Supreme Court of Queensland|2008-02-29|Before: Muir J, Fryberg J

Team Dynamik Racing Pty Ltd v. Longhurst Racing Pty Ltd & Ors [2008] QSC 36 (29 February 2008)

HIS HONOUR: The application before me today is the latest chapter in a long-running litigious saga. By the application the plaintiff in the action seeks an order that costs which it has been ordered to pay to the second defendants be set off against costs which the first defendant has been ordered to pay to the plaintiff. It does so against the background that the company, the first defendant, is, to put it shortly, funded by the male second defendant, or perhaps by both of the second defendants.

It is necessary to say a little more of the background to the litigation.

The plaintiff was the holder of two so-called licences to participate in motor racing. It borrowed some money from the first defendant. It used the two licences to secure the money which was taken in two separate loans. The loans were not repaid when they fell due. After the due date, less than a week after it, in fact, the first defendant sold or purported to sell one licence for $1.374 million having taken it as security for a loan of $450,000. It retained the other licence.

The plaintiff brought what, in effect, were redemption proceedings. They were tried before Muir J in February last year and his Honour gave judgment in favour of the plaintiff. Alternative relief which had been claimed against the second defendants was consequently dismissed. The first defendant appealed the decision and the appeal was dismissed in September last year. The first defendant sought special leave to appeal to the High Court and that application was refused on 8th of February this year.

Shortly after Justice Muir gave judgment in the trial he ordered as against the first defendant that an account be taken. He reserved the question of costs of the trial as between the plaintiff and the first defendant but made an order that the plaintiff pay the second defendants' costs of the trial.

The account was taken in July. The plaintiff was largely successful. Justice Muir made orders in respect of the right of redemption in September last year and made an order that the first defendant pay most of the costs of the proceeding, that is the costs of the trial and most of the costs of the account. The first defendant appealed that decision but discontinued the appeal in November of last year.

The plaintiff recognises that in these circumstances the costs orders which have been made in its favour do not have the element of mutuality with the costs order against it which would entitle it to set off those amounts by its own act. In other words, it recognises that there does not exist at common law or in equity a right of set off inherent in the circumstances of the case and exercisable by it.

The costs orders in the plaintiff's favour against the first defendant relate to six stages of the proceedings. They are the original interlocutory injunction hearing, an application to vary the injunction, the trial, proceedings in October relating to a stay brought by the first defendant to permit the special leave application, the appeal to the Court of Appeal, and the special leave application. Of those only the costs of the Court of Appeal have been assessed. They were assessed early this month and in the sum of $21,756.30, and remain unpaid. Other of the costs, that is costs of the stay, have, as I understand it, been secured by the second defendants but otherwise the plaintiff is, as things stand, able to look only to the first defendant for its costs.

The evidence satisfies me that the first defendant is at least impecunious and probably insolvent. Not only did it fail to honour a statutory demand, but the evidence given at the trial and the account hearing makes it clear that this is the position. I am satisfied that if the plaintiff can look only to the first defendant for its costs then it will get virtually nothing, or at least will get very little.

The second defendants were parties to the action in effect only down to the trial. They were not parties to the account nor to any of the appeals or applications for leave to appeal. I accept Mr Ratanatray's submission that in respect of those proceedings they should be regarded as being at arm's length, in effect as third parties. Indeed, as regards the proceedings between the plaintiff and the first defendant, even at earlier stages of the proceedings, that is probably the correct way to regard them since the proceedings against them were brought in the alternative.

The plaintiff postulates a number of reasons why, in the circumstances of the case, this is a situation where a costs order would be made against a third party in the position of the second defendants under the doctrines enunciated in Knight v FP Special Assets Ltd (1992) 174 CLR 178, and Naomi Marble and Granite Pty Ltd v FAI General Insurance Company Ltd [No 2] [1998] QSC 18; [1999] 1 Queensland Reports 518. He submits the fact that the second defendants are in fact parties cannot improve their position.

The categories which, it is submitted, apply in the present case are - and I refer to the categories as identified by Justice Shepherdson in the latter of the two cases which I have cited - (a) where a person has some management of the action; (b) where a person has maintained or financed an action; (c) where the unsuccessful party is a corporation the director or directors having the right to control the corporation; (d) where a party who was insolvent or a man of straw is related to a person who played an active part in the conduct of the litigation, and who has an interest in the subject matter of the litigation; (e) where the non party is the effective litigant standing behind the active party;

(f) where the non party is funding, or otherwise financially assisting the unsuccessful party and stands to benefit if the party had been successful; (g) where the non party has supported the unsuccessful party and done so acting in bad faith toward the other parties and toward the Court such as by giving false testimony.

In the present case, there is a very close connection between all of the defendants. They all relied upon the same defence and counterclaim at the trial. Originally, that was not the position, there were separate defences and separate representatives. But even then all defendants relied upon the same factual allegations and legal arguments to resist the plaintiff's claim.

At the trial, all defendants were represented by the same solicitors and counsel. There was evidence at the trial and thereafter that the second defendants were funding the first defendant's defence. I should refer to that in a little more detail.

Mr Longhurst testified that he had, in fact, lost money out of the transaction. He agreed that he had purchased a licence for $450,000 and sold it for $1.35 million, but said that he, in fact, lost about $300,000, and attributed that loss to paying a year's legal expenses. At the hearing on the taking of the account that was elaborated upon. He said he had spent three quarters of a million dollars on legal expenses in 18 months out of his own pocket. As I understand it, it is not now contested that he was the person standing behind the first defendant.

There was also evidence given at the trial by Mr Longhurst which was not accepted by the trial Judge. Those factors, it is submitted, warrant the set off being allowed by the Court.

In response to the application, the second defendants submit that, first, the power of the Court to order set off does not extend to these situations, and, second, that if it does so extend, that, in the exercise of the discretion, the power ought not to be exercised.

On the first question, the issue is, it seems to me, one of law. Counsel submitted that the Court's undoubted power to order a set off was constrained by two limitations. The first was that it was a power that could only be exercised by the Court or Judge making the costs order. On this theory the power of the Court was exhausted by the making of the order, and unless an order for set off was made at the time of the order, no order could be made. The impracticality of that situation is immediately obvious in relation to appellant costs. It is hardly likely that appeal Courts, when making costs orders, would want to descend into the detail of the costs situation in order to decide such a factual matter as whether there ought to be a set off of costs. Moreover, it is difficult to see where such a limitation is to be found in either the cases on set off, or the terms of the rule, which, as I read it, simply reinforces the general power of the Court to order that costs be set off. That is rule 681, as it is now numbered, of the Uniform Civil Procedure Rules.

The second limitation in counsel's submission was that the power to order set off was respect to two cases where a recognised right of set off could be found in law or in equity.

In support of that submission, Counsel referred me to the decision of Justice Dutney in Elfick v Elliott [2003]

1 Queensland Reports 362. Justice Dutney considered the source of the power in that case. His Honour, following a decision of the English Court of Appeal in Lockley v National Blood Transfusion Service [1992] 1 Weekly Law Reports 492, held that the power of the Court to order set-off was one based on an equitable right of set-off arising from the close connection between claims in an action.

He noted that the conclusion in the English case had been criticised in the leading Australian text book on set-off, Derham on Set-off, where it was argued that the right arose at common law and was an example of the Court's inherent power. He held that in the absence of any other authority, and he had not been referred to any other authority, he should follow Lockley because it provided an identifiable and defined source of a power which had been exercised by the Courts for many years.

He saw that source as an altogether more satisfactory solution than resorting to vague notions of inherent power. On the facts of the case he found that there was such an equitable right and consequently permitted the set-off. It is clear, therefore, that on any view of the matter in the case before his Honour, set-off would have been allowed. What his Honour says about the source of the power is plainly obiter dictum.

This Court, sitting at first instance, will of course, give great respect to decisions of other judges at first instance, but no question of them being binding can arise. A fortiori, no question of being bound by obiter dicta can arise. I do not think, as a matter of principle, that the power of the Court in relation to costs ought to be inhibited in the manner implicit in his Honour's dicta. It seems to me that the Court's inherent power in relation to costs is general. It is discretionary and that discretion ought not to be limited by a search through the categories of equity which, with great respect to his Honour, does not seem to me likely to be a process of greater clarity or certainty than the exercise of an undefined inherent jurisdiction.

Indeed, if the matter were one where it was necessary to find a pre-existing equity, the question would arise whether it would be necessary to invoke the Court's assistance. As things presently stand, I am not persuaded, despite Mr Morris's concession on the matter, that resort to the Court would be necessary if an existing right of equitable set-off were the source of the set-off.

I therefore hold that I have the power to order set-off in the circumstances of the case. The power is analogous to that which may be exercised where an order is made against a non-party for the payment of costs. I turn to the question of whether the discretion ought to be exercised in the present case.

I have already recounted the circumstances which favour that exercise. On the other side of the argument, it was submitted that a number of factors lean against the exercise. The first was that an order of this sort should be sought at the end of the trial and from the trial judge. I would accept that such an order should be so sought as a matter of general policy.

In the present case, one can understand why that did not happen. The order in favour of the second defendants was made at the end of the trial but costs of the proceedings between the plaintiff and the first defendant were reserved to await the subsequent taking of the account which occurred a number of months later. Only when costs were ordered at the end of that process did a clear picture emerge of the whole position.

Second, it was submitted that there had been delay, both in seeking the set-off and in having the plaintiff's costs of the trial assessed. The latter was relevant because if an order for set-off is made it will consequently be necessary to stay the order for payment of the second defendant's costs by the plaintiff.

The reason for delay in making the present application is in part explained by the fact that the order for payment of the plaintiff's costs by the first defendant was made only in September last year and there have been subsequent appellate proceedings in relation to the account which were only withdrawn at the end of last year. The special leave proceedings were dismissed early this month and one can understand why the plaintiff would have delayed commencing the expensive process of assessing its costs of trial until it was certain that the order would not be set aside on appeal.

In my judgment there has not been any delay which ought to deprive the plaintiff of any remedy to which it might otherwise be entitled

Third, it was submitted that there was in fact no impropriety on the part of the second defendants which would warrant an order of the type sought. Generally speaking that is true but impropriety is not a necessary element for the making of an order for set off or for a costs order against a third party. It is the fact that the third party is funding the nominal defendant or the nominal party and/or stands to benefit from the outcome of the litigation which is predominant in this aspect of the matter. I have referred to the relevant considerations in more detail already.

I said generally speaking, because the exception in the present case relates to the evidence given by Mr Longhurst which was rejected by the trial judge. That evidence was given in assistance of the first defendant, or on behalf of the first defendant, and some whiff of impropriety may there exist. It seems to me however that that is not a major factor in the present case.

Finally, it was submitted that the second defendants have suffered prejudice in two particular ways. First, that Mrs Longhurst, one of the second defendants, has not been shown to have been in any way involved in promoting the proceedings on behalf of the first defendant and therefore ought not to be deprived of the benefit of the costs order in so far as it involves her.

The situation appears to me one where Mr Longhurst has, in effect, had the carriage of the matter. It may be that Mrs Longhurst has had no involvement in the promotion of the proceedings on behalf of the first defendant but it appears equally that she has had little involvement on behalf of the second defendants and in particular there is no evidence that she has had any funds of her own employed in paying the costs of the second defendants. There is no reason to think that the leading part which Mr Longhurst has played in the conduct of the matter did not carry through to the payment of the costs of the second defendants.

I said a little while ago that Mrs Longhurst was perhaps not shown by the evidence to have been involved in the promotion of the first defendant's defence but I should refer to an e-mail sent on behalf of the second defendants to the costs assessor by the second defendants' solicitors in which the solicitors urged a particular urgency in having the second defendants' costs assessed. That urgency was that they had been forced to expend significant costs in the matter and in funding the first defendant which had caused financial and emotional stress. It is not suggested only one of the second defendants was involved in funding the first defendant.

The second of those last two matters was the fact that had the order been sought at an earlier stage or even some notice given the second defendants may have been able to avoid the expense of having their costs assessed. It may have given them an opportunity to agree to what was proposed or reach some form of overall settlement with the quite substantial costs of that assessment as extra funding for that purpose.

That is possibly correct but there is really no evidence before me which would indicate the slightest likelihood that those costs would in fact have been avoided had the prospect of set off been raised at an earlier stage.

In those circumstances I think the prospect is speculative. Certainly there has been no evidence pointed out to me and there has been no application for an adjournment to enable such evidence to be given and it seems an unlikely thing to have happened. In any event I doubt that that factor would do more than have a marginal impact on the amount of the set off even if it were otherwise.

In all the circumstances therefore it seems to me that there should be in this case an order in substance of the type sought in paragraph 5 of the application, namely that the plaintiff's costs against the first defendant be set off against the second defendants' costs against the plaintiff.

There should also, in consequence, be an order that enforcement of the order for costs of the second defendants against the plaintiff be stayed until the assessment of the plaintiff's costs against the first defendant and the setting off ordered by this order.

HIS HONOUR: The respondent should pay the applicant's costs of the application to be assessed and those costs as assessed should be included in the set off.

Team Dynamik Racing Pty Ltd v. Longhurst Racing Pty Ltd & Ors [2008] QSC 36 (29 February 2008)

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Team Dynamik Racing Pty Ltd v. Longhurst Racing Pty Ltd & Ors [2008] QSC 36 (29 February 2008)

Cases Cited (1)