The indemnity principle, unmasked.

The practical implications explained in two cases.

In this month’s edition Chris Grisenti, an associate solicitor in our Melbourne office, and another solicitor also based in Melbourne, Jasmine Beteramia, take a look at the indemnity principle.

This principle restricts a successful litigant to claiming only the costs their solicitor will charge. But what does that mean in practice? And, more importantly, how does the principle impact on the way you should be charging?

And a little reminder before reading on… The lead-up to Christmas is always a busy time for Blackstone. If you need your file costed before you return to the office in the New Year, be sure to schedule the work with us as soon as you can.

The indemnity principle, sometimes known as the indemnity rule, states that a successful litigant who obtains a cost order cannot recover more than their own solicitor will charge. Justices Redlich and Mandie of the Victorian Court of Appeal set this out in Shaw v Yarranova Pty Ltd [2011] VSCA 55 when their Honours stated:

“an order for costs…aims to provide the successful party with some level of indemnity for the legal costs the successful party would not have incurred…[S]uch an order does not entitle the successful litigant to recover more than he or she has paid or is liable to pay.”

This has very real implications for the ability of legal practitioners to recover costs. Following the changes to the Victorian Supreme Court and County Court in 2013 and 2014, it is increasingly common for the costs calculated under these scales to be higher than the amount charged by legal advisers.

So what exactly can litigants claim? And what does it mean for you as a practising solicitor? Two recent cases shed light on the indemnity principle.

Kilkenny Walsh Pty Ltd v Strasburger Enterprises

Between 2011 and 2014, this dispute ran in the Supreme Court of Victoria. Prior to the trial, the applicant, Kilkenny Walsh, accepted a one million dollar offer of compromise. It then prepared a bill of costs totalling $2,717,268.22.

The respondent, Strassburger Enterprises, alleged the claimed costs exceeded Kilkenny Walsh’s liability to pay costs and offended the indemnity principle established in Shaw. It asked the court to compel Kilkenny Walsh to produce several documents, including the retainer, costs agreement, any third party funding arrangements and all bills and tax invoices. It argued that it needed these to ascertain whether there was a liability. Meanwhile, Kilkenny Walsh opposed the application, claiming it was a fishing expedition.

Judicial Registrar Gourlay considered the principles in Shaw and, another case, Kuek v Deflan Pty Ltd [2012] VSC 571. This decision had found that, when assessing whether a party was seeking to recover more than they were entitled to, a court ought to have regard to any evidence presented on the taxation.
With this in mind, the Judicial Registrar ruled that retainer letters were relevant to establishing the extent Kilkenny Walsh’s liability to its lawyers, “and thus bore on the applicant’s ultimate contention as to the breach of the indemnity principle.”

 Gourlay JR addressed each document individually and decided:

• Retainer letters/Costs agreements. These were relevant and should be produced.
• Third party funding. A third party arrangement won’t extinguish a party’s liability to pay costs to their solicitor. If there was no evidence of a third party arrangement, asking for their production is a fishing expedition and no order should be made.
• Disbursement invoices. Counsel backsheets, fee memoranda, disbursement invoices and expert evidence fees provided details of charges claimed in the bill and offered insights into the work experts and counsel have undertaken. This meant they should be produced.

Implications for Practitioners

If, in a costs matter, the other side requests you to provide copies of your invoices, you won’t usually be compelled to produce them. However, you may need to produce your costs agreements and disclosure statements. This may have ramifications in the light of the next decision we consider.

Pieter Mourik v Roland Von Marburg [2016] VSC 601

This matter came before Wood JA of the Costs Court after the Supreme Court made a costs order in Mourik’s favour. Mourik was the second defendant in those proceedings but became the applicant here.

Mourik sought to have these costs taxed in the Costs Court while the substantive proceeding remained on foot. Orders were made for costs to be paid forthwith, considering Rule 63.20.1.

The respondent, Von Marburg, raised a preliminary issue as to whether Mourik had a right to recover legal costs. He believed Mourik’s lawyers, Minter Ellison, were acting on a pro bono basis and asked that his costs agreements and disclosure statements be produced.

While Mourik objected to producing these documents, he eventually acquiesced prior to the preliminary hearing, filing four costs agreements: one between Mourik and Minter Ellison, one between Dr Collins QC and Minter Ellison, and two between Ms Hickey of Counsel and Minter Ellison.

Minter Ellison Costs Agreement
Wood JA considered this agreement in some detail. The agreement stated:

“We have agreed that we will not charge you for the work except where specified below…The matters we will invoice you for are expenses and disbursements in connection with the work.”

It did not provide any rates for lawyers working on the file. This led Mourik to argue that, where a contract was silent as to price, a reasonable price can be charged.

The agreement also addressed the possibility that a costs order might arise, stating that:

“Where you are the beneficiary of such an order, we may give you an invoice for our charges, including our professional fees, to an amount no greater than the amount recovered from another party”.

Wood JA considered how this paragraph applied, particularly in light of the decision in Mainieri v Cirillo (2014) VSCA 227. His Honour found that:

”If the indemnity principle is considered at the time of taxation…and the liability to the practitioner in an Agreement is triggered by a favourable costs order then the liability crystallises before the taxation. Where the liability is triggered by an amount recovered, there is no liability at the time of the taxation”

Wood JA found that Mourik had no liability to pay costs at the time of taxation, even if Minter Ellison was able to charge Mourik. This was because any liability only arose upon recovery from Von Marburg.

Wood JA called this a “circular conundrum”, as fees could only be taxed once there was liability but liability only arose upon recovery.

Counsel’s Agreements

Wood JA considered counsel’s costs agreements only briefly.

Dr Collins QC’s agreement stated that the basis for charging was a costs order or case settlement where legal costs were included. Therefore, the liability for fees was triggered prior to a taxation, and so these costs were recoverable.

Ms Hickey’s initial agreement stated that the basis for charging was both:

• An order for costs in favour of the Applicant, and,
• Limited to the extent that the party against whom the order for costs is made in fact pays the costs.

This passage would trigger the same circular conundrum Minter Ellison had, as liability was only triggered by a recovery. However, Ms Hickey provided a second agreement which was expressed as retrospective, and contained a similar clause as Dr Collins QC.

As a result, His Honour found that there was liability to pay Counsel’s fees, and these fees could be taxed by the Costs Court.

What this decision means for you 

While an opposing party can’t review your invoices or timesheets before a taxation has concluded, in party/party matters they can call for and review both solicitors’ and counsel’s costs agreements and disclosure statements.

And, if you act on a pro bono or conditional basis, you should always ensure you do not make any liability for legal costs contingent on recovery of party/party costs from the unsuccessful litigant.

If you do, any recovery of costs will be a breach of the indemnity principle, and you won’t be entitled to recover any party/party costs, even if there is a court order that these to be paid.