It is a well known principle that an order for costs is usually only made against a party to the litigation. However, successful defendants should keep in mind that they may be able to seek costs orders not only against an unsuccessful plaintiff but also persons connected with the plaintiff, for example, directors or shareholders of a plaintiff company.
In Queensland, the Supreme Court’s power to award costs against non-parties is contained in r 681 Uniform Civil Procedure Rules 1999 (Qld) (UCPR) which provides that costs of a proceeding are in the discretion of the court but follow the event, unless the court orders otherwise. The High Court decision in Knight v FP Special Assets Ltd (1992) 174 CLR 178 (Knight) confirmed that such a provision authorises the court to award costs against non-parties to proceedings. In Knight, the majority of the High Court held that the discretion conferred on the court by a provision in the Rules of the Supreme Court of Queensland which was similar to r 681 UCPR was not limited to the parties to the proceedings. It identified that an applicant must satisfy the court that the case falls within a “general category of case where a non-party costs order might be appropriately made” and that the interests of justice require that such order is made. The High Court in Knight set out in the following three criteria to identify cases in that “general category”:
- the party to the litigation is an insolvent person or man of straw;
- the non-party has played an active part in the conduct of the litigation; and
- the non-party has an interest in the subject of the litigation.
The court will exercise its power to make a non-party costs order sparingly and with great restraint, particularly in relation to orders against directors and shareholders of a corporate litigant, in order to give appropriate recognition to the corporate veil. While there are a number of examples where courts were not prepared to pierce the corporate veil (eg FPM Constructions v Council of City of Blue Mountains  NSWCA 340, Rushton (Qld) P/L and Ors v Rushton (NSW) and Ors)  QSC 047), there are some relatively recent examples where courts have exercised their discretion (eg Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq)  VSCA 223 and JJES Pty Ltd v Sayan (No 2)  NSWSC 975).
JJES Pty Ltd v Sayan (No 2) is an example of the court’s willingness to make a costs order against a director and sole shareholder of a company. In this case, a solicitor successfully defended a claim brought against him by the plaintiff company for providing an allegedly negligent advice in relation to the purchase of a 7-Eleven franchise. The successful defendant then sought a costs order against the sole shareholder and director of the plaintiff company.
In an ex tempore judgment, Campbell J of the Supreme Court of New South Wales made the costs order sought by the defendant. In making this judgment, the court relied on its power to make non-party costs orders contained in s 98(1) of the Civil Procedure Act 2005 (NSW) which is similar to r 681 UCPR referred to above. The court further referred to the test propounded by the High Court in Knight.
The court thought that this case fell within the “general category” identified by the High Court in Knight. In particular, the court emphasised that the plaintiff was “an entity of straw”. The court reached this conclusion based on the fact that the director was the driving force of the company and only formed that company for the purpose of conducting the franchise because 7-Eleven insisted upon it. The plaintiff company was also insolvent. The director was the main active player in the proceedings against the defendant, she was the main witness on all issues of liability and damages, she provided all relevant instructions to the plaintiff’s lawyers and she was the person who would benefit from any damages recovered from the defendant.
The court was satisfied that the interests of justice required that a non-party costs order against the director be made. In particular, the court noted that the unsatisfactory and unreliable nature of the director’s evidence at trial made the conduct of the litigation unreasonable.
The above case illustrates that in certain circumstances, courts may be prepared to lift the corporate veil and make costs orders against directors or shareholders of a plaintiff company and applications for such orders should be considered where the plaintiff is unlikely to meet a cost order and argument can be made that the case falls within the “general category” identified in Knight.