FEDERAL COURT OF AUSTRALIA

Donaldson v Natural Springs Australia Limited (No 2) [2015] FCA 1157

THE COURT ORDERS THAT:

1.    The defendants’ application be dismissed.

2.    No order as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    On 22 May 2015 I delivered judgment in this matter (Donaldson v Natural Springs Australia Limited [2015] FCA 498). Mr Donaldson failed on all claims. Mr Donaldson was ordered to pay the defendants’ costs of and incidental to the proceeding. The defendants were then given an opportunity to apply for a costs order against Hakel Investments Pty Ltd (Hakel) and David Graer (the non-parties) on the basis that:

(a)    Hakel had partially funded Mr Donaldson’s proceeding; and

(b)    some wasted time was taken up during the trial pursuing the issue of Hakel’s capacity to pay, which was caused by the unsatisfactory nature and evolution of Mr Graer’s evidence on this question (see my reasons at [274] to [302] and [311]).

2    The defendants have now sought an order that the non-parties pay the defendants’ costs of and incidental to the proceeding. The defendants have not relied upon any affidavit material in support of their application but rather have relied upon the various findings in my reasons. In opposition to that application the non-parties have relied on the affidavit of David Arthur Graer sworn on 30 September 2015. On 28 October 2015 I refused the defendants’ application. These are my reasons for that refusal.

3    The Court has a discretion to award costs against the non-parties despite the terms of s 1335(2) of the Corporations Act 2001 (Cth); the principal proceeding before me in part fell within the description in s 1335(2). Section 1335(2) is an enabling provision and not a limitation on the power conferred by s 43 of the Federal Court of Australia Act 1976 (Cth) (FCA Act); see MG Corrosion Consultants Pty Ltd v Vinciguerra (No 2) (2011) 276 ALR 319 at [15] to [18] per North, McKerracher and Jagot JJ, Consolidated Byrnes Holdings Ltd v Hardel Investments Pty Ltd (2009) 176 FCR 348 at [293] to [314] per Lander J and Re Firepower Operations Pty Ltd (in liq) (No 3) (2010) 183 FCR 150 at [15] to [18] per Siopis J; but cf Re Wridgemont Display Homes Pty Ltd (1992) 39 FCR 193 at 196 and 197 per Jenkinson J and Australian Forest Managers Ltd (In Liquidation) v Bramley (1996) 65 FCR 13 at 20, 22 and 23 per Lindgren J.

4    Section 43 of the FCA Act provides:

(1)    The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which this or any other Act provides that costs must not be awarded. …

(1A)    …

(2)    Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.

(3)    …

5    The prima facie general principle is that an order for costs is only made against a party to the litigation (Knight v FP Special Assets Limited (1992) 174 CLR 178 at 192 per Mason CJ and Deane J). An order for the payment of costs by a non-party is exceptional and applications for such an order are to be treated with considerable caution (see Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 at 980 per Lord Goff, Symphony Group Plc v Hodgson [1994] QB 179 at 192 to 193 per Balcombe LJ and Applicant NAGM of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs (2002) 125 FCR 488 at [68] per Sackville, Allsop and Jacobson JJ).

funding arrangement with Hakel

6    In relation to the funding question, the relevant loan agreement between Mr and Mrs Donaldson and Hakel to advance some $50,000 to cover legal expenses was entered into on 19 February 2014, well after the commencement of this proceeding on 27 October 2011. Mr and Mrs Donaldson also executed a mortgage of their land as security for the repayment obligation, which mortgage was initially unregistered. $15,000 was advanced in late February 2014 and $20,000 was repaid in early March 2014; this was equalised by a further advance of $5,000 by Hakel on 13 March 2014. Further, Hakel advanced $10,000 and $16,973 on 15 April 2014 and 12 June 2014 respectively.

7    The moneys advanced by Hakel were due for repayment at the end of October 2014. The moneys were not repaid. In February 2015, Hakel registered the mortgage. In May 2015, Mr and Mrs Donaldson refinanced this debt. The debt owed to Hakel was repaid in full on 15 May 2015.

8    None of these arrangements in my view demonstrate that Hakel’s funding resulted in or was linked to giving Hakel a direct financial interest in the outcome of the litigation. Rather, the arrangements reflect a plain vanilla short-term secured loan to fund some of the legal expenses incurred and to be incurred.

(a) Relevant principles

9    Knight v FP Special Assets Limited concerned the question whether the Supreme Court of Queensland had jurisdiction under s 58 of the Supreme Court Act 1867 (Qld) to make a non-party costs order against some receivers. It was held that the Full Court had erred in identifying s 58 as the relevant source of power, but that non-party costs orders could be made under Order 91 r 1 of the Rules of the Supreme Court of Queensland. Mason CJ and Deane J stated at 192:

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.

10    In Kebaro Pty Ltd v Saunders [2003] FCAFC 5 at [103], Beaumont, Sundberg and Hely JJ stated the following propositions:

(a)    First, a non-party costs order is exceptional relief.

(b)    Second, the categories of case are not closed.

(c)    Third, to warrant its exercise, there must be a sufficiently close connection, or as Gobbo J expressed it, the “connection must be real and direct and it must be material to the issue of costs” (see Bischof v Adams [1992] 2 VR 198 at 205).

11    In Murphy v Young & Co’s Brewery [1997] 1 WLR 1591 at 1603, Phillips LJ held that funding alone would not justify a costs order against a funder under s 51 of the Supreme Court Act 1981 (UK). In that case, costs were sought by the successful defendants against the plaintiff’s legal expenses insurer. An appeal against the trial judge’s refusal to make the order was dismissed. Phillips LJ noted that the insurer had:

(a)    no interest in the result;

(b)    not initiated the claim;

(c)    no control over its conduct; and

(d)    been contractually obliged to provide funds up to the limit of cover.

12    In Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 10) [2009] FCA 498 at [31] Collier J cited Murphy as authority for the proposition that funding alone will not justify a costs order against an otherwise disinterested relative who had provided funding out of natural affection. Her Honour also considered the implications where the family member was the chargee of the assets of the first applicant. It was said by the respondents that this gave the relative a direct financial interest in the commencement and promotion of the proceeding. Her Honour rejected this submission finding that:

(a)    although success in the proceeding may have advantaged all creditors, the interests of the secured creditors were already protected; and

(b)    the interests of the secured creditors were not tied to the success or otherwise of the claims made in the proceeding.

13    Hamilton v Al Fayed (No 2) [2003] QB 1175 concerned a claim for a non-party costs order against contributors to a fighting fund established by supporters of a conservative Member of Parliament to pursue a libel claim against Mohamed Al Fayed. The claim failed and Mr Al Fayed sought costs from contributors to the fighting fund. Simon Brown LJ considered various authorities, commencing with Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 and Murphy and stated (at [48]):

So long as the law continues to allow impoverished parties to litigate without their having to provide security for their opponent’s costs, those sympathetic to their plight should not be discouraged from assisting them to secure representation. Thus is access to justice promoted, and another benefit too — fewer litigants in person.

14    Of course, such observations are to be contextualised to the situation where the contributors were not taking a share in the proceeds of the outcome of the litigation except for the refund of their precise contributions.

15    In Shah v Karanjia [1993] 4 All ER 792, the defendants sought a non-party costs order against a brother of one of the plaintiffs on the basis that, inter alia, entities associated with him had paid about half of the plaintiffs’ costs of the proceeding. The application was dismissed on the basis (see at 810 per Vinelott J) that there was no evidence that those companies had a direct interest in the outcome of the proceeding.

16    Consistently with such authorities, in Vestris v Cashman (1998) 72 SASR 449 at 457 Olsson J noted:

(a)    First, the mere fact that a non-party may have benefited from the litigation, by itself, is not a proper basis for an adverse costs order.

(b)    Second, where proceedings are initiated and controlled by a non-party who has a direct personal financial interest in the result, it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the claim fail or be discontinued. The existence of a special personal interest in or potential benefit from the litigation is the important factor warranting an order against a non-party. But that is not the present case before me.

(c)    Third, the mere fact that the non-party may have funded the legal costs of the unsuccessful party will not normally be sufficient. In my view that sufficiently characterises Hakel’s funding position in the present case.

17    Although a non-party costs order was made in Gore v Justice Corporation Pty Ltd (2002) 119 FCR 429, the funder had entered into a litigation agreement with the plaintiff under which it:

(a)    would receive 8% of any damages award;

(b)    had agreed to pay necessary litigation costs in relation to the claim, which included the defendants’ costs.

18    While the funder did not have any control over the litigation, it agreed to share in the fruits. As O’Loughlin, Whitlam and Marshall JJ stated (at [64]):

It seems to us, as a logical consequence of these circumstances, that in return for the chance of obtaining eight % of the judgment debt and a recoupment of much of its outlay for costs, [the funder] should be expected to incur the risk of a costs order in the event of [the defendants] being the successful party. Reaching that conclusion is made the easier because of the provision in the litigation agreement under which [the funder] agreed with [the plaintiff] that it would pay [the defendants’] costs in the event of [the plaintiff] losing the case.

(b)    Application of principles

19    Mr Graer is not a party to the funding agreement; accordingly, this limb of the application is only relevant to the costs order sought against Hakel.

20    In my view, a costs order should not be made against Hakel. I say this for the following reasons:

(a)    The loan agreement was entered into for the purpose of enabling Mr Donaldson principally to meet legal costs that had already been incurred. But even if Hakel had funded future costs, this is not, of itself, sufficient to justify the making of a non-party costs order. Hakel was at all times a secured creditor. Further, it had no direct interest in the outcome of the case, although no doubt the prospects of being repaid would have been enhanced by any success in the litigation. There was no evidence to suggest that it had a direct interest in the outcome of the case.

(b)    Further, Hakel entered into the loan agreement approximately two years and four months after Mr Donaldson had commenced the proceeding. Moreover, Hakel exercised no control over Mr Donaldson’s conduct of the proceeding.

(c)    Generally, Hakel was not the “real party” to the proceeding. Mr Donaldson was the driving force behind the proceeding and the person who stood to benefit if the claim succeeded. In relation to the question of funding, Hakel’s connection with the proceeding did not extend beyond the loan agreement and advances and any potential recovery thereunder (although recovery was independently secured by the mortgage in any event). In my view this is insufficient to ground a non-party costs order.

21    The defendants sought to put a more diffuse case and contended that Mr Graer and Hakel had a sufficiently close connection with the proceeding because:

(a)    Hakel was directly involved in the commencement of the proceeding by “filing” the originating process on behalf of Mr Donaldson;

(b)    Hakel had provided funding to Mr Donaldson to continue the litigation;

(c)    Mr Graer and Ms Young gave evidence on behalf of Mr Donaldson and such evidence was found to be unsatisfactory.

22    It was also contended by the defendants that the evidence of Mr Graer and Ms Young was necessary for Mr Donaldson to have any prospect of success in his claim for damages or compensation. It was said that Mr Donaldson’s ability to prove the alleged loss and damage rested entirely with the evidence of Mr Graer and Ms Young. Moreover, it was said that it was ultimately held that the obligation of Hakel to pay $300,000 to Mr Donaldson never became unconditional for reasons independent of the share transfer registration question, and in any event Hakel did not have the capacity to pay $300,000. It was said that my finding on this issue, which was the only point of relevance for any of the evidence of Mr Graer and Ms Young, was fatal to Mr Donaldson’s claim, even if he had succeeded in establishing any of the pleaded causes of action on the liability elements.

23    Further, it was said that the conduct of Mr Graer and Hakel and their involvement in this proceeding positively hindered the Court’s ability to determine the proceeding in the most just, efficient and economical manner possible. Furthermore, it was said to have resulted in the prolonging of the trial and additional expense for the parties.

24    The defendants made the foregoing submissions in an endeavour to demonstrate that Hakel did more than merely provide the funding that I have indicated. But in my view, these arguments fail. First, the evidence does not demonstrate that Hakel was substantially involved in the initiation and promotion of the proceeding. Second, Mr Graer’s unsatisfactory evidence and conduct is to be assessed separately in relation to the costs order sought against him. Third, many of the other assertions (see at [23]) were exaggerations.

25    In my view, the application for a costs order against Hakel fails.

26    Let me turn to the position of the costs order sought against Mr Graer.

Mr Graer’s conduct as a witness

27    Mr Graer swore affidavits on 4 February 2013 and 3 March 2014. Mr Graer gave evidence on 10 December 2014 for a total of one hour and 28 minutes. He was cross-examined for one hour and 12 minutes. During this period, the transcript reveals that he was asked 196 questions by the defendants’ counsel and a number of additional questions by me. The cross-examination was wide ranging and included the following topics:

(a)    Mr Graer’s May 2010 meeting with Mr Schlotzer;

(b)    Mr Graer’s discussions with Mr Donaldson held earlier in 2010;

(c)    the 7 December 2010 notice of meeting;

(d)    the AGM to be held on 21 December 2010;

(e)    Mr Graer’s meeting with Mr Donaldson held in February 2010;

(f)    Mr Graer’s meeting with Mr Donaldson held in May 2010;

(g)    the share transfer forms signed on 12 December 2010;

(h)    the value of a public company;

(i)    conditions on Hakel’s offer to purchase Mr Donaldson’s shares for $300,000;

(j)    Mr Graer’s email sent to Mr Schlotzer on 15 December 2010;

(k)    Mr Schlotzer’s email sent on 20 December 2010;

(l)    the involvement of Mr Munt in the planned acquisition;

(m)    discussions between Mr Graer and Mr Donaldson held in December 2010;

(n)    Hakel’s revocation of its offer to purchase the shares, as communicated in April 2011;

(o)    whether the agreement to sell Mr Donaldson’s shares was in writing;

(p)    the loan to Mr Donaldson from Mr Graer; and

(q)    Hakel’s capacity to pay $300,000 to Mr Donaldson.

28    The transcript reveals that approximately 27 questions addressed the capacity to pay issue. Mr Graer swore a further affidavit on 11 December 2014 addressing the capacity to pay issue. Mr Graer was not cross-examined on this affidavit.

29    In my reasons, I found that:

(a)    Mr Donaldson had failed to make out his breach of contract claim;

(b)    in any event, the agreement entered into between Mr Donaldson and Hakel was not unconditional;

(c)    Mr Donaldson’s claims based on the tort of interference with contractual relations and oppression under s 232 of the Corporations Act 2001 (Cth) failed; and

(d)    in any event, Mr Donaldson’s damages claim failed because Hakel’s obligation to pay did not become unconditional and Hakel did not have the capacity to pay $300,000 to Mr Donaldson.

30    I am not inclined to make any costs order against Mr Graer in his capacity as a witness. The usual rule is that witnesses enjoy immunity from any form of civil action in respect of evidence given during proceedings.

31    In Shah v Karanjia, in addition to the circumstances I have described earlier, costs were sought against a witness on the basis that he had supported the prosecution of the plaintiffs’ claim and that his evidence had been disbelieved by the trial judge. The application was refused with Vinelott J noting at 804 and 805 that:

(a)    the defendants’ contention was inconsistent with the dicta of Balcombe LJ in Symphony Group Plc v Hodgson;

(b)    the witness was not separately represented at the hearing;

(c)    the witness was not warned that he could be the subject of an adverse costs order; and

(d)    the claim was not formulated until after the hearing.

32    There is little authority to support the proposition that a costs order can be made against a witness on the basis of unsatisfactory evidence contained in affidavits and given in cross-examination. To the contrary, the normal rule is that a witness is immune from any such claim. The defendants drew my attention to Li v Xin (No 2) [2013] VSC 139, but in that case there was little analysis of the matter and in any event the witness (Lucy Li) also had an interest in the litigation. That decision can be put to one side. The defendants did not proffer any other persuasive authority on the point.

33    Further, at no time prior to or during the giving of his evidence was Mr Graer warned that costs could be sought against him personally.

34    Finally, the non-parties also contended that the findings that I had made in my judgment were inadmissible as evidence of the facts against the non-parties. I doubt the correctness of such an absolute proposition, particularly in a case where a non-party was closely connected to the proceedings, indeed perhaps the “real” or “true” party. I also doubt its correctness where the procedure is a summary and interlocutory application within the principal proceeding where the findings were made. Indeed, how else would costs orders against solicitors who were not parties be made where they had been responsible for the incurring of unnecessary trial costs and it was necessary to refer to the trial findings to establish this? No issue estoppel could arise against the non-party unless there was privity of interest with one of the parties. So, on a summary application for costs, evidence adduced by the non-parties in opposition could displace any such findings. But in the absence of such displacing evidence, I see no good reason why such findings could not be used where there was a sufficient connection of the non-party to the proceeding and that non-party suffered no injustice by using such findings (see generally Symphony Group Plc v Hodgson at 193 per Balcombe LJ and Staughton LJ at 196 and Flinn v Flinn [1999] 3 VR 712 at [139] to [144] per Brooking, Charles and Batt JJA). In the result, I do not need to resolve this question.

35    In my view, no costs order should be made against Mr Graer.

Conclusion

36    In my view, although I have adequate power to award costs against a non-party, in the exercise of my discretion I decline to do so. The defendants’ application is dismissed.

37    As to the costs of the present application, in my view costs should lie where they fall, notwithstanding the Calderbank letters sent by the non-parties. Mr Graer’s affidavit was late and I also do not consider it unreasonable for the non-parties’ offers to have been refused. Moreover, given the conduct of Hakel and Mr Graer generally in this litigation, including further deficiencies in the material recently filed, it is not inappropriate not to make any costs order in their favour on the present application.

Associate:

Dated:    29 October 2015