Yates v Boland & Ors S25/2001 [2001] HCATrans 257 (20 June 2001)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S25 of 2001

B e t w e e n -

IAN FRANCIS YATES

Applicant

and

JOHN BOLAND

First Respondent

THEODORE SIMOS

Second Respondent

JOHN WEBSTER

Third Respondent

Application for special leave to appeal

KIRBY J

HAYNE J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 20 NOVEMBER 2001, AT 9.33 AM

Copyright in the High Court of Australia

MR J.C. SHEAHAN, QC: May it please the Court, I appear with my learned friend, MR D.K.L. RAPHAEL, for the applicant. (instructed by The Bruce & Stewart Commercial Practice)

MR D.F. JACKSON, QC: If the Court pleases, I appear with my learned friend, MR S.T. WHITE, for the first and third respondents. (instructed by Minter Ellison and Moray & Agnew)

MR P.R.WHITFORD: May it please the Court, I appear for the second respondent. (instructed by Corrs Chambers Westgarth)

KIRBY J: We do not have the usual pleasant lighting arrangements that we normally have.

MR SHEAHAN: So we are told, your Honour.

KIRBY J: So there is going to be some other improvisation. If you go on for too long, we will get agitated, but we will find subtle means to show that your time is coming to a close.

MR SHEAHAN: I have no doubt.

KIRBY J: Mr Sheahan, I had the Registry notify the parties that I, of course, know Mr Simos and I have been to his home on one occasion and I knew Mr Boland at law school and Mr Webster has appeared before me in court and Mr Yates has had quite a bit of litigation in which I have sat. All of those things were drawn to the attention of the parties and I understand there is no objection to my sitting.

MR SHEAHAN: There is no objection, your Honour.

KIRBY J: Yes, thank you. Time will commence now.

MR SHEAHAN: Your Honours, in this matter the Full Court committed an elementary error. Their Honours held that an exercise of discretion, for which reasons are given, is not open to be reviewed on the ground that it is unreasonable or plainly unjust. Their Honours held that the trial judge here had given reasons that an attack on her Honour's reasons based on error of principle had failed, that an attack on her Honour's reasons based on factual error had failed. It followed, their Honours held, that the remaining ground of appeal, namely that the decision was in all the circumstances unreasonable or plainly unjust, was, as their Honours put it, misconceived.

Their Honours' error lay in applying too literally some of the language in House v The King. The true principle, of course, is that judicial discretions are open to appellate review on the ground that they are unreasonable or unjust, whether or not reasons are given, or, to put it differently, an unreasonable or plainly unjust order is not insulated from appeal merely because the judge gave reasons which do not disclose any discrete any error of law or fact.

HAYNE J: Let all that be assumed in your favour - and that may be an unduly large assumption - as I would understand the core of your contention, it is that, to try to adopt neutral language, particular weight should be given or particular account should be taken of the failure to warn. Do I understand the core proposition properly?

MR SHEAHAN: Your Honour does. We put it in two places though. We do say that the court below erred in treating it as merely another discretionary factor.

HAYNE J: Do you not seek to blow hot and cold by saying the discretion is unfettered but there should be a "principle", a "guideline" giving special place to warning or failure to warn?

MR SHEAHAN: With respect, no. What was decided in Knight's Case was that where a power to order costs is conferred on a court in general language, that power extends to a power to order costs against third parties. In the reasons of Chief Justice Mason and the other judge who agreed with him there was a statement of the sort of principle that would cover the circumstances in that case. Now, that was a statement of a principle, which has been subsequently applied. It was indeed applied in this case.

KIRBY J: It was Justice Dawson's - - -

MR SHEAHAN: It was Justice Deane.

CALLINAN J: What is it, that a de facto party - - -

MR SHEAHAN: In effect, where you have a plaintiff that is insolvent or a man of straw and a plaintiff who is interested or would stand to benefit from the outcome of a litigation, then an order for costs can be made against them though they are not a party if the interests of justice require it. That is a principle for which Knight has been taken to stand. It is a principle though consistent with it being a discretion that is conferred in unfettered terms. Your Honours, in this area there are no universal rules but there are, we would submit, general rules and the Court has power to lay down guidelines for the assistance - - -

HAYNE J: What is the guideline you say that should be established? What is the proposition ultimately for which you would contend?

MR SHEAHAN: Ultimately, we would contend for this proposition, that as a general rule costs will not be ordered against a third party where the defendant has failed to give notice that such an order might be sought, after the defendant is aware that the third party is someone against whom such an order might be sought, if the plaintiff does not or cannot satisfy an order for costs.

HAYNE J: What is the bite in the words "as a general rule"?

MR SHEAHAN: The bite in the words "as a general rule" is that we are in the realm of discretion. So there will be, obviously, situations which are truly able to be characterised as exceptional.

KIRBY J: What is the difference between what you are suggesting and what the Full Court of the Federal Court held?

MR SHEAHAN: The Full Court of the Federal Court held that this was simply another factor to be weighed in the discretion. It did not have any special weight. It had no special significance. It was just another factor to be weighed. So unlike, for example, a custody case where, as your Honours have held many times now, the interests of the child must, in the exercise of the discretion, have particular significance, it does not stop it being an exercise of discretion. Similarly here, we would contend that the principles of natural justice and procedural fairness require, in the circumstances we have outlined, notice. In the absence of notice, leaving aside exceptional circumstances, a third party should not be burdened with costs retrospectively.

KIRBY J: It is not entirely clear to me what the difference between your proposition, as finally expressed, and Mr Jackson's assertion is, unless it be a matter of the weight that is to be given. It is either a rule of law or it is a matter to be given weight in the exercise of a discretion. Now, if it is the latter, then where is the error?

MR SHEAHAN: Your Honour, the difference is on the one hand there are factors which are recognised by the courts as simply relevant to the exercise of the particular type of discretion. The proposition for which we contend is that there are also two other types of factors which, while relevant, are a little more than just relevant. There is some discussion of them, for example, Norbis v Norbis, which your Honours should - - -

KIRBY J: What is the citation?

MR SHEAHAN: 161 CLR.

KIRBY J: Yes. We are pretty familiar with Norbis, so just tell us what is the proposition.

MR SHEAHAN: At page 519 their Honours, Justices Mason and Deane said:

It has sometimes been said by judges of high authority that a broad discretion left largely unfettered by Parliament cannot be fettered by the judicial enunciation of guidance in the form of binding rules governing the manner in which the discretion is to be exercised. However, it does not follow that, because a discretion is expressed in general terms, Parliament intended that the courts should refrain from developing rules or guidelines affecting its exercise. One very significant strand in the development of the law has been the judicial transformation of discretionary remedies into remedies which are granted or refused according to well-settled principles.

Their Honours continue with the analysis.

HAYNE J: Do you say that costs against a third party should be regulated according to that fashion?

MR SHEAHAN: We do, your Honour. We put the submission in this context, that it has now been just short of a decade since Knight was decided. Knight was concerned only with the question of power, with the existence of the discretion. The judges were avowedly not concerned with the exercise of discretion, the factors which will inform it, whether there are or ought be principles or guidelines laid down to assist judges at first instance to exercise that discretion. That was a decade ago.

Your Honour, that there should be such principles developed emerges from thinking about some general propositions against the background of which Knight's principle has to stand. One of them is that the power to order costs against a third party must be exceptional. That was recognised by the High Court in Knight, by the House of Lords in Aiden Shipping. The second is that it has to be set against, in particular in relation to the companies, the - - -

HAYNE J: It is odd that a rule which has its application only in exceptional circumstances should be capable of formulation in a set of guidelines, is it not? It really challenges the imagination of the formulator of the rules.

MR SHEAHAN: Your Honours, it is not our submission that the Court should, in this appeal, if there is to be one, or any other, set down, as it were, a little statute as to how this type of discretion is to be exercised. It is our submission that the particular consideration with which we are concerned in this case and which we say led to the error below, an unjust outcome below, is an important one and more than merely a discretionary factor and that this Court should say so.

KIRBY J: But is not the principle that you are arguing for more a question of due process or fair procedure rather than a cost rule?

MR SHEAHAN: It is indeed.

KIRBY J: And in so far as you are looking at that issue, is it not the fact that the solicitors on the other side for the respondents gave notice to your client that this was in the wind? It is true they did not press it, and you make much of that in your written submissions, but it is not as if this is a case where this came out of the blue at the end of the matter.

MR SHEAHAN: With respect, no. What was floated as a possibility in correspondence was an application for security for costs. It has not been suggested at any stage that notice was - - -

KIRBY J: Yes, but who would give the security? It would have to have been your client, would it not?

MR SHEAHAN: It may be, or it may not be. It might have been able to be procured in other ways. One of the things that can - - -

CALLINAN J: Did the litigant party have the capacity to give security?

MR SHEAHAN: I do not think there was any evidence about that. I think if the question had arisen, which it did not below, there would have been a basis for a finding that it would have had difficulty providing security, depending upon the quantum of security, of course. It would have been an order for security made at a certain time. Normally those applications are made prospectively. So one has to imagine an estimate for the costs going forward - - -

CALLINAN J: How long did the trial last?

MR SHEAHAN: Ultimately it took seven weeks I believe, your Honour. So the costs of the trial itself were substantial.

CALLINAN J: It was always going to be a very long trial.

MR SHEAHAN: Yes, I think the original estimate was six. So it took just a little longer than estimated. One of the odd features of the case though, your Honours, is that - and here I have to distinguish between Mr Jackson's clients and the second respondent, Mr Simos. Mr Jackson's clients, the first and third respondents, had actually threatened an application for security for costs, seven months before the trial, said they would make it without further notice if credible information, detailed information about the assets of the company were not provided. No such information was provided, but they made no application for security.

CALLINAN J: Did your client ignore that letter?

MR SHEAHAN: Yes, it did. It did not respond. So, in other words, the ball was left in their court to live up to their threat.

CALLINAN J: I do not know about that, Mr Sheahan. I would have thought that it would have been courteous at least, and probably a little more than that, to have made a response or reply to the letter.

KIRBY J: Maybe your client thought they would not press on with it.

MR SHEAHAN: Your Honour, perhaps they did.

KIRBY J: Or hoped that it would all go away.

MR SHEAHAN: Perhaps they did.

KIRBY J: Or perhaps they were advised, "Well, just let's see what happens".

MR SHEAHAN: Perhaps they did, and if they made those judgments, as it turned out, perhaps contrary to expectations, they were right. The significance of it for this application is that - if I can go back to the general principles that I was mentioning to your Honours before. The first was these are exceptional orders. The second is that, ordinarily, the proper way to remedy an expectation that the plaintiff will not be able to satisfy an order for costs is to make an application for security for costs. In particular in the case of the first and third respondents here, it is apparent that by seven months before the trial they were asserting that they were in a position to make such an application; and they did not.

KIRBY J: Did you argue before Justice Branson - I rather assume from your reply on page 192 that you did not - that there should be a rule of this kind as a rule of law?

MR SHEAHAN: Your Honour is right. Counsel who then appeared before Justice Branson did not put the proposition in those terms.

HAYNE J: And, indeed, at 177 line 17 here you say:

the Full Court should have treated the absence of fair warning as having greater significance.

It seems to me that the principal difficulty you face in your application is that you would seek to have us re-exercise a discretion and you would say, in the course of doing that, we should say something that would give especial or particular significance to warnings. Am I mischaracterising the nub of your case?

MR SHEAHAN: I think your Honour is characterising it exactly as our opponents would.

HAYNE J: Therefore I am mischaracterising it. How should I characterise it?

MR SHEAHAN: Just slightly differently from the way we would, with respect. I am not sure that I can put it better than by saying that we would ask the Court to characterise the need for fair warning, in the way I described it earlier, as a principle that ought govern the exercise of discretion in these cases with the consequence that the decision that was made in this case was outside the scope of a proper exercise - - -

KIRBY J: Everybody seems to agree, in the written submissions, that the question of fair warning is a matter that is relevant, that it is an issue which must be, or should be given weight. The question is, does one somehow blow into that a greater point of principle than that it is a factor to be given weight? That is where the difference between you and the respondents lies.

MR SHEAHAN: On that part of the case, yes. There is another part of the case which is important from our point of view, your Honours, and that is, as I started to say, in our submission there has been a miscarriage of justice here because the Full Court did not deal with one of our grounds of appeal. It did not deal with it because it misconceived the law on an important matter: the scope of judicial review of judicial discretions. We would contend, if leave to appeal were granted, that this was a harsh and unreasonable outcome when regard is had to the fact that this was not in the real sense a straw company, because it was a company that had assets - - -

KIRBY J: Yes, we have read that.

MR SHEAHAN: There was no notice. Notice could have been given at least by the first and third respondents, but we would say by all of them. The outcome is harsh and unjust. Can I say in respect of that just one thing. A false issue was raised, with respect, by all the respondents. The false issue is that they learned, during the course of the application before Justice Branson, more about the financial circumstances of the company, the applicant in the original proceedings, and they said if they had known - so as to make its financial position look weak. That, they say, bears upon whether it was appropriate for them to have given warning.

It was a false issue for this reason. The question is not, "Do you have enough information to make an application for security? If not, you don't need to give warning". The question is whether you wished to reserve the right to make an application for third party costs against someone who is a viable target, an alter ego for the company for example. That is the basis on which the case was ultimately put before Justice Branson. Mr Yates was the alter ego for the company. If the company could not pay, he should pay.

In respect of that, nothing on the respondent's side, their state of knowledge, had changed. Even in respect of the financial circumstances of the corporate applicant, nothing had changed by the time the application for third party costs was made. The new information they got after they made the application for third party costs, not before.

CALLINAN J: Mr Sheahan, they were never to know, were they, of the very heavy involvement of Mr Yates personally in the litigation? It went beyond, for example, the sort of involvement that a director or a chief executive would have. As I recall the evidence on the appeal, he treated it as if it were his own personal litigation, which was a factor that the respondents could not have known about until later.

MR SHEAHAN: Your Honour, I am not sure that is right, with respect. Your Honour has to keep in mind that this application arose against the background of a six-week trial in which the defendants were the lawyers for the applicant. The lawyers for the applicant had known intimately of just how connected Mr Yates was with this company.

CALLINAN J: But they would not have known what the financial position was.

MR SHEAHAN: They might not have known the financial position.

CALLINAN J: It was a combination of factors, the intense personal involvement and, I will not say impecuniosity, but the incapacity to meet the costs.

MR SHEAHAN: In respect of financial capacity, all we can say is that nothing new came to light before they actually made the order to make Mr Yates liable. So that if they had enough knowledge to make an application to make him liable, they had enough knowledge to actually send him a letter saying, "We might want to make you liable one day". Your Honour, those are our submissions.

KIRBY J: Yes, thank you. The Court does not need the respondents' assistance.

The question in this application for special leave is whether the discretion of the primary judge in the Federal Court of Australia, Justice Branson, miscarried in ordering that the applicant personally pay the costs of litigation in which he was not a party. The jurisdiction and power of the judge to make the order is not challenged. However, it is said that the discretion miscarried chiefly because the primary judge failed to give due weight to the fact that the respondents did not give fair warning of their intention to seek an order for costs against the applicant personally.

The giving of a fair warning of such an intended application is certainly a relevant consideration. It affords those who stand behind a company the opportunity, ordinarily at an early stage, to decide whether to make the financial commitment necessary to allow the litigation to proceed: cf Knight v F.P. Special Assets Limited (1992) 174 CLR 178 at 192. However, while the giving of a fair warning is ordinarily necessary and always prudent, it does not represent an inflexible rule of law. It is a consideration to be given due weight. This is how the Full Court of the Federal Court treated it. In our view, no error is shown in that court's approach.

Once that view is taken, what is involved is a discretionary decision on a question of costs that does not warrant the grant of special leave. In the circumstances of the case, we are not convinced that any miscarriage of justice has been shown requiring the intervention of this Court. Accordingly, special leave to appeal is refused with costs.

The Court will now adjourn in order to be reconstituted.

AT 9.56 AM THE MATTER WAS CONCLUDED