Atanaskovic v Birketu Pty Ltd

[2023] NSWCA 312

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Atanaskovic v Birketu Pty Ltd [2023] NSWCA 312

Hearing dates:

1 May 2023

Date of orders:

15 December 2023

Decision date:

15 December 2023

Before:

Ward P at [1]; Kirk JA at [167]; Simpson AJA at [312]

Decision:

1.   If leave be necessary, grant leave to appeal.

2.   Appeal allowed.

3.   Set aside the orders made by the primary judge on 26 October 2022 and in lieu thereof make the following orders:

(a)   The summons filed on 2 August 2022 is dismissed.

(b)   The plaintiffs are to pay the defendants’ costs.

4.   The first and second respondents are to pay the appellants’ costs of the appeal.

Catchwords:

COSTS – General rule that self-represented litigants cannot recover costs for their own time – Chorley exception – Impact of Bell Lawyers v Pentelow on litigants recouping costs of employed solicitors – Inclusion of “remuneration” in definition of “costs” in the Civil Procedure Act 2005 (NSW) – Where the litigant party has obtained a costs order in their favour – Where the litigant party is also the solicitor on the record – Whether an unincorporated law firm litigant is entitled to recover costs for work done by its employed solicitors during the litigation

JUDGMENTS AND ORDERS — Court of Appeal — Review of previous decision of another intermediate Court of Appeal — Whether previous decision interpreted what the High Court said or developed the common law — Court of Appeal not bound by a coordinate court’s interpretation of what the High Court said

Legislation Cited:

Act Interpretation Act 1987 (NSW)

Civil Procedure Act 2005 (NSW), ss 3, 98

Legal Profession Uniform Law Application Act 2014 (NSW), ss 32, 74

Statute of Gloucester (1278) 6 Edw 1 c 1

Supreme Court (General Civil Procedure) Rules 2015 (Vic)

Supreme Court Act 1970 (NSW), s 101

Supreme Court Act 1986 (Vic), ss 3, 24

Uniform Civil Procedure Rules 2005 (NSW), Pt 42

Cases Cited:

Archer Capital 4A Pty Ltd as trustee for the Archer Capital Trust 4A v Sage Group Plc (No 2) [2013] FCA 1098; (2013) 306 ALR 384

Atanaskovic v Birketu Pty Ltd – Costs [2020] NSWSC 779

Atanaskovic v Birketu Pty Ltd [2019] NSWSC 1006

Atanaskovic v Birketu Pty Ltd [2020] NSWSC 573Attorney-General v Shillibeer (1849) 4 Ex 606 [154 ER 1356]

Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485; [1993] HCA 15

Banksia Securities Limited v The Trust Company (Nominees) Ltd [2017] VSC 583

Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29

Birketu v Castagnet [2022] NSWSC 1435

Burrows v MacPherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148

Cachia v Hanes (1994) 176 CLR 403; [1994] HCA 14

Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333; [2001] NSWCA 60

Coshott v Commonwealth Bank of Australia [2020] NSWCA 279

Coshott v Commonwealth Bank of Australia [2020] NSWSC 503

Coshott v Spencer [2019] HCATrans 183

Day v Ocean Beach Hotel Shellharbour Pty Ltd (2013) 85 NSWLR 335; [2013] NSWCA 250

Dyktynski v BHP Titanium Minerals Pty Ltd (2004) 60 NSWLR 203; [2004] NSWCA 154

Ex parte King; Re Blackley (1938) 38 SR (NSW) 483

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22

Galloway v Corporation of London (1867) LR 4 Eq 90

Garcia v National Australia Bank Ltd (1998) 194 CLR 395; [1998] HCA 48

Gugy v Brown (1867) LR 1 PC 411

Guneser v Aitken Partners Pty Ltd [2020] VSC 329

Guss v Veenhuizen (No 2) (1976) 136 CLR 47; [1976] HCA 57

Hasler v Singtel Optus Pty Ltd; Curtis v Singtel Optus Pty Ltd; Singtel Optus Pty Ltd v Almad Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266

Henderson v Merthyr Tydfil Urban District Council [1900] 1 QB 434

Hill v Zuda Pty Ltd (2022) 275 CLR 24; [2022] HCA 21

Hofer v The Queen (2021) 274 CLR 351; [2021] HCA 36

In re Eastwood (deceased) [1975] Ch 112

Irving v Gagliardi; Ex parte Gagliardi (No 2) (1895) 6 QLJ 200

Jaycar Pty Ltd v Lombardo [2011] NSWCA 284

Jervis v Dewes (1836) 4 Dowl 764

John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1; [2010] HCA 19

Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278

Latoudis v Casey (1990) 170 CLR 534; [1990] HCA 59

Leaver v Whalley (1833) 2 Dowl 80

London Scottish Benefit Society v Chorley (1884) 13 QBD 872

Ly v Jenkins (2001) 114 FCR 237; [2001] FCA 1640

Maher v Commonwealth Bank of Australia [2008] VSCA 122

Maules Creek Coal Pty Ltd v Environment Protection Authority [2023] NSWCCA 275

McCullum v Ifield [1969] 2 NSWR 329

McGuire v Secretary for Justice [2019] 1 NZLR 335; [2018] NZSC 116

McIlraith v Ilkin (Costs) [2007] NSWSC 1052

New South Wales Land and Housing Corporation v Quinn [2016] NSWCA 338

Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11

Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404; [1994] HCA 54

Parsloe v Foy (1833) 2 Dowl 181

Pennington v Russell (No 2) (1883) 4 LR (NSW) Eq 41

Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150

Ratkovic v Hadzic [2019] NSWSC 1627

Raymond v Lakeman (1865) 34 Beav 584; 55 ER 761

Registrar of Titles v Watson [1954] VLR 111

Riva NSW Pty Limited v Fraser; Fraser v Riva (NSW) (No. 4) [2022] NSWSC 1624

Salomon v A Salomon & Co Ltd [1897] AC 22

Spencer v Coshott (2021) 106 NSWLR 84; [2021] NSWCA 235

United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15

Vickers Cockatoo Dockyard Pty Ltd v El Ali (unreported, New South Wales Court of Appeal, 17 December 1987)

Viro v The Queen (1978) 141 CLR 88; [1978] HCA 9

Walton v McBride (1995) 36 NSWLR 440

Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3) (2012) 44 WAR 1; [2012] WASCA 157

Texts Cited:

A Summary of the Law and Practice Relating to Attorneys (V&R Stevens, Sons and Hayne, 3rd edn, 1862)

Lush’s Practice of the Superior Courts of Law at Westminster (Butterworths, 3rd edn, 1865)

Category:

Principal judgment

Parties:

John Ljubomir Atanaskovic (First Applicant)
Lawson Andrew Jepps (Second Applicant)
Birketu Pty Ltd (First Respondent)
WIN Corporation Pty Ltd (Second Respondent)
Maurice Jocelyn Castagnet (Third Respondent)

Representation:

Counsel:
DFC Thomas SC with D Birch (Applicants)
B Walker SC with A Vincent (First and Second Respondents)

Solicitors:
Atanaskovic Hartnell (Applicants)
HWL Ebsworth (First and Second Respondents)
Crown Solicitor for NSW (Third Respondent)

File Number(s):

2022/00342349; 2022/00377300

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

Supreme Court of New South Wales

Jurisdiction:

Common Law Division

Citation:

[2022] NSWSC 1435

Date of Decision:

26 October 2022

Before:

Brereton JA

File Number(s):

2022/00226444

HEADNOTE

[This headnote is not to be read as part of the judgment]

In 2018, the partners of an unincorporated law firm commenced proceedings seeking to recover professional fees and disbursements from two clients, being the first respondent (Birketu) and the second respondent (WIN). Judgment, including a costs order, was entered in the firm’s favour. The firm had acted for itself in the litigation.

The firm’s proposed costs application served on Birketu included costs for work done by the firm’s employed solicitors, although not its partners. Birketu’s solicitors objected to the claim for such costs. This objection was founded on the decision in Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29 (“Bell Lawyers”), in which the High Court held that solicitors, like other self-represented litigants, may not recover costs for time spent in representing themselves in litigation.

A costs assessor, the third respondent, was appointed. The costs assessor declined to make a determination as to whether the firm was entitled to recover the professional costs of its employed solicitors. Birketu and WIN commenced proceedings in the Common Law Division, seeking judicial review of the costs assessor’s interim decision. The firm joined Birketu in inviting the Court to resolve the substantive legal question of the application of Bell Lawyers to the professional costs of employed solicitors of a litigant law firm operating in an unincorporated partnership.

The primary judge made the declaration sought by Birketu and WIN, being that the partners of the firm were not entitled to recover in the assessment process the professional costs of their employed solicitors. In so doing, his Honour concluded that the decision of the Victorian Court of Appeal in United Petroleum v Herbert Smith Freehills [2020] VSCA 15 was both on point and correct in principle, and held that the partners of the firm were precluded from recovering costs in respect of work done by their employed solicitors.

The applicants, being the firm’s partners, sought leave to appeal (to the extent necessary). The application was heard concurrently with the substantive appeal.

The primary issue on appeal was whether the partners of an unincorporated law firm are entitled to recover costs for work done by the employed solicitors of that firm in prosecuting or defending legal proceedings brought by or against the partners of the firm.

The Court held, granting leave to appeal (per Ward P, Kirk JA and Simpson AJA agreeing on this point) and allowing the appeal (per Kirk JA, Simpson AJA agreeing as to the orders, Ward P dissenting):

Per Kirk JA:

1. The court’s power to award costs derives from s 98(1) of the Civil Procedure Act 2005 (NSW), which provides that “costs” are in the discretion of the court; the court has full power to determine by whom, to whom and to what extent costs are to be paid; and the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis: [173]. “Costs” is defined in s 3(1) of that Act to include “fees, disbursements, expenses and remuneration”: [174].

2. The notion of “remuneration” is a general one, referring to money paid for work or services rendered. The remuneration paid by an unincorporated law firm to its employed solicitors falls within that term. Accordingly, absent any textual or contextual basis from excluding such remuneration from the definition of “costs”, an unincorporated law firm is entitled, by statute, to charge for the costs incurred by its employed solicitors in representing the firm: [178]-[188]. This point is sufficient to resolve the appeal: [189].

Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29, applied.

3. This conclusion also follows as a matter of legal principle. The general principle affirmed in Bell Lawyers is that costs are awarded as (partial) indemnity for legal costs actually incurred. Bell Lawyers confirmed that this may include the cost of legal services provided by an employed or “in-house” solicitor, notwithstanding that cost of that employment is a general overhead paid by the litigant (the “employed lawyer rule”). Such costs are quantified by reference to what an independent solicitor may have charged, on the assumption that actual cost to the litigant would not exceed that sum in any substantial amount. Accordingly, the “employed lawyer rule” is an application of the general principle of indemnity, rather than an exception to it. There is no basis to exclude unincorporated law firms from the application of these principles: [190]-[213].

Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29; Cachia v Hanes (1994) 176 CLR 403; Guss v Veenhuizen (No 2) (1976) 136 CLR 47; [1976] HCA 57, considered.

4. This view is supported by an understanding of the historical origins of the relevant principles, which suggest that the “employed lawyer rule”, on which the applicants rely, cannot be equated with the Chorley exception, which was abolished in Bell Lawyers: [214]-[241].

London Scottish Benefit Society v Chorley (1884) 13 QBD 872; Attorney-General v Shillibeer (1849) 4 Ex 606; 154 ER 1356; Raymond v Lakeman (1865) 34 Beav 584; 55 ER 761; Galloway v Corporation of London (1867) LR 4 Eq 90; Pennington v Russell (No 2) (1883) 4 LR (NSW) Eq 41; Irving v Gagliardi; Ex parte Gagliardi (No 2) (1895) 6 QLJ 200; Henderson v Merthyr Tydfil Urban District Council [1900] 1 QB 434, considered.

5. This Court was not bound to follow the contrary decision of the Victorian Court of Appeal in United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15 unless “plainly wrong”. That is because that decision was made upon different statutory provisions. Further, it proceeded from a contrary interpretation of relevant High Court authority; it was that High Court authority by which this Court was directly bound, rather than the construction given to it by a coordinate court: [277]-[283].

Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22; Hasler v Singtel Optus Pty Ltd (2014) 87 NSWLR 609; [2014] NSWCA 266, applied.

6. Accordingly, in New South Wales, partners in an unincorporated law firm who obtain a costs order in their favour are entitled to claim costs with respect to the work done by solicitors employed by the partnership: [310].

United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15, not followed.

Per Simpson AJA:

1. Resolution of the appeal turns on the meaning of “costs” in s 98(1) of the Civil Procedure Act, as defined in s 3. The inclusion of the word “remuneration” in that definition indicates that it encompasses costs payable to employed legal practitioners, even if those costs are paid by the litigant as overheads rather than fees: [330]-[343]. This is consistent with the general principle that costs are awarded by way of indemnity for professional legal costs actually incurred: [344].

2. This view is also consistent with the acceptance by the plurality in Bell Lawyers (although obiter) that government and (non-lawyer) corporations (for example banks) are not precluded from recovering the costs of professional services rendered by employed legal practitioners. It is difficult to identify any basis on which a government department, agency or instrumentality, or a corporation, or a bank that employs legal practitioners who undertake legal work in litigation, or an incorporated legal practice, should be in a different position from a partnership of legal practitioners that employs legal practitioners for the provision of legal services to clients, but who also provide legal services where the partnership is the litigant: [341].

   Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333, Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333 at 337; [2001] NSWCA 60, discussed.

3. Having regard to the differing definitions of “costs” in Victoria and New South Wales, this Court was not bound to follow United Petroleum v Herbert Smith Freehills [2020] VSCA 15 unless it was plainly wrong: [348]-[359].

   Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22, applied.

Per Ward P (dissenting):

1. To enable an unincorporated law firm to recoup the cost of employed solicitors amounts to recovery of the partnership’s own time and effort as professional legal costs, in effect results in a reversion to a position where solicitor litigants are in a privileged position compared to other self-represented litigants (inconsistently with the policy of equality extolled in Bell Lawyers). Any solicitor litigant, like every other litigant who is party to proceedings, is entitled under a costs order to recover costs where it actually incurs professional legal costs. It does not incur these costs when acting for itself. Any departure from the application of the general rule in this context must be for the High Court (or the legislature) to determine. The ability for government bodies (or corporate entities not being legal firms, such as banks) to claim in-house solicitors/counsel fees must be an acceptance that policy permits it (they being sufficiently independent and their employer not being in the position of someone who operates to profit from litigation). Thus, there is a real and meaningful distinction between a corporation or government department represented by its employed in-house lawyers and the partners of an unincorporated law firm represented by their own employed solicitors: [161]-[164].

   Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29, followed.

Judgment

1. WARD P: The applicants (now the sole partners of an unincorporated law firm carrying on business under the name Atanaskovic Hartnell, Mr John Atanaskovic and Mr Lawson Jepps) seek leave to appeal (if leave be necessary) from orders made by Brereton JA sitting in the Common Law Division in Birketu v Castagnet [2022] NSWSC 1435 (the primary judgment). The application was heard as a concurrent hearing with the appeal should leave to appeal be granted (or found to be unnecessary). The applicants maintain that they are able to appeal as of right but in any event they argue that the appeal raises an important question of principle (such that leave should be granted if necessary), namely, whether the partners of an unincorporated law firm are entitled to recover costs for work done by the employed solicitors of that firm in prosecuting or defending legal proceedings brought by or against the partners of the firm.

Background

2. Proceedings were commenced by the then six partners of Atanaskovic Hartnell in 2018 (the plaintiffs) in the Commercial List of the Equity Division in the Supreme Court (2018/00164411) (the Equity proceedings), the partners seeking recovery of solicitors’ fees and disbursements, totalling in excess of $1 million, plus interest from two clients, Birketu Pty Ltd (the first respondent in the present proceedings) (Birketu) and WIN Corporation Pty Ltd (the second respondent) (WIN).

3. On 9 August 2019, Hammerschlag J, as his Honour then was, gave judgment in the plaintiffs’ favour in the sum of $928,982, plus interest, relating to six of the seven invoices in question and reserved for further consideration the seventh invoice (Atanaskovic v Birketu Pty Ltd [2019] NSWSC 1006). Subsequently, on 15 May 2020, his Honour held that the plaintiffs were not entitled to recover on the seventh invoice (an invoice relating to a retainer to investigate the circumstances in which a former employee of the law firm had perpetrated frauds on Birketu for which the firm was ultimately held to be vicariously liable), save for a small amount of $14,930 (Atanaskovic v Birketu Pty Ltd [2020] NSWSC 573). Thus, ultimately, the plaintiffs were awarded the sum of $943,912 plus interest.

4. In the Equity proceedings, the legal representative identified in the summons and the subsequent commercial list statements was the first applicant, Mr Atanaskovic, a partner of the firm. Another then partner of Atanaskovic Hartnell (Mr Michael Sophocles, himself one of the plaintiffs in the Equity proceedings) was initially identified in the court documents as the contact person at Atanaskovic Hartnell but, by the time of filing of the amended commercial list statement on 5 September 2018, Mr Paul Springthorpe (then an employed solicitor but subsequently a salaried or “non-equity” partner) was named as the contact person. At all relevant times, therefore, the solicitor formally on the record for the plaintiffs (and himself one of the plaintiffs) in the Equity proceedings was Mr Atanaskovic (cf some of the submissions made in this Court to the effect that Mr Springthorpe was the solicitor on the record). The plaintiffs were represented by Counsel (instructed by Atanaskovic Hartnell) at the hearing before Hammerschlag J.

5. On 19 June 2020, after a hearing on the papers, his Honour made a costs order in favour of the plaintiffs, ordering Birketu to pay the plaintiffs’ costs of the proceedings, up to and including 16 September 2019, attributable to the plaintiffs’ claims on six of the invoices, to be assessed on the ordinary basis. His Honour also ordered that the plaintiffs pay Birketu’s costs of the proceedings from 10 August 2019 (the date of the first judgment), to be assessed on the indemnity basis (see Atanaskovic v Birketu Pty Ltd – Costs [2020] NSWSC 779 (Costs Judgment)).

6. In the Costs Judgment, Hammerschlag J noted that the High Court (in Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29 (Bell Lawyers)) had (then only recently) reversed the so-called “Chorley exception” (eponymously named by reference to London Scottish Benefit Society v Chorley (1884) 13 QBD 872 (Chorley)), which allowed solicitors to charge for their own time in representing themselves; and his Honour there observed that the result was that the firm (i.e., Atanaskovic Hartnell) would not be able to recover for time spent by its own employees in bringing the Equity proceedings (see at [19] of the Costs Judgment). (The making of that observation gave rise to subsequent debate as to whether an estoppel arose on that issue – Hammerschlag J found that it did not and no issue is here taken with this.)

2. The plaintiffs filed an application for costs assessment on 1 February 2022, pursuant to s 74 of the Legal Profession Uniform Law Application Act 2014 (NSW), claiming the sum of $500,408.11. That sum comprised an amount of $305,463 for professional fees for legal services provided by solicitors employed by the law firm and $194,945.11 in disbursements . The applicants here (at [15] of their submissions) emphasise that the claim for the firm’s professional fees was limited to the services provided by its employed solicitors; and that no claim was made for any work performed by any of the firm’s partners (whether equity or salaried partners). In oral submissions before this Court, the applicants made clear that (although not conceding the point in relation to salaried partners) no fees were claimed for work performed by Mr Springthorpe after he became a salaried partner (see AT 1-2).

3. The third respondent in the present proceedings (who has filed a submitting appearance) was appointed as the costs assessor on 17 February 2022 (see the primary judgment at [5]). (As the costs assessor has not taken any active role in the proceedings, references to the respondents in these reasons are to Birketu and WIN only, unless otherwise indicated.) Both sides made submissions to the costs assessor. Relevantly, the respondents argued that the applicants were not entitled to recover the professional costs of their employed solicitors and requested that the costs assessor cease the assessment of those costs. When the costs assessor declined to make such a determination at that stage of the assessment process, the respondents filed a summons in the Common Law Division on 2 August 2022, seeking judicial review of what was identified as an interim decision by the costs assessor not to accede to the application that the costs assessor immediately determine that the partners of Atanaskovic Hartnell (the second defendant in the judicial review proceedings) were not entitled to recover the professional costs of the firm’s employed solicitors and that the costs assessor immediately cease the assessment of those costs.

4. In the judicial review proceedings before Brereton JA , the relief sought included: a declaration that the partners of Atanaskovic Hartnell were not entitled to recover in the assessment process the professional costs of their employed solicitors; an order setting aside the costs assessor’s decision not immediately to cease the assessment of those costs; and injunctive relief in relation thereto (see summons filed 2 August 2022; [8] of the primary judgment).

5. It was submitted by the partners of Atanaskovic Hartnell in the judicial review proceedings that there was no reviewable decision of the costs assessor but that, even if there was, there was no jurisdictional error nor error of law on the face of the record; and that prerogative relief ought be refused on discretionary grounds (see [9] of the primary judgment). However, as noted by the primary judge at [9], the parties joined in seeking a determination as to the question of the application of the High Court’s decision in Bell Lawyers to the professional costs of employed solicitors of a litigant law firm operating in a traditional partnership (as distinct from an incorporated legal practice), provided that this could be done without resort to any contentious matters of fact (a caveat that is relevant to the current proceeding insofar as the respondents in their submissions make assertions as to factual matters that the applicants complain were accepted not to be in contention in the proceedings before his Honour – see below).

6. The primary judge considered that the application for judicial review was misconceived (as to which there is no challenge in the present proceedings) but made the declaration sought by the respondents for the reasons summarised below (see the primary judgment at [11]-[18]).

Primary judgment

12. At the outset of his Honour’s reasons, the primary judge observed (at [1]) that the case before him fell at the intersection of two principles (as had been identified was also the case in Burrows v MacPherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148 (Burrows) – see at [110] per Leeming JA, albeit there in a materially different context), both of which principles had been confirmed by the High Court’s judgment in Bell Lawyers. Those intersecting principles were described as: first, that a self-represented party who obtains a costs order in litigation (even a legal practitioner, following the decision in Bell Lawyers) may not recover costs in respect of his or her own time and effort deployed in the litigation in his or her own interest; and, second, that a party which employs salaried solicitors (such as a government department, statutory authority, bank or another private corporation) may recover costs for their time (by reference to rates charged in private practice) even though the employed solicitor represents a fixed cost to the employer. At least on one view, the distinction between the scenarios described in those two principles is the concept of a “self-represented” litigant.

13. The primary judge noted (at [1]) the different context in which the present case arose as being that, whereas in Burrows the incorporated legal practice that acted in the relevant proceedings as the solicitors for the solicitor litigant was a separate and distinct legal entity that was retained by the solicitor litigant (another incorporated legal practice), in the present case the lawyers in respect of whose work costs were claimed were the employed solicitors of the law firm which was the litigant. His Honour likened the situation in the present case to that of United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15 (United Petroleum). (Pausing here, the reference by his Honour to the law firm being the litigant must be understood as a shorthand expression for the partners of the law firm being the litigant, since the unincorporated law firm has no separate legal identity – a matter of which the primary judge was clearly aware.)

14. The primary judge, having addressed (from [10]-[18]), and dismissed as misconceived, the application for prerogative relief, turned at [19]ff to the respondents’ claim for declaratory relief. His Honour noted (at [22]) that it is well established that the costs which a party is entitled to recover under a costs order do not include compensation for the party’s own time and labour in preparing for or conducting litigation (citing Cachia v Hanes (1994) 176 CLR 403at 417; [1997] HCA 14 (Cachia v Hanes) (Mason CJ, Brennan, Deane, Dawson and McHugh JJ); Walton v McBride (1995) 36 NSWLR 440 at 452-3 (Kirby P) 461, 464 (Powell JA)). His Honour explained that the rule that self-represented litigants are not entitled to their time is not a special rule for self-represented litigants but, rather, an application of the general rule that costs are not recoverable in respect of a litigant’s own time or labour (referring to Bell Lawyers at [33] per the plurality – Kiefel CJ, Bell, Keane and Gordon JJ).

15. That led to the consideration by his Honour of the Chorley exception and the “employed solicitor” exception. The primary judge explained those “exceptions” at [23], referring (at footnote 19 to [23]) to the Chorley exception as a rule of practice that had been stated in Chorley but earlier recognised in this State in Pennington v Russell (No 2) (1883) 4 LR (NSW) Eq 41 (Faucett J). As to the (separate) “employed solicitor exception”, the primary judge noted that it had been acknowledged that this “exception” (i.e., that a litigant who employs an in-house lawyer rather than an external law firm is not prevented from recovering costs assessed on the same basis as would be the case had an external lawyer done the work) might not be appropriate if it was clear that allowing costs on such a basis might confer a substantial profit on the litigant and thus infringe the indemnity rule (there citing Bell Lawyers at [50] per the plurality).

16. Significantly, in light of the submissions made by the applicants in this Court (to which I refer below), in a further footnote to [23] (footnote 20), the primary judge explained what he meant by the use of the terminology of “employed solicitor exception”:

The authorities which establish this “exception” are discussed below, at [25]-[34]. For convenience I have retained the terminology of the “employed solicitor exception”, though for reasons which will appear it might be better styled the “in-house solicitor exception”. It has been suggested that it might not be an exception but an application of the general rule that a party is entitled to professional legal costs actually incurred in the conduct of litigation: Bell [Lawyers] at [68] (Gageler J); insofar as I treat it as an exception, it is an “exception” to the rule that a party is not entitled to recover costs for its own time and effort.

17. The applicants complain that the meaning of the above footnote is not clear; and that his Honour “persisted” in describing this as an “exception” notwithstanding his apparent recognition that this label for the principle was not consistent with the reasoning of Gageler J in Bell Lawyers (at [30] of their written submissions). I do not consider that criticism to be well-founded. It seems to me clear that what his Honour was explaining by this footnote was his view that this “exception” would be better styled as the “in-house solicitor” exception; and that, acknowledging that it might not be an exception (as such) but rather an application of the general indemnity rule (as Gageler J had suggested), insofar as his Honour treated it in his reasons as an exception he was treating it as an “exception” to the rule that a party is not entitled to recover costs for its own time and effort.

18. As I read the footnote, his Honour is there distinguishing between the general indemnity rule (that a party is entitled to professional legal costs actually incurred in the conduct of litigation) and the rule that a (self-represented) party is not entitled to recover costs for his or her own time or effort in the conduct of litigation. Whether there is a distinction between those two general rules (or they are simply aspects of the one overall indemnity rule) may be a matter for debate. Indeed, in Bell Lawyers, Nettle J (who concurred in the result but on more limited reasoning than the rest of the Court) stated that there is no “employed lawyer rule” in this country as such (see at [75]), his Honour there treating the “employed lawyer rule” as falling under (or perhaps within) the Chorley exception. In any event, I consider it tolerably clear that in this footnote (for whatever precedential value a footnote may have – see my observation in New South Wales Land and Housing Corporation v Quinn [2016] NSWCA 338 at [60]-[61]), the primary judge was eschewing any significance in the label of “exception” itself (consistent with the caution sounded in Owners of “Shin Kobe Maru” v Empire Shipping Co Inc (1994) 181 CLR 404; [1994] HCA 54 at 419-420) but, rather, was treating the recoverability of employed solicitors’ costs as something to be determined having regard to the general principle that a party cannot recover costs for his or her own time in the conduct of litigation.

19. I interpose here to note that in my opinion the reference to “in-house” solicitors may itself be apt to lead to confusion. That is because “in-house” seems to me to be inapt to describe solicitors of a law firm (whether that be an incorporated or incorporated practice) the business of which is to provide legal services; at least unless there is within such a firm a separately styled and organised group of lawyers from the general body of lawyers working in the firm (such as, for example, may be seen where there is an office of general counsel that is separate from the fee earners providing services to external clients). Otherwise, the entirety of the legal practitioners in the law firm (including the partners or principals) would meet the description of in-house lawyers, which seems to me to make no sense. The “in-house” description is more apt when one considers a separate legal section within a corporation or entity (such as a bank or a government authority), often seen for example in large accounting firms where the lawyers are in essence providing an in-house service for the benefit of the firm but not usually acting for clients of the firm themselves, which to my mind explains the primary judge’s preferences for that terminology. I accept that this analogy becomes more problematic with multi-disciplinary firms where legal services may be provided by the employed lawyers both externally and internally. In any event, I digress.

20. Returning to the reasoning of the primary judge, his Honour (addressing the question as to the applicants’ entitlement to recover the costs of their employed solicitors as a matter of principle in light of the submission by the applicants that the Victorian Court of Appeal in United Petroleum was plainly wrong), considered (at [25]-[34]) the evolution and rationale of the “employed solicitor exception” before proceeding to analyse the cases of Bell Lawyers (at [35]-[46]) and United Petroleum (at [47]-[58]) and then briefly considering two decisions of this Court (Burrows and Spencer v Coshott (2021) 106 NSWLR 84; [2021] NSWCA 235 (Spencer v Coshott) (at [59]-[65])).

21. Ultimately, his Honour concluded that United Petroleum was both precisely on point and correct in principle; and held that the applicants (being partners of an unincorporated law firm) were precluded from recovering costs for work done by their employed solicitors (at [66]-[67]).

Grounds of Appeal

22. The applicants raise the following grounds of appeal:

1.   The primary judge erred in holding that, at law, an unincorporated law firm may not recover costs for work done by the employed solicitors of their own firm.

2.   The primary judge erred in declaring that the appellants are not entitled to recover costs for work done by the employed solicitors of their own firm under the costs order made in proceedings 2018/164411 on 19 June 2020, being the subject of the costs assessment proceeding 2022/029349.

Particulars of grounds 1 and 2

i.   The primary judge ought to have found that the appellants are entitled at law to recover costs for work done by the employed solicitors of their own firm, including by reason of the principle commonly known as the ‘employed solicitor rule’.

23. In essence, both grounds of appeal raise the same issue, that being (as stated earlier) whether partners of an unincorporated law firm may recover costs for work done by their own employed solicitors in prosecuting or defending legal proceedings brought by or against the partners themselves. The applicants (at [28]-[32] of their submissions) maintain that the import of the indemnity principle in relation to costs is that a party may recover expenses incurred by the litigant in acting in legal proceedings; and that the employed solicitor rule (which they say is not an “exception” but an application of the general indemnity principle, citing Gageler J’s observation in Bell Lawyers at [68] – see below) makes clear that such expenses include the costs of solicitors employed by the litigant (the quantum of such costs being able to be calculated at professional or “market” rates).

24. Much emphasis was placed in the course of submissions by the applicants on the perceived perversity or inequality of an outcome whereby the costs of solicitors employed in an incorporated law practice may be recoverable by a litigant who in effect controls that incorporated law practice (say, as its sole director and shareholder) but those costs would not (on the primary judge’s conclusion) be recoverable if the law practice is a traditional unincorporated partnership. The respondents dispute the proposition that there is any perversity of outcome and emphasise the import of the separate corporate personality involved in the former instance. To my mind, the structure adopted by the principals of a law practice is a matter for them; and the fact that there may be advantages or disadvantages of any particular partnership or corporate structure should not determine the outcome of the question here in issue.

Leave to appeal

25. It is convenient first to address the applicants’ contention that they have a right of appeal pursuant to s 101(1) of the Supreme Court Act 1970 (NSW) (Supreme Court Act).

26. The applicants submit (at [26] of their written submissions) that leave is not required under s 101(2)(c) (which, relevantly, applies where the proposed appeal is from a judgment or order “as to costs only which are in the discretion of the Court”) nor under s 101(2)(q) (which applies where the judgment or order is with respect to the taxation or assessment of costs); noting that the amount in issue in the costs assessment process in respect of the applicant’s professional costs of their employed solicitors ($305,463) exceeds the threshold specified in s 101(2)(r) in relation to an appeal from a final judgment or order.

27. The applicants argue (at [20] of their written submissions) that there is therefore an appeal as of right from the declaration given on a final basis of the parties’ rights at law (noting that at [19] of the primary judgment, his Honour made reference to a declaration that binds the parties and will conclusively establish their rights).

28. In any event, if leave be necessary, the applicants submitted (at [22]ff of their written submissions) that it should be granted on the basis that the present case involves an issue of principle which raises a question of public importance (satisfying the test in Jaycar Pty Ltd v Lombardo [2011] NSWCA 284 at [46] per Campbell JA). The applicants submit that a grant of leave will assist in resolving divergences which it is perceived have arisen between New South Wales and Victoria in the wake of Bell Lawyers; and that the present case is a suitable vehicle for determination of the question posed, the matter having been dealt with at first instance on the basis that the question of declaratory relief could be determined on the basis of uncontested facts.

29. In my opinion, leave to appeal is not necessary. The appeal is from a final declaration made as to the applicants’ entitlement (pursuant to the costs order already made in the Equity proceedings) to recover their employed solicitors’ costs; and is thus not a judgment in the exercise of the costs discretion or given as to costs only. That said, nothing turns on this because, if leave were to be necessary, I would grant leave to appeal for the reason that the issue raised is clearly one of principle that is of general importance, as the applicants contend.

Appeal

30. Turning then to the appeal itself, I propose to deal with the grounds of appeal together.

31. The applicants have emphasised that the starting point must be construction of the relevant statutory regime in this State. Certainly, as recognised in Bell Lawyers at [33] by the plurality (their Honours citing, among others, Latoudis v Casey (1990) 170 CLR 534; [1990] HCA 59 (Latoudis) at 557 (per Dawson J) and Oshlack v Richmond River Council (1998) 193 CLR 72; [1998] HCA 11 (Oshlack) at 85-86 [33]-[34] (per Gaudron and Gummow JJ), 120 [134] (per Kirby J)), costs are a creature of statute. The power to award costs is conferred by s 98 of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act). Although there is a broad judicial discretion as to costs, it is clear that costs are awarded by way of indemnity (for professional legal costs actually incurred in the conduct of litigation) rather than being compensatory in nature (see Cachia v Hanes at 410-411 per Mason CJ, Brennan, Deane, Dawson and McHugh JJ); and hence such costs are not awarded as compensation for lost earnings or as a reward for success (see Bell Lawyers at [33]) or for travel and lost time (see Cachia v Hanes at 411, referring to Coke’s observations on the Statute of Gloucester (1278) 6 Edw 1 c 1).

30. There is no dispute in the present case that the costs recoverable by a successful litigant in this State may include costs referable to the professional legal services of employed solicitors. “Costs” is defined in s 3(1) of the Civil Procedure Act to mean “costs payable in or in relation to the proceedings” and it includes “fees, disbursements, expenses and remuneration”. As recognised in Bell Lawyers (at [44]), the reference to “remuneration” encompasses remuneration for professional services rendered under a contract for services; the plurality considering that the reference to remuneration makes plain that the costs of professional legal services rendered by an employed lawyer are included in the definition of costs, though also noting that remuneration is not a word apt to include the notion of payment to a person by himself or herself for work done by himself or herself.

31. The applicants argue that there is nothing in the definition of “costs” in s 3(1) of the Civil Procedure Act (or the High Court plurality’s explanation of that definition in Bell Lawyers) which allows a conclusion that the remuneration which a company or government agency pays its employed solicitors falls within the definition of “costs” but that the remuneration which a law firm pays its employed solicitors falls outside the definition of “costs”. Thus, the applicants maintain that professional legal services rendered by an employed lawyer are included in the definition of “costs”.

32. However, the fact that there can now be no dispute that the definition of costs in s 3(1) of the Civil Procedure Act can encompass costs referable to services performed by an employed solicitor (as was made clear in Bell Lawyers) rather begs the question in the present case as to whether, applying the general rules which have been developed by the courts and form part of the common law of Australia (see Edelman J in Bell Lawyers at [80]-[81]; and the discussion by Leeming JA in Burrows at [122]), the partners of an unincorporated law firm may recover the costs referable to services performed by their own employees. That issue was not the particular issue confronting the High Court in Bell Lawyers. Rather, the issue in that case was as to whether the so-called Chorley exception (permitting recovery by a self-represented solicitor litigant in respect of his or her professional costs of acting in his or her own litigation) should be extended to apply to a barrister; and, in considering that issue, the High Court considered its premise, namely whether the so-called Chorley exception was, or should remain, part of the common law of Australia. The majority concluded that it should not (Nettle J’s dissent on this conclusion is referred to above).

33. Thus, the principles of statutory construction do not here arise for consideration. Rather, as already noted, the relevant question is whether there is, as part of the common law of Australia, either an entitlement under the general indemnity principle for the partners of an unincorporated law firm to recover costs of their employed solicitors for professional legal services rendered in the conduct of litigation to which the partners are party or, if not within the application of the general indemnity principle (whether because of the principle that a self-represented litigant cannot recover for his or her own time or otherwise), whether there is nevertheless an “employed solicitor exception” to the general indemnity rule pursuant to which the applicants in the present case may recover costs referable to the professional legal services rendered by their employed solicitors.

Bell Lawyers

36. With that introduction, it is convenient now to address the complaint by the applicants that the primary judge erred in reaching the conclusion that the effect of Bell Lawyers was to prevent a law firm operating as a traditional partnership from claiming the professional costs of its employed solicitors.

37. The issue in Bell Lawyers arose in the following way. Ms Pentelow, a barrister who had been retained by Bell Lawyers Pty Ltd (an incorporated legal practice) in proceedings before the Supreme Court of New South Wales, brought proceedings against the firm for the payment of outstanding legal fees owed to her. During those fee proceedings, Ms Pentelow was represented by different solicitors and by senior counsel, but Ms Pentelow also did some of the preparatory legal work for the matter. Ms Pentelow’s claim for costs included the time and work undertaken by herself as a barrister in the conduct of the proceedings brought by her. It was not disputed that she was entitled to the fees of the solicitors and senior counsel retained in the matter. However, the law firm disputed her entitlement to costs relating to her own professional legal services.

38. The High Court allowed the appeal brought by the law firm from the decision of the New South Wales Court of Appeal under which Ms Pentelow had been permitted to recover her own costs of the fee recovery litigation. By majority (Nettle J deciding the matter on the more limited basis as referred to above), the High Court held that the Chorley exception was not part of the common law of Australia (see the plurality at [3]; with whom Gageler J agreed at [63], as did Edelman J at [99]).

39. In so concluding, the plurality expressed the view that it was “undesirable, as a matter of professional ethics, for a solicitor to act for himself or herself in litigation” (at [19]). Citing Brereton J (as his Honour then was) in McIlraith v Ilkin (Costs) [2007] NSWSC 1052 (McIlraith v Ilkin (Costs)) at [25], the plurality noted the importance for a solicitor to act impartially and independently as an officer of the Court, and for the Court be entitled to expect as such, as now codified in the various Australian Solicitors’ Conduct Rules across Australia; and identified the consequence of encouraging a solicitor to act for himself or herself through the prospects of a costs order (or monetary reward) as being the removal of any independent or impartial advice. Further, the plurality noted the observation in Cachia v Hanes as to the questionable nature of a situation in which a successful solicitor litigant not only receives the amount of the verdict but is able, by recovering recompense for their legal services, also to profit from the litigation (Bell Lawyers at [23]). The plurality considered it “an affront to equality before the law” (and something which would impermissibly exalt the position of solicitors in the administration of justice, conferring on them a privilege inconsistent with the notion of equality before the law) to quantify the value of a solicitor litigant’s time but not that of a non-solicitor litigant (see at [24]-[25]), finding unpersuasive the reasoning of Bowen LJ in Chorley as to the difficulty in measuring the “private expenditure of labour and trouble by a layman”.

40. Significantly, for present purposes, the plurality noted that the justification for the general rule is that costs are awarded by way of indemnity (or partial indemnity as it ordinarily will be as a result of costs assessment) for professional legal costs actually incurred in the conduct of litigation. At [32], the possibility that a solicitor might profit from his or her participation in the conduct of litigation was regarded by the plurality as unacceptable in point of principle.

41. The plurality considered the use of in-house solicitors in the context of a submission by the respondent law firm to the effect that non-recognition of the Chorley exception would mean that “governments and other employers, and incorporated legal practices operating through a sole director” would be precluded from recovering for professional legal services rendered by employed solicitors (see from [46]). Their Honours considered that the use of in-house solicitor arrangements was to be treated as outside the general rule because recovery of their professional costs enured by way of indemnity to the employer. Reference was there made to the situation where the government or corporation had been “represented” by an employed solicitor (at [47]).

42. At [50], the plurality said that:

A decision by this Court that the Chorley exception is not part of the common law of Australia would not disturb the well-established understanding in relation to in-house lawyers employed by governments and others, that where such a solicitor appears in proceedings to represent his or her employer the employer is entitled to recover costs in circumstances where an ordinary party would be so entitled by way of indemnity.

43. At [51], their Honours suggested that the position might be different where a solicitor was employed by an incorporated legal practice of which he or she was the sole director or shareholder, querying whether there would then be sufficient professional detachment for the solicitor to be characterised as acting in a pure legal capacity and whether those costs would fall within the expansive view of indemnity. Their Honours considered this issue to be problematic but ultimately a question for the legislature. In Spencer v Coshott at [101], Simpson AJA (Bell P, as his Honour then was, and Emmett AJA agreeing) understood this to mean that the existing law that recognises the separate legal personality of a corporation, including an incorporated legal practice, is to be applied unless and until the legislature intervenes or consideration of the already existing legislation dictates a different result. In Burrows, Meagher JA considered (at [16]) that this passage of the plurality’s reasoning resolved the question as to the recoverability of legal costs when an incorporated legal practice sues or is sued and acts for itself by its employed solicitors “provided that the self-represented incorporated legal practice is not a ‘vehicle for a sole practitioner’”.

44. Gageler J, as his Honour then was. in his separate judgment concurring with the plurality as to the rejection of the Chorley exception, when referring to the decision of the Supreme Court of New Zealand in McGuire v Secretary for Justice [2019] 1 NZLR 335; [2018] NZSC 116, where the Court had chosen not to abandon the Chorley exception, said (Bell Lawyers at [68]) that:

Recovery of costs by a party using an employed solicitor predated introduction of the Chorley exception. The better view, explained in a number of cases to which the Supreme Court of New Zealand appears not to have been referred, is that recovery of costs by a party using an employed solicitor is an application of the general principle rather than an exception to it. The general rule is engaged on the basis that the costs of using the employed solicitor are still awarded as indemnity for professional legal costs actually incurred in the conduct of litigation by the employer who is a party to the litigation, albeit that those professional legal costs are incurred in the form of an overhead and are therefore not reflected in a severable liability.

45. In the above passage, his Honour was explaining why the abandonment of the Chorley exception as part of the common law of Australia encountered neither of the obstacles of concern to the New Zealand Supreme Court (namely, that the rules of the Court were there seen to have been framed on the basis of the continued operation of the exception and it was considered that there was no principled basis to abandon the exception and yet maintain the ability of a party to recover costs of an employed lawyer) and why it involved no adoption of the view specifically rejected by the New Zealand Supreme Court that costs could only be awarded by way of reimbursement for fees actually invoiced.

46. Justice Nettle did not consider that there was a need or justification to decide that the Chorley exception be abolished, identifying the real problem with that exception being that it permitted profit from the conduct of litigation (at [71]). His Honour said (at [75]) that in Australia there is no employed lawyer rule as compared to New Zealand, but that the position was similar in that it was long accepted that “firms of solicitors, corporations and government and semi-government agencies that employ solicitors may, under the Chorley exception, recover the taxed costs of the work performed by such employed solicitors in representing their employers” (citing the authorities at footnote 128 which included Attorney-General v Shillibeer (1849) 4 Ex 606 [154 ER 1356], among others). Thus, his Honour seems to have treated the position of employed solicitor costs as falling within the Chorley exception, rather than as an application of the general indemnity principle quite apart from the Chorley exception; and focused on the fact that employed solicitors in question were “representing their employers”. His Honour considered that, logically, abolition of the Chorley exception meant that the entitlement to recover such costs ceased.

47. Insofar as the plurality considered that the abolition of the Chorley exception should not be taken to disturb the well-established understanding in relation to in-house solicitors employed by governments “and others”, Nettle J queried why there should be such a distinction and was of the opinion that the analysis of considerations relevant to a determination of whether the employed solicitor rule should be permitted to survive the Chorley exception and, if so, in what form could not be undertaken in the matter then before the Court (concluding that abrogation of the Chorley exception was a determination better left to the legislature).

48. Finally, as already noted, Edelman J agreed with the conclusion of the plurality as to the abrogation of the Chorley exception, considering that it was impossible as a matter of principle to justify an exception that recognises costs for expenditure of time in litigation by an unrepresented solicitor litigant who performs work on the case but not by any other unrepresented litigant (at [91]).

Court of Appeal decisions after Bell Lawyers

49. It is convenient at this stage to note that the question as to what is encompassed by the expression “in-house lawyers employed by governments and others” (as used in Bell Lawyers) was considered in two decisions of this Court: Burrows and Spencer v Coshott.

50. Burrows concerned the question of recompense for the costs of an incorporated legal practice that acted in the relevant proceedings for the solicitor litigant but was a separate and distinct legal entity from the solicitor litigant. Similarly, in Spencer v Coshott, the solicitor who was a party to civil proceedings was represented by an incorporated legal entity of which he was the sole director and shareholder.

51. In both cases, it was held that the litigant was entitled to recover costs, primarily on the basis of the separate legal personality of the respective corporations (Burrows at [18] (per Meagher JA), [109], [129]-[133] (per Leeming JA), [162] (per White JA); Spencer v Coshott at [101]-[102] (per Simpson AJA, with whom Bell P and Emmett AJA agreed)).

52. So, for example, in Burrows, Meagher JA said at [18] that:

If her contention that M&K Sydney and M&K Lawyers Group were to be regarded as one and the same legal entity (whether incorporated or not is not clear) is made out, it would follow that there could be no “costs payable” within the first part of the [Civil Procedure Act] section 3(1) definition. However, for the reasons given by Leeming JA there is no basis in the evidence for disregarding the legal reality of the separate incorporated legal practices. The first was alleged to have incurred a liability to Ms Burrows at a time when it was carrying on a legal practice as Macpherson Kelley. The second then provided legal services to the first in the proceedings subsequently brought by Ms Burrows and at a time when it was carrying on that legal practice.

from which it is clear that his Honour considered that there would be no costs payable if the legal services were provided by one and the same legal entity, whether incorporated or not.

53. In Burrows, Leeming JA, after referring to the intersection of the two principles confirmed by the High Court’s judgment in Bell Lawyers (at [110]), said (at [112]) that it was clear that “whatever be the scope of “the Chorley exception” which was abrogated by the High Court, it did not alter the ability of a litigant to recover amounts calculated at professional rates for the work done by salaried solicitors as part of party/party costs”.

54. Leeming JA had earlier observed (at [94]) that, insofar as the statutory regime regulates “law practices” (which may be, inter alia, a natural person, a partnership of natural persons, or an incorporated legal practice) there was force in the submission that this statutory regime is “inconsistent with an implied restriction which prevents an incorporated legal practice from recovering on the assessment of a costs order amounts representing a fair and reasonable amount for work done by its employed lawyers acting on its behalf as a party to litigation”.

55. In Spencer v Coshott, Simpson AJA considered the answer to the question whether the bill of costs rendered by the incorporated legal practice (of which Mr Spencer was the sole director and shareholder) to Mr Spencer (the solicitor litigant) represented “costs payable in or in relation to the proceedings” was found in what was said at [53] in Bell Lawyers, namely the plurality’s recognition of the separate legal personality of the corporation, which meant that the costs were so payable.

56. At [60]ff of the primary judgment in the present case, the primary judge addressed (and dismissed) the argument put forward by the applicants that Burrows and Spencer v Coshott told against the extension of Bell Lawyers to work done by a solicitor litigant’s employees.

Primary judge’s analysis of Bell Lawyers

57. Turning then to the primary judge’s analysis of the decision in Bell Lawyers, the primary judge considered that what the plurality had in mind, when making it clear that it was not intending to displace the “employed solicitor exception”, was not the litigant solicitor’s own employed solicitors (referring to the plurality judgment at [46]-[51]) but, rather, the position of “in-house” lawyers employed by government departments and corporations (who act as solicitors for the employing department or corporation in litigation), contrasting these with “employed solicitors in a law firm which as a party to litigation has some or all of the work done by those employees” (see primary judgment at [36]-[40]). His Honour considered that the authorities cited by Gageler J at [68] of Bell Lawyers (see above) confirmed that what Gageler J was there addressing was the position where a party is represented in the proceeding by a solicitor who is an employee of the party “typically a government officer or instrumentality” (see the primary judgment at [39]).

58. The primary judge considered that the High Court’s rejection of the Chorley exception was founded on three main considerations (as identified by the primary judge at [41]) and that these considerations unambiguously favoured the position that a solicitor litigant should not be able to recover costs in respect of work done by his or her own employees, any more than work done by himself or herself (since to permit the solicitor to recover such costs would provide an incentive for solicitors to act for themselves, while allocating as much work as possible to their employees; and it would preserve the appearance that the solicitor was in a privileged position as a self-represented litigant in being able to recover costs for work done by his or her own firm) (at [42]).

59. At [45], his Honour said that the recovery of costs where work was done by the solicitor litigant’s own employee was thought to be justified by the Chorley exception rather than the in-house solicitor rule (referring to Chorley at 877 per Bowen LJ; Cachia v Hanes per the plurality in the High Court at 412); and hence his Honour considered that the rejection in Bell Lawyers of the reasoning of Bowen LJ in Chorley (as not persuasive) involved rejection of the rationale that a solicitor litigant could recover costs for work done by his or her employed solicitor. (This reflects the reasoning of Nettle J at [75] – see above.)

57. Brereton JA concluded that the policy reasons which moved the High Court to abrogate the Chorley exception equally favoured denying a law firm litigant recovery of costs for work done by its employed solicitors and the rationale which had previously been supposed to support recovery by a solicitor litigant of costs for work done by his or her employed solicitor was rejected (at [46]).

Applicants’ submissions that primary judge erred in analysis of Bell Lawyers

61. As noted above, the applicants contend that the primary judge erred in his analysis of the High Court decision in Bell Lawyers. They argue that the primary rationale for the High Court’s abolition of the Chorley exception was that it was an affront to the fundamental value of equality of all persons before the law; and they maintain that the exclusion of unincorporated law firms from the employed solicitor rule is also an affront to that fundamental value of equality.

62. As to the primary judge’s first reason for his conclusion as to the effect of Bell Lawyers (see at [40] of the primary judgment) (namely that what the High Court had in mind was the position of in-house lawyers employed in government departments and corporations, not employed solicitors in law firms), the applicants submit that the cases referred to at [25]-[34] of the primary judgment as demonstrating the evolution and rationale of the employed solicitor exception were not principally concerned with providing a rationale for the principle that a party can recover professional costs in respect of employed solicitors; rather, they assumed that such costs were recoverable and were concerned with the manner in which those costs are calculated (whether by reference to the employed solicitor’s salary, or by reference to the employed solicitor’s charge-out rate, i.e., the market value of their services as if the solicitor had been an independent solicitor).

63. The applicants submit that the passages cited by the primary judge from the reasons of the plurality and of Gageler J in Bell Lawyers demonstrate that it is part of the ratio decidendi of that decision that the abolition of the Chorley exception leaves the entitlement to employed solicitor costs as part of the law of Australia; and they emphasise that the language used by the plurality to explain the ongoing operation of the employed solicitor rule was inclusive rather than exhaustive (referring to in-house lawyers employed by governments “and others” at [50]). The applicants argue that there is nothing in the reasons of the plurality at [46]-[51] to suggest that the removal of the Chorley exception was intended to place law firms (however structured) in a worse position than other litigants, by preventing them (and only them) from recovering costs for professional legal services rendered by employed solicitors. Rather, the applicants contend that the plurality proceeded on the basis that the removal of the Chorley exception would have no impact on such arrangements.

64. The applicants place emphasis on the fact that the plurality (at [51]-[53]), when raising as problematic the position of an incorporated legal practice, referred to the situation of an incorporated legal practice that operated as a vehicle for a sole practitioner. They say that the selection of this as the “edge case” suggests that the High Court plurality had no difficulty with law firms in general recovering the professional costs of their employed solicitors (referring in this context to the observations of Simpson AJA at [101] in Spencer v Coshott; and Meagher JA in Burrows at [16] in relation to this passage from Bell Lawyers – see above). The applicants argue that the plurality must have intended that unincorporated legal practices (for example, law firms operating as traditional partnership) should also be entitled to recover the legal fees of their employed solicitors. It is submitted (at [43] of their written submissions) that there is nothing in the reasons of the plurality which supports a distinction being drawn purely based on the business structure in which a law firm is operated.

65. Referring to the observation of Leeming JA in Burrows at [94] as to the statutory regime regulating “law practices” (see above), the applicants argue that the statutory scheme for recovery of costs is inconsistent with an implied restriction which permits an incorporated legal practice from recovering costs but prohibits a partnership of natural persons from so doing.

66. As to the second of the primary judge’s reasons (the three considerations that the primary judge considered founded the High Court’s rejection of the Chorley exception and weighed against an unincorporated law firm seeking to recover the professional costs of its employed solicitors), the applicants make the following criticisms (at [45]-[56] of their written submissions).

67. First, as to the view that solicitors should not be encouraged to act for themselves in litigation (it being considered undesirable as a matter of professional ethics), the applicants say that the plurality’s comments (at [18]-[20]) were limited to the case of an individual solicitor acting for himself or herself, or where an incorporated legal practice is a vehicle for a sole practitioner (noting the plurality’s citation of McIlraith v Ilkin (Costs) at [25] and references to the relevant Australian Solicitors’ Conduct Rules concerning the risk of an individual solicitor becoming a material witness or acting as the mouthpiece of the client). The applicants maintain that neither of those examples is applicable to a multi-partner firm, with salaried employees (the applicants referring to Leeming JA’s observation in Burrows at [132] to the effect that the plurality evidently viewed their comments at [18]-[20] as compatible with the continued ability of a litigant to recover the professional costs of its employed solicitors, save perhaps for the specific situation which the plurality considered as problematic at [51]-[53]; namely, where the incorporated legal practice is a vehicle for a sole practitioner).

68. At the outset of their written submissions, the applicants say that the view that it is unwise for unincorporated partners to act for themselves (cf [42] of the primary judgment) is not a valid basis for confining the employed solicitor rule so as to exclude such persons from recovering the expense of using their employees (at [9]). The applicants point out that there was no suggestion in the proceedings below that the course taken by them in defending the proceedings was prohibited by relevant professional rules; and they argue that there may be entirely valid reasons why the use of employed solicitors (rather than an external firm), will result in a more efficient defence or prosecution of litigation. The applicants point out that employed solicitors owe professional obligations to the Court (whether they be employed by a law firm, a bank or a government body) and they point out that no criticism was made of the conduct of the employed solicitors of Atanaskovic Hartnell in the conduct of the proceedings against the respondents.

69. Insofar as the primary judge considered (at [42]) that “[t]o permit a solicitor to recover such costs would be to provide an incentive for solicitors to act for themselves, while allocating as much of the work as they could, to their employees”, the applicants submit (at [49] of their written submissions) that this would be just as much an incentive for other litigants with solicitor employees (because they can also claim their employed solicitors’ costs at their charge-out rate rather than the actual cost to the employer), yet the plurality in Bell Lawyers (at [47]) accepted that employed solicitors are entitled to have their costs assessed on the same basis as that of independent solicitors exercising comparable skills in the performance of comparable work (the plurality there referring to Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333 at 337; [2001] NSWCA 60). Indeed, the applicants argue that the supposed incentive for a law firm operating in the traditional partnership model is less than for any other litigant, as the partners of the law firm will inevitably need to supervise the work of the employed solicitors at least to “some extent”, and on any view the partners’ time will not be recoverable. Pausing here, apart from the speculation involved in this last submission (as to the likely extent or level of supervision) it is difficult to see why this would lessen the incentive for allocation of work to employed solicitors as here suggested (one might equally think that it would increase the incentive for only cursory supervision which would hardly be a desirable outcome). In any event, the applicants argue that concern for the potential to profit from litigation did not significantly feature in the reasoning of any of the majority in Bell Lawyers (nor in the reasoning of the Victorian Court of Appeal in United Petroleum); and they say that any concern about undue profiteering can be controlled through the taxation of costs rather than denial of recovery (at [51] of their submissions).

70. As to the second consideration that the primary judge identified as founding the High Court’s rejection of the Chorley exception (namely, that it would exalt the position of solicitors in the administration of justice to an extent that is an affront to equality before the law), the applicants argue that this consideration has no relevance to the present question, given that the High Court was content to preserve the general entitlement for litigants to claim professional costs for employed solicitors and the applicants have never sought recovery of the costs of their own work in defending the litigation.

71. As to the third consideration identified by the primary judge (that the exception amounts to a privilege afforded to solicitors of a kind inconsistent with the equality of all persons before the law), the applicants again argue that this has no relevance to the present question, as the ability to recover an employed solicitor’s professional costs is not in any way a solicitor’s privilege but one that accrues to any litigant who has employed solicitors. The applicants say at [56] of their written submissions (cf the primary judge’s reasons at [42]) that permitting a solicitor to recover such costs does not preserve the appearance that a solicitor was in a privileged position as a self-represented litigant to that of other self-represented litigants (since it would be open to other self-represented litigants to recover the cost of an employed solicitor who had performed work relevant to the litigation). The applicants argue that this third consideration belies the primary judge’s own analysis since the effect of his Honour’s reasoning is to disadvantage partners of unincorporated law firms when compared to all other litigants.

72. As to the third reason for his Honour’s conclusion (see at [43]-[46] of the primary judgment) (i.e., that the High Court’s rejection of the reasoning underlying the Chorley exception also weighs against a solicitor being able to claim the professional costs of an employed solicitor), the applicants point to Gageler J’s recognition that recovery of costs by a party using an employed solicitor predated the introduction of the Chorley exception (referring to Bell Lawyers at [68]). The applicants argue that the plurality’s rejection (Bell Lawyers at [22]) of Bowen LJ’s reasoning in Chorley at 877 did not attack the premise from which Bowen LJ proceeded; rather, that the plurality observed that the legal services rendered by a solicitor to himself or herself, regardless of whether they are measurable, are not “professional legal costs actually incurred in the conduct of litigation”.

73. The applicants maintain that, prior to Bell Lawyers, the combined effect of the Chorley exception and the employed solicitor rule meant that a self-represented law firm could claim professional costs for both the time spent by principals (for example, partners) and by employed solicitors; and it was therefore not necessary for any court to determine precisely what was the principled basis upon which a solicitor litigant could recover for the professional costs of his or her employed solicitor(s). The applicants argue that the High Court’s rejection of the reasoning which established the Chorley exception does not undermine the pre-existing principle that a solicitor (as any other litigant) could claim professional costs for an employed solicitor (that, they say, being a principle that pre-dated Chorley and not one which was questioned in subsequent cases).

74. Accordingly, the applicants submit that Bell Lawyers does not prevent them from recovering the professional costs of their employed solicitors in the costs assessment, and that the primary judge erred in finding to the contrary.

Respondents’ submissions as to alleged erroneous treatment of Bell Lawyers

75. As to the criticism by the applicants of the primary judge’s conclusion at [40] as to what the High Court had in mind in relation to the concept of “in-house” lawyers, the respondents point to [39] of the primary judgment where his Honour stated that “the authorities cited by Gageler J confirm that his Honour was addressing the position where a party is represented in the proceeding by a solicitor who is an employee of the party, typically a government officer or instrumentality”. The respondents point out that the same view was taken of Gageler J’s reasons by the Victorian Court of Appeal in United Petroleum at [105] (see below); and they refer to the primary judge’s reasons in the present case (at [45]-[46]), which explain his Honour’s reasoning in this regard (see at [30]-[34] of the respondents’ written submissions).

76. I note that the applicants, in their submissions in reply at [34]ff, point out that the primary judge’s reasons at [39] relates only to the consideration of Gageler J’s reasons (the applicants maintaining their criticism that the primary judge did not offer any specific analysis of the plurality’s reasons to support his Honour’s conclusion at [40] of the primary judgment, which refers to what the plurality “had in mind”). Further, the applicants contend that the flaw in the primary judge’s reasoning at [39] that the principle is confined only to situations involving employed solicitors of government departments or corporations (because the cases cited by Gageler J at [68] were such cases) is that it is inconsistent with the express statement of principle by Gageler J, the applicants noting that Gageler J referred to “recovery of costs by a party using an employed solicitor” as an application of the general principle and said that “[t]he general rule is engaged on the basis that the costs of using the employed solicitor are still awarded as indemnity for professional legal costs actually incurred in the conduct of litigation by the employer who is a party to the litigation”. (The applicants similarly criticise the primary judge’s observation at [37] on the basis that it limits the effect of the plurality’s statements of principle by reference to the particular factual situation of a case which the plurality cited.)

77. Returning then to the respondents’ submissions, the respondents say (as to the applicants’ contentions in relation to the three considerations identified by the primary judge at [41]), that the applicants’ reliance on Burrows is misguided and that the decision in Burrows is distinguishable on the facts (that being a case which concerned two incorporated legal practices, one being the litigant client and the other acting as the former’s solicitor) (see at [37]-[38] of the respondents’ written submissions). The respondents argue that the separate legal personalities of each of the incorporated legal practices (and the benefits attributed to those separate legal personalities) was a key circumstance in Burrows (the respondents here referring to [162] of that decision where White JA said that to deny the respective entities the benefits of separate legal personality “on the ground that to do so would advance substantially the same policy reasons for which the High Court in Bell Lawyers rejected the Chorley exception would exceed the limits of the judicial role”).

78. The respondents argue that there are clear differences in the characteristics of a law partnership and an incorporated legal practice: that an incorporated legal practice has the various incidents of being a corporation whereas the law partnership does not; and that ownership and control of a law practice conducted by partners are generally coextensive, with those in control also being entitled to the profits and liable for the losses; and that, whereas a director of an incorporated legal practice must be an Australian lawyer holding a practising certificate, there is no such requirement for shareholders of the legal practice. The respondents say that Burrows therefore cannot be relied on to provide guidance with respect to law firm partnerships (since to do so would disregard the fundamental differences arising from their separate legal personalities).

79. The applicants in their submissions in reply at [3]-[5], reject the proposition that they have conflated the position of an incorporated legal practice which acts for itself and an incorporated legal practice which acts for its natural person controller. They say that in both situations the incorporated legal practice is entitled to claim the professional costs of its employed solicitors and argue that the doctrine of separate corporate personality has no direct relevance to the present proceedings and arises only insofar as the doctrine was the basis upon which Burrows was decided. The applicants submit that the fact that Burrows was grounded in that doctrine does not detract from the reasoning of Leeming and Meagher JJA, respectively, concerning the effect of Bell Lawyers (the applicants referring to [101]-[122], [131]-[132], [134] and [5]-[16] and [19], of their Honours’ respective reasons in Burrows). The applicants argue that the effect of both Burrows and Spencer v Coshott (in finding that an incorporated legal practice is entitled to claim the professional costs of its employed solicitors) highlights a marked disparity in treatment and undercuts the suggestion that to permit a partnership to recover costs for its employed solicitors would place the partnership in a privileged position when compared to other litigants.

80. As to the applicants’ criticism of the reasons at [43]-[46] in relation to the third of the considerations that his Honour identified as informing the High Court’s rejection of the reasoning underlying the Chorley exception, the respondents accept that Bell Lawyers did not disturb the “employed solicitor rule” but they maintain that this rule does not assist the applicants in the present case, as the applicants are to be regarded as self-represented. (Pausing here, this seems to me to be the nub of the issue in the present case, as I explain in due course.)

81. In their written submissions in reply at [27]-[31], the applicants maintain their argument that there is significance in the inclusion of “remuneration” in the statutory definition of “costs” in this State; and their reliance on the decision in Burrows. Further, insofar as the respondents (in their written submissions at [46]) contend that there must be “costs payable” between separate entities and therefore that there must be evidence of separate costs agreements or tax invoices, the applicants emphasise that they are claiming the professional costs of their employed solicitors. The applicants say that the remuneration which the applicants paid to their employed solicitors are “costs” for the purposes of s 3(1) of the Civil Procedure Act; and that those costs were actually incurred in the conduct of litigation by the applicants (albeit that those professional legal costs were incurred by reason of the employment of the solicitor(s) allocated to the litigation in question and were therefore not reflected in a severable liability (referring to Gageler J’s judgment in Bell Lawyers at [68])). The applicants further say that the notion that separate costs agreements and/or invoices are required fails to recognise that no such conditions qualify the costs entitlement of a company or governmental agency under the same regime.

299. Returning to the decision of the primary judge, his Honour then addressed a submission about the significance of this Court’s decisions in Burrows and Spencer. His Honour concluded that “neither … governs the present situation” (at [65]). I agree that neither governs. However, as addressed above at [243]-[255], they are consistent with the view that I have reached.

300. In sum, I disagree with the conclusion of the primary judge for two essential reasons. First, in my view the Supreme Court and this Court are bound to apply the meaning of the word “remuneration”, as used in the definition of “costs” in s 3(1) of the CPA, as expounded at [44] of the joint judgment of Bell Lawyers. As explained above at [187]-[188], there is no reason why unincorporated law firms should be regarded as falling outside that understanding as a matter of statutory construction.

301. Secondly, even if the matter is approached simply as a matter of common law principle, it follows from the joint judgment and the judgment of Gageler J that the employed lawyer rule involves an application of the general indemnity principle. There is no proper basis to take the step of excluding unincorporated law firms, uniquely, from the benefit of that rule and that principle.

Orders

310. The appeal should be upheld with costs. In my view the partners of an unincorporated law firm are entitled in this State, as part of their costs recovery for a proceeding, to recover in relation to work done by solicitors employed by the partnership performing legal work with respect to the litigation in their capacity as solicitors.

311. The orders of the Court should be as follows:

1. If leave be necessary, grant leave to appeal.

2. Appeal allowed.

3. Set aside the orders made by the primary judge on 26 October 2022 and in lieu thereof make the following orders:

1. The summons filed on 2 August 2022 is dismissed.

2. The plaintiffs are to pay the defendants’ costs.

4. The first and second respondents are to pay the appellants’ costs of the appeal.

312. SIMPSON AJA: The facts and circumstances relevant to this appeal are fully set out in the judgments of Ward P and Kirk JA, each of which I have read in draft. Other than as is necessary to explain my reasoning, I will not restate the facts. I agree with their Honours, that, if leave to appeal is necessary, that leave ought to be granted. I will therefore refer to Messrs Atanaskovic and Jepps (the partners in Atanaskovic and Partners) as the appellants.

313. As is made clear in the judgments of Ward P and Kirk JA, the High Court in Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333; [2019] HCA 29 (“Bell Lawyers”) identified and left untouched a “general rule” that a self-represented litigant is not entitled to recompense for the value of time spent in the litigation.

314. The Court also identified, but did not leave untouched, a long-standing exception to the general rule. The exception was derived from the decision of the English Court of Appeal in London Scottish Benefit Society v Chorley (1884) 13 QBD 872 and was to the effect that, where the self-represented litigant happened to be a solicitor, the general rule did not apply and the self-represented solicitor was entitled to recover his or her professional costs of acting in the litigation (“the Chorley exception”).

315. The plurality in the High Court (Kiefel CJ, Bell, Keane and Gordon JJ) adopted an earlier description of the Chorley exception as “anomalous”: Cachia v Hanes (1994) 179 CLR 403; [1994] HCA 14 (“Cachia”) (see also Gageler J at [62] and Edelman J at [86]-[87]). All members of the Court declined to extend the exception to barristers who represent themselves in litigation. The Court went further and, by majority (Nettle J dissenting), declared the Chorley exception to be not part of the common law of Australia: the plurality at [3]-[39] and [57], Gageler J at [63], Edelman J at [93], [99].

316. The relevant facts in Bell Lawyers were relatively straightforward. A barrister (Ms Pentelow) successfully brought proceedings against Bell Lawyers, an incorporated legal practice, for fees she claimed to be owed to her pursuant to a retainer. Ms Pentelow was represented in the proceedings, but performed some of the legal work herself. A costs order was made in her favour. Bell Lawyers refused to pay those amounts claimed for work undertaken by Ms Pentelow herself. A majority of this Court (Beazley ACJ and Macfarlan JA, Meagher JA dissenting) held that Ms Pentelow, as a barrister, was entitled to rely on the Chorley exception (Pentelow v Bell Lawyers Pty Ltd [2018] NSWCA 150) notwithstanding that the exception was expressed in Chorley to apply to solicitors and did not expressly include barristers. This Court was bound by earlier decisions of the High Court (Cachia and Guss v Veenhuizen [No 2] (1976) 136 CLR 47; [1976] HCA 57) that, while not endorsing the Chorley exception, proceeded on the basis that it was part of the common law of Australia.

317. It was in relation to that set of circumstances that the High Court declared that the Chorley exception is not part of the common law of Australia. Post Bell Lawyers (in the absence of legislation to the contrary) an Australian legal practitioner acting for himself or herself may not recover, by way of a costs order, any amount representing the professional costs of legal work undertaken by himself or herself. That is, the “general rule”, since the decision in Bell Lawyers, applies to self-represented legal practitioners (whether solicitors or barristers) along with all other self-represented litigants. While the Chorley exception has thus been abolished, the scope of the abolition has yet to be explored.

318. The rationale for the “general rule” is that, as a “general principle”:

“… costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation”:

Cachia at 410, extracted by Gageler J at [60] of Bell Lawyers (and see additional authorities cited in footnote 99 thereof).

319. In this State the relevant statutory provision for present purposes is s 98(1) of the Civil Procedure Act 2005 (NSW) which provides:

“(1)   Subject to rules of court and to this or any other Act—

(a)   costs are in the discretion of the court, and

(b)   the court has full power to determine by whom, to whom and to what extent costs are to be paid,

(c)   the court may order that costs are to be awarded on the ordinary basis or on an indemnity basis.”

320. The more important provision is s 3, which contains a definition of “costs” as used in that Act. Section 3 provides:

“costs, in relation to proceedings, means costs payable in or in relation to the proceedings, and includes fees, disbursements, expenses and remuneration.”

“Remuneration” is not defined; the inclusion of “remuneration” is a matter of some significance, to which it will be necessary to return.

321. As I have suggested above, Bell Lawyers was a relatively straightforward case, where the issue was whether the costs to which Ms Pentelow was entitled and which Bell Lawyers was obliged to pay extended to legal work actually performed by Ms Pentelow on her own behalf. There was no issue that Bell Lawyers was obliged to pay the costs incurred by her in retaining lawyers who represented her.

322. There are, however numerous other scenarios that are not so straightforward, and which cannot readily be seen to come within the reasoning in Bell Lawyers. Possible scenarios include:

1. a legal practitioner litigant who represents himself or herself (or, as in the case of Ms Pentelow), who, although represented, performs, and claims costs for, some legal work in pursuit or defence of the litigation;

2. a government body or agency, or a corporate litigant, which employs one or more legal practitioners by whom it is represented in litigation;

3. a legal practitioner litigant in a private legal practice which is structured as an incorporated legal practice, of which the legal practitioner is the sole director and shareholder (and effectively the controlling mind or the alter ego of the corporation), and who is represented in the litigation by the incorporated legal practice;

4. conversely, an incorporated legal practice litigant having a single director and shareholder who is a legal practitioner, the incorporated legal practitioner being represented in the litigation by the legal practitioner;

5. a legal practitioner litigant in a private practice which is structured as an incorporated legal practice of which there are multiple or numerous shareholders and multiple or numerous directors, the incorporated legal practice being represented in the litigation by one or more of the directors and shareholders;

6. a legal practitioner litigant in a private practice which is structured as an incorporated legal practice, the legal practitioner litigant being (personally) represented in the litigation by one or more legal practitioners employed by the incorporated legal practice;

7. a legal practitioner litigant in a private practice with others, structured as a partnership, with employed legal practitioners, who is represented in the litigation by a partner where legal work is undertaken by employed legal practitioners;

8. a legal practitioner litigant (or litigants) in a private practice with others, structured as a partnership, with employed legal practitioners, the litigant or litigants being represented in the litigation by an employed legal practitioner (or practitioners);

9. an incorporated legal practice litigant, with employed legal practitioners, the incorporated legal practice being represented in the litigation by an employed legal practitioner.

This list does not purport to be exhaustive.

323. It is clear that a legal practitioner described in scenario (i) cannot claim any recompense for the work done in the litigation. That was determined in Bell Lawyers. It is also clear that a government agency or corporation described in scenario (ii) is able to recover its costs of representation in litigation by its employed legal practitioners. That is because the plurality in Bell Lawyers held (although in obiter), in response to an argument advanced on behalf of Ms Pentelow “…that governments and other employers, and incorporated legal practices operating through a sole director, would be prevented from recovering costs for professional legal services rendered by employed solicitors”, that:

“47.    This submission fails to appreciate that in relation to the use of in-house solicitors, such arrangements have been treated as being outside the general rule because it is accepted that the recovery of the professional costs of in-house solicitors enures by way of indemnity to the employer, as is confirmed by the inclusion of ‘remuneration’ in the definition of ‘costs’ in the Civil Procedure Act. Where a government or corporate litigant has been represented by an employed solicitor, the courts have proceeded on the footing that the actual cost to the government or corporation of the legal services provided by its employed solicitor would not exceed, in any substantial amount, the sum recoverable by it for professional legal costs …”

324. Their Honours then referred, with apparent approval, to the decision of the Supreme Court of New South Wales in Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333; [2001] NSWSC 60 at [11] (“Hattersley”), where Davies AJ said:

“… where an employed solicitor is involved, the traditional approach has been to award costs on a basis comparable to the costs which would have been incurred and allowed on taxation had an independent solicitor been engaged. The assumption has been made that, in an ordinary case, the indemnity principle will not be infringed by taking this approach.”

It should be acknowledged that Hattersley was a case in which the costs claimant was a banking corporation, within the class of litigants to which the plurality in Bell Lawyers referred in [47] and in scenario (ii) above.

325. It also appears that the legal practitioner described in scenario (iii) is able to recover the costs of representation in litigation by the incorporated legal practice of which he or she is the sole director and shareholder. In Bell Lawyers, the plurality left open that question, saying:

“51   Whether the same view should be taken in relation to a solicitor employed by an incorporated legal practice of which he or she is the sole director and shareholder stands in a different position. It might be queried whether such a solicitor has sufficient professional detachment to be characterised as acting in a professional legal capacity when doing work for the incorporated legal practice. And it might be queried whether costs claimed by an incorporated legal practice for work of its sole director and shareholder are within the expansive view of indemnity that has been adopted in the authorities. …

52   The resolution of this question may require close consideration of the legislation which provides for incorporation of solicitors’ practices and the intersection of that legislation with the provisions of the Civil Procedure Act in light of the general rule; and so the resolution of this question may be left for another day, when all the legislation that bears on the question has been the subject of argument.

53   It is sufficient for present purposes to say that whether or not an incorporated legal practice that is a vehicle for a sole practitioner should be able to obtain an order for costs for work performed by its sole director and shareholder is ultimately a matter for the legislature. …”

326. That question could not be escaped in Spencer v Coshott (2021) 106 NSWLR 84; [2021] NSWCA 235 (“Spencer”), the legislature having resisted the invitation to intervene. The point in Spencer was a narrow one. Mr Spencer was the sole director and shareholder of an incorporated legal practice, Kejus Pty Ltd, which traded under the name “Spencer & Co Legal”. Mr Spencer was the beneficiary of a costs order against Mr Coshott, in proceedings in which he had been represented by Spencer & Co Legal, which rendered bills of costs to him. Mr Spencer was, in reality (but not in law), a sole practitioner who represented himself. The separate legal personality of Spencer & Co Legal (or Kejus Pty Ltd) was sufficient to distinguish the incorporated legal practice from Mr Spencer. The distinction is a truly artificial one, as Keane J said in related proceedings between the same parties in the High Court (Coshott v Spencer [2019] HCA Trans 183 (11 September 2019) (“Coshott v Spencer (HCA)”)). As quoted in Spencer at [29], his Honour said:

“It may be said that it is quite artificial that an individual may render services for a corporation of which he or she is a sole shareholder and director at the same time as the corporation provides those services for the same individual as a client of the corporation. It may fairly be said that this ‘meta-physical bifurcation’, as it was described by Bray CJ in R v Goodall [(1975) 11 SASR 94 at 99-100], is as unattractive as it is unnatural. But as Bray CJ also recognised, it is ‘the logical consequence of Salomon’s Case’ [Salomon v A Salomon & Co Ltd [1897] AC 22], in which the House of Lords affirmed that the legal personality of a corporation is separate from that of an individual who controls the corporation. And so an individual who is the sole director and shareholder of a corporation may contract with that corporation for the provision of services by it so as to give rise to an obligation to pay for those services.”

327. In Burrows v Macpherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148 (“Burrows”) two incorporated legal practices were involved, M & K Sydney, which was the client and wholly owned subsidiary of M & K Lawyers Group. M & K Lawyers Group represented M & K Sydney in proceedings brought against it by Ms Burrows. M & K Sydney was successful and was awarded costs. Rejecting a contention that the two incorporated legal practices should be regarded as one and the same entity, this Court held that there was no basis in the evidence for disregarding the legal reality of the separate incorporated legal practices (at [18]), and M & K Sydney was entitled to recover the costs of its representation by M & K Legal Group.

328. The present case is an illustration of scenario (viii) above. The appellants are the partners in an unincorporated association, constituting a legal practice, who employ legal practitioners. The appellants were parties to litigation against the respondents. For the purpose of the litigation, the employed legal practitioners undertook professional legal work. The appellants were successful in the litigation and were the beneficiaries of a costs order. At issue is whether, pursuant to that costs order, the appellants are able to recover costs representing the costs of legal professional work undertaken by their employed legal practitioners.

329. These reasons, and the determination of this appeal, directly concern only scenario (viii). In the interests of coherence, however, the alternative scenarios ought not be ignored or overlooked. These scenarios were not before the High Court in Bell Lawyers and the reasons do not directly address any scenario other than that which I have labelled scenario (i) and (although indirectly) scenario (ii).

330. The starting point is that, pursuant to s 98(1) of the Civil Procedure Act, an order was made that the respondents pay the appellants’ costs of proceedings in the Equity Division of the Supreme Court up to and including 16 September 2019, assessed on the ordinary basis. By reference to s 3 of the Civil Procedure Act those costs are the “costs payable in or in relation to the [Equity Division] proceedings”, and include “fees, disbursements, expenses and [importantly] remuneration”. As mentioned above, “remuneration” is not defined in the Civil Procedure Act.

331. Two questions immediately arise:

1. what costs were payable in or in relation to the Equity Division proceedings?; and

2. was any remuneration (and if so, what) included in the “costs payable”?

332. The answers to those questions depend upon what is meant by (or included in) “costs payable in or in relation to” the Equity Division proceedings and what is encompassed in “remuneration” as the word is used in the s 3 definition. No clear answer to these questions, so far as they apply to the present case, emerges from the reasons in Bell Lawyers.

333. To repeat, costs are awarded by way of “indemnity … for professional legal costs actually incurred in the conduct of litigation”: Cachia at 410. That excludes costs of a self-represented legal practitioner, who does not incur costs payable to himself or herself. Similarly, “remuneration” in the extended meaning of “costs” in the s 3 definition, does not extend to a self-represented legal practitioner, because, as the plurality said in Bell Lawyers at [44]:

“… ‘[r]emuneration’ is simply not a word which is apt to include the notion of payment to a person by himself or herself for work done by himself or herself.”

334. These observations in Bell Lawyers answer the questions in relation to self-represented legal practitioner litigants in the uncomplicated class of case that is illustrated in Bell Lawyers. They do not answer the question in relation to the more complicated class of cases illustrated in scenarios (iv), (v), (vi), (vii), (viii) or (ix). These reasons do not attempt to provide answers to those questions in respect of scenarios (iv), (v), (vi), (viii) or (ix). But they must provide answers to the questions in respect of scenario (viii) – preferably answers that do not create potential incoherence if and when a court is confronted with answering the same questions with respect to those scenarios.

335. The outcomes in both Burrows and Spencer show that, where the entity to which the legal costs are payable is an incorporated legal practice, the costs are not payable by the legal practitioner to himself or herself. They are payable to a separate entity, the incorporated legal practice.

334. In the present case, the costs were not payable to an incorporated legal practice. Nor can it be said that they were payable to the employed legal practitioners who performed the legal work. Those legal practitioners were, presumably, paid by way of remuneration from the partnership – that is, by the partners (the appellants). It may be assumed that their salaries were not dependent on the quantity or nature of the work they undertook in this particular litigation. They were, nevertheless, paid by the appellants, for the professional legal work they undertook. In my opinion, those salaries, to the extent that they covered the legal professional work involved in the litigation against the respondents, are properly characterised as “professional legal costs actually incurred in the conduct of [the] litigation”.

335. That is consistent with an important observation in Bell Lawyers by Gageler J, at [68]. There, his Honour said:

“Recovery of costs by a party using an employed solicitor predated introduction of the Chorley exception. The better view … is that recovery of costs by a party using an employed solicitor is an application of the general principle rather than an exception to it. The general rule is engaged on the basis that the costs of using the employed solicitor are still awarded as indemnity for professional legal costs actually incurred in the conduct of litigation by the employer who is a party to the litigation, albeit that those professional legal costs are incurred in the form of an overhead and are therefore not reflected in a severable liability.” (Internal citations omitted)

338. Gageler J’s observation, which does not appear to have been either adopted or rejected by any other member of the Court, would support the view that an incorporated legal practice such as Bell Lawyers and a partnership such as the present appellants would be entitled to recover, as “costs actually incurred in the conduct of litigation”, an appropriate amount by reference to the costs of employing the legal practitioners to whom the legal work was assigned, in a way similar to that which applies where the litigant is a government instrumentality or corporation using employed legal practitioners. It would also engage the concept of “remuneration” in the s 3 definition, which is, as noted above, inapplicable where the legal work has been performed by the legal practitioner litigant. It does not, in my opinion, involve payment by the litigant to himself or herself.

339. There are reasons of coherence that support the view that a legal practitioner litigant who is a beneficiary of a costs order is entitled to include, in the costs recoverable, amounts referable to the costs of the legal professional work undertaken by the employed legal practitioner. It is difficult to see any rationale for allowing, as was done in Burrows and Spencer, costs payable to an incorporated legal practice that is in fact the alter ego (Spencer) or the parent company (Burrows) of the litigant (in Burrows the client being itself an incorporated legal practice).

340. It is worth observing here that, while the plurality in the High Court referred to incorporated legal practitioners of which the legal practitioner litigant is the sole director and/or shareholder, no reference was made to multi-director or multi- shareholder incorporated legal practices. It may be that the observation was a recognition of the artificiality of which Keane J spoke in Coshott v Spencer(HCA).

341. The view that a legal practitioner litigant is entitled to recover the costs incurred in litigation by the use of employed solicitors is consistent with the acceptance by the plurality in Bell Lawyers (although obiter) that government and (non-lawyer) corporations (for example banks – see Hattersley) are not precluded from recovering the costs of professional services rendered by employed legal practitioners. It is difficult to identify any basis on which a government department, agency or instrumentality, or a corporation, or a bank that employs legal practitioners who undertake legal work in litigation, or an incorporated legal practice, should be in a different position from a partnership of legal practitioners that employs legal practitioners for the provision of legal services to clients, but who also provide legal services where the partnership is the litigant. This was a question asked by Nettle J (in dissent on this issue) in Bell Lawyers at [75], with respect to litigants in the position of Ms Pentelow. It has more force when asked with respect to a partnership of legal practitioners for which professional legal work is undertaken by legal practitioners employed by the partnership.

342. It may be that “remuneration” in the NSW definition is intended to provide for the professional costs of those employed legal practitioners in government departments and corporations that the plurality in Bell Lawyers expressly recognised as being outside the general rule. Equally, the term could have been intended to encompass the remuneration of employed legal practitioners in legal practices. I see no reason to adopt the narrower version. “Remuneration” in this sense is not “payment to a person by himself or herself for work done by himself or herself”; it is payment to another person for the costs of legal professional work undertaken by that other person.

343. In my opinion resolution of the questions in this appeal comes down to the construction of the terms of the s 3 definition. I would give a wider meaning to “costs payable in or in relation to the proceedings”, so that the phrase encompasses costs payable to employed legal practitioners. While “costs payable” is not apt to include what can be no more than the notional costs of a self-represented legal practitioner (such as Ms Pentelow) it is apt to (and in the case of government departments and incorporations does) include the actual costs attributable to the use of employed legal practitioners, even if, as Gageler J said, the quantification is by reference to overheads rather than fees (as are payable to retained legal practitioners).

344. That is consistent with “the general principle” that “costs are awarded by way of indemnity … for professional legal costs actually incurred in the conduct of litigation”. While a self-represented legal practitioner does not incur any actual professional costs, a legal practitioner litigant using an employed legal practitioner does incur the professional costs of the employment of that legal practitioner.

345. The fundamental reasoning of the High Court in Bell Lawyers concerned the unjustifiable “affront to the fundamental value of equality of all persons before the law” that underlay the Chorley exception, and placed solicitors in a privileged position vis a vis other litigants (such as Mr Cachia) who represent themselves, by allowing them to be compensated for the time expended in the litigation.

346. On these bases I would conclude that the appellants are entitled to recover costs representing the costs of the professional services rendered to them by their employed solicitors. In reaching this conclusion I have not overlooked other aspects of the reasoning in Bell Lawyers. Perhaps the strongest argument against the conclusion I have reached is this. In Cachia Mason CJ, Wilson, Dawson, Toohey and Gaudron JJ described as “questionable” a “situation in which a successful litigant not only receives the amount of the verdict but actually profits from the conduct of the litigation”. In Bell Lawyers the plurality (at [32]) considered that possibility to be “unacceptable in point of principle”. Plainly, if costs recovered in relation to work undertaken by employed legal practitioners is assessed at usual commercial rates, an element of profit will be included in what is recovered by the partner litigant. While I am conscious of the force of this point, it does not seem to me that it overcomes the other powerful reasons for accepting that recovery of costs for work done by an employed legal practitioner is an example of an indemnity for costs incurred in the conduct of the litigation.

347. There remains for consideration the decision of the Victorian Court of Appeal in United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2020] VSCA 15 (“United Petroleum”), the circumstances of which, one major departure aside, are materially identical to the present case, in which a contrary view was taken. The major departure is the statutory definition of “costs” applicable in the two jurisdictions. The Victorian definition does not include, as does the NSW definition, “remuneration”.

United Petroleum v Herbert Smith Freehills

348. As I have indicated, the relevant facts in United Petroleum were very nearly identical with the facts of the present. The respondent in United Petroleum (Herbert Smith Freehills, to which the Victorian Court of Appeal referred as “Freehills”, nomenclature it is convenient to adopt) was a large multi-member legal practice structured as a partnership. Freehills became embroiled in litigation with United Petroleum. There were two strands to the litigation – a claim by Freehills for unpaid fees, and a claim by United Petroleum against Freehills in negligence. Freehills succeeded in both. According to the Court of Appeal judgment (at [56]-[58]), “Freehills were the solicitors on the record for the fees proceeding and in the applications for leave to appeal arising from that proceeding”, and the solicitors on the record for the negligence proceeding, until (later) they were represented by external lawyers. “Freehills staff” carried out “substantive legal work” in both proceedings, even after the external lawyers had assumed carriage of the negligence proceedings. Each of the “Freehills staff” who carried out work held a practising certificate and recorded the time spent working on the proceedings “in the usual way”, which I take to mean in the same way as they would have done had they been undertaking work for external clients.

349. As in the present case, Freehills sought to recover costs in respect of the work performed by employed solicitors but did not seek to recover costs in respect of any work performed by partners.

350. The Victorian Court of Appeal identified the relevant issue as “whether Freehills [was] precluded from cost recovery because it acted for itself in the proceeding[s]”: at [6].

351. Section 24(1) of the Supreme Court Act 1986 (Vic) relevantly provides that, unless otherwise provided, the costs of and incidental to all matters in the court are in the discretion of the court and the court has full power to determine by whom and to what extent the costs are to be paid. There is no material difference between that provision and s 98(1)(a) and (b) of the Civil Procedure Act.

352. Section 3 of the Supreme Court Act 1986 (Vic) defines “costs” to include “fees, charges and disbursements”. There is no mention of “remuneration”. The Court of Appeal concluded, having analysed the reasoning in Bell Lawyers, that Freehills were not entitled to recover costs “for the time spent by its own employees”: at [121].

353. A preliminary question is whether, having regard to the obligation of this Court to follow a relevant decision of a court of co-ordinate jurisdiction unless satisfied that it is “plainly wrong” (Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89; [2007] HCA 22 at [135]), this court ought to apply that decision.

354. Although the Victorian Court of Appeal considered that its determination did not depend on any differences between the statutory powers to award costs between NSW and Victoria (at [94]) (with which I respectfully agree), I am of the view that there is a material difference in the definitions of “costs” that are applicable in the two jurisdictions. The inclusion of “remuneration” in the NSW definition is not insignificant and should not be disregarded. I therefore do not consider that this Court is bound adopt the reasoning (and the conclusion) in United Petroleum.

355. The Victorian Court of Appeal appears to have placed considerable weight on the fact (as stated in [56] and [97]) that “Freehills” was the solicitor on the record in that case. Their Honours drew a distinction, which they said was recognised in Bell Lawyers, between “the position where solicitors who are parties represent themselves, and the position where a party is represented by an employed solicitor”. In the latter case, their Honours said, the party is not unrepresented or self-represented, but is represented by the employed solicitor.

356. Their Honours went on to observe that in those cases an issue had arisen as to what amount of costs should be recoverable given the employment relationship. No instances of cases in which those issues have arisen was cited.

357. I have difficulty in accepting that the nomination of a solicitor as the solicitor on the record is a relevant distinction. Exactly the same considerations would apply; the partner litigants would, on the view I have expressed, incur professional legal costs in the conduct of the litigation, although in the form of overheads. In any event, the question is not determined by the identity of the solicitor on the record. It is commonplace for legal professional costs to be incurred by work done by solicitors other than the solicitor on the record.

358. At [105] their Honours addressed [68] (extracted above) of Bell Lawyers, in which Gageler J said that recovery of costs by a party using an employed solicitor is an application of the general rule rather than the exception to it. Their Honours appear to confine Gageler J’s observations to circumstances where:

“A party is represented in the proceeding by a solicitor who is an employee of the party (or of a related interested person or entity), usually a government officer or instrumentality”. (emphasis in original)

This is a further instance of the emphasis placed on the identity of the solicitor on the record. In any event I do not see Gageler J’s observations as so confined. They are equally capable of applying to solicitors employed in an incorporated legal practice or a partnership.

359. Having regard to the differing definitions of “costs” in the two jurisdictions, I do not consider that questions of comity bind this court to adopt the reasoning in United Petroleum. For the reasons given above, I am of the view that the appellants are entitled to recover the professional legal costs incurred in the litigation by the use of employed legal practitioners.

360. I agree with the orders proposed by Kirk JA.

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Decision last updated: 15 December 2023