Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors (No. 2) (New Zealand)  UKPC 39 (21 July 2004)
Privy Council Appeal No. 8 of 2001
Dymocks Franchise Systems (NSW) Pty. Ltd. Petitioner
(1) John Todd
(2) Alicia Beatrice Todd
(3) Bilgola Enterprises Ltd and
(4) Lambton Quay Books Ltd. (No.2) Respondents
THE COURT OF APPEAL OF NEW ZEALAND
JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL UPON A PETITION
FOR AN ORDER FOR COSTS AGAINST A NON-PARTY
Delivered the 21st July 2004
Present at the hearing:-
Lord Nicholls of Birkenhead
Lord Rodger of Earlsferry
Lord Brown of Eaton-under-Heywood
Dame Sian Elias
[Delivered by Lord Brown of Eaton-under-Heywood]
The underlying proceedings
(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
"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
(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
"[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."
"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."
"[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."
"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."
"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."
Issue 2: Causation
"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."
"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."
Issue 3: Discretion
"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.