El Ali v Royal & Ors; Zreika v Royal & Ors

[2019] HCATrans 227

[2019] HCATrans 227

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S224 of 2019

B e t w e e n -

MAHMOUD EL ALI

Applicant

and

PETER PAUL ROYAL

First Respondent

JUDITH LOUISE ROYAL

Second Respondent

MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI

Third Respondent

Office of the Registry
  Sydney  No S225 of 2019

B e t w e e n -

MAHMOUD ZREIKA

Applicant

and

PETER PAUL ROYAL

First Respondent

JUDITH LOUISE ROYAL

Second Respondent

MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI

Third Respondent

OTTOMAN INVESTMENTS PTY LIMITED (IN LIQUIDATION) (ACN 139 438 074)

Fourth Respondent

SARACEN HOLDINGS PTY LIMITED (IN LIQUIDATION) (ACN 126 493 552)

Fifth Respondent

Applications for special leave to appeal

KIEFEL CJ
KEANE J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 15 NOVEMBER 2019, AT 10.50 AM

Copyright in the High Court of Australia

MR N.C. HUTLEY, SC:   If the Court pleases, I appear with my learned friends, MR D. BARLIN and MS J.E. TAYLOR for the applicants in both matters.  (instructed by Roberts & Partners Lawyers)

MR C.J. BIRCH, SC:   May it please the Court, I appear with my learned friend, MS P.A. THEW for the respondents in the first matter and the first to third respondents in the second of these matters.  (instructed by Watson Mangioni)

KIEFEL CJ:   It is to be noted that in the matter of Zreika v Royal, there is no appearance for the fourth and fifth respondents.  Yes, Mr Hutley.

MR HUTLEY:   Your Honours, there were a number of proceedings before the primary judge, Justice Davies, and her Honour gave some four judgments.  This special leave concerns the appeal which was dismissed against the third of those four judgments and her Honour’s reasons commence at appeal book 10.  Her Honour’s reasons became the reasons of the Full Court in relation to the question of costs when the Full Court adopted her Honour’s reasoning in full, at paragraph 320, at court book 175, without any further development or analysis.

The relevant agreements – costs agreements, your Honours ‑ the terms of which your Honours will find – the relevant terms of which are at paragraphs 38 and 48 to 49.  We have a small bundle here if your Honours wish to see the whole agreements which I can hand up in due course if your Honours would wish to see them.  Your Honours will find those agreements at the bundles, tabs 1 to 3.  I will come back to them in due course.

The relevant legislation governing costs agreements was the Legal Profession Act 2004 and the relevant section was section 323, at tab 7, which provided in subsection (1) for:

Costs agreements may provide that the payment of some or all of the legal costs is conditional on the successful outcome –

Subsection (3)(a) requires that:

A conditional cost agreement:

(a)must set out the circumstances that constitute the successful outcome –

Those provisions maintain, in the now national legislation – national to the extent that it applies to Victoria and New South Wales and I understand that Western Australia is acceding to it in June of next year, in 2020 – and your Honours will see that in section 181, at tab 9 of the bundle.

It is common ground that the indemnity principle continues to exist.  Its recent affirmation in this Court in Bell Lawyers v Pentelow [2019] HCA 29, at paragraphs 33, 38, 39 and 60, make that clear. Therefore, the starting point is that, for an order of costs to be made, it is to grant an indemnity for – as the Court expressed it in Bell at paragraph 33 – legal costs actually incurred by the relevant successful party.

Now, conditional costs of agreements has, as your Honours will have seen, been the subject of debate in intermediate appellate courts as to what is sufficient in a conditional costs agreement to maintain the indemnity principle.  It has been held that the indemnity principle is to be maintained whilst allowing for there to be conditional costs agreements. 

Your Honours will have seen from the reasons the debate between Justice Santow and Justice Basten in the Wentworth v Rogers decision as to whether conditions could be – “conditions” there expressed as subsequent and precedent – essentially, namely, whether you could have a condition that costs would only be paid upon the making of an order for costs.  That debate was passed upon in the Queensland Supreme Court in a way which was favourable to the view expressed by Justice Basten – namely, that the condition subsequent were required – in dicta, admittedly, but it was considered dicta of the two members of that Court.

That was since considered in the Victorian Court of Appeal in Mainieri v Cirillo where the view was expressed by the court in favour of a broader approach to conditions expressed by Justice Santow.  Your Honours will see the reasoning process at 51 to 52.  Cirillo, your Honours will find behind tab 5 in the bundle.

Can I take your Honours, shortly, to it because the relevant reasoning is the reasoning in the joint judgment of the then Acting President, Justice Nettle, Justice Hansen and Justice Santamaria.  They took up the analysis of this problem, your Honours, from paragraph 46 where they considered the observations of the various courts which I have referred to, including King v King in the Court of Appeal in Queensland.

The important paragraph, relevantly, is 51 and 52, and if I can take your Honours shortly to those at 146 in the reasons:

Evidently, the weight of considered dicta favours the Basten JA view.  Conscious as we are, however, of the importance of consistency among Australian intermediate courts of appeal, we agree with Santow JA that, as the Legal Profession Act now recognises conditional costs agreements of the kind where payment of costs is ‘contingent on the successful outcome of the matter’, and draws no distinction between such a contingency expressed as a condition precedent or subsequent, the application of the indemnity principle should not depend on that distinction.

Then it says, “With all respect”.  But, 52, is important:

As to the first, although it may be that an obligation to pay fees which is conditional on the actual recovery of costs would not impose a sufficient obligation to warrant an order for costs in accordance with the indemnity principle, logically it does not follow that an obligation to pay costs which is conditional on obtaining a costs order ought not be regarded as sufficient.

So, in other words, their Honours were prepared to go so far as saying, if one’s costs agreement was contingent on obtaining a favourable costs order, that was sufficient to maintain the indemnity principle although, in accordance with the view of Justice Basten, that led to a circularity, namely, one’s entitlement to the order was antecedent to the existence of an obligation to grant the indemnity.

KEANE J:   But, you do not suggest that the view taken by the Victorian Court of Appeal in Mainieri is wrong.

MR HUTLEY:   We do not need to go that far.

KEANE J:   No, but accepting you do not go that far, is it not then the position that the question is simply one of the drafting of the agreement – that if it is drafted in terms of a condition subsequent relating to the making of an order as opposed to actual recovery, the indemnity principle is sufficiently honoured.

MR HUTLEY:   But that is precisely the position that Justice Basten – I am sorry – the Full Court in the Court of Appeal said it is not honoured at that point; that is what 52 indicates.  It is not honoured for this reason; because let it be assumed that if the condition is a condition of actual recovery, that condition may never be satisfied and, therefore, the order will, by hypothesis, have been made in a situation where there is no indemnity.

KEANE J:   Yes, but if it is conditional on the making of an order for costs, then the indemnity principle is sufficiently honoured and there is not a problem.

MR HUTLEY:   But, ours is not – the orders in this case are not conditioned on the making of an order for costs.  They are conditioned on actual recovery of the judgment.

KEANE J:   I appreciate that might be the position in this case but in terms of this case raising a general question, if the problem can be overcome, as a matter of drafting, this is taking up this case not to solve a general problem of principle but, simply, to deal with one case about a costs order.

MR HUTLEY:   With respect, if ‑ ‑ ‑

KEANE J:   Why would we do that?

MR HUTLEY:   Because the Full Court has said, any contingency is sufficient.  That is what her Honour has said:  any contingency is sufficient to maintain the indemnity principle.  At that point, with respect, the indemnity principle evaporates.  Because, if it is correct and you can define success in terms of any contingency, that is where they moved from ‑ and that is in her Honour’s reasons, I think, at paragraph 44 ‑ that, we say, is the general principle.  Paragraph 44, at 22, it says:

Mainieri v Cirollo is authority that the application of the indemnity principle does not depend on whether the contingency is expressed as a condition precedent or condition subsequent –

And, in the limited sense in which I have indicated Mainieri v Cirillo – the judgment of the Court of Appeal says it – that if the contingency is such, the obligation will become absolute upon making of the order, that is sufficient.  But her Honour goes on and says:

is contingently liable to pay legal fees “at the instant the costs order is to be made”.

But that is not the point.  The Court of Appeal says the critical thing was, upon the costs order being made, the obligation was absolute. 

KIEFEL CJ:   Are you saying that in Mainieri there is a distinction created between the contingency and the actual obligation? 

MR HUTLEY:   Quite.  The contingency in Mainieri of the entitlement to be made was the making of a costs order.

KIEFEL CJ:   Are you saying that Mainieri then diverges from what Justice Santow was saying?

MR HUTLEY:   It says that Justice – it supports Justice Santow to that point.

KIEFEL CJ:   But, at paragraph – is not the answer then at paragraph 53 of Mainieri where it is made tolerably clear that the Court is following Justice Santow completely and that leaves you in a position where there is no real dispute between the intermediate appellate courts.

MR HUTLEY:   Except, at paragraph 52, they make it perfectly clear.  The Court of Appeal says, to make it contingent upon recovery would not maintain the indemnity principle.  That is what paragraph 52 is saying.  Because the circularity then becomes impossible because it may not ever be an indemnity.  That is why the Court said, it is sufficient if the condition – and this is allowing the flexibility – it was sufficient if the condition was the condition being the making of an order.  It was not sufficient if it was recovery.

We say, if you allow – if it goes beyond that point – and, we say, arguably that is too far, we do not need to go that far – but if one says, it is any contingency is sufficient – which we say paragraph 44 in the Full Court’s reasoning is – the indemnity principle has evaporated because you could put in a contingency which would never be satisfied.  You will pay me in 20 years’ time.

KEANE J:   In paragraph 44, at pages 22 to 23, the primary judge concluded by saying:

There is a contingent liability to pay fees and thus an obligation to be indemnified when a costs order is made.

Her Honour comes to that view on the basis of a construction of the particular terms of the particular costs agreement before her but that is the proposition that she reaches as a matter of construction.

MR HUTLEY:   But, her Honour, with respect, your Honour ‑ ‑ ‑

KEANE J:   In terms of principle, her Honour is saying:

There is a contingent liability to pay fees and thus an obligation to be indemnified when a costs order is made.

Is your case for leave turning on the construction of a particular costs agreement in the case?

MR HUTLEY:   No, with respect.  We submit that it is not the law that any contingency will be sufficient to support the indemnity principle.  We say, strictly speaking, the correct analysis should be that of Justice Basten because of the circularity.  But, even allowing the flexibility which Mainieri brought to the exercise, Mainieri was astute and, we say, consciously astute to no more extend it to the fact that only if the contingency is the making of the costs order creating the obligation by the client to pay the solicitor, that was as far as one could go and maintain the indemnity principle.

If one says any contingent obligation is sufficient, then the indemnity principle becomes not a matter of substance just a matter of form because you could express a contingency on matters which are highly unlikely ever to occur to justify a costs order – and almost certain never to occur as long as they were logically possible.  And that, we say, is exactly what paragraph 44 is saying – as long as there is a contingent obligation, you can make a costs order.  And here, as they said:

The mere fact that the liability is contingent on sufficient recovery of moneys out of which to meet –

the costs order which, of course, for all one knows, may never occur, may not occur for years and years, may be an insolvency – and this case, as your Honours would appreciate, involved a claim by the Royals against the bankrupt of whom the trustee is the trustee in bankruptcy, a judgment of about a million dollars.  He recovered some shares in two companies which were insolvent – and whether there is going to be any recovery in favour of the Royals will be dependent upon the outcome of the winding‑up, the distribution into Mr Ali’s estate, and then whether he, if ever, there is a dividend in favour of the Royals.

So, the condition of their costs agreement may never be satisfied.  There may never be a penny paid to them under the recovery of the judgment and, therefore, the only recovery would be the recovery of the costs.  Therefore, you have created a contingent obligation.  The indemnity principle, in effect, has evaporated.  What we say is 44 accepting the extensions that are taking place in Victoria.  If 44 is correct, what essentially is a licence to draft costs agreements – which are, effectively, not shams but are so unlikely to ever produce anything in the nature of a true obligation – but because they will be contingent, will be sufficient to justify a costs order.

Effectively, the indemnity principle will go out of the door.  It will become a matter of form, not substance.  The one thing this Court has said is it is a matter of substance.  It is the substance which justified the inability of parties to recover their own costs, such as a business person’s costs, wasted in developing the case.  Now, we say this case is fundamental because if it is right, the Full Court – paragraph 44 is right – the indemnity

principle has become purely a token, it is a matter of form, because they did not adhere to what was said by Justice Nettle, going just that far.

Your Honour, if an appeal took place, it may be that the Court came to the conclusion that that was even inappropriate.  We do not need to go that far.  But, if it is as far as the Full Court goes then, we say, the indemnity principle has simply become, in effect, a fig leaf for an entitlement to costs orders whenever a solicitor – legal representatives – act in a case.  Therefore, we say, it is not a question of construction of this deed.  It is a fundamental question of principle.  This is the perfect case because of the form of the agreements.  I cannot put it any – that is our submission, your Honours.

KIEFEL CJ:   We need not trouble you, Mr Birch. 

In our view no question of general principle arises in this case.  The principles to be applied in cases of this kind have been settled by decisions of intermediate appellate courts and those principles have been applied in this case.  The matter would have insufficient prospects of success to warrant a grant.  Special leave is refused with costs.

The Court will adjourn to reconstitute.

AT 11.10 AM THE MATTER WAS CONCLUDED