufficient about its case to assess its prospects of success. The defendants certainly knew, and they said so in the second offer. They were vindicated at trial.
It is in my view incorrect to say, as the plaintiff's submissions say, that its prospects of success at the time of the second offer were "at least reasonable". They were not. The litigation would appear thereafter to have proceeded from the plaintiff's subjectively hopeful but objectively hopeless position that something might change. It never did. The plaintiff sustained no loss and should have accepted that reality in response to the second offer.
The defendants are entitled to indemnity costs on and from 13 April 2018.

Third party costs

It goes without saying that in forming the view I have reached on this issue, I have considered the parties' respective detailed submissions summarised earlier in these reasons.
The consistently reoccurring theme throughout this litigation, first identified in the security for costs application but evident thereafter in an undiluted form, is the fact that the controlling minds of the plaintiff have been prepared at all times to utilise it as a dispensable and disposable corporate plaintiff to be funded and supported only when the need arose, such as the provision of security for costs, but in all other respects apparently content in the knowledge that their personal liability was limited. That attitude should have been given some reconsideration at the point when Mr Green SC openly acknowledged the spectre of a third party costs liability in the event that the plaintiff failed.
In this case, there is in my view no doubt that the plaintiff is the equivalent of a man of straw, that the non-parties have played an active part in the conduct of the litigation and that they relevantly have an interest in the subject of the litigation. The distribution of the plaintiff's profits from the Willoughby property venture went directly or at least ultimately to the third parties concerned. The evidence upon which the defendants rely in these proceedings establishes as much. There is no evidence to the contrary.
I am satisfied that the interests of justice warrant the making of the order sought. That is so where the third parties have conspicuously approbated the anticipated advantage of the legal distance created between them and the plaintiff by their complicated corporate trust structure on the one hand but now seek to reprobate the unsavoury consequence that the defendants' unsatisfied costs burden should fall on them on the other hand. The third parties could have been in no doubt from at least the time of the security costs application that the potential liability for any costs that the plaintiff could not satisfy might fall on them. It is not to the point to say, as the third parties say, that it was always open to the defendants to seek further orders for security for costs. On the contrary, the plaintiff's opposition to the application for security heard by me, challenged unsuccessfully on appeal, was patently borne of an attitude that sought to minimise their own potential liabilities to fund the litigation. It would not be in the interests of justice to permit the third parties to in effect manipulate the structure that they created in the face of the defendants' continuing and persistent concern that they would be left to carry the costs of litigation they did not commence and which they persistently reminded the plaintiff was doomed to fail.
The third parties were in differing respects the source of funds for the litigation. The litigation was wholly unsuccessful and was, having regard to the detailed protestations of the defendants in their offers of compromise, if not otherwise, unreasonable: it was commenced before any loss was established and continued long after it was or should have been apparent that no loss could be sustained. The third parties had a significant financial interest in the plaintiff's development of the project on the Willoughby land.
In PM Works, upon which the third parties relied, Leeming JA cited with approval the entirety of McDougall J's relevant conclusions on the question of whether or not the corporate veil should be lifted to expose the company's sole director to a costs order: "[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'."
By way of distinction from that case, the plaintiff in the present proceedings was incorporated for the sole purpose of purchasing and developing the Willoughby land. It necessarily became in that capacity the plaintiff in the litigation that the development spawned. Moreover, unlike the present case, the plaintiff can be seen to have proceeded in the face of "advice" from the defendants that its case was weak and in the face of what I have now found was an unreasonable failure to accept the second offer.
I have taken account of the observations of Leeming JA in PM Works at [35] that: "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) …"
I consider that it was unreasonable for the plaintiff to continue with the litigation when its prospects of success were so small. The non-parties had control of that decision. It was made at a time when they knew, and "their" senior counsel had acknowledged, that their personal liability for costs that the plaintiff might be ordered to pay was on the line. Their conduct as the entities with effective control of the plaintiff was unreasonable. It is in the interests of justice that they should pay the defendants' costs.

Orders

In these circumstances, I make the following orders: 1. Vacate the costs orders made by me on 9 December 2020. 2. Order the plaintiff pay the defendants' costs of the proceedings on an ordinary basis up until 13 April 2018 and thereafter on an indemnity basis. 3. Order PPK Group Limited, SMN Holdings Pty Ltd, Phillip Street Properties Pty Ltd and G.R.G. Finance Pty Ltd to be jointly and severally liable for the defendants' costs of the proceedings. 4. Order that the deposited funds paid into Court by the plaintiff as security for costs pursuant to the Orders made by me on 11 December 2018 be withdrawn and paid to the defendants' solicitor, together with any interest accrued thereon. 5. Order the plaintiff, PPK Group, SMN, Phillip Street and G.R.G to pay interest on any costs awarded to the defendants, such interest to be calculated at the rate prescribed under UCPR 36.7 from the date or dates on which the costs concerned were ordered in accordance with ss 101(4) and 101(5) of the Civil Procedure Act 2005. 6. Grant liberty to the parties to apply in respect of the calculation of interest if so advised by arrangement with my Associate.

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 December 2022

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