FEDERAL COURT OF AUSTRALIA

Chapman v Luminis Pty Ltd (No 7) [2002] FCA 1098

COSTS – non-party costs order sought by successful respondents - applicants people of straw – whether the non-party played an active part in the conduct of the litigation – whether the non-party or some person on whose behalf it was acting or had been appointed had an interest in the subject matter of the litigation – whether interests of justice require that the order be made.

Federal Court of Australia Act 1976 (Cth) s 43

Chapman v Luminis Pty Ltd & Ors (No 5) [2001] FCA 1106 cited

Knight v F. P. Special Assets Ltd (1992) 174 CLR 178 applied

Caboolture Park Shopping Centre Pty Ltd (In Liquidation) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224 cited

McKewins Hairdressing and Beauty Supplies Pty Ltd (In Liquidation) v Deputy Commissioner of Taxation (2000) 171 ALR 335 cited

Chapman v Luminis (1998) 86 FCR 513 cited

Symphony Group Plc v Hodgson [1994] QB 179 distinguished

Vestris v Cashman (1998) 72 SASR 449 distinguished

Yates v Boland [2000] FCA 1895 followed

Gore v Justice Corporation [2002] FCAFC 83 followed

Ulowski v Miller (1968) SASR 277 followed

THOMAS LINCOLN CHAPMAN, WENDY JENNIFER CHAPMAN & BINALONG PTY LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQUIDATION) v LUMINIS PTY LTD, DEANE JOANNE FERGIE, CHERYL ANNE SAUNDERS, ROBERT EDWARD TICKNER & COMMONWEALTH OF AUSTRALIA

No SG 33 of 1997

von DOUSSA J

ADELAIDE

10 SEPTEMBER 2002

THE COURT ORDERS THAT:

1.         Kebaro pay the first and second respondents their costs of these proceedings on the footing that if the applicants, or any of them, or any other party are or is ordered to pay such costs, the liability of all persons ordered to pay such costs should be joint and several. 

2.         Kebaro pay the third, fourth and fifth respondents their costs of these proceedings on the footing that if the applicants, or any of them, or any other party are or is ordered to pay such costs the liability of all persons ordered to pay such costs should be joint and several. 

3.         Further consideration of the amended notice of motion by the first and second respondents dated 16 August 2002 and the amended notice of motion filed by the third, fourth and fifth respondents dated 24 June 2002 be otherwise adjourned for further consideration on a date to be fixed. 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 21 August 2001 the claims of the applicants for damages in the principal proceedings against all five respondents were dismissed:  Chapman v Luminis Pty Ltd (No 5) [2001] FCA 1106 (Chapman (No 5)).  This judgment concerns two notices of motion, the first filed by the third, fourth and fifth respondents (the Commonwealth respondents) and the other by the first and second respondents (the Luminis respondents).  In their final form, after amendment, the notices of motion seek the following orders:

“1.       Kebaro Pty Ltd (Kebaro) be joined as a party to the within proceedings for the purpose of enabling the respondents to seek orders with respect to their costs of action as against Kebaro;

2.         Kebaro do pay to the … respondents their costs of these proceedings on the footing that if the applicants or any of them or any other party are/is ordered to pay such costs the liability of all persons ordered to pay such costs be joint and several; 

3.         Any costs ordered to be paid pursuant to paragraph 2 above be assessed [claimed] in a sum to be ascertained on the basis that such sum is to comprise all costs except so far as they are of an unreasonable amount or were unreasonably incurred, so that, subject to such exception the … respondents will be completely indemnified for their costs;

4.         Alternatively to order 3, that such costs be assessed on a party and party basis;

5.                  Costs be determined by the Court on a gross sum basis;  and

6.                  Such further or other order as the nature of the case may require.

7.                  Kebaro pay the costs of this notice of motion.”

Only pars 1 and 2 of the notices of motion have been argued.  It is understood between the parties that if the respondents succeed on par 2, the balance of the notices of motion should be heard in conjunction with other issues which are still outstanding between the parties as to the costs of the principal proceedings. 

2                     Kebaro Pty Ltd (Kebaro) is a non-party.  The power of this Court to order costs against a non-party is not in dispute:  see s 43 of the Federal Court of Australia Act 1976 (Cth), Knight v F. P. Special Assets Ltd (1992) 174 CLR 178 (Knight) and Caboolture Park Shopping Centre Pty Ltd (In Liquidation) v White Industries (Qld) Pty Ltd (1993) 45 FCR 224 at 230.  In Knight, Mason CJ and Deane J (with whom Gaudron J agreed) said at 188:

“The cases awarding costs against non-parties are more readily explicable on the footing that there was no absence of jurisdiction to order costs against non-parties in the strict sense and that the jurisdiction could be exercised against persons who were considered to be the ‘real parties’ to the litigation.”

3                     In McKewins Hairdressing and Beauty Supplies Pty Ltd (In Liquidation) v Deputy Commissioner of Taxation (2000) 171 ALR 335 at [15], Gummow J observed that where costs are sought against a non-party, joinder of that party before making such an order is not a necessary course, but it is one that is prudent to follow.  Hence par 1 of the notices of motion.  Notwithstanding this observation, when counsel for Kebaro opposed the joinder sought by par 1 of the notices of motion, counsel for the Commonwealth respondents said that par 1 would not be pressed.  On this point I understand counsel for the Luminis respondents to take the same position.  It is to be noted that in the leading case of Knight at 206 the receivers and managers against whom a non-party order for costs was made were not formally joined as parties to the proceedings for the purposes of making that order. 

4                     For the purpose of the present applications all counsel relied on the following passage from the judgment of Mason CJ and Deane J in Knight as setting out the considerations on which the outcome of the notices of motion depends.  Their Honours said at 192-193:

“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.”

5                     Whilst this passage expresses the general category of case in which an order for costs against a non-party should be made, their Honours recognise at 192 that no implicit restriction is to be put upon the scope of that power, save that it is to be exercised “judicially and in accordance with general legal principles pertaining to the law of costs”.  Section 43(2) of the Federal Court of Australia Act provides that the power to award costs in all proceedings before the Court “is in the discretion of the Court or Judge”. 

6                     The respondents contend that the three circumstances identified by Mason CJ and Deane J are present in this case.  They submit that the evidence establishes beyond question that the unsuccessful applicants are people of straw;  Kebaro has played an active part in the conduct of the litigation;  and Kebaro, and the persons on whose behalf it was acting, and by whom it was appointed, had an interest in the subject matter of the litigation.  Kebaro was controlled by Mr Chapman and the respondents contend that Kebaro was acting at relevant times for the applicants, Mr and Mrs Chapman (the Chapmans). 

7                     Counsel for Kebaro, however, contend that the notices of motion are without merit and should be dismissed because Kebaro played no active part in the conduct of the litigation, and has no interest in its subject matter.  Kebaro contends that it did not fund the litigation in the sense of providing its “own funds at risk”.  Further, and in any event, Kebaro contends that the notices of motion should be dismissed as it was at no time during the course of the proceedings warned that an application for non-party costs could be made against it if the applicants failed.

8                     The affidavit material filed by the Commonwealth respondents in support of the notices of motion is extensive.  On 3 May 2002 the Court directed that Kebaro file within four weeks whatever affidavit or other material it wished to rely on in opposition to the claim against it.  It has filed no material.  However, the respondents concede that at no time before judgment was Kebaro put on notice by the respondents that an order for non-party costs might be made against it.

9                     The respondents rely on the following events and evidence to support their claim for costs against Kebaro.

10                  The principal proceedings were commenced on 23 May 1997 by the Chapmans.  The proceedings were brought by them as assignees pursuant to two deeds of assignment dated respectively 22 May 1997 (the first deed of assignment) and 25 September 1997 (the second deed of assignment).  The Chapmans sought to recover damages which they alleged that Binalong Pty Ltd (Receivers and Managers appointed) (In Liquidation) (Binalong) had suffered in consequence of the wrongful conduct of each of the respondents.  Their claims are described in Chapman (No 5) at [149] to [160]. 

11                  In their defences the respondents pleaded that the deeds of assignment were not valid and effective.  This led to an application by the Chapmans to join Binalong as an applicant, and leave to do so was granted pursuant to O 6, r 8 of the Federal Court Rules on 4 September 1998:  Chapman v Luminis Pty Ltd (1998) 86 FCR 513 (Chapman (No 1)).  The terms of the order giving leave assume some importance, and are discussed below.

12                  The action as it proceeded to trial was constituted with the Chapmans and Binalong as applicants, and the Luminis respondents and the Commonwealth respondents as the five named respondents. 

13                  Mr Chapman was a director of Binalong, and the Chapmans owned 50% of the issued shares, the remainder being owned by Mr Chapman’s mother, Ruth Galle Chapman.  Binalong was the developer of a marina complex on Hindmarsh Island, future stages of which were dependent upon the construction of the Hindmarsh Island Bridge.  Even before action was taken under the Aboriginal and Torres Strait Islander Heritage Protection Act 1984 (Cth) to halt the construction of the bridge, Binalong was in dire financial straits.  On 30 March 1994 its financier, Partnership Pacific Ltd (PPL), served a notice of demand for some $15.4 million.  The demand was not met and Receivers and Managers were appointed on 8 April 1994.  On 2 May 1994 PPL applied to the Supreme Court of South Australia to wind up Binalong.  The order was later made on 8 August 1994.

14                  On 5 May 1994 Kebaro was incorporated.  The sole director is, and always has been, Mr Chapman.  It had a paid-up share value of $3.  On 6 May 1994 The Lincoln Trust was established by deed.  It is a discretionary trust, the beneficiaries being Ruth Galle Chapman and her descendants and their spouses.  Kebaro was appointed trustee.  The Trust Deed empowered Mr Chapman to remove the trustee and appoint others.

15                  A deed dated 30 June 1997 obtained by the respondents during discovery, announces that Mr Chapman, by that deed, removed Kebaro as trustee of the Lincoln Trust and appointed himself and Mrs Chapman as trustees in its place.

16                  The Chapmans have given evidence on a number of occasions in the course of the proceedings that they entered into the first deed of assignment and the second deed of assignment as trustees for The Lincoln Trust, although there is no mention of the fact in either of the deeds of assignment, or any contemporaneous declaration of trust or other document to verify that assertion.  Their evidence is that The Lincoln Trust was established for the purpose of prosecuting the proceedings, and that apart from the interest received under the assignments, the Trust has no other assets.

17                  On 30 June 1997 The Galle Trust was established by deed, and Kebaro was appointed trustee.  The Galle Trust is a discretionary trust.  Like The Lincoln Trust, the potential beneficiaries of The Galle Trust are Ruth Galle Chapman and her descendants and their spouses.

18                  In his evidence in the principal proceedings, Mr Chapman deposed that between the months of May and September 1997 confidential negotiations took place between PPL, its holding company Westpac Banking Corporation (Westpac) and the Chapmans, concerning the sale and purchase of the marina.  That negotiations were taking place during that time was confirmed by a senior officer of Westpac in the course of his evidence at trial:  see Chapman (No 5) at [762]–[766].  The trial evidence indicates that the Chapmans were trying every way possible to regain control of the marina development, and, as a part of the incentive being offered by them to Westpac/PPL, proposed that Westpac/PPL receive a proportion of the proceeds of the action to be taken by them against the respondents.  Westpac business records indicate that the proportion under consideration was 50%. 

19                  The terms of the first deed of assignment dated 22 May 1997 (the day before the commencement of these proceedings) assigns to the Chapmans causes of action against the first, second and third respondents, Luminis Pty Ltd, Dr Fergie and Prof Saunders.  The stated consideration payable to the liquidator of Binalong is the sum of $1 and 20% of the net proceeds from pursuing the assigned causes of action.  Clause 4 of the deed provides:

“The Chapmans will diligently pursue the causes of actions only in their own names, and use their best endeavours within their available resources to maximise the return to the Company [Binalong] from the same as soon as reasonably practicable.”

By cl 8, the Chapmans agreed that if they are in breach of any obligation pursuant to the deed they will assign back to Binalong the causes of action for the consideration of $1. 

20                  In September 1997 the Chapmans reached agreement with Westpac/PPL about the sale of the marina.  Many transactions were settled between them and other parties during that month.  It is only necessary to refer to some of them. 

21                  On 19 September 1997 The Hindmarsh Trust was established by deed.  Kebaro was appointed the trustee.  The Trust was a discretionary one, in favour of the Chapmans and their children.  The evidence is that The Galle Trust was established to become the owner of that part of the marina’s operation that involved the development and sale of land, and that The Hindmarsh Trust was to operate the mooring and other water orientated aspects of the marina. 

22                  On 25 September 1997 a complex deed of sale was executed by many parties pursuant to which Kebaro acquired the marina from Westpac/PPL as mortgagees in possession.  The transaction was settled on 30 September 1997.  Since that time Kebaro has operated the marina development ostensibly as trustee for The Galle Trust in respect of the land development, and as trustee of The Hindmarsh Trust in respect of the other aspects of the undertaking.

23                  Recitals T and V of the deed of sale refer expressly to the first and the second deed of assignment respectively.  Recital W says that the Chapmans intend to join Mr Tickner and the Commonwealth as defendants in the litigation.

24                  Besides Westpac and PPL, the parties to the deed of sale include Kebaro, Ruth Galle Chapman and the Chapmans and their children.  At the outset, Kebaro is described as “the purchaser”, “in its capacity as trustee of the trust known as ‘The Galle Trust’”.  However, in the body of the deed at cl 20.3.2.1, the purchaser and the Chapmans represent, warrant, undertake and agree with Westpac and PPL that:

“The Purchaser enters into this Deed and any other security required to be given by the Purchaser under this Deed both in its own right and as Trustee of the Galle Trust.”

Kebaro’s precise role in the transaction, whether as trustee or principal or both, is not easy to understand, but I do not think that difficulty is material to the present application.

25                  The second deed of assignment was made on 25 September 1997.  By that deed Binalong assigned, inter alia, its causes of action against Mr Tickner and the Commonwealth to the Chapmans.  Clause 3 of the deed relevantly provided:

“3.1     As consideration for the assignment the Chapmans will pay $1.00 upon the execution of this deed. 

3.2       In the event that the Chapmans receive any proceeds by exercising the just terms rights or bringing the Commonwealth causes of action, they must pay 50% of the net proceeds of the same to the Liquidator and in consideration of this Deed the Chapmans agree to pay a further 30% of any net proceeds recovered (a total of 50%) of the net proceeds from any cause of action referred to in the May Deed.  In this regard, clause 3.2 of the May Deed is varied by changing ‘20%’ to ‘50%’.”

Clause 4, like the corresponding clause in the first assignment, imposes an obligation on the Chapmans to diligently pursue the assigned causes of action.  However, the second deed does not contain any provision for the re-assignment in the event of breach. 

26                  The terms of cl 3.2 are significant.  Retrospectively the proportion of the proceeds from the action payable to the liquidator (in reality, because of the Westpac/PPL securities, to Westpac/PPL) have been increased from 20% to 50%.  Given the evidence already mentioned regarding the negotiations taking place between May and September 1997 between the Chapmans and Westpac/PPL, the inference is that the increased percentage is part of the deal struck with Westpac/PPL.

27                  In consequence of the second deed of assignment, and the amendment made by it to the first deed of assignment, on 25 September 1997, the day when the deed of sale was executed, Westpac/PPL was, in effect, entitled to 50% of the proceeds of the action against the five respondents, which action the Chapmans had undertaken to diligently pursue.  The respondents not surprisingly therefore draw attention to cl 21 of the deed of sale and contend that it is a reflection of a likelihood that parties to the deed recognised the potential for the respondents to seek security for the costs of the action, and potentially a non-party costs order against Westpac/PPL should the action fail.  Clause 21 provides:

“21      FERGIE/SAUNDERS ACTION AND TICKNER/COMMONWEALTH ACTION

21.1     The parties to this Deed acknowledge that Tom and Wendy Chapman in their capacity as trustees of The Lincoln Trust have commenced the Fergie/Saunders Action and may commence the Tickner/ Commonwealth Action.

21.2     The Purchaser and the Guarantors acknowledge and agree that if, for any reason whatsoever, an Order is made by the Court or Courts in which the Fergie/Saunders Action and/or the Tickner/Commonwealth Action have been commenced whereby either or both of PPL and Westpac are required to either give security for or to pay costs to the Defendants in those actions:

21.2.1    that they will indemnify PPL and Westpac and keep them indemnified in respect of any moneys which PPL and/or Westpac may be required to pay by way of costs under any such Order and pay to Westpac and/or PPL any amount so paid by them or either of them by way of such costs when the balance of the purchase price payable by the Purchaser for the Land is paid or if such balance has been paid then upon demand.

21.2.2    that payment by the Purchaser to PPL and/or Westpac of any amount so paid by them or either of them by way of such costs will be secured by the Chapman Securities.

21.3     In the event that an Order for security for costs or for the payment of costs is made against either or both of PPL or Westpac in the Fergie/Saunders Action and/or the Tickner/Commonwealth Action, the Purchaser and the Guarantors, and in particular Tom and Wendy Chapman, undertake and agree with PPL and Westpac that they will not continue or permit allow or procure the continuance of those actions or either of them unless and that any further prosecution of those actions or either of them will be subject to:

21.3.1    Westpac and/or PPL consenting to and approving the continuation of the prosecution of such actions, which consent and approval may be withheld or given on such terms and conditions as Westpac and/or PPL in their/its absolute discretion shall determine;  provided that such consent and approval maybe withheld only if advice is received from senior counsel either approved or appointed by Westpac or PPL that neither of those actions has any reasonable prospect of success on the question of liability and that the quantum of damages likely to be recovered under them or either of them as the case may be, will not be sufficient to justify their continued prosecution;  and

21.3.2    if so required by Westpac and/or PPL, the providing by the Purchaser and/or the Guarantors to Westpac and/or PPL of such further security for the repayment of those costs to Westpac and/or PPL as Westpac and/or PPL may reasonably require over property legally or beneficially owned by the Purchaser and/or the Guarantors or any of them or to which they or any of them have any legal or beneficial right or entitlement at that time.”

Thus, under cl 21.2 Kebaro has agreed, should the occasion arise, to indemnify Westpac/PPL against any liability incurred by way of costs.  Further, the respondents stress the importance of cl 21.3, which they contend indicates that Kebaro acknowledged, and undertook to exercise when necessary, control over the prosecution of the litigation.

28                  The continued prosecution of the litigation by the Chapmans assumed importance in another respect under the deed of sale.  By cl 5 the Land (effectively the marina complex) is sold subject to a registered debenture charge granted by Binalong to PPL.  The floating charge crystallised on the appointment by Westpac/PPL of agents to enter into possession of the Land. 

29                  Recital X acknowledges that the causes of action that are the subject of the litigation are subject to the charge (a result presumably achieved by clauses in the deeds of assignment which charge the assigned choses in action with the due performance and observance of the terms and conditions of the deeds of assignment in favour of Binalong:  see cl 6 in each deed of assignment).  However, the deed of sale provides for the discharge of the charge in cl 24 which provides:

“24.     BINALONG DEBT

24.1          Westpac and PPL acknowledge, undertake and agree with the Chapmans, and in particular Thomas Lincoln Chapman, Wendy Jennifer Chapman and Ruth Galle Chapman, the Associated Companies and MS Co that upon payment to PPL or to the Liquidator of Binalong, as the case may be, of all moneys which may be or become due by Thomas Lincoln Chapman and Wendy Chapman to the Liquidator of Binalong under the First Assignment of Rights [the first deed of assignment] and the Second Assignment of Rights [the second deed of assignment]:

24.1.1  that Westpac and PPL will accept the same in full satisfaction and discharge of the obligations under any guarantee or guarantees which may have been given by Thomas Lincoln Chapman, Wendy Jennifer Chapman or Ruth Galle Chapman, the Associated Companies and MS Co to PPL in respect of the Binalong Debt and which are either contained in or form part of the Binalong Securities;  and

            24.1.2  that PPL will give such releases, discharges and assurances in respect of such guarantees and any security which PPL may hold over the Land and/or the Binalong Assets which forms part of the Binalong Securities as may reasonably be required in the circumstances.  Any such release, discharge or assurance shall be at the cost in all things of Thomas Lincoln Chapman, Wendy Jennifer Chapman, Ruth Galle Chapman, the Associated Companies and MS Co. 

24.2          It is expressly acknowledged and agreed by the Chapmans, the Associated Companies and MS Co that until the payments referred to in Clause 24.1 have been made and any release discharge and assurance referred to in that Clause is given by PPL all of PPL’s rights against Binalong and under such of the Binalong Securities as shall then be in force and effect shall continue in full force and effect, until the payments referred to in Clause 24.1 have been made.

…”  (emphasis added)

30                  The respondents point out that Kebaro had a direct interest in the outcome of the litigation to ensure that under cl 24 the Binalong debt, and in turn the charge referred to in cl 5, could have no further impact on the Land. 

31                  At [11] above I referred to the joinder of Binalong as a party to the proceedings.  The circumstances that gave rise to the Chapmans making application to join Binalong are set out in Chapman (No 1).  In March 1998 the respondents asserted that the deeds of assignment were not valid and effective, and for that reason pleaded that the Chapmans had no standing to maintain a litigation.  The Chapmans sought the consent of the liquidator of Binalong to use the name of Binalong in the proceedings.  They did so to provide for the contingency that the respondents’ argument that the assignments were not valid at law was upheld.  They wished to contend that the assignments would nevertheless be valid equitable assignments, but to maintain the action on that basis it was necessary that Binalong be a party to the proceedings.  The order of the Court made on 4 September 1998 relevantly provided as follows:

“1.       Subject to the first and second applicants and Kebaro Pty Ltd ACN 064 584 667 (‘Kebaro’) entering into a Deed in terms handed to the Court and marked ‘A’ and further subject to Kebaro granting the security referred to in the Deed in the form of a mortgage in the form handed to the Court and marked ‘B’, the first and second applicants at their own expense and risk as to costs be authorised to use the name Binalong Pty Ltd ACN 007 620 439 (Receivers and Managers Appointed) (In Liquidation) as joint applicant with the existing applicants in this action.

2.         That the applicants have leave to amend the application herein to name the aforesaid company as applicant.

…”

32                  A deed in terms of the document marked “A” (referred to in the above order) was executed on 2 October 1998.  The parties were Binalong, the Chapmans and Kebaro.  By cl 3 the Chapmans and Kebaro jointly and severally undertook to indemnify and keep indemnified Binalong and the liquidator against costs, charges and expenses, more particularly described in the deed in connection with or arising out of the proceedings.  Further, by cl 4 Kebaro agreed to provide to Binalong and the liquidator security for the indemnity.  By cl 2.2 that security was to be a first ranking security with priority to any other mortgage.  Clause 10 provided:

“The Chapmans and Kebaro at their cost shall cause their solicitors to provide reports in writing on the status of the proceedings to the Liquidator upon his reasonable request from time to time.”

Kebaro gave Binalong and the liquidator a first mortgage over some thirty-two allotments of land in the Hindmarsh marina, and negotiated a deed of priority with Westpac dated 2 October 1998.  Westpac otherwise held a first mortgage over the marina land to secure the balance of the purchase price payable under the deed of sale.

33                  In short, Kebaro provided security over its assets to meet the condition imposed by the Court order and by the liquidator for the use of Binalong’s name in the litigation.

34                  On 4 March 1998 the Luminis respondents made application for security for costs against the Chapmans.  The supporting affidavit indicates that the Luminis respondents were unaware of any suggestion that the Chapmans had brought the proceedings in a representative capacity.

35                  The hearing of the application for security was delayed, partly by reason of the application by the Chapmans to join Binalong.  It was not until 10 November 1998 that the Chapmans swore an affidavit in opposition to the application for security.  That affidavit disclosed for the first time that the Chapmans asserted that the deeds of assignment had been entered into by them on trust for The Lincoln Trust.  They said that they were without assets.  They said they worked at the marina for Kebaro and “drew” the sum of $1,000 per week (tax returns and later evidence indicates that they asserted that their actual wages were very modest – in that year they each disclosed taxable earnings of $6,150).  They disclosed that since about September 1997 they had become entitled to approximately $104,166, before the payment of legal costs, by way of settlement or judgment in defamation actions, and said that that money had either been expended or was committed to meeting the disbursements of the litigation.  They said the liquidator of Binalong had no funds – a matter that was common knowledge to all concerned.  They said no other party had provided any funding in respect of the litigation “save that Kebaro Pty Ltd has paid some disbursements in respect of this litigation all of which (except for $5,000.00 outstanding) have been subsequently reimbursed by us to Kebaro Pty Ltd”.  On 19 November 1997 the Luminis respondents reached agreement with the Chapmans to compromise the application for security by Kebaro granting a registered second mortgage over marina land in favour of the Luminis respondents to a maximum sum of $50,000.  The settlement was stated to be in full and final satisfaction of any security for costs application against any applicant, regardless of any changed circumstances or financial status. 

36                  The above summary indicates the extent of the information that was available to the respondents about the role of Kebaro prior to the delivery of final judgment on 21 August 2001.  Whether the respondents at that stage understood the implications of the terms in the deed of sale insofar as they concerned Kebaro’s role in the litigation is another matter.  Additional information has since become available to the respondents in the course of a contested application by them for security for costs in the appeal which the Chapmans have instituted against the dismissal of the action.  The further information reveals that Kebaro has, to a substantial extent, provided funding for disbursements and counsel fees during the trial.  Through the years 1999-2001 Kebaro was selling land in the marina development.  Proceeds from the sale of allotments were credited to accounts within the firm of the applicant’s solicitors from which disbursements in litigation were met, totalling in the order of $680,000.  Evidence from the principal solicitor for the applicants, given at the security for costs application in November 2001, and from Mr Chapman on 19 December 2001, is to the effect that Kebaro lent monies to the Chapmans for the purposes of the litigation, and did so in its capacity as trustee of The Galle Trust and The Hindmarsh Trust.  No papers were produced on subpoena recording the loans or the involvement of the Trusts in providing them.  The solicitor said that he had not seen any documents as to the terms of any loans, and had never asked to see such documents.  Mr Chapman is the sole director of Kebaro and the solicitor said he acted upon Mr Chapman’s instructions.  With respect to Mr Chapman’s duties as a director, and Kebaro’s duties as a trustee, no independent advice was given to Kebaro, nor was Mr Chapman advised to obtain independent advice, nor was any advice given regarding Kebaro’s duties to preserve Trust assets.  No security was provided by the Chapmans to Kebaro for the loans.

37                  In answer to a written request by the respondents made after judgment as to how the applicants funded the proceedings, the applicants said they had funded the disbursements from their personal funds.  The first source of these funds was proceeds from defamation actions, actual receipts from which totalled in excess of $550,000, plus additional sums by way of costs.  Most of these sums which the Chapmans received had been applied by them to fund the payment of disbursements in the litigation, including one payment of $150,000 to refund The Galle Trust for monies advanced to the Chapmans.  The total advances by The Galle Trust to the Chapmans was said to be in the order of $700,000 (which is in line with the evidence about payments made by Kebaro from land sales).  However, they said that at least $140,000 of that sum had been applied to disbursements in other matters.  Thus The Galle Trust had advanced some $560,000 in respect of the litigation against the respondents, $150,000 of which had later been refunded from the fruits of defamation actions by the Chapmans.

38                  The evidence adduced at the security for costs hearing also revealed substantial drawings by the Chapmans from The Hindmarsh Trust between 13 December 1999 and 3 July 2000 for which no documentary record or explanation was offered.  Their drawings accounts increased between those dates from a net $63,060 to $240,827 – an increase of $177,767.  On the evidence that the applicants were drawing $1,000 a week, some $140,000 is unaccounted for.  Whether this was used in whole or in part to fund the litigation is unclear and I do not think that it can be inferred from the evidence that it was so used.  However, this piece of evidence illustrates the absence of records being kept by the Chapmans and the inter-mingling of monies said to belong to the Trusts and Kebaro with the affairs of the Chapmans.

39                  The Chapmans said that there had been no other sources of funding for the proceedings.  Their solicitors were unpaid and some counsel fees were outstanding.

40                  When considering the way in which the funds under the control of Kebaro as trustee of The Galle Trust and The Hindmarsh Trust have been used, it is pertinent to note cl 8 of each of the Trust deeds which provide:

“8        The powers of the trustee

            Subject to this deed, the trustee has all the powers in relation to this trust as if the trustee was a natural person and the trust fund was beneficially owned by the trustee. 

            Without limiting the generality of the preceding paragraph, the trustee also has all the following powers.

            …

8.4       To manage the whole of the trust fund as if the trustee was the beneficial owner of it without restriction and without being responsible for loss except as provided in this deed.”

Clause 14 of each deed also provides:

“14.1   No trustee is liable for any neglect or default, or any losses or liabilities, in carrying out this trust, except those arising from a breach of trust committed by the trustee actually knowing it to be a breach of trust.”

41                  Finally, the respondents relied on a letter from the Chapmans’ solicitors saying that no-one but the Chapmans had controlled the conduct of the proceedings, and upon the personal observation of counsel for the respondents at trial, that Mr Chapman was in Court for the vast majority of the trial, and appeared frequently to be conferring with and providing instructions to his counsel and solicitors.  The respondents point out that throughout the trial Mr Chapman “wore two hats”.  To say that he was giving instructions leaves open the question whether he was doing so as one of the controllers of The Lincoln Trust, or as the controller of Kebaro, or in both capacities. 

42                  On the factual material summarised above the respondents contend that the circumstances which fulfil the requirements of the general category of case in which a non-party order for costs should be made, identified by Mason CJ and Deane J in Knight at 192‑193, have been fulfilled.

43                  The evidence establishes that the Chapmans are people of straw.  That proposition is conceded, and there is no need to spend further time analysing the evidence on that topic.  Insofar as it is relevant to take into account that as trustees of The Lincoln Trust they would have a right of indemnity in respect of the costs of the litigation, the trust has no assets.

44                  The respondents contend, and Kebaro denies, that Kebaro played an active part in the conduct of the litigation.  On this question, when all the evidence is considered together, I am satisfied, and so find, that Kebaro played an active part in the litigation.  It provided security to the Chapmans to enable them to obtain the liquidator’s consent to the use of the name of Binalong as an applicant.  It provided security to enable the Chapmans to compromise the application for security for costs which was made by the Luminis respondents.  It appears from the affidavit of the Chapmans sworn on 10 November 1998 in opposition to the application by the Luminis respondents, that in the early stages of the proceedings Kebaro also initially met some disbursements.  Apparently most of those disbursements were later refunded by the Chapmans.  The amount outstanding at 10 November 1998 was said to be about $5,000 which, in the overall magnitude of the case was a small amount.  It is doubtful that these three matters, if they stood alone, would be sufficient to establish that Kebaro had so involved itself in the conduct of the litigation that it should be held liable for the costs of the successful parties to the litigation.  However, these matters do not stand alone.  Of much greater significance is the fact that in the later stages of the case, large sums of money were advanced to support disbursements and counsel fees – apparently up to $560,000.

45                  In my opinion it is plain on the evidence that, but for this support, the litigation could not have continued.  The fact that the Chapmans have outstanding liabilities to their solicitors in respect of these proceedings is powerful evidence that finance was not available from another source to fund the litigation.  I also accept the respondent’s contention that the evidence establishes that Kebaro was acting on behalf of the Chapmans by whom it had been appointed.  It was doing so when it provided security to the liquidator and to the Luminis respondents, and in funding disbursements.  It was also acting on behalf of the Chapmans and in their interests in accepting obligations under the deed of sale to indemnify Westpac/PPL in the event that Westpac/PPL were required to pay the respondents’ costs in the proceedings or give security for costs. 

46                  I also accept the respondents’ submission that the evidence establishes that Kebaro had an interest in the litigation.  The Land had been transferred to it under the deed of sale subject to the charge to Westpac/PPL securing the Binalong debt.  Absent any evidence from Kebaro to the contrary, I infer that it was of very substantial importance to Kebaro that it ensured that the Land become free of the charge pursuant to the provisions of cl 24 of the deed of sale. 

47                  Further, Kebaro had an interest in ensuring that the litigation proceeded successfully so as to avoid liability under the security given to the Luminis respondents.  The clear inference from the evidence is that the prospects of Kebaro recovering monies which it advanced by way of disbursements or otherwise to the Chapmans to maintain the litigation would be slight indeed in the event that the litigation failed to produce a positive result.

48                  The respondents contend that in the circumstances of the case the interests of justice require that Kebaro be held liable for the respondent’s costs of the proceedings.  The overwhelming picture from the evidence is that the Chapmans arranged their affairs so that they could obtain financial support as required and to the extent possible as beneficiaries under discretionary family trusts, whilst not exposing the same source of funds to risk in the litigation.  I agree with the respondents’ submission that it is significant that as the Chapmans put into operation their unswerving desire to regain control of the marina from Westpac/PPL, Kebaro was removed as the trustee of The Lincoln Trust, and that role assumed by the Chapmans who were, at the time, the only applicants in the litigation.  Kebaro then assumed the role as trustee of the trust entities through which the marina, once acquired, was operated.  I accept the respondents’ submission that through this structure the Chapmans endeavoured to shelter the assets and income stream over which they had control from risk in the litigation, whilst at the same time enjoying benefits under the trusts which were run by Mr Chapman as if they were his own.  In the operation of this scheme Kebaro has played a central role.  As the litigation has failed, in my opinion justice requires that Kebaro (and through it, the assets of The Galle Trust and The Hindmarsh Trust) be exposed to a liability to meet the respondents’ costs. 

49                  Kebaro seeks to resist such an order on several grounds.  Its contentions that it played no active part in the conduct of the litigation and had no interest in the subject matter of the litigation I have already rejected.  I also reject the argument that Kebaro did not fund the litigation in the sense of providing its own funds at risk.  In my opinion it did precisely that.  Had it not provided security to the liquidator and to the Luminis respondents, and met disbursements, I am satisfied that the litigation could not have been maintained by the Chapmans.  Kebaro’s money was directly at risk both under the security and in respect of the disbursements for the reason, expressed above, that no realistic prospect of reimbursement from any other source existed in the event of failure of the litigation. 

50                  Kebaro contends that an order for costs should not be made against it because the respondents did not at an early stage in the proceedings seek security for costs from it, or warn it that it might be exposed to an application for non-party costs in the event that the litigation failed.

51                  The suggestion that the respondents should have made application against Kebaro for security for costs is misconceived.  Kebaro was not a party to the litigation.  An application under s 56 of the Federal Court of Australia Act for security for costs would therefore have failed.  This is not a case like Symphony Group Plc v Hodgson [1994] QB 179 where an order for costs was not made against a non-party on the ground that the successful party in the litigation could have joined the non-party early in the case, thereby giving the non-party the opportunity to participate in the litigation and protect its position as it saw fit. 

52                  The present case is also unlike Vestris v Cashman (1998) 72 SASR 449.  There the non-parties would have escaped a costs order (had the District Court jurisdiction to make it) on the ground that an application for security for costs had not been made against the plaintiff company.  The plaintiff was a corporate trustee.  The non-parties were its shareholders and were beneficiaries of the trust administered by it.  An application made against the plaintiff for security of costs would inevitably have required the non-parties to confront a potential exposure to the financial risks of the litigation.  In the present case, the parties against whom security for costs could have been sought were the Chapmans, and once Binalong was joined, Binalong.  In my opinion an application for security for costs against Binalong would have failed having regard to the limited purpose and condition upon which leave was granted for Binalong’s name to be used in the proceedings.  An application for security for costs against the Chapmans would have confronted the considerable obstacle that the Chapmans would have asserted that their impecuniosity was the consequence of the defaults of the respondents.  I think it is now unrealistic for Kebaro to assert that justice requires that it be released from liability for costs on the ground that the respondents did not pursue a doubtful claim for security against other parties.

53                  I turn to the absence of a warning notice to Kebaro.  There is no absolute rule that a party will be disqualified from claiming a non-party costs order if notice is not given to the non-party;  rather, it may, depending on the circumstances of the case, be a material consideration to be taken into account in the exercise of the discretion whether or not an order should be made:  Yates v Boland [2000] FCA 1895 at [34] and Gore v Justice Corporation [2002] FCAFC 83 at [51].

54                  Counsel for Kebaro asserts from the bar table that, had a warning been given, Kebaro could have taken steps to arrange alternative funding for the action, or taken other protective action (although no such possibility was identified).  In short, Kebaro asserts that it has been prejudiced by the absence of a warning.

55                  Where a party seeks to avoid a remedial order of the Court in favour of the opponent on the ground that the party will suffer unfair prejudice, it behoves that party to identify, on oath, the alleged prejudice.  He who asserts must prove.  See for example Ulowski v Miller [1968] SASR 277 at 283-284.  Here no evidence of prejudice has been put forward by the Chapmans.  Further, I respectfully agree with the observation of the Full Court in Gore v Justice Corp Pty Ltd at [61] that it is not helpful to enter into speculation about what might have happened had notice been given.  The better and correct approach is to examine what did happen putting aside issues of speculation.  As in that case, Kebaro in this case did give financial support to the Chapmans. 

56                  In this case I do not think that the evidence establishes that the respondents should have realised before judgment that the conduct of Kebaro, viewed overall, was such that Kebaro was exposing itself to a non-party costs order.  As I indicated at [36] the knowledge of the respondents was that Kebaro had given security on behalf of the Chapmans to the liquidator, had given security to compromise the Luminis respondents’ application for security, and in the early stages of the proceedings had made some advance in respect of disbursements all but a modest amount of which had been refunded.  The mere fact that a non-party makes a loan to a litigant knowing that the proceeds may be used by the litigant for the purpose of the litigation is not in itself enough to attract liability for a non-party costs order.  The Chapmans were beneficiaries of The Galle Trust.  In my opinion the mere fact that the trustee agreed to provide the security that was known to the respondents, and had made a modest loan to the Chapmans would fall short of exposing Kebaro to a non-party costs order.  The deed of sale had been discovered, but the complexity of the document is such that I think it is most unlikely that the present significance of the terms relating to Kebaro’s interest in the litigation would have been understood.  The document was one amongst many hundreds of discovered documents.  Its relevance to the issues in the principal proceedings was quite different.  I am not satisfied that by reading the deed of sale, and knowing of the other matters just mentioned, the respondents should have realised that Kebaro’s role in the litigation brought it into the category of case for a non-party costs order. 

57                  Had the respondents studied the deed of sale closely they would also have noted that cl 20.3 of the deed of sale provides that the purchaser (Kebaro) and the Chapmans represent, warrant, undertake and agree with Westpac and PPL that:

“20.3.3.11       the Trustee will not otherwise than in the ordinary course of business:

20.3.3.11.1            intermingle or mix the Trust’s assets;

20.3.3.11.2            compromise any claim in relation to the Trust assets;

20.3.3.11.3            incur any debt;

20.3.3.11.4            dispose of any property of the Trust;

20.3.3.11.5            mortgage, charge, pledge or otherwise encumber any assets of the Trust.”

For the purpose of cl 20.3.3.11 the Trust assets in the case of Kebaro are the assets of The Galle Trust.  Having regard to these restrictions the respondents would have had no reason to suspect that Kebaro, using The Galle Trust assets, would become a financier of the litigation. 

58                  Now, with the benefit of evidence gathered in the recent hearing over security for costs of the appeal, the respondents understand the position to be different.  However, the significance of not giving a warning to Kebaro must be determined on the state of the respondents’ knowledge at the time when it is suggested notice should have been given.  I am not satisfied that the state of the respondents’ knowledge at relevant times was such that they should now be deprived of the order they seek. 

59                  In my opinion there is no reason to differentiate between the Luminis respondents and the Commonwealth respondents.  I think the way in which the case was conducted by the respondents justifies the conclusion that whatever the Commonwealth respondents knew about the applicants and their related entities would have been made known to the Luminis respondents, and vice versa.

60                  In my opinion orders should be made in terms of par 2 of the notices of motion of both the Luminis respondents and the Commonwealth respondents.

61                  The parties should now apply for a date for hearing the balance of the notices of motion, including the applications for costs therein.

Associate:

Dated:              10 September 2002