Costs order and the impecunious unsuccessful party

Client lost a court case and has insufficient funds to pay for any costs order?

Client won a court case and the unsuccessful party made submissions there

should be no order as to costs because of impecuniosity?

How often do we, as solicitors, find ourselves with a client in one of these positions? What are our options?

In ‘extremely rare’ circumstances (Austen v Ansett Transport Industries (Operations) Pty Ltd [1993] FCA 403 [58]) and ‘exceptional’ circumstances (Ritter v Godfrey [1920] 2 KB 47, 52) judges can, despite the ‘costs follow the event’ rule, deprive the successful party of its costs of the proceedings.

The High Court of Australia recently considered whether the impecuniosity of the unsuccessful party justifies the successful party bearing their own costs.

Northern Territory v Sangare [2019] HCA 25
Mr Sangare brought a defamation claim against the Northern Territory of Australia seeking damages in the sum of $5 million.

The Supreme Court of the Northern Territory dismissed Mr Sangare’s claim and he filed a Notice of Appeal. Although the appeal was unsuccessful, the Court of Appeal refused to order that Mr Sangare pay the Northern Territory’s costs because Mr Sangare’s impecuniosity would likely render the order futile.

The Northern Territory of Australia appealed the Court of Appeal’s decision in relation to costs.

The High Court of Australia allowed the appeal on the following grounds:

• The Court of Appeal erred in principle in treating Mr Sangare’s impecuniosity, without more, as sufficient reason to deny the Northern Territory an order for its costs of the litigation, in which it had been wholly successful (House v The King (1936) 55 CLR 499, 505).
• It was not open to the Court of Appeal to refuse to award the Northern Territory its costs on the ground that such an order would be futile.

Numerous authorities support the principle that the court’s power to make an order as to costs is a discretionary power. It is also well established that this discretion must be exercised judicially. In engaging in an exercise of this discretion, reference must be given to considerations connected to its exercise and the facts of the litigation (Latoudis v Casey (1990) 170 CLR 534). In light of this discretion, there seems no better reason to refrain from making an order for costs against an unsuccessful party than that such an award would be futile.

With the Sangare decision, the highest court of Australia has affirmed the position stated by various lower courts that impecuniosity on its own will not limit the judicial discretion to deprive the successful party of the costs of the proceedings.

Decisions of the Supreme Court of Victoria in the past few months highlight the need for barristers to be aware of the small steps that can be taken to ensure a litigating client, as opposed to their instructing solicitor, becomes liable for their fees. These decisions not only highlight potential problems in costs recovery, but also illustrate the risks that counsel can be exposed to in being sued by the ‘ultimate’ client in relation to costs. They also make clear that barristers are able to sue clients for costs recovery despite the fact that they were engaged by another party (their instructing solicitor).

So, what’s the point of making a costs order against an impecunious party?
The High Court’s decision to order an unsuccessful party to pay costs, despite that party’s impecuniosity, is reasonable for the following reasons:

• A costs order provides a deterrent to litigants without funds who may otherwise conduct proceedings in a way that forces other parties to the proceedings to unnecessarily incur costs Rose v Barwon (No 2) [2010] FamCA 738 [8]).
• A costs order provides the successful party with a reasonable expectation of recovering its proper costs. Courts have held that the losing party’s financial position is irrelevant (Board of Examiners v XY [2006] VSCA 190), even though the successful party’s ability to recover those costs may prove illusory because there are insufficient funds to cover those costs. Courts are expected to exercise their jurisdiction in an exemplary manner <ahref=”https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2010/681.html” target=”_blank”>(Australian Competition and Consumer Commission v Seal-A-Fridge Pty Ltd (No 2) [2010] FCA 681 [47]).
• A litigant’s financial ability to satisfy a costs order is not usually a matter connected with the conduct of the proceedings (Director-General Department of Land and Water Conservation v Ramke[1999] NSWLEC 22 [44]; WAEY v Minister for Immigration and Multicultural and Indigenous Affairs[2003] FCA 1314 [41]).
• If courts could refrain from ordering costs against unsuccessful parties, courts would be burdened with the task of determining the level of impecuniosity or wealth of the unsuccessful party in order to justify its exercise of the costs discretion (Board of Examiners v XY [33]).
• A costs order can be used as a bar against the unsuccessful party commencing further litigation.
• There are important policy considerations that back the accepted principle that costs follow the event. It is critical that parties who are contemplating litigation, either by commencing or defending proceedings, consider the costs involved. If the principle that costs follow the event was to be disregarded, and reliance was placed on impecuniosity alone to avoid a costs order, an increase in litigation would be inevitable (Oshlack v Richmond River Council (1998) 193 CLR 72 [68]).

Options for an impecunious unsuccessful party

There are avenues whereby impecuniosity can be at least partially accommodated by courts.

When there are multiple parties, there is ordinarily greater scope to take into account an unsuccessful party’s impecuniosity. By way of example, impecuniosity may justify the making of a Bullock Order (where the plaintiff pays the successful defendant’s costs and seeks reimbursement from the unsuccessful defendant) instead of a Sanderson Order (where the unsuccessful defendant has to pay the successful defendant’s costs).

The court may also allow additional time to an impecunious party to pay costs (eg, Tzavellas v Canterbury City Council (1999) 105 LGERA 262, 265; CRW v CML (No 2) [2003] FMCAfam 446 [37]), or allow the party to make payment by instalments (Underdown v Secretary, Dept of Education, Employment and Workplace Relations (No 2) [2009] FCA 1223 [9]).

It is important to note that, while impecuniosity alone cannot fetter the judicial discretion as to costs, a party’s inability to pay any costs awarded against them may permit a court to exercise its discretion to make no order as to costs when coupled with other compelling factors, such as the public interest. In Oshlack v Richmond River Council the High Court upheld the Land and Environment Court’s decision to make no order as to costs against the unsuccessful party in circumstances where there was a public interest in the litigation’s outcome. The High Court posited that, where a successful party had an interest in resolving an uncertainty by proceeding with litigation, and the initiation of such litigation was promoted by wide provisions as to standing, it was not unfair that the successful party bear its own costs.

Accordingly, if an impecunious unsuccessful party can establish that the litigation was motivated by the public’s interest in the outcome of the proceeding, they may have success in persuading the court to make no order as to costs.

At Blackstone Legal Costing we guide you through the labyrinth that is cost law to achieve optimum recovery for both you and your clients.

Dipal Prasad & Romaine Abraham Dipal Prasad & Romaine Abraham are senior associates at Blackstone Legal Costing, one of the largest legal costing firms in Australia with experienced costs lawyers and consultants in Sydney, Melbourne and Brisbane. Dipal is committed to maximising costs recovery for successful parties in litigation and minimising costs liability for unsuccessful parties. With experience across New South Wales and Victoria, Romaine is skilled in obtaining the best commercial results for her clients.