Supreme Court New South Wales Medium Neutral Citation: JJES Pty Ltd v Sayan (No 2) [2014] NSWSC 975 Hearing dates: 04 July 2014 Decision date: 04 July 2014 Jurisdiction: Common Law Before: Campbell J Decision: (1)I revoke order 2 pronounced on 8 May 2014 and, in its place, order the plaintiff to pay the defendant's costs of and incidental to the proceedings on the ordinary basis up to 2 February 2012 and thereafter on an indemnity basis, forthwith after they had been agreed or assessed. (2)Under section 98(1) Civil Procedure Act 2005, I order Emily Navaei to pay the defendant's costs of the proceedings forthwith after they have been agreed or assessed on the ordinary basis up to 2 February 2012 and on an indemnity basis thereafter. (3)Satisfaction of either of order 1 or 2 discharges the other pro tanto. Catchwords: COSTS - non party costs order - when non party costs order against director appropriate Legislation Cited: Civil Procedure Act 2005 (NSW), s 98 Uniform Civil Procedure Rules 2005 (NSW), rr 20.26 and 42.15A Cases Cited: FPM Constructions v Council of City of Blue Mountains [2005] NSWCA 340; Knight v FP Special Assets Ltd (1992) 174 CLR 178; Leichhardt Municipal Council v Green [2004] NSWCA 341; May v Christodoulou [2011] NSWCA 75; (2011) 80 NSWLR 462 Category: Costs Parties: JJES Pty Ltd (Plaintiff) Hakki Sayan (Defendant) Emily Navaei (Respondent) Representation: Counsel: J Jobson (Respondent) D Priestley (Defendant) Solicitors: DLA Piper (Defendant) File Number(s): 2011/125034 EX TEMPORE Judgment 1This judgment resolves outstanding questions as to costs. I gave judgment in favour of the defendant applicant on 8th May 2014 ordering the plaintiff company JJES Pty Ltd to pay the defendant's costs on the ordinary basis. My reasons are published as [2014] NSWSC 541. I am entertaining an application to vary the costs order made by the successful defendant. 2The defendant seeks its costs on the ordinary basis up to 2 February 2012 and on an indemnity basis thereafter. It relies upon the interaction of rules 20.26 and 42.15A of the Uniform Civil Procedure Rules 2005 (NSW), and the service of an offer of compromise on 2 February 2012. 3Additionally, the defendant seeks a non-party costs order under s 98(1) Civil Procedure Act 2005 (NSW) against Emily Navaei in respect of the whole of the costs that the unsuccessful plaintiff is ordered to pay. 4These reasons will assume familiarity with my principal judgment. However, I record again that the action between the parties was an action on the defendant's retainer as a legal practitioner acting on behalf of the plaintiff company in relation to the purchase of a 7-Eleven franchise. 5The offer of compromise is in the following terms: The defendant offers to compromise this action in whole on terms that: (1) Judgment for the defendant; (2) Each party to pay its own costs and disbursements; (3) The offer is made in accordance with r 20.26 of the Uniform Civil Procedure Rules 2005 NSW; (4) The offer is to remain open for 28 days after the date in which the offer is made at which point it shall expire. 6The letter serving the offer of compromise set out four reasons why the claim of the plaintiff corporation "is destined to fail". Notwithstanding that language, the offer of compromise did not call for a complete capitulation on the part of the plaintiff. 7The affidavit of Mr Lachlan Header, a solicitor in the employ of the solicitors for the defendant, read in support of the application, points out that, as at the date of the offer of compromise, the defendant had incurred fees and disbursements approximating $30,000. In any event, it is well recognized that an offer in that form may constitute a genuine compromise: Leichhardt Municipal Council v Green [2004] NSWCA 341; and indeed r 20.26 in the form which it took as at the date of the offer of compromise expressly countenanced an offer in that form. 8There is no appearance for the plaintiff corporation before me today. At the outset of these proceedings, Mr Jobson of counsel, who appeared for the plaintiff at the trial, indicated to me that he did not appear for the plaintiff in today's application; rather, he was appearing for Mrs Navaei, whom he pointed out, as is demonstrated by the evidence, is the sole director and shareholder of the plaintiff company. 9The plaintiff company's name was called outside the court three times with no appearance. Moreover, I record that the solicitor previously acting on behalf of the plaintiff company has filed a notice of ceasing to act, and emailed my chambers earlier this week advising that that step was being taken. 10Mr Jobson was previously instructed by Pserras Lawyers, but I infer today he is appearing on the instructions of Mrs Navaei direct. I am grateful to him for his appearance. 11I record that I accept the arguments of Mr Priestley of counsel, who appears for the defendant, that each of the points made by the solicitor for the defendant in support of the offer of compromise at the time it was served was made out by the defendant at the trial. 12In particular, I found that even if the defendant's solicitor had breached his duty of care in giving advice, which I find he did not, the plaintiff company through its sole director, Mrs Navaei, did not rely upon his advice in entering into the contract; that by the time the solicitor was engaged, JJES was thoroughly committed to the proposed purchase of the franchise to the extent it had paid the deposit to the outgoing franchisee; Mrs Navaei had commenced to undertake training with 7-Eleven to equip her to take over the business; and she had engaged an accountant who had prepared a business plan for the conduct of the franchise by the company: see paragraphs 13, 46, 65, 72, 74, 75, 106 and 107 of my principal judgment. 13The defendant, in the circumstances, is entitled prima facie to the benefit of rule 42.15A unless I am persuaded otherwise. Given the non-appearance on behalf of the company, no argument has been put against the order for indemnity costs. In any event, I am of the view that the order is appropriate having regard to the purpose of rules 20.26 and 42.15A. I will amend my order in due course. 14I turn then to the non-party costs order sought against Ms Navaei. The power to make this order is found in section 98(1) Civil Procedure Act 2005. By dint of that provision, costs are in the discretion of the Court; the Court has full power to determine by whom, to whom and to what extent costs are to be paid and the Court is empowered to order the costs may be awarded, inter alia, on an indemnity basis. 15The leading high court case concerning non-party costs orders is Knight v FP Special Assets Ltd (1992) 174 CLR 178. In that case, the High Court of Australia identified what it regarded as a general category of case where a non-party costs order might be appropriately made. Mason CJ and Deane J (Gaudron J agreeing), at p 192-3, said: 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. 16It can be seen from this statement of principle that for the test propounded to be satisfied, the applicant needs to satisfy me that the present case falls within that general category and that the interests of justice require that the non-party costs order be made. I take the latter part of the formulation as being a reference to general discretionary considerations attending upon the exercise of the wide power conferred in the Court in relation to costs. It should be pointed out that many of the cases evince a reluctance on the part of the Court to exercise its power in respect of non-party costs orders (see FPM Constructions v Council of City of Blue Mountains [2005] NSWCA 340, and May v Christodoulou [2011] NSWCA 75; (2011) 80 NSWLR 462). 17Both FPM Constructions and May were cases where non-party costs orders were sought against directors of a company, as is the case here. Part of the Court's restraint in exercising the undoubted power relates to the importance, in principle, of the separate legal existence of corporations. As Basten JA said in FPM Constructions at [210]: "The requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself". 18At [206] his Honour referred to the care which should be exercised before exceptions to the rule should be recognised "otherwise, the corporate veil would, in effect, be nullified at the very point at which it provides protection against personal liability for the shareholders and directors. The carefully crafted exceptions to the principle would overtake the principle itself were that not the case". 19His Honour identified certain non-exhaustive and non-exclusive criteria which may inform a proper exercise of the discretion to make a non-party costs order. They are as follows: (a)the unsuccessful party to the proceedings was the moving party and not the defendant; (b)the source of funds for the litigation was the non-party or its principal; (c)the conduct of the litigation was unreasonable or improper; (d)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; (e)the unsuccessful party was insolvent or otherwise be described as a man of straw. 20The defendant argues that this case falls into the general category identified in Knight and that a preponderance of Basten JA's criteria have been made out so it can be said that, in this case, the interests of justice require making a non-party costs order against Mrs Navaei. 21Mr Jobson argues, as was accepted in FPM Constructions and in May, that although Mrs Navaei is the sole shareholder and director of the company, there is no suggestion that the company itself was a sham. It was the defendant's actual client. It was formed for the purpose of actually conducting the 7-Eleven franchise and did in fact conduct it. I understood him to argue that no proper case had been shown for, as it were, piercing the corporate veil. 22I am satisfied that the plaintiff company is, I will say, an entity of straw. The evidence before me at the trial was that Mrs Navaei and her husband Mr Navaei were looking for a franchise business which they could operate. They became interested in a 7-Eleven franchise. Mrs Navaei applied as an interested person. The corporation was only formed for the purpose of conducting the franchise because 7-Eleven insisted upon that. 23The evidence suggests that since Mrs Navaei ceased to work in the franchise, the company does not trade and has no business or meaningful separate existence in any commercial sense. There is no doubt that Mrs Navaei was the main active player in the proceedings. She was the main witness on all issues going to liability and damages. As the sole director and shareholder, I accept that she would have provided all relevant instructions to the plaintiff's lawyers. 24It seems to me that Mrs Navaei was the person who would benefit from any damages recovered by the plaintiff. As it is not continuing to trade, any funds recovered from the proceedings, are likely to have been within the control of Mrs Navaei and, perhaps, available to be distributed to her as a dividend. 25Some reliance is put upon the fact that I found Mrs Navaei to be an unsatisfactory and unreliable witness, and those findings are relied upon to support the argument that the conduct of the litigation, at the instigation of Mrs Navaei, was unreasonable in the relevant sense. Particular reliance is put upon the following findings I made: (a) rejected Mrs Navaei's evidence that the plaintiff had been given the legal advice she claimed had been given; (b)contrary to her evidence, the plaintiff did not rely upon the defendant's advice in entering into the contract; (c)I rejected her evidence that she was ignorant of the terms of the lease, especially the critical condition as to term; (d)she had, in any event, been advised, in clear terms, of the remaining term of the lease and of the terms of the franchise agreement which imposed no obligation upon 7-Eleven to exercise the available options. 26I accept that the power to make a non-party costs order should be exercised sparingly and with great restraint. I am also satisfied, for the reasons I have given, this case falls into the general category recognised in Knight. In particular, as I have said, the company is, relevantly, insolvent. Mrs Navaei has played the largest part in the litigation. She stood to gain from the litigation and, in many respects, because of the unsatisfactory nature of her evidence, and its unreliability, her conduct of the litigation has been unreasonable. 27Although Basten JA's criteria should not be applied like a checklist, it seems to me that a majority of them are satisfied in this case. Indeed, the only criterion not clearly established on the evidence before me is criterion (b) - that is, that the source of the funds for the litigation was Mrs Navaei. There is no evidence from which I could infer that and, being aware that many different arrangements are made between solicitors and clients to fund litigation on behalf of private individuals, I would not infer that she was actually and actively funding the litigation as opposed to there being some other arrangement in place by which the lawyers had to abide the outcome of the proceedings before receiving any payment of their fees. 28For these reasons, I am satisfied that the defendant has established that the interests of justice require that the non-party costs order be made. It does not necessarily follow from this that Mrs Navaei should be liable for the defendant's costs on an indemnity basis. However, given what I have said about the satisfaction of Basten JA's criteria, it seems to me that Mrs Navaei would have been aware of the offer of compromise when it was made and the reasoning behind the offer. I am satisfied that these matters would have been communicated to her by her legal advisers, and that, relevantly, she is the person from whom instructions would have been sought whether to accept or reject the offer. In that additional circumstance, I am of the view that it is appropriate that I make an order in the same terms as the order made against the unsuccessful plaintiff. 29My orders are: (1)I revoke order 2 pronounced on 8 May 2014 and, in its place, order the plaintiff to pay the defendant's costs of and incidental to the proceedings on the ordinary basis up to 2 February 2012 and thereafter on an indemnity basis, forthwith after they had been agreed or assessed. (2)Under section 98(1) Civil Procedure Act 2005, I order Emily Navaei to pay the defendant's costs of the proceedings forthwith after they have been agreed or assessed on the ordinary basis up to 2 February 2012 and on an indemnity basis thereafter. (3)Satisfaction of either of order 1 or 2 discharges the other pro tanto. 30I make clear that the orders that I have just pronounced extend to the costs of this application which I will allow only on the ordinary basis. ********** 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: 23 July 2014