Pursuing Indemnity Costs

Leaving aside a handful of special circumstances, Courts make indemnity costs orders in response to misconduct in litigation. For that reason, an application for indemnity costs almost inevitably involves an allegation that a litigant and the litigant’s lawyers have been involved in misconduct.  Such allegations are serious ones to make; both against a litigant and against a lawyer. Why, then, are applications for indemnity costs so casually threatened and pursued?

Indemnity costs as a response to misconduct

There are, of course, circumstances in which indemnity costs are awarded without any reference to the way the litigation has been conducted. Mortgagees and lessors often have the benefit of contractual entitlements to indemnity costs, which are given effect by favourable exercise of the costs discretion. Parties to family provision applications are usually awarded their costs on the indemnity basis to be paid out of the subject estate. The plaintiff who does better than a formal offer has a prima facie entitlement under rule 360 of the Uniform Civil Procedure Rules 1999 to indemnity costs (although that rule emanates from the authorities which hold that an offer imprudently refused is a basis upon which an indemnity costs order might be made).

Those circumstances aside, the cases indicate that indemnity costs orders are exceptional, and are made in response to “blameworthy” conduct.  A brief traversal of the authorities is usefully started with Sheppard J’s well-known summary of actuating factors in Colgate-Palmolive Co v Cussons Pty Ltd1:

1. The problem arises in adversary litigation, ie litigation as between parties at arm’s length. Different considerations apply where parties may be found to be entitled to the payment of their costs out of a fund or assets being administered by or under the control of a trustee, liquidator, receiver or person in a like position, eg a government agency or statutory authority.
2. The ordinary rule is that, where the court orders the costs of one party to litigation to be paid by another party, the order is for payment of those costs on the party and party basis …
3. This has been the settled practice for centuries in England. It is a practice which is entrenched in Australia. Either legislation (perhaps in the form of an amendment to rules of court) or a decision of an intermediate Court of Appeal or of the High Court would be required to alter it …
4. In consequence of the settled practice which exists, the court ought not usually make an order for the payment of costs on some basis other than the party and party basis. The circumstances of the case must be such as to warrant the court in departing from the usual course … Woodward J in Fountain Selected Meats appears to have adopted what was said by Brandon LJ (as he was) in Preston v Preston ([1982] 1 All ER at 58) namely, there should be some special or unusual feature in the case to justify the court in departing from the ordinary practice … But as French J said (at 8) in Tetijo:“the categories in which the discretion may be exercised are not closed’’ …
5. Notwithstanding the fact that that is so, it is useful to note some of the circumstances which have been thought to warrant the exercise of the discretion. I instance the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud … evidence of particular misconduct that causes loss of time to the court and to other parties … the fact that the proceedings were commenced or continued for some ulterior motive … or in wilful disregard of known facts or clearly established law … the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions … an imprudent refusal of an offer to compromise … and an award of costs on an indemnity basis against a contemnor …
6. It remains to say that the existence of particular facts and circumstances capable of warranting the making of an order for payment of costs, for instance, on the indemnity basis, does not mean that judges are necessarily obliged to exercise their discretion to make such an order. The costs are always in the discretion of the trial judge. Provided that discretion is exercised having regard to the applicable principles and the particular circumstances of the instant case its exercise will not be found to have miscarried unless it appears that the order which has been made involves a manifest error or injustice.

More recently, in The Beach Retreat Pty Ltd v Mooloolaba v Mooloolaba Marina Ltd2, Martin J conducted an extensive survey of the authorities.  His Honour referred to “the development of a less confined approach to the award of indemnity costs” as identified by the NSW Court of Appeal in Chaina v Alvaro Homes Pty Ltd3.  

In Chaina, Basten JA expressed the view that, notwithstanding the injunction in the cases sparingly to exercise the relevant discretion, “more recent case-law generally shows a tendency to grant indemnity costs orders more readily than was the case in the past”4.  This, His Honour held, was to be seen as “an element of a broader policy directed to limiting the litigation of cases where there are no reasonable prospects of success”.

His Honour went on to observe that, the growing tendency to make such awards notwithstanding, “it is important that the standard to be applied in awarding indemnity costs not be allowed to diminish to the extent that an unsuccessful party will be at risk of an order for costs assessed on an indemnity basis, absent some blameworthy conduct on its part.”5  Boddice J, writing for the Queensland Court of Appeal last year in LPD Holdings (Aust) Pty Ltd v Phillips6, adopted Basten JA’s view.

The corollary is that, any loosening of the bias against indemnity costs orders has not been so much as to regard such an order as anything other than exceptional.

Orders against lawyers

At least since Knight v FP Special Assets7, it has been settled that the general discretion to award costs includes the discretion to award them against a third party. It is acknowledged that the discretion extends to orders against a practitioner with carriage of a case.8 Leaving aside the jurisdiction identified in Knight, the Courts have traditionally exercised a jurisdiction to make wasted costs orders against practitioners.9 That jurisdiction is an incident of the Court’s supervision of practitioners. The primary object of such an order is to avoid the cost of unjustifiable conduct by a practitioner being borne by a litigant.10

An order against a practitioner is usually justified by reference to some unreasonableness in the conduct of a case.  Goldberg J summarised the relevant authorities in White Industries (Qld) Pty Ltd v Flower & Hart (a firm)11:

This analysis of the cases makes it clear that the jurisdiction to order costs against an unsuccessful party’s solicitors is enlivened when they have unreasonably initiated or continued an action when it had no or substantially no prospects of success but such unreasonableness must relate to reasons unconnected with success in the litigation or to an otherwise ulterior purpose or to a serious dereliction of duty or serious misconduct in promoting the cause of and the proper administration of justice. Further, the cases establish the proposition that it is a relevant serious dereliction of duty or misconduct not to give reasonable or proper attention to the relevant law and facts in circumstances where if such attention had been given it would have been apparent that there were no worthwhile prospects of success.

As is apparent from the reasons of Davies JA in Steindl Nominees v Laghaifar12, that passage resonates the barrister’s duty to the Court independently to exercise judgment as to the presentation of a case to the Court.13 In that decision, His Honour rejected the proposition, apparently advanced by the English Court of appeal in Ridehalgh v Horsefield14, to the effect that “a legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he acts for a party who pursues a claim or a defence which is plainly doomed to fail.”  

On the other hand, Williams JA appeared to give some support for the English Court of Appeal’s position, adopting the following statement of Lord Hobhouse in Medcalf v Mardell15:

So it is not enough that the court considers that the advocate has been arguing a hopeless case. The litigant is entitled to be heard; to penalise the advocate for presenting his client’s case to the court would be contrary to the constitutional principles to which I have referred. The position is different if the court concludes that there has been improper time-wasting by the advocate or the advocate has knowingly lent himself to an abuse of process.

To the extent that there is any difference between their Honours on that point, it is unclear which view should prevail. There has been an increasing focus in recent years on the primacy of counsel’s duty to avoid the unarguable, however, subsequent authority has referred to cases such as Medcalf and Rigehalgh with approval.16 

The implications of seeking indemnity costs

Often enough, those of us who practice civil litigation will have seen outlandish threats to seek indemnity costs in letters between solicitors. It is easy enough to flick them away with a sense of world-weariness, but there are ethical implications which deserve consideration.

In 2004, the Council of the New South Wales Law Society perceived the practice to be so endemic as to require the Council’s intervention. The Council published a missive to its members in which it advised:

A threat to seek a personal costs order against a practitioner in any proceedings should not be made unless:

1. The practitioner making the threat has material available which would clearly suggest that the proceedings have little merit and are likely to fail; and
2.  The practitioner has specific instructions from the client to make the threat after the client has been made aware of its seriousness and the possible consequences for the client if the allegation is not made out. Those consequences might include the making of an indemnity costs order against the client in respect of any application for costs subsequently made; and
3. The practitioner makes known to the opposing practitioner the evidentiary basis for having formed the view referred to in (1) above and that the warning is being given as a matter of professional courtesy.

Should a practitioner consider that proceedings are so ill founded or so lacking in a credible defence, interlocutory proceedings for dismissal or strike out should be a more appropriate course.

A practitioner has an obligation to maintain her or his professional independence. A practitioner should never threaten an application for a personal costs order or act on such an application merely because a client has instructed the practitioner to do so.

That advice was given against the background of the duty of solicitors to deal with their opponents courteously, but it raises issues as important to counsel as to solicitors. Most importantly, it points to the seriousness of making an allegation of misconduct in the course of litigation, the consequences for the client if the allegation is not made out (including the client’s own exposure to an order for indemnity costs) and the correlative requirement that such an allegation only be made on proper material.

It is also to be noted that whilst the statement addressed the particular vice of threatening an application against a colleague, there is no reason to think that different considerations should apply when making a similar threat against a litigant. For one thing, given that the litigation will usually have been conducted on behalf of the litigant by lawyers, the allegation necessarily reflects on the professionalism of those lawyers. For another, an application, when made against a litigant, will involve defaming that litigant on an occasion of absolute privilege. The defamation of the litigant will not usually hold the same professional implications18 but it nevertheless marks that person out as having done something disreputable.

An acute example of the potential for an application against a litigant to reflect on the lawyers is given by the recent decision in Ashby v Slipper.  In that case, the conduct of the solicitor for Ashby was attacked, but no order was sought against him and he was not joined to the proceeding. At first instance, serious and adverse findings were made with respect to the solicitor’s conduct.  On appeal, the Full Court overturned the findings to the effect that the solicitor had been untruthful in his affidavit evidence, saying that “[t]he gravity of such findings cannot be overstated”.19

The advice of the NSW Law Society that an application should only be made on proper material aligns with ethical obligations set out in our conduct rules. We are obliged only to make allegations when we have a proper basis, and, of course, only to pursue allegations of fraud and serious misconduct with caution.20

Should the lawyers for a respondent continue to act?

Because the allegation has those serious implications for both the litigant and the lawyers, an immediate ethical question arises with respect to conflict.  It may be in the interests of the litigant to argue that the proper object of an order is the solicitor or the counsel, on the basis that the litigant did no more than follow advice. Perhaps the litigant would, properly advised, argue that the lawyers never properly explained the implications of taking the step that is said to justify the order.

Where, advised by new lawyers, the respondent litigant seeks to displace blame to the previous lawyers, the original representatives may have to defend their conduct before the Court. That invokes its own difficulties for the original lawyers; not least the extent to which they can defend themselves consistent with their obligations of confidentiality to their former client.21

The course of events in Steindl Nominees, to which I have referred above, demonstrates that these concerns are not merely theoretical. The matter first came before the Court of Appeal as an application for leave to appeal out of time. The respondent (Steindl Nominees) applied for indemnity costs against both the applicant and the applicant’s counsel. The Court ordered indemnity costs against the litigant at the end of the first hearing but adjourned the application as against counsel to allow him to obtain advice and separate representation.22

Of course, such applications are rarely met with a decision to split representation before they are argued.  In a sense, that underlines the perception in the profession that such applications are, as often as not, made on the basis that “if you don’t ask, you don’t get”; but it is submitted that the questions of conflict traversed immediately above must be considered whenever such an application is advanced.

The fact that those conflicts arise underlines the seriousness of making the allegation of misconduct in the first place.  The implicit reflections upon professionalism aside, making the allegation has the potential to see the costs of litigation explode and the litigation itself distend. Given the overarching obligation of parties and practitioners to give proper regard to the efficient use of the Court’s resources and to concentrate on the real issues in dispute,23 that potential, of itself, raises professional concerns for counsel.

Proper steps to take in making an application

As the NSW Law Society advised, an application for indemnity costs should only be made on proper material. That proper material will include evidence necessary to establish the misconduct, as well as a cool consideration as to whether the conduct in question really rises to the level of the misconduct required by the cases.

Just as importantly, an application should only be made on instructions given in the context of full advice, including as to the possibility of ramifications (particularly in costs) if the application fails.

It may be noted that the missive from the NSW Law Society advised that the opponents should be warned as a matter of professional courtesy. It may be doubted whether any requirement of that character remains in Queensland. Professional courtesy raises the concern that litigants’ interests are trumped by professional harmony. Whether or not that is so, it is difficult to imagine circumstances in which the client’s interests will not be advanced by giving the opposing side the opportunity to reveal any matter which may tell against an order for indemnity costs before launching the application. The failure to respond substantively to such an opportunity may, in turn, be important evidence in favour of granting the order.

At a more basic level, there is authority for the view that such an application is more likely to succeed in circumstances where proper notice has been given.24 Obviously, the seriousness of the issues raised, and the potential need to consider questions of conflict, make notice important.

Conclusion

Because applying for indemnity costs based on misconduct involves factual allegations of some seriousness, the remedy should not be lightly pursued. The application must be based on proper material and should normally be made with sufficient notice to allow questions such as conflicts to be considered.

Strategic and ethical considerations overlap at the point of considering whether the application is worthwhile. It may be that making such an application risks a significant expansion of the dispute and, if the application is unsuccessful, costs consequences for the applicant and the applicant’s legal representatives.

Nick Ferrett Barrister, Brisbane

1. (1993) 118 ALR 248 at 256 — 7
2. [2009] 2 Qd R 589. An appeal to the Queensland Court of Appeal was subsequently dismissed.
3. [2008] NSWCA 353.
4. Ibid at [111].
5. Ibid at [113].
6. [2013] QCA 305.
7. (1992) 174 CLR 178.
8. See, for example, Steindl Nominees Pty Ltd v Laghaifar [2003] 2 Qd R 683. See also Moore v Devanjul Pty Ltd [2010] QSC 250 at [21] per McMurdo J citing Orchard v South Eastern Electricity Board [1987] QB 565 at 571.
9. Myers v Elman [1940] AC 282. Kelly v Jowett (2009) 76 NSWLR 405 at 418.
10. Kelly v Jowett (2009) 76 NSWLR 405 at 418.
11. White Industries (Qld) Pty Ltd v Flower & Hart (a firm) (1998) 156 ALR 169 at 239.
12. [2003] 2 Qd R 683 at 689 — 690.
13. This obligation is partially embodied in rules 41 and 42 of the 2011 Barristers’ Rule. The obligation was stated more fully by Mason CJ in Giannarelli v Wraith (1998) 165 CLR 543 at 556: … a barrister’s duty to the court epitomizes the fact that the course of litigation depends on the exercise by counsel of an independent discretion or judgment in the conduct and management of a case in which he has an eye, not only to his client’s success, but also to the speedy and efficient administration of justice. In selecting and limiting … what points of law will be raised, counsel exercises an independent judgment so that the time of the court is not taken up unnecessarily, notwithstanding that the client may wish to chase every rabbit down its burrow. The administration of justice in our adversarial system depends in very large measure on the faithful exercise by barristers of [an] independent judgment in the conduct and management of the case.
14. [1994] Ch 205 at 233 — 234.
15. [2003] 1 AC 120 at 143 — 144.
16. Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300 at 320 — 321 per McColl JA.  Martinovic v Chief Executive, Queensland Transport [2005] 1 Qd R 502 at 507.
17. A duty now subsumed in a wider duty of courtesy in the course of legal practice: Australian Solicitors Conduct Rules 2012, r 4.1.2.
18. Although if the litigant is engaged in some profession or trade which requires fitness of character, the accusation might have particularly acute impact.
19. Ashby v Slipper [2014] FCAFC 15 at [144].
20. Barristers’ Rule 2011, r 64.
21. Ashby v Slipper [2014] FCAFC 15 at [144].
22. Steindl Nominees Pty Ltd v Laghaifar [2003] QCA 49.
23. Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 at 189 per French CJ.
24. Huntsman Chemical Company Australia Ltd v International Pools Australia Ltd (1995) 36 NSWLR 242 at 249.