Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors (No. 2) (New Zealand) [2004] UKPC 39

Judicial Committee of the Privy Council
Case No Privy Council Appeal No. 8 of 2001Venue FROM THE COURT OF APPEAL OF NEW ZEALAND
Between
Dymocks Franchise Systems (NSW) Pty LtdAppellantTodd & Ors (No. 2) (New Zealand)Respondent
Before
Lord Nicholls of BirkenheadLord HuttonLord Rodger of EarlsferryLord Brown of Eaton-under-HeywoodDame Sian EliasDate 21 July 2004
[1]:- Lord Nicholls of Birkenhead Lord Hutton Lord Rodger of Earlsferry Lord Brown of Eaton-under-Heywood Dame Sian Elias [Delivered by Lord Brown of Eaton-under-Heywood] The petition before the Board seeks an order for costs against a non-party. It was lodged following an order of the Board (differently constituted although including two members of the present Board) made on 7 October 2002 allowing an appeal by Dymocks Franchise Systems (NSW) Pty Ltd ("Dymocks") against the respondents, John Todd and Alicia Beatrice Todd, Bilgola Enterprises Ltd (Bilgola) and Lambton Quay Books Ltd (Lambton) (together called "the Todds"), restoring the trial judge's order in favour of Dymocks (including his orders as to costs) and ordering the Todds to pay Dymocks' costs in the New Zealand Court of Appeal and in the Privy Council. It now being plain that the Todds are unable to meet the order for costs in the Court of Appeal and the Privy Council, Dymocks ask the Board to order that they be paid by Associated Industrial Finance Pty Ltd ("Associated"), a company whose relationship to the Todds and this litigation will shortly be explained. The underlying proceedings[2]It is unnecessary to say much about the underlying proceedings. They are, of course, described in detail in the Board's judgment of 7 October 2002. It is sufficient for present purposes to recount the following matters:(i) In 1994-1995 Dymocks, long-established Australian booksellers, entered into three franchise agreements with the Todds, allowing them to open three bookstores in New Zealand.(ii) Upon the agreements being summarily terminated by Dymocks in February 1998, both Dymocks and the Todds issued proceedings: Dymocks for a declaration that their termination of the franchise agreements was lawful (the Todds counterclaiming damages for repudiation) and for an order enforcing their contractual option to take over the assets of the three bookstores; the Todds for damages for mis-representation.(iii) On 26 February 1999, following a 7-week trial, Hammond J found for Dymocks in both sets of proceedings. Subsequently he ordered the Todds to pay Dymocks costs totalling some NZ $940,000.(iv) On 11 May 1999, following refusals successively by the judge and the Court of Appeal for a stay of execution, Hammond J ordered that Dymocks' compulsory purchase of the bookstores pursuant to the option take place in the week commencing 24 May 1999. Later that month Dymocks paid into court the purchase price of the acquired assets, some NZ$1,800,000. Some NZ$400,000 of that fund having been paid out to certain retention of title claimants and employees, the remainder was subject to separate legal proceedings in which competing claims were advanced respectively by Dymocks themselves (partly pursuant to Hammond J's costs order, partly in respect of other claims by Dymocks against the Todds), ANZ Bank as first debenture holders in respect of the Todds' assets, Associated as second debenture holders (in circumstances which will shortly be explained), and certain other parties.(v) The Todds appealed against Hammond J's orders in both actions. On 6 July 2000 the Court of Appeal dismissed their appeal in the misrepresentation proceedings but partially allowed their appeal in the termination proceedings, holding Dymocks' determination of the franchise agreements to have been unlawful but upholding their right to enforce the option to acquire the assets of the three bookstores.(vi) Both Dymocks and the Todds appealed to the Privy Council, Dymocks against the finding of unlawful termination, the Todds against the finding that Dymocks were entitled to acquire the bookstores. Following a three-day hearing in November 2001, the Privy Council upheld Dymocks appeal, holding that it was the Todds, not Dymocks, who by their conduct had repudiated the franchise agreements. The Privy Council dismissed the Todds' cross appeal, rejecting their contention that the option was void as a penalty. Associated and their part in the underlying proceedings[3]Associated is a private company beneficially owned by Mrs Todd's family. Prior to her bankruptcy in December 2002, Mrs Todd was herself a director of Associated together with her father, Frederick Thom, and her two brothers, Ian Thom and Malcolm Thom. Associated is itself a subsidiary of Parkes Holdings Pty Ltd ("Parkes"), the family's holding company. In 1996-1997 Parkes advanced the Todds A$1,200,000 on commercial terms to fund the expansion of their franchise business. In about May 1998, when the Todds asked the family for further financial assistance because of the demands of the litigation with Dymocks upon their normal resources, Associated advanced them a further A$800,000, on 15 June 1998 registering an all monies debenture over Bilgola (a company wholly owned by Mr and Mrs Todd). On 21 May 1999, following Hammond J's judgment, Associated put Bilgola into receivership under that debenture, Michael Stiassny and Grant Graham being appointed receivers. Both the Todds and Associated having been independently advised by leading counsel that the Todds had a good prospect of succeeding on their appeal, Associated then advanced to the receivers further sums to fund the Court of Appeal hearing. Associated instructed a solicitor, Mr Webeck, to negotiate on their behalf with the Todds' solicitors, Russell McVeagh, themselves already owed substantial costs, the terms upon which together they would fund the appeal and, were it to succeed, would distribute any sums recovered by way of damages and costs.[4]When Dymocks appealed to the Privy Council following the Todds' partial success before the Court of Appeal, Associated advanced yet further sums to the receivers with instructions to pay these over to Russell McVeagh and counsel for their conduct of the appeal, Mr Webeck again having negotiated on their behalf the actual sums to be paid and the distribution of any monies recovered were the Privy Council to find in the Todds' favour.[5]As already stated, the Todds in the event lost the appeal before the Privy Council. To complete the history of this petition, a month later, on 7 November 2002, Dymocks wrote to Grove Darlow & Partners (solicitors acting for Associated in the priority proceedings regarding the monies in court following Dymocks' purchase of the Todds' business assets), stating for the first time that they were intending to seek an order that their costs in the Court of Appeal and the Privy Council be paid by Associated. On 10 December 2002 Mr and Mrs Todd were both made bankrupt. On 8 May 2003 Bilgola and Lambton (a wholly-owned subsidiary of Bilgola) were put into liquidation by Penguin Books, another creditor. In September 2003 the priority proceedings were settled. No monies will be available from the fund in court to meet any part of the Dymocks' costs in the Court of Appeal or the Privy Council. Nor can Dymocks hope to recover anything in the Todds' bankruptcy or in Bilgola's or Lambton's liquidation.[6]There is a substantial amount of evidence before the Board concerning Associated's involvement in, and control over, the appeals successively before the Court of Appeal and the Privy Council. Affidavits have been sworn on Dymocks' behalf by Paul Buetow (their solicitor acting on the present petition) and John Land (the solicitor acting for them throughout the earlier proceedings); and on Associated's behalf by Ian Thom, Mark Webeck, John Todd, Michael Stiassny and Christopher Darlow (Associated's solicitor in the priority proceedings). The main thrust of the evidence taken as a whole is conveniently to be found in Mr Stiassny's affidavit:
"4. The receivers in electing to allow the proceedings to continue relied upon the following: (i) The advice from Russell McVeagh and in particular Mr Fardell QC that [the Todds] had a good case. (ii) The independent advice [from Associated's leading counsel] supporting the view of Mr Fardell. (iii) The fact that there was no other prospect of any recovery for any of the creditors unless the proceedings against Dymocks were successful. (iv) That Associated were prepared to provide the funding. (v) That Russell McVeagh and Mr Fardell were prepared to carry some of the risk by means of the fees arrangements negotiated by Mr Webeck. 5. ... It was the receivers' views that given the legal advice that we had seen and the fact that a secured creditor was prepared to provide the funding, the appropriate course was for Bilgola to pursue its claims against Dymocks."
The issues before the Board[7]Associated do not dispute the Court's power under New Zealand law to make orders for costs against non-parties. Consistently with the decisions of the House of Lords in Aiden Shipping Co L td v Interbulk Ltd, [1986] 1 AC 965 (construing section 51(1) of the Supreme Court Act 1981), and the High Court of Australia in Knight v FP Special Assets Ltd (1992) 107 ALR 585 (construing O 91 r1 of the Queensland Supreme Court rules), Tompkins J in Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) [1992] 3 NZLR 757 construed rule 46 of the New Zealand High Court rules to allow for an order of costs to be made against a non-party, a decision since followed in the New Zealand courts. The Board itself has the same power with regard to the costs incurred both before the Board and in the courts below – see section 15 of the Judicial Committee Act 1833 and section 12 of the Judicial Committee Act 1843.[8]On the facts already set out, three central issues now arise for determination by the Board:(i) Having made a final order on the appeal on 7 October 2002, has the Board still power to make a further costs order as sought by Dymocks on the present petition, or is its jurisdiction exhausted?(ii) Must Dymocks prove that, but for Associated's involvement in the appeals successively before the Court of Appeal and the Privy Council, those appeals would probably not have been brought and, if so, is this established on the evidence?(iii) Assuming that Dymocks succeed on issues (i) and (ii), should the Board in its discretion order Associated to pay Dymocks' costs incurred on these appeals? Issue (i): Jurisdiction[9]It is Associated's contention that, following the making, and subsequent sealing, of the Board's order on the substantive appeal, the Privy Council's jurisdiction is exhausted and no further costs order can now be made. Mr Dale relies in support of that contention principally upon two authorities: the Privy Council's decision in Lindo v Barrett (1856) 9 Moore 456, 15 ER 371 and Hayne J's first instance decision in the Supreme Court of Victoria in Ken Morgan Motors Pty Ltd v Toyota Motor Corporation Australia Ltd (unreported, 23 November 1993).[10]The Board in Lindo v Barrett refused the appellant's application, made a year after the order allowing its substantive appeal, for an order for the costs of the appeal. The Board ruled, at p 456:
"[I]t is impossible now, after the matter has been disposed of, and the Order in Council acted upon, to grant costs. Upon the whole, their Lordships are of opinion, that they can make no Order."
[11]As Dymocks point out, however, the Board there was concerned with an application for costs against the other party to the appeal when that question had not been raised at the hearing. Here the application for costs is made against a non-party who has only subsequently been joined in the proceedings for that purpose.[12]True it is that in Ken Morgan Motors Hayne J concluded in the particular circumstances of that case that it was not open to the successful party to return to court after the initial costs order had been made "to seek some other, wider costs orders than it already has obtained". As will shortly appear, however, that decision was distinguished in a later Australian case.[13]The two decisions upon which Dymocks mainly rely are Caboolture Park Shopping Centre Pty Ltd (in liquidation) v White Industries (QLD) Pty Ltd (1993) 45 FCR 224 and Akedian Co Ltd v Royal Insurance Australia Ltd (1999) 1 VR 80. In Caboolture, at pp 235-236 the full court of the Federal Court of Australia rejected the argument that the making of final orders after trial, including a costs order against the losing party, precluded the making of supplemental orders:
"Critical to the jurisdiction of the Court is first that the application not be one in any way to vary or alter the initial order. The present application does not seek to do this. It is, in the sense used in the cases, a supplemental order. ... The principle behind denying the right of a court to vary or alter a judgment regularly given and entered is the need for finality of litigation. The Court has adjudicated upon the facts of the claim brought by a plaintiff against a defendant, found for one side and entered the relevant judgment. Neither the facts nor the law are to be agitated again, save upon an appeal. But the issues involved where a claim is made against a solicitor for costs by a party to the litigation have not been finally determined by the judgment which has been entered. They remain yet to be resolved."
[14]Caboolture was followed by Byrne J in the Supreme Court of Victoria in Akedian. At p100 Byrne J dealt with Ken Morgan Motors as follows:
"[Counsel] invited me to follow the judgment of Hayne J in the Ken Morgan Motors case but said that it may be that the conclusion his Honour there reached might be better supported as a refusal of a single judge to make an order supplemental to a decision of the Full Court. To my mind, that case may be distinguished on the further basis, as his Honour said, that orders had already been made against non-parties by the Full Court and that, accordingly, the power should not be re-exercised."
[15]Byrne J continued:
"In my opinion, the correct view is that the orders sought against the underwriters in this case are truly supplemental and do not affect the legal impact of the judgment pronounced ... Accordingly, as a matter of jurisdiction, it is open to me to entertain the present application."
[16]The final authority to which their Lordships would refer on this issue is Packing In Ltd (In liquidation) v Chilcott (2003) 16 PRNZ 958, 960 in which the New Zealand Court of Appeal said:
"13. Neither counsel cited authority directly on point as to whether an order of costs made by this Court, once sealed, exhausts the jurisdiction of the Court to make an order for costs against a non-party. We would be reluctant to hold that this was the case as it is not difficult to conceive of a situation which might call out for the exercise of just such a jurisdiction. So, for the purposes of this application, we are prepared to accept (although we do not expressly find) that we have jurisdiction to make an additional and supplementary order against [the non-party]. 14. Nonetheless, there are sound reasons why this (and indeed any) Court is reluctant to allow parties to litigation to have what, in effect, is a second shot. As will become apparent, this is a relevant consideration in the particular circumstances of this case."
[17]Their Lordships are of a clear view that where, as here, the order being sought is one against a non-party (and, indeed, the first such order to be sought in the proceedings), it is in the strictest sense supplemental to the judgment already pronounced and sealed and in no way varies it. The Todds remain liable pursuant to the initial order. Any order made against Associated would be separately enforceable although obviously Dymocks would only be entitled to recover in all up to the total of their (yet to be taxed) costs. Issue 2: Causation[18]The Board was referred to very little authority on this issue, merely dicta from Hamilton v Al Fayed (No. 2) [2002] 3 All ER 641 and Gore (t/as Clayton UTZ) v Justice Corporation Pty Ltd (2002) 189 ALR 712. In Hamilton, Simon Brown LJ noted at para. 54 that: "There is ample authority" and "no dispute" but that "proof of causation is a necessary pre-condition to the making of a section 51 order against a non-party" before concluding, as a further ground for rejecting the application made in that case for costs against non-party funders, that some at least of the contributions "plainly did not cause Mr Al Fayed to incur any costs which he would not otherwise have incurred".[19]In Gore, the Federal Court of Australia was clearly adopting the same approach when stating in para 53:
"Justice Corporation had nothing to do with the decision to institute those proceedings and it had nothing to do with any subsequent decision (prior to 21 April 1999) to prosecute those proceedings. There is no basis upon which Clayton UTZ could claim its costs against Justice Corporation in respect of that period. As his Honour said, there was no causal connection between those costs being incurred and the involvement in the case of Justice Corporation."
[20]Although the position may well be different when a number of non-parties act in concert, their Lordships are content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such non-party's involvement in the proceedings. On the facts of this case, however, their Lordships conclude that, but for Associated's involvement, the Todds would not have pursued their appeal to the Court of Appeal and thus occasioned the costs both in that Court and on the further appeal to the Privy Council.[21]The only evidence on which Mr Dale could seek to rely on the issue of causation was, first, Mr Stiassny's statement in his affidavit that he was "unable to say whether Mr and Mrs Todd would have continued with the litigation in the event that the receivers had elected to discontinue on behalf of Bilgola and Lambton" and, secondly, Mr Todd's own affidavit stating:
"7. I believe that if Associated had not agreed to provide financial assistance, and although Alicia and I had no resources of our own, we would have been able to finalise an agreement with Russell McVeagh to take the appeal on a full contingency basis, such was their belief in the strengths of our case. I shared Russell McVeagh's views about our prospects on appeal and Alicia and I were very anxious to take the case further. I believe that we would have done so even without Associated's assistance. Likewise I believe that we would have defended the appeal to the Privy Council."
[22]Conspicuously absent from the evidence, however, is any suggestion by Russell McVeagh themselves that they would have been prepared to conduct these appeals without any funding by Associated. Rather the agreements they negotiated with Mr Webeck on behalf of Associated strongly suggests the contrary. Issue 3: Discretion[23]A great number of authorities were put before the Board on this issue, cases decided variously in the United Kingdom, Australia and New Zealand. Although Mr Gustafson for Dymocks cautioned the Board against a too ready assumption that the courts of New Zealand would take the same approach to costs applications against "pure funders" as the English court took in Hamilton v Al Fayed - contingency fee arrangements not having been legalised in New Zealand - their Lordships are not persuaded that there is in fact any material difference in the approach taken in the various different jurisdictions to the exercise of this discretion. On the contrary, one of the latest and most helpful of the many authorities before the Board, the decision of the full court of the Federal Court of Australia in Kebaro Pty Ltd v Saunders [2003] FCA 5, discusses in detail a number of the leading cases in all three jurisdictions (including Hamilton v Al Fayed) without suggesting any difference of approach between them.[24]What, then, are the principles by which the discretion to order costs to be paid by a non-party is to be exercised and, in the light of these principles, should the Board make the order here sought against Associated?[25]A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows:
"Where proceedings are initiated by and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in their result, such as a receiver or manager appointed by a secure creditor, a substantial unsecured creditor or a substantial shareholder, 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 proceedings fail or be discontinued. That will be so whether or not the person is acting improperly or fraudulently. In many cases a major consideration will be the reason for the non-party causing a party, normally but not always an insolvent company, to bring or defend the proceedings. If a non-party does so for his own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest, it may, depending upon the circumstances, be appropriate to make an order for costs against that person. The relevant factors will include the financial position of the party through whom these proceedings are brought or defended and the likelihood of it being able to meet any order of costs, the degree of possible benefit to the non-party and whether, in all the circumstances, the bringing or defending of the claim - although in the end unsuccessful - was a reasonable course to adopt. The directors of a company may frequently be in a position different from other non-parties with a direct financial interest in promoting or defending proceedings. Even where a company is in receivership, directors may have a duty to prosecute or defend a claim through the company in the interests of creditors other than the creditor that had appointed the receiver, or in the interests of the shareholders. Other creditors and shareholders are entitled to expect that those responsible for the management of the company will use all proper endeavours to ensure that their financial interests are protected or that there is a fund out of which such creditors can be paid ..." "19. The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without risk to himself or herself should the proceedings fail or be discontinued. 20. ... [W]here a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation. 21. ... [T]he overall rationale [is] that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail." "
For our part, we consider it appropriate to recognise 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. The 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." "[An order] may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit ... It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified. The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. ... If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail." The present case "Funding alone will not justify an order against the funder under section 51. I do not consider that an order under section 51 will normally be appropriate where a disinterested relative has, out of natural affection, funded costs of a claim or a defence that is reasonably advanced." Here, however, Associated were far from being "a disinterested relative". Rather they were pursuing their own interests under an all monies debenture secured on strictly commercial terms.

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