Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Australian Federation of Islamic Councils Inc v Farrell [2016] NSWCA 256 Hearing dates: 6 September 2016 Date of orders: 06 September 2016 Decision date: 06 September 2016 Before: Ward JA at [1]; Emmett AJA at [29] Decision: Application for leave to appeal dismissed with costs. Catchwords: COSTS – indemnity costs – whether primary judge erred in dismissing application that respondents' solicitors personally pay applicant's costs on indemnity basis of proceedings commenced ex parte without authority – application for leave dismissed where amount in issue small and no question of principle Cases Cited: Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241 Gibson v Drumm [2016] NSWCA 206 Hillig v Darkinjung Pty Ltd (No 2) [2008] NSWCA 147 Hoskins v Van Den-Braak (1998) 43 NSWLR 290 House v The King (1936) 55 CLR 499; [1936] HCA 40 Joo v Yoo [2016] NSWCA 172 Malek Fahd Islamic School Ltd v Australian Federation of Islamic Councils Inc [2016] NSWSC 672 Multitec FBM (Asia Pacific) Pty Ltd v Seong Myeon (2009) 69 ACSR 106; [2008] NSWSC 1339 Polo Enterprises Australia Pty Ltd v Pinctada Hotels and Resorts Pty Ltd [2015] NSWCA 397 Stokes (by a tutor) v McCourt [2013] NSWSC 1014 Zimmerman Holdings Pty Ltd v Wales [2002] NSWSC 447 Category: Principal judgment Parties: Australian Federation of Islamic Councils Inc (Applicant) David James Farrell (First Respondent) Vincent John Goldrick (Second Respondent) Barry John Mullan (Third Respondent) Goldrick Farrell Mullan (Fourth Respondent) Representation: Counsel: M Ashhurst SC with M Gunning (Applicant) A Cheshire SC (Respondents) Solicitors Mitry Lawyers (Applicant) Gilchrist Connell (Respondents) File Number(s): 2016/00197587 Publication restriction: Nil Decision under appeal Court or tribunal: Supreme Court of New South Wales Jurisdiction: Equity Citation: [2016] NSWSC 672 Date of Decision: 01 June 2016 Before: Pembroke J File Number(s): 2015/321262 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Judgment 1. WARD JA: The applicant (Australian Federation of Islamic Councils Inc) seeks leave to appeal from a decision of Pembroke J in the Equity Division dismissing with costs its application for an indemnity costs order against the solicitors who had acted for the plaintiffs (Malek Fahd Islamic School Ltd and Mr Agim Garana) in proceedings commenced against the applicant on 30 October 2015. Those proceedings were dismissed by Lindsay J on 6 November 2015 after his Honour had granted leave to Mr Garana to discontinue the proceedings insofar as they were brought in his name and had granted leave to the plaintiffs' solicitors (the respondents to the present proceedings) to file a notice of ceasing to act. 2. The application that the respondents pay the applicant's costs of the Equity Division proceedings was made on the basis that the respondents had no authority from the first plaintiff (the corporate entity) to commence the proceedings. The second plaintiff was joined to the proceedings on 2 November 2015 and there was no challenge to the respondents' retainer from him. 3. Pembroke J dismissed the application for the solicitors to pay indemnity costs. His Honour considered that the solicitors had behaved reasonably in difficult circumstances ([39]), which I will explain shortly. 4. Having heard the application for leave to appeal, this Court dismissed that application with costs, indicating that reasons for that decision would be published later. These are my reasons for joining in that decision. Background 1. The background to the matter, as appears from the decision now being challenged (Malek Fahd Islamic School Ltd v Australian Federation of Islamic Councils Inc [2016] NSWSC 672), can be briefly outlined. Proceedings were commenced by Malek Fahd Islamic School (the first plaintiff) in the duty list of the Equity Division on 30 October 2015. It sought urgent injunctive relief in effect to restrain the Council from taking steps to change the composition of the school board. Instructions to commence the proceedings were given at around 4.30pm that day by Mr Garana, then a director of the school and its bursar. Interlocutory relief was granted by Stevenson J on an ex parte basis shortly before 7pm that day, restraining the applicant from taking any steps to withdraw the appointment of any member of the first plaintiff or to appoint any member, director or officeholder of the first plaintiff. 2. It appears that, at the time that the interlocutory orders were made, an executive committee meeting of the applicant was already taking place at which it was proposed that Mr Garana (a director of the first plaintiff) and two others be removed from the school board. There was evidence before Pembroke J, which his Honour accepted, that the making of the court orders was made known at the meeting. Notwithstanding this, by letters dated 30 October 2015 (which his Honour found were sent on 1 November 2015), the president of the applicant (Mr Kassem) notified each of Mr Garana and the other two persons that the executive committee of the applicant had resolved to withdraw their membership and directorship of the first plaintiff effective 7.10pm 30 October 2015. 3. Pembroke J was satisfied (beyond reasonable doubt if it were necessary so to find) that Mr Kassem had ignored the court orders knowingly and contumaciously ([16]). Elsewhere (at [17]) his Honour referred to Mr Kassem's deliberate disobedience of the court orders. His Honour noted that, with the removal of the three directors from the school board contrary to the orders of the court, Mr Kassem's supporters controlled the first plaintiff and, absent a derivative action (which he said was not open), there was no one representing the first plaintiff who was able to authorise the continuation of the proceedings ([38]). 4. When the matter returned to court on 2 November 2015, Mr Garana was joined as a second plaintiff and the proceedings were adjourned to 4 November 2015. A challenge to the retainer of the plaintiffs' solicitors was then foreshadowed. On 5 November 2015, Mr Garana sought to be released from his undertaking as to damages and the plaintiffs' legal representatives applied for leave to withdraw from the proceedings. That led to the dismissal of the proceedings by Lindsay J on 6 November 2015. 5. The basis on which costs orders were sought by the applicant against the solicitors personally was that, at the time the injunction proceedings were commenced, the solicitors did not have any actual or ostensible authority to act on behalf of the school in commencing the proceedings and there was no reasonable basis for the respondents to have concluded that they had any authority from the school to commence the proceedings. Primary judgment 1. The primary judge rejected the application for costs. In doing so, his Honour expressed the view that Mr Kassem's contumelious conduct had already been rewarded (he and his supporters having gained control of the school board) and that such conduct should not be further sanctioned by allowing any costs "let alone against the plaintiffs' solicitors, who behaved reasonably in difficult circumstances" ([39]). 2. His Honour first considered (at [17]-[22]) whether he should hear from the applicant, or refuse any relief to it, in view of Mr Kassem's disobedience of the court orders, having regard to the general principle articulated in Chamberlain Group Pty Ltd v Kids for Life Academy Pty Ltd [2015] NSWCA 241 at [7]. His Honour expressed a natural reluctance to refuse to hear a party, especially on a costs application, unless such a course were compelled by grave considerations of public policy. (The applicant maintains that his Honour was correct to proceed to hear its application – an issue raised on the respondents' proposed notice of contention – on the basis that the respondents were not party to the contempt proceedings and the rule in Chamberlain is in respect of the party in whose favour the relevant order was obtained.) 3. His Honour then addressed the question whether any significance attached to the fact that the underlying premise of the costs application was that the proceedings were a nullity because their commencement was unauthorised ([23]) and concluded that the nature of the application in the case before him did not make a difference as a matter of principle ([24]). (The applicant does not directly challenge that conclusion.) 4. Accordingly, his Honour proceeded on the basis that the application fell to be determined by reference to the usual relevant discretionary considerations, one of which his Honour considered to be the failure of the applicant to comply with the court orders made on 30 October 2015. His Honour extracted (at [25]) the summary of principles in Hillig v Darkinjung Pty Ltd (No 2) [2008] NSWCA 147 at [47]-[52], emphasising that there the discretionary power to make costs orders was expressly recognised. 5. In the proceedings before Pembroke J, it was conceded by counsel for the solicitors that any argument for actual or implied actual authority or agency of necessity could not be maintained (see [26]). His Honour noted that the evidence tended to indicate that when Mr Goldrick (the second respondent to the present proceedings) acted on Mr Garana's instructions and caused the proceedings to be commenced, only two or possibly three of the directors supported the taking of that step by the first plaintiff, and that they did not represent a majority of the board and could not make decisions on behalf of the company. 6. The primary judge concluded, however, that Mr Goldrick had acted reasonably and honestly in the circumstances ([27]), Mr Goldrick's belief being that Mr Garana was part of the majority of the board. His Honour formed the view that Mr Goldrick was "professionally careful". His Honour said that Mr Goldrick was concerned to ensure that he was properly authorised (having sought confirmation from the board that it approved of the injunction and the giving of written instructions to proceed) but was not on notice of any absence of authority ([35]). His Honour noted that the circumstances and degree of negligence or fault in the solicitor was relevant as to the order to be made as to costs (extracting what Bryson J had said in Zimmerman Holdings Pty Ltd v Wales [2002] NSWSC 447 at [10] to that effect). 7. His Honour said (at [36]) that the proceedings collapsed once the court orders were ignored. Factually, that is precisely what occurred. However, the applicant takes issue with his Honour's conclusion (at [38]) that the removal of the three directors from the school board, contrary to the orders of the Court, led inexorably to the proceedings being dismissed or discontinued. The applicant maintains, to the contrary, that the proceedings were always doomed to failure and, in its written submissions, contends that any breach of the Court orders by the applicant was not a relevant consideration because any breach of those orders was not in any way causative of the commencement or continuation of the injunction proceedings. Proposed appeal 1. The applicant seeks leave to appeal from his Honour's decision on the grounds that the primary judge erred: in finding that Mr Goldrick acted reasonably in commencing proceedings (ground 1); in finding that Mr Goldrick's state of mind was as his Honour had set out at [31(a)-(e)] (ground 2); and in finding that Mr Goldrick had no reason to doubt that Mr Garana had the support of the majority of the board (ground 3), in each case by failing to take into account what are stated to have been relevant considerations. The applicant also seeks to argue that his Honour erred in finding that any breach of the court orders prolonged the proceedings or caused them to collapse, on the basis that such a finding was contrary to the evidence and failed to take into account the absence of authority at the time the proceedings commenced (ground 4). 2. The applicant contends that the respondents were or ought to have been aware, before proceedings were commenced on 30 October 2015, that there was an issue relating to the control of the school board and an issue about the capacity and authority of Mr Garana properly to retain them to act for the school; and that the respondents were obliged to determine whether the school board had provided the necessary authority to Mr Garana to instruct solicitors. 3. The applicant submits that relevant to the exercise of the costs discretion was that the absence of a retainer or authority did not arise from any contempt of the Court's orders (since there were only three directors who were agreeable to give instructions to commence and continue proceedings and those circumstances existed both before and after the proceedings were commenced and irrespective of whether there was a contempt of the Court's orders). It points out that, even if the respondents were instructed by a majority of the directors, an informal meeting to authorise or ratify the decision to commence and continue proceedings would not have satisfied the quorum requirements of the Constitution of the school; and that Mr Goldrick knew about the requirement of a quorum under the Constitution and admitted that he knew there was no authority to commence the injunction proceedings but intended to have the commencement of the proceedings subsequently ratified. 4. The applicant relies on the principle that costs should follow the event and says that, even if there is a contempt, proceedings commenced without authority are a nullity (Hoskins v Van Den-Braak (1998) 43 NSWLR 290 at 293F and Multitec FBM (Asia Pacific) Pty Ltd v Seong Myeon (2009) 69 ACSR 106; [2008] NSWSC 1339 at [29]). It notes that the principle that a party in contempt should not be heard only applies until the contempt is purged (Stokes (by a tutor) v McCourt [2013] NSWSC 1014 at [27]). Here, it argues that it is no longer possible to purge the contempt (though acknowledging that it has proffered no apology to the Court for its breach of the court orders). 5. It is submitted that the applicant will suffer substantial injustice if leave is not granted; that the primary judge's discretion not to award costs miscarried by reason of a failure to take into account relevant matters (critically, it points to the fact that his Honour did not refer to the evidence that Mr Goldrick knew a quorum had not been present at the time of the decision to commence proceedings) and by reason of manifest error in the way the primary judge approached the exercise of discretion. 6. Apart from the complaint made as to the lack of any reference in the primary judge's reasons to the quorum requirement, the applicant submits that his Honour erred in taking the view that the contempt caused the proceedings to collapse when there was no evidence to that effect. It submits that the primary judge incorrectly made that assumption, which was an incorrect assumption because the proceedings were "always going to collapse" since they were commenced without authority and there was no chance that there would be any ratification of the decision to commence proceedings (because of the resignation of the fourth director who had made up the informal majority on which Mr Garana had relied). 7. Insofar as the errors alleged include a failure to take into account relevant considerations and errors of fact, the applicant submits that there has been error in the House v The King sense ((1936) 55 CLR 499; [1936] HCA 40) such as to warrant appellate intervention. 8. The respondents oppose the grant of leave to appeal. They point to the amount in issue, arguing that, since there was no challenge to the retainer by Mr Garana only $8,680 of the total costs in respect of which the order is sought ($35,075), resulted from any want of retainer by the school. If leave is granted, the respondents seek to rely on a notice of contention seeking to affirm the decision of the primary judge on the basis that his Honour should not have entertained the application in view of the findings of contempt, deliberated and contumelious disobedience, and flouting of the orders of Stevenson J, and ought to have dismissed the application on that basis. Determination 1. Leave is required both because the decision appealed from is a costs decision and because the amount in issue is less than $100,000. Statements have been made in this Court as to the need for proportionality on applications for leave to appeal (see for example Joo v Yoo [2016] NSWCA 172; Polo Enterprises Australia Pty Ltd v Pinctada Hotels and Resorts Pty Ltd [2015] NSWCA 397; Be Financial Pty Ltd as Trustee for Be Financial Operations Trust v Das [2012] NSWCA 164 at [39]; and Gibson v Drumm [2016] NSWCA 206). Those statements of principle are apposite to the present case where, on one view (though the applicant does not concede that this would be the outcome), the amount at issue is less than $10,000. 2. The applicant submits that this is not simply a case where the parties are fighting over a relatively small sum of money, but rather it is a case where the parties are fighting over a relatively small sum of money in circumstances where the proceedings would never have been commenced but for the deliberate act that the respondents took. That submission turns on the quorum argument. There was no submission made to the primary judge, as I understand it, as to whether the school itself was a proper party to commence the proceedings (and counsel for the respondents to this application points to a memorandum of understanding between the school and the council which suggests that the school may have had standing to bring some form of proceeding against the council in relation thereto). 3. In my opinion, leave to appeal should not be granted. The amount in issue is conceded to be small. The applicant maintains that the important legal issue is as to whether contempt by the applicant should be dealt with in any way different from any other form of misconduct by a successful litigant. It stresses that its contempt did not cause the proceedings to commence or continue and argues that nor did its contempt cause the proceedings to collapse. However, it accepts that ultimately the question of costs fell within the discretion of the Court and concedes that it was not irrelevant for Pembroke J to take into account the applicant's misconduct. I am not persuaded that the matter involves a question of principle or of public importance. It can readily be accepted that a solicitor who commences proceedings without authority to do so risks being personally liable for the costs of those proceedings. However, all the circumstances in which that occurred are relevant to be taken into account. While reasonableness of the solicitor acting as he or she did may not be sufficient to enable him or her to avoid personal liability for the costs so incurred, the degree of negligence or fault is a matter that the Court may properly take into consideration (as the primary judge here did). The applicant's submission that the present proceedings were always doomed to fail is based on hindsight, not on what was or should have been known to the respondents at the relevant time, and risks an enquiry into the merits of the underlying cause of action following the discontinuance of the proceedings. 4. For those reasons, and particularly having regard to the small (and potentially very small) amount of costs in issue, I was of the opinion that the application for leave to appeal should be refused with costs; and hence joined in the order made by the Court that the application be dismissed with costs. 5. EMMETT AJA: The applicant, Australia Federation of Islamic Councils Inc (the Federation) was joined as defendant in proceedings brought in the Equity Division in the name of Malek Fahd Islamic School Limited (the School). The present respondents acted as solicitors in connection with the commencement of the proceedings. In fact, the solicitors did not have a valid retainer to act on behalf of the School in commencing the proceedings. The proceedings were ultimately dismissed and the Federation sought an order for costs against the solicitors. 6. Ordinarily, where solicitors commence proceedings without a proper retainer and the commencement of the proceedings is not ratified, it should be common for an order for costs to be made against the solicitors in favour of the defendant. In such circumstances, the defendant has been brought to court and incurred costs in proceedings that have been dismissed. Ordinarily, such a defendant would be out of pocket unless the solicitors who acted without instructions were required to bear the costs. However the question of costs is a matter for the exercise of discretion. 7. The Federation applied for an order for costs against the solicitors. That application was refused. The Federation sought leave to appeal from that refusal. On 6 September 2016, the Court dismissed the application for leave with costs, indicating that reasons for that decision would be published later. I have had the opportunity of reading in draft form the reasons proposed by Ward JA for joining in that order. Her Honour's reasons are also my reasons for joining in the order. ********** Amendments 19 September 2016 - Catchwords, insertion of the word 'of' Par 22 - the word 'change' to 'chance' 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: 19 September 2016