District Court New South Wales Medium Neutral Citation: Selective Trade Pty Ltd v Ferngrove Pharmaceuticals Australia Pty Ltd (No. 2) [2022] NSWDC 312 Hearing dates: 08 July 2022 Decision date: 01 August 2022 Jurisdiction: Civil Before: Coleman SC DCJ Decision: 1. The defendants' application for a non-party costs order against Mr Wang is dismissed; 2. The defendants pay 80% of the plaintiff's costs of the notice of motion filed 12 May 2022. Catchwords: COSTS – Party/Party – Orders against non-parties – Factors relevant to exercise of court's discretion to award costs against non-parties – whether in interests of justice to order non-party director of plaintiff company to pay costs Legislation Cited: Civil Procedure Act 2005 (NSW), s 98(1)(b) Cases Cited: Brand2Content t/as Franchise Works v Dalby [2019] NSWCA 16 FPM Constructions v Council of the City of the Blue Mountains [2005] NSWCA 340 Selective Trade Pty Ltd v Ferngrove Pharmaceuticals Australia Pty Ltd [2022] NSWDC 131 Category: Costs Parties: Selective Trade Pty Ltd (Plaintiff) Ferngrove Pharmaceuticals Australia Pty Ltd (Defendant) Representation: Counsel: Mr S Burchett (Defendant) Solicitors: Ms V Cha (Plaintiff) Mr A Labrooy (Defendant) File Number(s): 2020/00136755 Judgment Background 1. On 29 April 2022 the Court published its reasons in respect of the principal claims in these proceedings: see Selective Trade Pty Ltd v Ferngrove Pharmaceuticals Australia Pty Ltd [2022] NSWDC 131 ("the principal judgement"). 2. This judgment will assume that the reader is familiar with the factual findings and legal conclusions otherwise made in the principal judgment. 3. By way of summary only, the Court found that: 1. There was no Collateral Contract entered into on 18 August 2018 as alleged by the defendants; 2. On a proper construction of the PEAA and NAA read together as the contractual documents, Selective Trade was granted a right of exclusive distributorship of the NTSA products in China for a period of three years from 1 November 2018; 3. A deposit of 30% of the Purchase Price was to be paid by Selective Trade before Ferngrove had an obligation to process the order; 4. The Purchase Price (and deposit) was GST inclusive; 5. On payment of the full amount of the 30% deposit, Ferngrove was obliged to manufacture the products ordered and have them packaged and delivered to Selective Trade's Australian warehouse (or some other place in Australia nominated by Selective Trade) or ready for collection by Selective Trade if otherwise arranged within 60 days from the payment of the full amount of the deposit; 6. Selective Trade was not in breach of its obligations under the contractual arrangements; 7. The final tranche of the deposit for the First Order was paid by Selective Trade on 12 April 2019. Accordingly, Ferngrove was obliged to have ready for delivery, and deliver, the balance of the First Order (apart from the 1500 units of lactoferrin already collected by Selective Trade) by 9 July 2019; 8. Ferngrove failed to deliver the balance of the First Order by that time and was thus in breach of contract; 9. The conduct of Ferngrove through Mr Tang and Mr Zhou relating to the complaints by Mr Song, together with the failure to deliver the products as referred to above constituted a repudiation of the contract by Ferngrove; 10. Selective Trade accepted the repudiation and validly terminated the contractual arrangements; 11. Neither Ferngrove nor Mr Tang engaged in any misleading or deceptive conduct in contravention of the Australian Consumer Law; 12. Selective Trade has failed to adduce any evidence on which expectation damages or loss of opportunity damages could be assessed and is entitled to nominal damages only (in addition to the $964.37 for its actual loss). 1. In respect of costs, the Court ordered that the plaintiff pay the defendants' costs of the proceedings (see [274]-[277] of the principal judgement). 2. By notice of motion filed 12 May 2022 the defendants' moved the Court for an order pursuant to s.98(1)(b) of the Civil Procedure Act 2005 (NSW) ('CPA') that Mr Wang, the sole director of the plaintiff, be jointly liable to pay the costs of the defendants ('the non-party order'). Other relief was sought in that notice of motion but that relief has been dealt with by consent orders. 3. The plaintiff and Mr Wang oppose the non-party costs order. 4. For the reasons that follow, the defendants' motion seeking the non-party costs order be dismissed with costs. Legal Principles 1. Section 98(1)(b) of the CPA relevantly provides: '98 Courts powers as to costs (1) Subject to the rules of court and to this or any other Act – (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and (c) the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.' 1. The principles applicable on application for a non-party costs order under s.98 CPA were summarised by Simpson AJA in Brand2Content t/as Franchise Works v Dalby [2019] NSWCA 16 at [7]-[26]. From those paragraphs, and omitting references to the authorities cited by her Honour but largely adopting her Honour's language the following principles can be discerned: 1. Notwithstanding the breadth of s.98(1), as a general principle, costs will only be awarded against a party to the litigation. There is jurisdiction conferred under the section for payment of costs by non-parties. The section confers a general discretion on the Court to award costs, including to order that a person who was not a party to the proceedings pay costs. 2. The discretion conferred to order that a non-party to the litigation pay costs must be exercised judicially and in accordance with general legal principles pertaining to the law of costs. 3. Whilst the prima facie general principle is that an order for costs is only made against a party to litigation, there are 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. Such circumstances, which are not closed, include: 1. The case of a receiver of a company who is not party to the litigation. This category consists of circumstances where the party to the litigation is an insolvent person or a 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 matter of the litigation. 2. Where the circumstances of the case fall within that category, an order for costs against the non-party should be made where the interests of justice require that it be made. 1. In FPM Constructions v Council of the City of the Blue Mountains [2005] NSWCA 340 the Court of Appeal identified five criteria ('the criteria') for the exercise of the power that emerges from cases in which orders for the payment of costs by non-parties have been made. The criteria are: 1. the unsuccessful party to the proceedings was the moving party and not the defendant; 2. the source of the funds for the litigation was the non-party or its principal; 3. the conduct of the litigation was unreasonable or improper; 4. the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and 5. the unsuccessful party was insolvent or could otherwise be described as a person of straw. 1. It is a mistake to regard the criteria as a checklist against which an application ought to be measured, rather they are an illustration of the circumstances that have, in past cases, been seen to justify an order that a non-party pay costs. The list is not an exhaustive statement of relevant factors. It would also be a mistake to regard any or all of the criteria as necessary factors before an order may be made. The overriding consideration is whether it is in the interests of justice to make the order. 1. The criteria are not to be taken as prescriptive. They are a guide to circumstances of the kind that have permitted an order to be made against a non-party. They each need to be carefully evaluated lest, in the circumstances of the particular case, it be given weight to which it is not, on a proper evaluation, entitled. 2. In respect of corporate litigants: 1. There may be good reasons for a company officer to provide funds for litigation which a corporate litigant is unable to provide; 2. It will frequently be the case that an officer of a company who takes responsibility for the management of the litigation is also the ultimate, or an ultimate, beneficiary of the litigation in the event it is successful. That is certainly so where the director is a shareholder; 3. In every case of a corporate litigant, some one or more officers of the company must play an active part in the litigation and make necessary decisions. Thus, care needs to be taken where the corporate litigant is a single director or small-company, or where all or the majority of the shares are held by one or two individuals. In those cases, it is a practical necessity that the, or a, director or shareholder has a personal (often financial) interest in the outcome, is actively involved in the pursuit of litigation and, sometimes, is required to provide funding to enable the litigation to be maintained. None of those circumstances alone, or even any combination of them, is necessarily sufficient to warrant an order that those individuals, if non-parties, pay the costs of the proceedings; 4. Mechanical or rote application of the criteria, which has been cautioned against, might suggest that an order ought to be made, where, in reality, the criteria (or some of them) are satisfied by reasons of the practical assessments associated with the corporate structure of the company involved in the litigation. Defendants' Submissions 1. The defendants submit that the plaintiff is essentially a sole-purpose entity created in 2018 by the sole director, Mr Wang (against whom the non-party cost order is sought) to exploit its "partnership" and agreement said to have been made with the Beijing Company in China. They submit that the plaintiff is a "man of straw." They submit that at no time since the commencement of the proceedings did the plaintiff have the capacity to pay its own or the defendants' legal costs. It has been funded by Mr Wang. Mr Wang stood to benefit from any judgment obtained by the plaintiff as he was a 90% legal shareholder and, apparently, a 100% beneficial shareholder. 2. The defendants gave written notice to the plaintiff and Mr Wang on 13 September 2021 that it intended to seek a non-party costs order against Mr Wang if the defendant was successful in the proceedings. 3. The defendants say that the bringing of the proceedings, despite the establishment of liability in contract against the first defendant, was substantially speculative. As such, the defendants submit that it is difficult to see reasonable grounds on which the proceedings were commenced and it is open to be inferred that Mr Wang used the plaintiff company to quarantine himself from the risk of costs ([29] Defendants' written submissions). They submit that the plaintiff's claim of $1.31 million, because the jurisdiction of this Court is limited to $750,000, resulted in the plaintiff abandoning at least $560,000 of its claimed damages at the commencement of the hearing. 4. They submit the plaintiff's claim was wholly unrealistic, that the plaintiff never complied with any request for particulars of the claim and that the claim for damages was "almost entirely manufactured by Mr Wang" ([31] Defendants' submissions). They submit that it can be inferred that at all times, properly advised, Mr Wang could not have reasonably expected to recover any award of damages in the proceedings which was not wholly disproportionate to the costs which he has caused the defendants to incur. They submit that the evidence of the prices negotiated by him with the Beijing Company, relative to those offered by FPA (inclusive of GST) did not disclose a profitable business opportunity that was lost by reason of the termination of the distribution agreement. 5. Additionally, they submit that the claim against the first defendant's director, Mr Tang, had no reasonably arguable foundation in law and he could only have been brought into the proceedings to intimidate the first defendant personally. 6. The defendants submit that it is in the interests of justice that a non-party costs order be made in this case. They submit that the circumstances of the hopeless nature of the plaintiff's damages case show that the proceedings were improperly conducted. 7. Mr Wang, they submit, was the real party prosecuting the litigation. The recovery of the costs incurred by the defendants will be very much prejudiced by the impecuniosity of the plaintiff. 8. They submit Mr Wang has run the risk of loss in the pursuit of a benefit for himself in the proceedings, whilst hiding behind a corporate veil of the plaintiff. The Plaintiff's Submissions 1. The plaintiff accepts the power of the Court to make the order under s.98 of the CPA. It submits, however, that in the proper exercise of discretion the order should not be made in this case. The plaintiff referred to the relevant principles with respect to corporate litigants (including those I have extracted above) and submitted that it is a small company and that all of the shares are held by two people. It was a practical necessity that Mr Wang had an indirect financial interest and was actively involved in the litigation and provided some funding for the litigation to be maintained. 2. It was submitted that the fact that Mr Wang was the sole director of an unsuccessful corporate litigant is not, without more, enough to justify the non-party costs order against him. There is nothing in the conduct of the proceedings which demonstrates that it was unreasonable within the meaning of the criteria referred to above. 3. The plaintiff reminds the Court that, in fact, it was successful in obtaining relief with respect to the repudiation of the contract that it had entered into with the first defendant. As a party to the contract it, of course, was the appropriate entity to sue to seek to enforce its rights under the contract. The fact that its evidence was not in an admissible form does not mean the proceedings were hopeless or improperly conducted. 4. In all the circumstances, the plaintiff submitted that it was not in the interests of justice in this case for a non-party costs order to be made. Consideration 1. In my opinion the submissions of the plaintiff should be accepted. 2. I do not accept that there was anything in the conduct of the litigation that was unreasonable or improper such that I should exercise my discretion to make a non-party costs order against Mr Wang. Clearly as a matter of practicality, as the sole director of the plaintiff, it was essential that Mr Wang be intimately involved in the prosecution of the proceedings. This included providing affidavits by way of evidence in the plaintiff's case (again, practically necessary as he was involved in the negotiation of the relevant contract and the events which led to its repudiation by the first defendant), instructions to the company's solicitors and providing assumptions to be made by the plaintiff's expert witnesses who were called to give evidence in support of the damages claim. 3. True it is that I ruled at a very early stage of the proceedings that the plaintiff's expert evidence with respect to its loss was not admissible. It is also true that after those rulings, the plaintiff continued to pursue the proceedings. That of itself, however, again does not cause me to consider that the conduct of the proceedings thereafter was improper. Reasonable arguments were made by reference to the evidence that was admitted, that the Court had information before it on which it could undertake an assessment of the plaintiff's loss doing the best it could. Whilst those arguments were rejected by me and I found that to do so would require the Court to engage in speculation, the arguments were not so hopeless as to cause me to think that the plaintiff was acting unreasonably in continuing with its claim once the evidence was rejected. No application for summary dismissal was made by the defendants when the evidence was rejected. 4. It is important to note that the plaintiff had success in the proceedings, in the sense that it established its entitlement to its primary relief. It was successful in obtaining a finding that the first defendant had repudiated the agreement made with it. It received nominal damages for that repudiation because of the rulings I made with respect to the rejection of the expert evidence on loss and the rejection of the plaintiff's submissions that there was otherwise material on which the Court could assess that loss. Because of the award of nominal damages only, I exercised the discretion to order that the plaintiff pay the first defendant's costs. Again, in my opinion, these matters alone do not cause me to hold the view that it is in the interests of justice that a non-party costs order should be made. 5. The defendants have the benefit of an order for costs against the plaintiff. It may be that the plaintiff's impecuniosity means that the defendants do not recover any or all of the costs assessed to be payable to them. However, that fact without more does not cause me to reach the view that the discretion available under s.98 should be exercised in this case. The defendants had the benefit of some security for their costs. The application for security for costs was made very late in the proceedings (immediately before trial) when it was known, or ought to have been known, that the plaintiff was a small corporation with de minimis assets. 6. With respect to the defendants' submission that the personal claims against Mr Tang had no foundation and were always bound to fail, I note that there had not been any application to seek summary relief with respect to those claims. Whilst the claims were dismissed, the appropriate result of that was an order for costs in Mr Tang's favour. 7. The defendants submit that the evidence before me proves that there could never have been a profitable business by reason of the plaintiff's relationship with the Beijing Company and the price lists tendered. The defendants also noted that I had rejected the argument that the plaintiff had entered into a profit share agreement with the Beijing Company. This submission ignores the fact that by reason of the repudiatory conduct of the first defendant, the plaintiff never had the opportunity to exploit the rights it obtained under the agreement with the first defendant, or the agreement it made with the Beijing Company to distribute the goods it was to buy from the first defendant. I do not accept that absent a consideration of a whole raft of other matters not canvassed in the evidence, the price list referred to by Mr Burchett would enable me to conclude that the plaintiff would never have made a profit from the business it had contracted with the first defendant (and the Beijing Company) to engage in. 8. Having regard to all of these matters, I do not conclude that it is in the interests of justice that I exercise my discretion to make a non-party costs order against Mr Wang. As the sole director and major shareholder of the plaintiff, the practical realities of the matter were that he would be intimately involved in the prosecution of the proceedings and, if the plaintiff was successful, benefit from that success. It is also the practical reality that he would have funded the plaintiff's prosecution of the proceedings, it being a small company initially incorporated to undertake and exploit the contractual rights and benefits granted to it by the first defendant but which were denied to it by the first defendants' repudiation of that agreement at a very early stage in the term of that agreement. 9. I do not accept the defendants' submissions that this is a case "par excellence" for a non-party costs order. In my opinion, to make such an order having regard to all of the circumstances I have identified and those in the parties' submissions, would simply be a rigid application of the criteria I have referred to above. As the authorities indicate, that is not an appropriate exercise of the discretion under s.98 of the CPA. 10. The defendants' motion seeking the non-party costs order will be dismissed. As I mentioned above, additional relief was sought in the motion including with respect to payment out to the defendants of an amount held by way of security for their costs. That matter was resolved by consent orders. Whilst I did not determine the matter, a review of the evidence prior to the hearing of the motion indicated that the prima facie position was that there was no legitimate reason identified by the plaintiff as to why the money should not have been paid out, absent the defendants bringing the motion. Accordingly, in my opinion, the plaintiff will not be entitled to all of its costs of the motion, although the adjustment will be relatively minor as this was not the most significant issue to be determined and was not the subject of much evidence or written submissions. 11. The orders I therefore make are: 1. The defendants' application for a non-party costs order against Mr Wang is dismissed; 2. The defendants pay 80% of the plaintiff's costs of the notice of motion filed 12 May 2022. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 04 August 2022