Newell; Muriniti v De Costi

[2018] NSWCA 49

Court of Appeal

Supreme Court

New South Wales

• Summary available
• Amendment notes

Medium Neutral Citation:

Newell; Muriniti v De Costi [2018] NSWCA 49

Hearing dates:

10 and 11 July 2017

Decision date:

20 March 2018

Before:

Beazley P at [1];
Gleeson JA at [241];
White JA at [242]

Decision:

(1)   To the extent required, grant leave in each proceeding to the applicant to appeal from the orders.

 

(2)   In each proceeding, appeal allowed in part.

 

(3)   In each proceeding, cross-appeal dismissed.

 

(4)   Declare that the appellant in proceedings 2016/385849, Mr Newell, is liable to indemnify the respondents in respect of the costs incurred by the respondents by reason of:

 

(a)   the joinder of the fifth respondent as cross-defendant;

 

(b)   the filing or service of more than three versions of the cross-claim;

 

(c)   the failure to reduce the evidence in the various affidavits of Mr Wachtenheim to one affidavit or to at least many fewer affidavits than those served;

 

(d)   the making, deployment, submissions, and hearing in respect of the illegal tape recording that was the subject of the second judgment: De Costi Seafoods (No 2) including the costs of the application dealt with in De Costi Seafoods (No 2);

 

(e)   the failure to discover correspondence between Mr Newell, Mr Muriniti and Mr Shnider;

 

(f)   the affidavit of Mr Ng;

 

(g)   the allegations of impropriety against Mr Thorpe;

 

(h)   the allegations of impropriety that the respondents obtained a misleading affidavit from Mr Shnider and Mr Shnider’s evidence.

 

(5)   Declare that the appellant in proceedings 2016/382130, Mr Muriniti, is liable to indemnify the respondents in respect of the costs incurred by the respondents by reason of:

 

(a)   the joinder of the fifth respondent as cross-defendant;

 

(b)   the filing or service of more than three versions of the cross-claim;

 

(c)   the failure to reduce the evidence in the various affidavits of Mr Wachtenheim to one affidavit or to at least many fewer affidavits than those served;

 

(d)   the instructions given by Mr Muriniti to Mr Dent;

 

(e)   the false account contained in Mr Wachtenheim’s affidavit dated 15 December 2011 as to how he was alerted to the issue of the understatement of sales revenue in Mr Wachtenheim’s affidavit dated 23 August 2011;

 

(f)   the making, deployment, submissions and hearing in respect of the illegal tape recording that was the subject of the second judgment: De Costi Seafoods (No 2) including the costs of the application dealt with in De Costi Seafoods (No 2);

 

(g)   the non-production of a diary indicated by the chronology of events forwarded by Mr Muriniti to Mr Dent;

 

(h)   the failure to discover correspondence between Mr Newell, Mr Muriniti and Mr Shnider;

 

(i)   the affidavit of Mr Ng;

 

(j)   the allegations of impropriety against Mr Thorpe;

 

(k)   the allegations of impropriety that the respondents obtained a misleading affidavit from Mr Shnider and Mr Shnider’s evidence.

 

(6)   Remit both proceedings to the District Court for further hearing and determination in accordance with the above declarations and these reasons;

 (7)   Otherwise order that the appeals be dismissed.

Catchwords:

COSTS – indemnity costs – indemnification by legal practitioner – Legal Profession Act 2004 (NSW), s 348 – meaning of costs “payable” – whether indemnity could only be provided for the benefit of the party against whom claim was brought without reasonable prospects of success – whether primary judge erred in approach adopted to quantify the indemnity

 

COSTS – indemnity costs – indemnification by legal practitioner – Civil Procedure Act 2005 (NSW), s 99 – whether conduct of the applicants amounted to “serious neglect, serious incompetence or serious misconduct” – whether primary judge erred in approach adopted to quantify the indemnity

EVIDENCE – adverse inferences – whether primary judge erred in his application of the rule in Jones v Dunkel (1959) 101 CLR 298 – whether applicants constrained from giving evidence due to the operation of legal professional privilege – whether the applicants could rely on the observations in Medcalf v Mardell [2003] 1 AC 120

Legislation Cited:

Civil Liability Act 2002 (NSW)
Civil Procedure Act 2005 (NSW) s 99
Evidence Act 1995 (NSW) s 97
Legal Profession Act 1987 (NSW) Div 5C
Legal Profession Act 2004 (NSW), ss 345, 348, 349
Legal Profession Uniform Law Application Act 2014 (NSW) Sch 2
New South Wales Bar Association Barristers’ Conduct Rules (8 August 2011), r 17(f)
Uniform Civil Procedure Rules 2005 (NSW), r 20.14

Cases Cited:

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41
Ampolex Limited v Perpetual Trustee Company (Canberra) Limited (1996) 137 ALR 28; [1996] HCA 15
Attard v James Legal Pty Ltd (2010) 80 ACSR 585; [2010] NSWCA 311
Bahai v Rashidian [1985] 1 WLR 1337
Brendon v Spiro [1938] 1 KB 176
Collier v Lancer (No 2) [2013] NSWCA 186
Commonwealth of Australia v McLean (unreported, NSW Court of Appeal, 31 December 1996)
De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 2) [2012] NSWDC 286
De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54
De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 4) [2014] NSWDC 70
De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 5) [2015] NSWDC 8
De Costi Seafoods (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 6) [2016] NSWDC 378
Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284; [2005] NSWSC 3
Eurobodalla Shire Council v Wells [2006] NSWCA 5
Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 250 CLR 303; [2013] HCA 46
Firth v Wowk & Ors [2008] NSWCA 104
Flinn v Flinn [1999] VSCA 134
Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178
Furlong v Wise & Young Pty Ltd [2016] NSWSC 647
Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34
Holloway v McFeeters (1956) 94 CLR 470; [1956] HCA 25
In the Matter of Condor Blanco Mines Ltd (No 3) [2017] NSWSC 65
Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8
Keddie v Stacks/Goudkamp Pty Ltd (2012) 293 ALR 764; [2012] NSWCA 254
Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278
Lee v New South Wales Crime Commission (2012) 224 A Crim R 94; [2012] NSWCA 262
Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153
Manly Council v Byrnes [2004] NSWCA 123
Medcalf v Mardell [2003] 1 AC 120
Metsikas v Quirk (No 2) [2010] NSWSC 757
Myers v Elman [1940] AC 282
Myers v Rothfield [1939] 1 KB 109
Re Felicity [2015] NSWCA 19
Ridehalgh v Horsefield [1994] Ch 205
Rodi v Gelonesi [2012] NSWCA 424
Symphony Group Plc v Hodgson [1994] QB 179
SZTAL v Minister for Immigration and Border Protection (2017) 347 ALR 405; [2017] HCA 34
Young v Hughes Trueman Pty Ltd (No 4) [2017] FCA 456

Texts Cited:

C Sappideen and P Vines, Fleming’s Law of Torts (10th ed, 2011, Lawbook Co)

Category:

Principal judgment

Parties:

Robert Newell (Appellant/Cross-Respondent CA 2016/385849)
Leonardo Carlo Muriniti (Appellant/Cross-Respondent CA 2016/382130)
De Costi Seafoods (Franchises) Pty Limited (First Respondent/First Cross-Appellant)
De Costi Seafoods (Holdings) Pty Limited (Second Respondent/Second Cross-Appellant)
Frank Theodore (Third Respondent/Third Cross-Appellant)
George Costi (Fourth Respondent/Fourth Cross-Appellant)
Androulla Costi (Fifth Respondent/Fifth Cross-Appellant)

Representation:

Counsel:
G Watson SC (Mr Newell)
D Lloyd (Mr Muriniti)
S Stanton (Respondents)

  Solicitors:
Barry Nilsson Lawyers (Mr Newell)
Yeldham Price O’Brien Lusk (Mr Muriniti)
McLachlan Thorpe Partners (Respondents)

File Number(s):

2016/385849; 2016/382130

 Decision under appeal 

Court or tribunal:

District Court

Jurisdiction:

Civil

Citation:

De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 6) [2016] NSWDC 378

Date of Decision:

16 December 2016

Before:

P Taylor SC DCJ

File Number(s):

2006/296319

Headnote

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

Mr Newell and Mr Muriniti acted as counsel and solicitor respectively for the plaintiffs/cross-claimants (‘the Wachtenheim parties’) in proceedings involving certain franchise agreements. The franchisors sued for monies owing under the agreement. The Wachtenheim parties cross-claimed against the franchisors and others (‘the De Costi parties’) alleging, inter alia, the making of false and misleading statements. The cross-claim was dismissed and the De Costi parties sought orders that Mr Newell and Mr Muriniti indemnify them in respect of costs arising from the cross-claim, pursuant to the Legal Profession Act 2004 (NSW), s 348, and the Civil Procedure Act 2005 (NSW), s 99 (‘the costs proceedings’). Neither Mr Newell nor Mr Muriniti gave evidence in the costs proceedings.

The costs proceedings were conducted in stages. At the first stage, the primary judge found that the presumption was satisfied pursuant to the Legal Profession Act 2004 (NSW), s 349(1) that legal services were provided without reasonable prospects of success in relation to the claim against Androulla Costi. By way of a further notice of motion Mr Newell and Mr Muriniti successfully sought orders dismissing the claim for indemnity costs under s 348 except insofar as it related to Androulla Costi.

At the final stage in the costs proceedings, the primary judge found that Mr Newell and Mr Muriniti should indemnify the De Costi parties in respect of costs payable in the proceedings under the Legal Profession Act 2004 (NSW), s 348 and the Civil Procedure Act 2005 (NSW), s 99. He indicated the orders he would have made in respect of each of the sections, but imposed a combined order for wasted costs under those provisions.

On appeal, the applicants argued that:

(i)   His Honour erred in finding that they were liable, pursuant to the Legal Profession Act, s 348, to provide an indemnity to the De Costi parties on account of the costs occasioned by the claim against Androulla Costi;

(ii)   His Honour erred in the approach he adopted for quantifying the extent of that indemnity;

(iii)   His Honour erred in finding that they were liable, pursuant to the Civil Procedure Act, s 99, to provide an indemnity against costs payable by the De Costi parties;

(iv)   His Honour erred in the means he adopted for quantifying the extent of that indemnity; and

(v)   His Honour erred in drawing adverse inferences against the applicants in accordance with the principle in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8.

In relation to (i)

(Per Beazley P, Gleeson JA and White JA agreeing)

(i)   The Legal Profession Act 2004 (NSW), s 348 did not require that the party in whose favour an indemnity order is made be the party against whom proceedings were brought without reasonable cause. This was clear from the text of the provision, and there was nothing in the context or purpose of the section that indicated a different construction: [47]-[49]; [246].

Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41, SZTAL v Minister for Immigration and Border Protection [2017] HCA 34, referred to.

In relation to (ii)

(Per Beazley P, Gleeson JA and White JA agreeing)

(i) The purpose of s 348(1)(b) was to impose a cost sanction on a practitioner who provided legal services in respect of a proceeding which ought not to be brought because it did not have “reasonable prospects of success”. This phrase does not denote a high or inflexible bar, but equates to a case which is so lacking in merit or substance as to be not fairly arguable: [57]-[58].

Degiorgio v Dunn (No 2) (2005) NSWLR 284; [2005] NSWSC 3; Lemoto v Able Technical Pty Ltd & Ors (2005) NSWLR 300; [2005] NSWSC 153, referred to.

(ii)   His Honour erred in the approach he adopted for quantifying the indemnity under s 348. The five parties had engaged the services of one law practice and one counsel to represent all of them. However, it did not follow that because there were five defendants, 20 per cent of the costs of the whole claim constituted “costs payable” in respect of Androulla Costi: [61]-[62]; [248].

(iii) There were a number of orders which could have been made so the costs specifically attributable to the Androulla Costi claim were identified. This could include ordering the applicants to pay the costs of the proceedings insofar as they related to the Androulla Costi claim, and leaving the parties to determine the costs, or an order referring the quantification of those costs to an expert costs assessor under the UCPR r 20.14: [63]; [248].

In relation to (iii) and (v)

(Per Beazley P, Gleeson JA and White JA agreeing)

(i)   On balance, the language of the trial judge indicated that he was of the opinion that he was required to draw a Jones v Dunkel inference, not only that he might draw the inference. This was a misstatement of the rule: [78]-[80].

Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, referred to.

(ii)   The Court upheld the appeal in part.

(iii)   In the circumstances of this case, the appellants were not entitled to the protection of the observations in Medcalf v Mardell to the effect that where a practitioner is precluded from giving evidence about a matter because of legal professional privilege, the court must be very slow to conclude that a practitioner could have had no answer to the substantive complaint, and to impose a “wasted costs” order: [86]-[89]. This was because:

a. There was no reason why legal professional privilege would have constrained an explanation being provided in relation to the multiple versions of the cross-claim, or the non-production of the diary: [104]; [108]; [189].

b. Even if Mr Muriniti was constrained from giving evidence in relation to the illegal tape recording, this was a still a clear case where a s 99 finding was appropriately made against him: [176].

Medcalf v Mardell [2003] 1 AC 120, Ridehalgh v Horsefield [1994] Ch 205, referred to.

In relation to (iv)

(Per Beazley P, Gleeson JA and White JA agreeing)

(i) It was not open to his Honour under s 99 to treat the applicants as equally liable to pay costs under a “joint enterprise”. It was necessary to determine in respect of each applicant and each instance of specific conduct found to constitute serious neglect, serious incompetence or serious misconduct whether costs were incurred by the De Costi parties: [228]-[232]; [253]-[257].

(ii) It was not open to his Honour to combine the assessment to be made under s 348 with the assessment under s 99: [233].

White JA in obiter commented on multi-stage process by which the s 348 proceedings were conducted:

(i) The purpose of s 349 was to streamline the procedure for determining a costs application under s 348 by allowing for a rebuttable presumption in the applicant’s favour if certain findings were made. The judgment that is relied upon is that of the trial court on the hearing of the proceedings on the claim for damages, not a judgement of the trial court on a separate hearing after the claim for damages has been determined: [288].

(ii) The expensive and time consuming procedure adopted in this case was not consistent with the apparent purpose of s 349(1), being to expedite the determination of the an application for a costs order against a legal practice, while making the procedure as simple and summary as fairness permits: [291]-[292].

Lemoto v Able Technical Pty Ltd & Ors (2005) 63 NSWLR 300; [2005] NSWCA 153, considered.

Firth v Wowk & Orrs [2008] NSWCA 104; Metsikas v Quirk (No 2) [2010] NSWSC 757; Eurobodalla Shire Council v Wells [2006] NSWCA 5, referred to.

Judgment

1. BEAZLEY P: On 3 May 2013, Taylor DCJ dismissed a cross-claim brought by Mr Serge Wachtenheim and Deist Safety Equipment Pty Limited, (Deist) (together, the Wachtenheim parties) against De Costi Seafoods (Franchises) Pty Ltd, De Costi Seafoods (Holdings) Pty Ltd, George Costi, Androulla Costi, Frank Theodore (together, the De Costi parties) and Barry David Shnider. On 16 December 2016, his Honour ordered Robert Newell, barrister, and Leonardo Muriniti, solicitor, both of whom acted for the Wachtenheim parties, to indemnify the De Costi parties against 50 per cent of their costs payable on the cross-claim. Mr Newell and Mr Muriniti (to whom I will refer variously as the appellants or by their names as is appropriate) apply for leave to appeal against the orders of 16 December 2016.

Background

2. The proceedings in the District Court have a complicated procedural history, which requires a brief overview before dealing with the issues the subject of the appeal.

3. In 2004, Deist entered into a retail franchise agreement with De Costi Seafoods (Franchises) Pty Ltd, and a further agreement with De Costi Seafoods (Holdings) Pty Ltd for the supply of seafood. Mr Wachtenheim, the principal of Deist, guaranteed the performance of Deist under each agreement. Deist fell into arrears under each agreement and the respective De Costi companies commenced proceedings against Deist and Mr Wachtenheim. The Wachtenheim parties retained Mr Muriniti and Mr Newell to act for them in the dispute.

4. The Wachtenheim parties brought a cross-claim against the De Costi companies (the first and fifth cross-defendants respectively), two directors of the De Costi companies, George Costi and Androulla Costi (the fourth and seventh cross-defendants respectively), and Frank Theodore (the second cross-defendant), who was Androulla Costi’s brother and employed by De Costi Seafoods (Holdings) Pty Ltd. Mr Theodore was alleged to have made certain misleading representations to Mr Wachtenheim. Mr Shnider was the sixth cross-defendant. Mr Shnider was Mr Wachtenheim’s brother-in-law and accountant.

5. The Wachtenheim parties’ cross-claim was based on: alleged misrepresentations made by various of the De Costi parties during the course of negotiations for the franchise agreement, claimed to constitute misleading or deceptive conduct within the meaning of the Trade Practices Act (Cth) 1975; unconscionable conduct; alleged breaches of implied terms of the franchise agreement and in the case of George Costi and Androulla Costi, accessorial liability.

6. As against Mr Shnider, it was alleged that he had provided negligent advice to the Wachtenheim parties and that he was knowingly involved in the misleading or deceptive conduct occasioned by Mr Theodore’s alleged misleading representations. Mr Shnider was made bankrupt in 2011 and the cross-claim against him was dismissed by consent in February 2012 with no order as to costs.

7. On 12 December 2011, judgment was entered in favour of the two De Costi companies on their claims in respect of the arrears. That judgment was stayed pending determination of the Wachtenheim parties’ cross-claim.

8. The hearing of the cross-claim, which was advanced by way of a sixth further amended cross-claim, occupied 75 hearing days. During the course of the hearing, a voir dire examination was conducted over three days in relation to certain tape recorded evidence of a telephone conversation between Mr Shnider and Mr Newell. The tender of the tape recorded evidence was rejected on the basis that it was illegally and improperly obtained: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 2) [2012] NSWDC 286.

9. On 3 May 2013, the cross-claim was dismissed. The primary judge ordered that the Wachtenheim parties pay the De Costi parties’ costs of the cross-claim: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 3) [2013] NSWDC 54.

10. On 5 August 2013, the De Costi parties filed a notice of motion seeking orders that Mr Newell and Mr Muriniti indemnify them pursuant to the Legal Profession Act 2004 (NSW), s 348 and the Civil Procedure Act 2005 (NSW), s 99 in respect of the whole of the costs arising from the cross-claim. An amended notice of motion was filed on 16 March 2016. For the purposes of these reasons, it is convenient to refer to the relief sought as “the De Costi parties’ notice of motion” as is appropriate.

2. The hearing of the De Costi parties’ notice of motion was conducted in two stages. This procedure was adopted having regard to the respective observations of Hodgson and McColl JJA in Lemoto v Able Technical Pty Ltd (2005) 63 NSWLR 300; [2005] NSWCA 153, particularly at [5], [7], [148] and [149]. I agree with the observations of White JA as to this procedure.

3. The first stage of the hearing of the notice of motion dealt with the presumption which arises under the Legal Profession Act 2004 (NSW), s 349(1), the terms of which are set out below at [25]. That hearing took place on 16 and 17 December 2013. In his judgment delivered on 13 June 2014, his Honour found that pursuant to s 349(1) the presumption arose that the legal services provided to the Wachtenheim parties were provided without reasonable prospects of success in respect of the claim against Androulla Costi, but that it did not arise in respect of the claims against the other De Costi parties: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 4) [2014] NSWDC 70.

4. Prior to the hearing of the second stage of the De Costi parties’ notice of motion, Mr Muriniti and Mr Newell brought an application, described by the primary judge as being in the nature of a summary judgment application, for the dismissal of the notice of motion brought by the De Costi parties other than the claim brought in respect of Androulla Costi’s costs. That application was heard on 27 and 28 August 2014. His Honour gave judgment on 10 February 2015, in which he noted, at [41], that a prima facie case for a s 348 order had been established in respect of Androulla Costi, but not against the other De Costi parties. Accordingly, his Honour dismissed the De Costi parties’ claim for an indemnity in respect of costs under s 348 except insofar as it related to Androulla Costi. The De Costi parties’ notice of motion was, to that extent, dismissed: De Costi Seafoods (Franchises) Pty Limited and Anor v Wachtenheim and Anor (No 5) [2015] NSWDC 8.

5. This left for determination the second stage of the De Costi parties’ notice of motion, which was heard on 14-18 and 24 March 2016. This hearing dealt with the question whether an order should be made pursuant to s 348 against Mr Newell and Mr Muriniti in relation to the cross-claim proceedings against Androulla Costi, and whether an order should be made pursuant to the Civil Procedure Act, s 99 against Mr Newell and Mr Muriniti that they indemnify the De Costi parties for the costs incurred by their serious neglect, serious incompetence or serious misconduct.

6. Judgment on this aspect of the De Costi parties’ notice of motion was delivered on 16 December 2016: De Costi Seafoods (Franchises) Pty Ltd and Anor v Wachtenheim and Anor (No 6) [2016] NSWDC 378.

7. In De Costi Seafoods (No 6), the primary judge stated, at [125], that if he were to make orders separately under the different statutory provisions, he would make the following orders:

“(a) Mr Newell and Mr Muriniti indemnify the De Costi parties in respect of 20% of the costs payable by the De Costi parties in the proceedings, on account of the costs occasioned by the claim against Mrs Costi, pursuant to s 348 of the LPA;

(b) Mr Newell and Mr Muriniti indemnify the De Costi parties in respect of 50% of the costs payable by the De Costi parties in the proceedings, on account of the costs occasioned by the serious neglect, serious incompetence and serious misconduct of Mr Newell and Mr Muriniti, pursuant to s 99 of the CPA; and

(c)   the two orders not be cumulative.”

17. However, his Honour considered that it was appropriate to make a single costs order in respect of the De Costi parties’ entitlement under the Legal Profession Act and the Civil Procedure Act and accordingly made the following order:

“(1)   Order Robert Newell and Leonardo Muriniti to indemnify [the De Costi parties] against 50% of their costs payable in the proceedings up to the conclusion of the trial on 11 October 2012.

(2)   Reserve the questions of costs of the application and interest for further submissions on a date to be fixed.”

18. Subject to the question of leave to appeal, the appeal is brought in respect of order (1) set out above. As I understand it, no decision on costs has been made pending the outcome of the appeal.

Leave to appeal

19. A preliminary question arose as to whether Mr Newell and Mr Muriniti required leave to appeal. The De Costi parties submitted that leave was required pursuant to the District Court Act 1973 (NSW), s 127(2)(b), which provides that leave is required for an appeal against “a judgment or order as to costs only”. However, the De Costi parties did not oppose the grant of leave. Mr Newell and Mr Muriniti contended that they did not require leave to appeal.

20. There is an uncertainty as to whether an order that imposes a costs liability on a non-party is an order “as to costs only”. This was referred to by Gleeson JA, with whom Macfarlan and Leeming JJA agreed, in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [4]:

“In Yu v Cao [2015] NSWCA 276 at [5], McColl JA (Sackville AJA and Adamson J agreeing) noted that there was room for debate about whether leave is required where the costs order is one against a non-party, albeit made in the exercise of the costs discretion in s 98(1) of the Civil Procedure Act 2005 (NSW) (Civil Procedure Act). Reference was made to the diversity of judicial opinion on this question which Campbell JA (McColl and Macfarlan JJA agreeing) referred to in Arena Management Pty Ltd (Receiver and Manager Appointed) Pty Ltd v Campbell Street Theatre Pty Ltd [2011] NSWCA 128; 80 NSWLR 652 at [104] – [121]. After reviewing authorities in England and different Australian states, Campbell JA did not express a preference for a particular approach, it being unnecessary for the decision in that case. It is unnecessary for this Court to resolve this question as, for the reasons that follow, I am of the view that, if required, leave to appeal should be granted and the appeal be allowed with no order as to costs.”

21. Although I am inclined to the view that Mr Newell and Mr Muriniti need leave to appeal, it is not necessary to finally determine that question, as I consider that leave should be granted if required. The proceedings before the Court raise significant questions of principle, including questions of the circumstances in which it is appropriate to make an order against legal practitioners under either or both of the Legal Profession Act, s 348 and the Civil Profession Act, s 99. The outcome of these proceedings will also have significant consequences for the professional reputations of Mr Newell and Mr Muriniti: Rodi v Gelonesi [2012] NSWCA 424 at [24]; Collier v Lancer (No 2) [2013] NSWCA 186 at [7]; Lee v New South Wales Crime Commission (2012) 224 A Crim R 94; [2012] NSWCA 262 at [12]. Accordingly, this an appropriate case in which to grant leave to appeal, should leave be required.

Issues on the appeal

22. Mr Newell and Mr Muriniti raised the following issues in their notice of appeal:

1. Whether his Honour erred in finding that they were liable, pursuant to the Legal Profession Act, s 348, to provide an indemnity to the De Costi parties on account of the costs occasioned by the claim against Androulla Costi: appeal ground 1(a);

2. Whether his Honour erred in the approach he adopted for quantifying the extent of that indemnity: appeal ground 1(b);

3. Whether his Honour erred in finding that they were liable, pursuant to the Civil Procedure Act, s 99, to provide an indemnity against costs payable by the De Costi parties: appeal ground 2(a);

4. Whether his Honour erred in the means he adopted for quantifying the extent of that indemnity: appeal ground 2(b); and

5. Whether his Honour erred in drawing adverse inferences against them in accordance with the principle in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8: appeal ground 3.

23. The De Costi parties cross-appealed against his Honour’s determination as to the quantum of the indemnity ordered in respect of Androulla Costi.

24. Mr Newell and Mr Muritini were separately represented on the appeal and cross-appeal. However, to the extent applicable, their respective counsel divided the submissions so as to avoid duplication. In general terms, that division involved senior counsel for Mr Newell making submissions on broader issues of principle and counsel for Mr Muriniti dealing with the appeal grounds in greater detail. Accordingly, when reference is made in these reasons to the respective submissions of Mr Newell and Mr Muriniti, they are to be read in that light.

Legislative provisions

25. The Legal Profession Act provided, relevantly:

“345   Law practice not to act unless there are reasonable prospects of success

(1)   A law practice must not provide legal services on a claim or defence of a claim for damages unless a legal practitioner associate responsible for the provision of the services concerned reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim or the defence (as appropriate) has reasonable prospects of success.

(2)   A fact is provable only if the associate reasonably believes that the material then available to him or her provides a proper basis for alleging that fact.

(3)   This Division applies despite any obligation that a law practice or a legal practitioner associate of the practice may have to act in accordance with the instructions or wishes of the client.

(4)   A claim has reasonable prospects of success if there are reasonable prospects of damages being recovered on the claim. A defence has reasonable prospects of success if there are reasonable prospects of the defence defeating the claim or leading to a reduction in the damages recovered on the claim.

(5)   Provision of legal services in contravention of this section constitutes for the purposes of this Division the provision of legal services without reasonable prospects of success.

…

348   Costs order against law practice acting without reasonable prospects of success

(1)   If it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success, the court may of its own motion or on the application of any party to the proceedings make either or both of the following orders in respect of the practice or of a legal practitioner associate of the practice responsible for providing the services:

…

(b)   an order directing the practice or associate to indemnify any party other than the party to whom the services were provided against the whole or any part of the costs payable by the party indemnified.

….

(3)   An application for an order under this section cannot be made after a final determination has been made under this Part by a costs assessor of the costs payable as a result of an order made by the court in which the proceedings on the claim concerned were taken.

(4)   A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section.

349   Onus of showing facts provided reasonable prospects of success

(1)   If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.

…

(3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success.

(4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if:

(a)   the client is the client to whom the legal services were provided or consents to its disclosure, or

(b)   the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section.”

26. The Civil Procedure Act provided, relevantly:

“99   Liability of legal practitioner for unnecessary costs

(1)   This section applies if it appears to the court that costs have been incurred:

(a)   by the serious neglect, serious incompetence or serious misconduct of a legal practitioner, or

(b)   improperly, or without reasonable cause, in circumstances for which a legal practitioner is responsible.

(2)   After giving the legal practitioner a reasonable opportunity to be heard, the court may do any one or more of the following:

…

(c)   it may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party.

(3) Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Part 7 of the Legal Profession Uniform Law Application Act 2014) for inquiry and report.

(4)   The court may direct that notice of any proceedings or order under this section with respect to a legal practitioner be given:

(a)   in the case of a barrister, to the instructing solicitor or client, or both, as the court may direct, or

(b)   in the case of a solicitor, to the client.

(5)   The court may give ancillary directions to give full effect to an order under this section, including directions to a legal practitioner to provide a bill of costs in assessable form:

(a)   to the court, or

(b)   to a party to the proceedings, or

(c)   in the case of a barrister, to the instructing solicitor or client, or both, or

(d)   in the case of a solicitor, to the client.

…

(7)   In this section, client includes former client.”

Primary judge’s earlier credit findings: De Costi Seafoods (No 3)

27. Before dealing with the primary judge’s reasons for decision in De Costi Seafoods (No 6), it is relevant to refer to his Honour’s findings as to Mr Wachtenheim’s credit, made in the judgment on the cross-claim. In De Costi Seafoods (No 3), the primary judge found, at [67], that Mr Wachtenheim was “entirely discredited as a witness and that his evidence could not be relied upon”. This finding, as his Honour observed, “created a substantial impediment” to Mr Wachtenheim being able to establish that the misrepresentations he alleged had been made.

28. Leading up to this finding, his Honour had referred to aspects of Mr Wachtenheim’s evidence that he found demonstrated Mr Wachtenheim to be “less than frank in his evidence and morally obtuse”: at [46]; to have engaged in a “deliberate falsehood to procure a substantial loan”: at [47]; to have given evidence that was “an invention”: at [53]; and that he had “falsely maintained” in an affidavit that all the receipts of the business were banked: at [54]. His Honour observed, at [60], that although the false affidavits Mr Wachtenheim had sworn in the proceedings had been corrected before trial, the evidence disclosed that that had been done only because the De Costi parties were aware of all of the evidence which would have exposed him to cross-examination had he not corrected his evidence. His Honour did not accept that the corrections were made because of a desire on the part of Mr Wachtenheim to correct an innocent mistake.

Primary judge’s reasons: De Costi Seafoods (No 6)

29. In De Costi Seafoods (No 6), being the judgment the subject of the appeal, his Honour identified three matters for determination in relation to the claim for indemnity pursuant to s 348: first, whether there was evidence sufficient to displace the presumption he had found in De Costi Seafoods (No 4) that the legal services provided in the cross-claim proceedings against Androulla Costi were provided without reasonable prospects of success; second, whether the fact that Androulla Costi did not personally pay any costs precluded an order for recovery of the costs of the action against her; and third, whether the action against Androulla Costi was a minor part of the proceedings and what proportion of the costs of the proceedings was attributable to that action. The claim for indemnity under s 99 also fell for determination.

30. Neither Mr Newell nor Mr Muriniti gave evidence. His Honour observed, at [9], that no reason had been advanced to explain or excuse their failure to do so and stated that he “must infer, in accordance with Jones v Dunkel, that the evidence could not have assisted their case”.

31. In relation to the first question identified above, the primary judge, at [14], found that there were no provable facts to provide a foundation for an arguable case of unconscionable conduct against Androulla Costi, or a proper basis for alleging such a cause of action. Accordingly, his Honour found that the presumption under s 349(1) was not displaced.

32. His Honour held, at [16], that s 345(1) was contravened so that, pursuant to s 345(5), legal services in respect of the claim against Androulla Costi were provided without reasonable prospects of success, which in turn enlivened the discretion to make an order under s 348(1)(b). In response to Mr Muriniti’s submission that Androulla Costi had not, in fact, paid any costs to her legal representatives, his Honour, at [22], observed that that submission assumed that it was Androulla Costi who was the party indemnified, whereas s 348(1)(b) referred to “any party”. His Honour found no reason to read down the words “any party” to refer only to Androulla Costi.

33. Accordingly, whilst his Honour was of the view that the indemnity under s 348(1)(b) should be limited to the costs connected with the baseless claim against Androulla Costi, he considered, at [27], that on the proper construction of s 348(1)(b), the indemnity was not restricted to an order in her favour. Rather, an order “in favour of any party (other than the party to whom the services were provided) [could] be made”. It followed on his Honour’s view that it was immaterial that Androulla Costi had not personally paid the costs and that s 348(1)(b) permitted an order in favour of the De Costi parties in respect of the costs of the claim against her.

34. His Honour next dealt with the question whether the costs of defending the claim against Androulla Costi were minor. His Honour considered, at [30], that the claim against Androulla Costi was “not trivial” and observed that the claimed damages, which he described as “substantial”, were the same as those claimed against the other De Costi parties, so that all issues as to damages were part of the case against her. His Honour stated that this included the credit issues that arose in respect of the evidence of major witnesses in the case, such as Mr Wachtenheim, Ross McGowan, Richard Mare and Mr Theodore. Mr McGowan and Mr Mare, who were former employees of the De Costi companies, were witnesses called in Mr Wachtenheim’s case.

35. His Honour observed that Androulla Costi was required to swear four substantial affidavits, that she was cross-examined extensively and that she was referred to on 13 pages of the sixth further amended statement of claim. His Honour also noted that the appellants had not attempted to identify any portion of the evidence or the time spent at trial that was not relevant to the claim against her.

29. His Honour considered, at [31], that the costs of the claim against Androulla Costi “should be treated as an equal portion of the whole of the costs of the proceedings”, which he determined to be 20 per cent of the costs of the cross-claim against the De Costi parties, on the basis that the De Costi parties comprised five parties.

30. His Honour, at [33], determined that, subject to his decision in respect of s 99, an order should be made under s 348 directing Mr Newell and Mr Muriniti to indemnify the De Costi parties for the costs of the claim against Androulla Costi, being 20 per cent of the cost of the proceedings.

First issue on the appeal: whether his Honour erred in finding that the appellants were liable, pursuant to the Legal Profession Act, s 348, to provide an indemnity against costs payable by the De Costi parties: appeal ground 1(a)

38. The appellants did not challenge his Honour’s finding that the proceedings against Androulla Costi were commenced without reasonable prospects of success. However, they challenged his Honour’s finding that they were liable to indemnify the De Costi parties for the costs they had incurred, being an amount equivalent to 20 per cent of the costs incurred in the proceedings.

39. The appellants submitted that on its proper construction, s 348(1)(b) only applied to a person who had the benefit of a finding that proceedings were commenced against the person without reasonable cause , where that person had an actual liability to pay costs in defending the claim. They submitted that the first of these qualifications was not satisfied, as the other De Costi parties did not have the benefit of a finding to that effect. As to the second qualification, the appellants submitted that the word “indemnify” in s 348 bore its ordinary meaning, namely, a liability to compensate for an actual loss. The appellants acknowledged that an indemnity could operate prospectively, but that it only crystallised if there was an actual liability. This in turn led to a consideration of the meaning of the word “payable” in s 348. The appellants submitted that on its ordinary meaning, “payable suggests that there must be an actual liability to pay something”.

40. The appellants submitted that it was common ground that there were no costs payable by Androulla Costi. They also relied upon the fact that notwithstanding that she had every opportunity to do so, Androulla Costi did not adduce any evidence of a personal liability to pay costs to her legal representatives, including any evidence of an agreement that she had entered into in respect of costs. Nor did she adduce evidence of any liability to account to the other De Costi parties for any costs they may have paid.

41. The appellants submitted that the construction given to s 348(1) by the primary judge undermined the purpose of the statutory provision. They submitted that the practical effect of the order made by his Honour was to provide a partial indemnity to the other De Costi parties in circumstances where they had not established the necessary precondition to entitle them to an order under s 348(1)(b), namely, that proceedings had been commenced against them without reasonable prospects of success.

42. The De Costi parties at all times acknowledged that Androulla Costi did not personally pay any costs to her legal representatives in respect of the claim and that all costs incurred were paid by a single corporate entity. However, they denied that it was common ground between the parties that there were no costs “payable” by Androulla Costi. In their submission, the fact that costs are met by another party does not mean that there is no actual liability in respect of costs arising from the claim brought against a party without reasonable prospects of success. They argued that if the construction for which the appellants contended was correct, significant injustice would be rendered in circumstances where there were multiple parties and the costs of their representation was met by one party.

Consideration

43. The starting point for the consideration of appeal ground 1(a) is the proper construction of s 348(1). In accordance with the established principles of statutory construction, it is necessary to begin with a consideration of the text. As the plurality stated in Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41, at [47]:

“… The language which has actually been employed in the text of legislation is the surest guide to legislative intention.”

44. More recently, in SZTAL v Minister for Immigration and Border Protection (2017) 347 ALR 405; [2017] HCA 34 the plurality explained, at [14], that:

“The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.” (footnotes omitted)

See also Gageler J at [37].

45. Having regard to these principles, it is necessary to turn to the terms of s 348(1). Section 348(1) has a number of elements. First, it applies where a court has determined that a law practice has provided legal services to a party on a claim for damages “without reasonable prospects of success”. The primary judge made that finding in respect of the legal services provided by the appellants to the Wachtenheim parties in respect of the claim against Androulla Costi. That is not in contest on the appeal.

46. The second element, relevantly, is that the court may make an order on the application of “any party”, directed to the law practice or associate of the law practice. The third element is that the order that the court may make is to indemnify “any party … against the whole or any part of the costs payable by the party indemnified”.

47. In my opinion, this language does not constrain the making of an order for indemnity in respect of costs only in favour of the person against whom proceedings were brought without reasonable prospects of success. It permits a costs order in favour of “any party”. That party must have a liability for or have paid the costs that were incurred in respect of proceedings brought without reasonable prospects of success. The text of the provision does not require that the party in whose favour an indemnity order is made be the party against whom proceedings were brought without reasonable cause. This is clear from the concluding words of para (b) of s 348(1).

48. If the construction for which the appellants contended were correct, it would be expected that the legislature would have said so by the use of a phrase such as “costs payable by the person against whom the proceedings were brought without reasonable cause”. However, that is not the language used. The section provides that an order may be made to indemnify “the whole or part of the costs payable by the party indemnified”.

49. There is nothing in the context or purpose of the section that compels or even indicates a different construction. In this regard, I accept the submission of the De Costi parties that significant injustice would be rendered in circumstances where there were multiple parties and the costs of their representation was met by one party, or some only of the parties.

50. In my opinion, ground 1(a) of the appeal should be rejected.

Second issue on the appeal: whether his Honour erred in quantifying the extent of the indemnity: appeal ground 1(b)

51. The appellants submitted that if his Honour’s construction of s 348(1)(b) was correct, he nonetheless erred, at [31], in determining that “the costs of the claim against [Androulla Costi] should be treated as an equal portion of the whole of the costs of the proceedings”. In this regard, the appellants submitted that there was a “disjunct” between the reasons given by the primary judge, especially at [30], where his Honour gave reasons why the claim against Androulla Costi was not trivial, and the quantification of the costs at 20 per cent of the whole of the costs incurred by the De Costi parties, that assessment being solely based upon Androulla Costi being one of five parties.

52. The appellants further contended that his Honour’s approach was unsupported by authority and in any event was flawed, as the section required that specific attention be paid to the likely costs incurred or wasted by reason of the joinder. In this regard, the appellants pointed out that any costs in joining Androulla Costi would have been negligible, that the claim against her was a minor part of the proceedings and that even had she not been a party to the proceedings, she was an important witness and would have given evidence in any event.

53. The appellants submitted that his Honour took an impermissibly broad approach to the section. They contended that the proper approach to an order for indemnity under s 348 was the same as that required under s 99, namely, that the indemnity was in respect of costs thrown away or lost by reason of the impugned conduct. In other words, it was only the extent to which costs were increased by the bringing of the proceedings against a party without reasonable cause that may be the subject of an order under the section and that the order could only be made in favour of that party.

54. Mr Muriniti submitted that, at the least, there should have been evidence that costs were wasted. He cited, by way of example, that there could have been evidence of costs incurred in obtaining instructions on the claim against Androulla Costi that ought not to have been incurred as the claim was brought without reasonable prospects of success. Mr Newell submitted that an appropriate approach for his Honour to have taken was to refer the matter out to a costs assessor to determine what costs, if any, were ‘wasted’ as a result of the joinder of Androulla Costi.

55. The De Costi parties supported his Honour’s reasoning and submitted that his Honour’s determination that the claim against Androulla Costi should be treated as an equal portion of the whole of the De Costi’s costs was “sound, clear and appropriate”.

Consideration

56. Pursuant to s 348(1)(b), if it is found that legal services were provided in respect of a claim that did not have reasonable prospects of success, the court may make an order against the law practice or legal practitioner or associate responsible for providing the service directing that the practice or associate “indemnify … against the whole or any part of the costs payable by the party indemnified”.

57. The purpose of s 348(1)(b) was to impose a costs sanction on a law practice or practitioner who provided legal services in respect of a proceeding which ought not to have been brought because it did not have reasonable prospects of success. The phrase “reasonable prospects of success” is not defined in the Legal Profession Act, although s 345 provides some guidance as to its meaning. It is not a high or inflexible bar as Barrett J (as his Honour then was) explained in Degiorgio v Dunn (No 2) (2005) 62 NSWLR 284; [2005] NSWSC 3 (his Honour’s judgment was in respect of the former s 198M(1), the terms of which were substantially the same as the present s 348). As Barrett J observed in that case, at [28]:

“... ‘without reasonable prospects of success’ ... equates its meaning with ‘so lacking in merit or substance as to be not fairly arguable’. The concept is one that falls appreciably short of ‘likely to succeed’.”

58. His Honour's reasons were approved by this Court in Lemoto v Able Technical Pty Ltd at [131]-[132]. See also Fowler v Toro Constructions Pty Ltd [2008] NSWCA 178 and Keddie v Stacks/Goudkamp Pty Ltd (2012) 293 ALR 764; [2012] NSWCA 254 at [58].

59. If proceedings were brought against one party only and found not to have reasonable prospects of success, the court could order that, subject to any determination by the court that part only of the costs of that party ought to be indemnified, then all the costs incurred by that party in defending the claim would be subject to the indemnity. Such costs are often referred to as ‘wasted costs’, a convenient enough label. However, I would prefer to use the terminology of the costs that are to be indemnified under the section.

60. The position may not be as straightforward where the claim is brought against more than one party. If the claim against all parties had no prospect of success and the parties were separately represented, then, again, subject to the court determining that part only of the costs that were incurred in defending the claim were to be indemnified, each party would be entitled to be indemnified for the costs of defending the claim.

61. The present case is different from either of those two straightforward examples. The claim against one of several defendants, Androulla Costi, has been held to have had no reasonable prospects of success. She was one of the De Costi parties amongst whom there were corporate and familial relationships: see at [4] above. Those parties decided to engage the services of one law practice and one counsel to represent all of them.

62. However, it does not follow that, because there were five defendants, 20 per cent of the costs of the whole claim were “costs payable” in respect of the claim against Androulla Costi. The following simple example illustrates why this is so. Having regard to the findings in favour of Androulla Costi in De Costi Seafoods (No 4), the conference time required to take instructions and a witness statement would have been limited, and in particular, limited relative to the time required in respect of those of the De Costi parties involved in dealing with the Wachtenheim parties in relation to the franchise. In addition, the factual and legal issues involved in respect of the corporate liability of the De Costi companies, which may have been different as between them, would not, on the findings made, have involved Androulla Costi in De Costi Seafoods (No 4).

63. In follows, in my opinion, that his Honour erred in his determination that the costs of the claim against Androulla Costi should be treated as an equal portion of the whole of the costs of the proceedings. There were a number of orders that his Honour could have made so that the costs attributable to the claim against Androulla Costi were indemnified. One could simply have been an order that the appellants pay the costs of the proceedings insofar as they related to the claim against Androulla Costi on an indemnity basis. That would have left the parties to either agree to what those costs were or to have those costs assessed. Alternatively, his Honour could have referred the quantification of those costs to an expert costs assessor pursuant to the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 20.14. In my opinion, nothing in s 348(3) would have prevented his Honour from taking that course, the application for the order under s 348 having already been made.

64. However, as none of those steps were taken, there is a question as to what orders this Court ought to make in the circumstances. I deal with that question later in these reasons.

65. It follows, in my opinion, that ground 1(b) of the appeal should be allowed. It also follows that it is unnecessary to determine the De Costi parties’ cross-claim.

Third and fifth issues on the appeal: whether his Honour erred in finding that the appellants were liable, pursuant to the Civil Procedure Act, s 99, to provide an indemnity against costs payable by the De Costi parties: appeal ground 2(a); whether his Honour erred in drawing adverse inferences against the appellants in accordance with the principle in Jones v Dunkel: appeal ground 3

66. The De Costi parties, in the proceedings before the primary judge, relied upon the following matters to establish “serious neglect, serious incompetence or serious misconduct” within the meaning of s 99(1)(a): first, the multiple versions of the cross-claim; second, the form of the pleaded representations and particulars; third, that the cross-claim was inconsistent with the evidence; fourth, that the matter was poorly prepared, irrelevant, false, and based upon improper evidence; fifth, there had been a failure to produce documents; sixth, there had been inappropriate dealing with witnesses; and seventh, that there had been serious allegations of impropriety without a proper basis.

67. His Honour upheld each allegation. These matters are dealt with in detail below. It is sufficient at this point to note his Honour’s conclusion, at [94]:

“… there is a proper basis for a costs order on three bases:

(a)   Specifically in respect of the costs attributable to the action against Mrs Costi under s 348 of [the Legal Profession Act], which I have assessed as 20% of the costs of the claim. That same conduct of providing legal services for a baseless claim against Mrs Costi is serious misconduct that would justify a similar order under s 99 of [the Civil Procedure Act].

(b)   Specifically in respect to the evidence of Mr Shnider. The basis for such an order rests upon the illegal recording and its use, the inappropriate joint conference, and the false and unsupported allegations of impropriety. Mr Shnider’s evidence consumed nine days of the trial, about 12% of the total.

(c)   The other unexplained incidences of serious misconduct, serious neglect and serious incompetence identified earlier in this judgment, in particular, the inappropriate preparation of a false affidavit by Mr Wachtenheim and the improper instructions given to Mr Birrell and Mr Dent, but also the excessive amendments, the prolixity of the pleadings, the causes of action pleaded which were unsupported by evidence, the volume of irrelevant, ill-prepared or improperly prepared evidence and the nonproduction of documents.”

68. As a significant portion of the appellants’ challenge to his Honour’s findings of serious neglect, serious incompetence or serious misconduct was based on their challenge to his Honour’s drawing of a Jones v Dunkel inference, the third and fifth challenge fall to be considered together. Before looking at his Honour’s specific findings, it is appropriate first to make certain observations by way of overview about the proceedings, next to consider the proper construction of the Civil Procedure Act, s 99 and the principles that govern the jurisdiction to make an order under that section, next to consider the principle in Jones v Dunkel and then to consider whether the appellants were constrained in the evidence they might have been able to give by legal professional privilege.

Overview of proceedings

69. The orders made by his Honour were based upon the time taken for the hearing of the Wachtenheim parties’ cross-claim over and above what his Honour considered was reasonable. The following is an overview of the proceedings as they were conducted before his Honour:

1. The matter had been set down for hearing for a period of 10 weeks. At the time that it was set down for hearing, all parties had agreed that this was a reasonable estimate.

2. The hearing took 75 hearing days.

3. 60 affidavits were served by the Wachtenheim parties.

4. 35 subpoenas (other than subpoenas to give evidence) were served by the Wachtenheim parties.

5. The first 13 days of the hearing were spent dealing with objections to evidence and other procedural matters.

6. The Wachtenheim parties called 24 witnesses. Cross-examination of those witnesses took 34 days.

7. The voir dire examination took place over three days. Mr Newell accepted that the costs involved in the voir dire were costs that could properly be ordered against him.

1. More than a day was spent dealing with the Wachtenheim parties’ application to file a sixth further amended cross-claim.

2. Closing addresses occupied nine days.

3. The evidence of the other franchisees involved nine witnesses, 17 affidavits and about 400 pages and many folders of exhibits.

70. The time spent in dealing with the objections to evidence referred to in [69](5) above needs to be considered in the context where the substantive hearing of the Wachtenheim parties’ cross-claim had been subject of a pre-trial process dealing with the admissibility of certain evidence, particularly that of the other franchisees, as tendency or coincidence evidence: see the Evidence Act 1995 (NSW), s 192A. That process, which involved objections to 28 affidavits, was heard by Johnstone DCJ over three days. None of Mr Wachtenheim’s affidavits were subject to that application. Johnstone DCJ excluded all or some of the evidence in seven affidavits. When the matter came before the primary judge, the De Costi parties sought to re-agitate the rulings on the objections on the basis that they were not bound by them. They submitted to the primary judge that it was open to him to make rulings on the objections to the affidavit evidence regardless of the fact that the objections had previously been subject to rulings by a different judge. That application was acceded to by the primary judge.

Construction of s 99

71. Section 99, insofar as it is relevant to this case, applies where costs have been incurred “by the serious neglect, serious incompetence or serious misconduct of a legal practitioner” (the serious misconduct), in which case the court may, by order, direct the legal practitioner to indemnify any party (other than the client) against costs payable by that party. There is thus a causation requirement in the section. It is not sufficient that there be conduct which falls within any of the three matters with which the section deals. Such conduct must have caused costs to have been incurred that would not otherwise have been incurred but for that conduct. Before making such an order, the court may refer the matter to a costs assessor (within the meaning of Pt 7 of the Legal Profession Uniform Law Application Act 2014 (NSW)) for inquiry and report.

72. The order that a court may relevantly make under the section is an order that a legal practitioner “indemnify” a party against the costs payable by that party. In my opinion, the word “indemnify” bears its ordinary meaning, namely, that it is an indemnity for loss. However, the order that may be made is only in respect of costs that are “payable by” the party to be indemnified. In this respect, I consider that “payable” means that the party to be indemnified has an obligation to pay costs. However, I consider that an order could be made under this provision where there was an arrangement in place as between a party, a third entity and the party’s legal representative for the payment of the costs.

73. It should also be noted that the De Costi parties bore the onus on the notice of motion to establish that s 99 was engaged because “costs [had] been incurred by the serious neglect, serious incompetence or serious misconduct of a legal practitioner”. The De Costi parties did not call expert evidence in the matter, but rather relied upon the objective circumstances of the trial which were the subject of the seven specific matters of impugned conduct. It was thus necessary for his Honour to make his own assessment as to whether it “appear[ed]” that the conduct particularised involved “serious neglect, serious incompetence or serious misconduct”. The appellants did not suggest that this course was not open to his Honour.

74. His Honour’s approach reflected authority to that effect. In Attard v James LegalPty Ltd (2010) 80 ACSR 585; [2010] NSWCA 311, Tobias JA (myself and Giles JA agreeing) stated, at [131]:

“In this context it may be noted that it is now well established that on the questions of professional legal practice, particularly in professional negligence cases, and except possibly, but not necessarily, in specialist legal areas, a court does not need expert evidence to be advanced as to the appropriate professional standards from which it is alleged a defendant has departed. The court can resort to its own knowledge of such practices: Neagle v Power [1967] SASR 373 at 376 per Bray CJ; Dickson v Creevey [2002] QCA 195 at [15] per Holman J (McPherson JA and Mullins J agreeing); Keesing v Adams [2010] NSWSC 336 at [35] per Brereton J.

75. The question of his Honour’s approach in assessing the quantum of costs raises different questions and is the subject of the fourth issue on the appeal: ground 2(b).

Principles governing the jurisdiction to make orders under s 99

76. The principles governing the exercise of the court’s power to make costs orders against legal practitioners were summarised by McColl JA in Lemoto v Able Technical at [92] and again in Kelly v Jowett (2009) 76 NSWLR 405; [2009] NSWCA 278 at [60]. The jurisdiction is to be exercised with care and only in a clear case. The procedure adopted should be “as simple and summary as fairness permits ... measured in hours, and not days or weeks”. Of particular relevance to this case are the observations in Lemoto v Able Technical, at [92], that:

“…

(c)   the legal practitioner is not ‘the judge of the credibility of the witnesses or the validity of the argument’ … the legal practitioner is not ‘the ultimate judge, and if he reasonably decides to believe his client, criticism cannot be directed to him’ …:

…

(f)   Where a legal practitioner’s ability to rebut the complaint is hampered by the duty of confidentiality to the client he or she should be given the benefit of the doubt …; in such circumstances ‘[t]he court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so’…” (citations omitted)

77. Observations to similar effect were made by Bingham LJ in Medcalf v Mardell [2003] 1 AC 120 at [23] to which reference is made below.

Jones v Dunkel

78. The rule in Jones v Dunkel applies where there is an unexplained failure of a party to give evidence or to call a witness. Such failure may have either or both of the following consequences in the fact finding process. It “may lead rationally to an inference that the evidence would not help that party’s case”: Jones v Dunkel at 321; Holloway v McFeeters (1956) 94 CLR 470; [1956] HCA 25 at 480-481. It also enables the court more readily to draw an affirmative inference in support of the opposing party’s case: Commonwealth of Australia v McLean (unreported, NSW Court of Appeal, 31 December 1996); Manly Council v Byrnes [2004] NSWCA 123 at [51]; Carolyn Sappideen and Prue Vines, Fleming’s Law of Torts (10th ed, 2011, Lawbook Co) at 13.50.

79. His Honour first referred to Jones v Dunkel at [9] of his reasons in De Costi Seafoods (No 6). At that stage, his Honour was dealing with the question whether there was evidence to displace the presumption that he had found arose under s 349 that the legal services were provided to the Wachtenheim parties on the claim against Androulla Costi without reasonable prospects of success: see De Costi Seafoods (No 4). Having observed that no reason was advanced to explain or excuse why the appellants had not given evidence, his Honour stated “I must infer, in accordance with Jones v Dunkel, that their evidence could not have assisted their case”.

80. If, by that statement, his Honour meant that the rule in Jones v Dunkel required him to draw the inference, not only that he might draw the inference, then, with respect, that was a misstatement of the rule. There is no such requirement to draw the inference. Rather, as I have explained, the rule in Jones v Dunkel allows for a form of inferential reasoning that is available to a judge in determining the facts upon which a case is to be decided. However, if his Honour meant no more than that, in the circumstances with which he was dealing, it was appropriate to draw the inference that their evidence would not assist their case (thus explaining his Honour’s use of the phrase “must infer”), then there was no misstatement of the relevant rule. However, on balance, I consider that his Honour’s language indicates that he considered that as the circumstances enabled him to draw the inference, the inference thereby was required to be drawn.

81. The appellants complained that having misstated the rule at the outset, his Honour’s subsequent application of the principle when dealing with the various bases upon which he concluded that there had been “serious misconduct, serious neglect or serious incompetence” within the meaning of s 99(1)(a) was erroneous. Whether this is so, or alternatively whether the Court exercising its appellate function by way of rehearing pursuant to the Supreme Court Act 1970 (NSW), s 75A(5) would come to the same or a different conclusion as the primary judge on a correct application of the rule, requires an examination of the primary judge’s reasons in relation to each of the seven particulars of “serious misconduct, serious neglect or serious incompetence” that his Honour found to have been established. That examination is undertaken below in detail at [97]ff.

Were the appellants constrained from giving evidence because their communications with Mr Wachtenheim were protected by legal professional privilege?

82. The appellants also contended that it was impermissible for the primary judge to draw any Jones v Dunkel inference at all, in circumstances where they were each prevented from giving evidence because of a claim for legal professional privilege asserted by Mr Wachtenheim. In that respect, the appellants relied upon the observations of Bingham LJ in Medcalf v Mardell.

83. Mr Newell and Mr Muriniti differed to some extent as to whether there was evidence that Mr Wachtenheim had maintained privilege in respect of their communications and in respect of some, at least, of the documents they had in their possession. Mr Muriniti, for his part, contended that the correspondence between his solicitors and Mr Wachtenheim’s solicitor demonstrated that although Mr Wachtenheim’s consent to waive privilege had been sought, that consent had not been forthcoming.

84. In oral submissions, Mr Newell accepted that there was no direct evidence that the reason he was unable to give evidence was because there had been no waiver of privilege but submitted it was a matter of speculation as to how any claim for privilege might have affected the appellants’ ability to give evidence.

85. The De Costi parties did not contend that privilege had not been waived. Rather, without making any concession, their submission proceeded on the basis that if privilege existed, it was not apparent how that could have prevented the appellants from meeting all aspects of the individual claimed breaches of s 99. In their oral submissions, the De Costi parties submitted that Medcalf v Mardell would not apply in the circumstances.

86. The questions of legal professional privilege and lawyers’ duty of confidentiality to their clients which can arise where costs are claimed against a legal practitioner, which, as I have indicated, is sometimes called the ‘wasted costs’ jurisdiction, was considered in Ridehalgh v Horsefield [1994] Ch 205. The Court of Appeal (Bingham MR, Rose and Waite LJJ) observed, at 237, that:

“… the respondent lawyers may find themselves at a grave disadvantage in defending their conduct of proceedings, unable to reveal what advice and warnings they gave, what instructions they received. … Judges who are invited to make or contemplate making a wasted costs order must make full allowance for the inability of respondent lawyers to tell the whole story. Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order.”

87. This observation was adopted in Medcalf v Mardell at [23], in which Lord Bingham considered it appropriate to emphasise two matters arising from Ridehalgh v Horsefield. First, where, in the absence of a waiver by the client, the practitioner is precluded by reason of legal professional privilege from giving an account of the instructions and material received at the time of settling the impugned document, the court “must be very slow to conclude that a practitioner could have had no sufficient material”. His Lordship considered that:

“Only rarely will the court be able to make ‘full allowance’ for the inability of the practitioner to tell the whole story or to conclude that there is no room for doubt in a situation in which, of necessity, the court is deprived of access to the full facts on which, in the ordinary way, any sound judicial decision must be based.”

88. The second matter emphasised by Bingham LJ was that:

“The court should not make an order against a practitioner precluded by legal professional privilege from advancing his full answer to the complaint made against him without satisfying itself that it is in all the circumstances fair to do so. This reflects the old rule, applicable in civil and criminal proceedings alike, that a party should not be condemned without an adequate opportunity to be heard. Even if the court were able properly to be sure that the practitioner could have no answer to the substantive complaint, it could not fairly make an order unless satisfied that nothing could be said to influence the exercise of its discretion. Only exceptionally could these exacting conditions be satisfied.”

89. Thus, his Lordship concluded that:

“Where a wasted costs order is sought against a practitioner precluded by legal professional privilege from giving his full answer to the application, the court should not make an order unless, proceeding with extreme care, it is (a) satisfied that there is nothing the practitioner could say, if unconstrained, to resist the order and (b) that it is in all the circumstances fair to make the order.”

90. The appellant’s reliance on the considerations to which reference was made in Ridehalgh v Horsefield and Medcalf v Mardell begs the question whether their communications with Mr Wachtenheim were protected by legal professional privilege. This needs to be considered at the outset.

91. On 9 June 2015, Mr Muriniti’s solicitors wrote to Mr Wachtenheim seeking his consent to waive privilege over those parts of the file that were subject to legal professional privilege. Mr Muriniti stated that if privilege was waived, material in the file that was otherwise confidential may become available to other parties in the proceedings. Mr Muriniti wrote to Mr Wachtenheim again on 15 June 2015, stating that the file had been reviewed and that previously, on 30 May 2013, Mr Wachtenheim had filed an authority waiving privilege over the file to the appellants. The letter noted that Mr Wachtenheim may not have had independent legal advice at the time that he gave the authority and asked whether he was “still content to provide this authority”. Not having received a response, the solicitors for Mr Muriniti wrote again on 30 June 2015, asking for a response as soon as possible. It should be noted that the authority waiving privilege was not in evidence before the primary judge. It was indicated that it could be made available to this Court, but that did not occur.

92. On 31 July 2015, a response was received from solicitors stating that they acted for Mr Wachtenheim “for the limited purpose of assessing whether it is in his best interests to release that file as requested”. The file comprised many, many boxes of material. However, notwithstanding a number of telephone calls, the boxes of material were not inspected by Mr Wachtenheim’s solicitors and there was no response to an email of 6 October 2015 and a letter dated 12 October 2015 from Mr Muriniti’s solicitor to those solicitors.

93. It was suggested in the course of argument on the appeal that Mr Wachtenheim’s written authority in 2013 was directed to the appellants only. I am not sure I understand the relevance of that argument. But in any event, there may be a question as to whether the authority, having been given, Mr Wachtenheim could withdraw his consent to the use of privileged material by the appellants and whether he did withdraw that consent. Those questions were not agitated before the primary judge and were not answered satisfactorily when raised on the appeal. It may be that the terms of Mr Wachtenheim’s solicitors’ letter of 31 July 2015 were such as to purportedly withdraw the authority to use privileged material. However, it is by no means certain that that was the case. But in any event, at common law, the relevant principle is that once privileged material is disclosed in circumstances whereby privilege was lost, the privilege cannot be regained. As Kirby J stated in Ampolex Limited v Perpetual Trustee Company (Canberra) Limited (1996) 137 ALR 28; [1996] HCA 15 at [7]:

“Once that advice is disclosed, particularly if disclosed to all parties in a public trial, the genie cannot be returned to the bottle. The privilege is effectively lost. It cannot be retrieved.”

(See Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Limited (2013) 250 CLR 303; [2013] HCA 46, as to an accidental or inadvertent disclosure.)

94. Privilege is now governed by the Evidence Act, s 122(1), which provides that evidence of privileged communications or documents may be adduced where the client consents to the disclosure of that material. Section 122(2) provides that the client cannot claim privilege where it has acted in a way that is inconsistent with the client objecting to the disclosure of the privileged material. In my opinion, the provision of an authority waiving privilege constitutes conduct which is inconsistent with the maintenance of privilege under s 122(2).

95. However, in circumstances where the De Costi parties did not contend that privilege had been waived, I will proceed on the basis that, at the least, the communications between Mr Wachtenheim and the appellants were protected by legal professional privilege.

96. Against that background, it is now necessary to consider each of the individual matters that were the subject of his Honour’s findings.

The multiple versions of the cross-claim

97. There were 16 versions of the cross-claim comprising nine unfiled versions and seven filed versions. His Honour considered, at [45], that 16 versions of a cross-claim, whether filed or not, was “grossly excessive if unexplained”. His Honour, at [42], accepted that amendments to pleadings were common, but considered, at [45], that while three versions of a pleaded claim might be excused, the same could not be said of the service of 16 versions of a pleading if unexplained. His Honour considered that that:

“… raise[d] the possibility that the costs thrown away or occasioned by the amendments reflected in the fifth further amended statement of cross-claim and subsequent versions should be borne by the legal practitioners.”

98. His Honour, at [46], considered that the fact that a pleading had been verified by the client did not mean that it fell “outside the application of s 99”. His Honour noted at [47] that Mr Muriniti in his submissions had “ignored the assertion of service of eight draft versions of the fifth further amended statement of cross-claim”, by which I understand his Honour to mean that Mr Muriniti did not deny that assertion. His Honour, at [48], then stated that:

“… in the absence of explanation, the repeated serving of amended pleadings ultimately resulting in the filing of the fifth further amended statement of cross-claim suggests serious incompetence and, therefore, enlivene[d] the application of s 99.”

(4)    A law practice or legal practitioner associate of the practice is not entitled to demand, recover or accept from a client any part of the amount for which the practice or associate is directed to indemnify a party pursuant to an order under this section.

349   Onus of showing facts provided reasonable prospects of success

(1)    If the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.

(2)    If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.

(3) A presumption arising under this section is rebuttable and a person seeking to rebut it bears the onus of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success.

(4) A law practice or legal practitioner associate of the practice may, for the purpose of establishing that at the time legal services were provided there were provable facts (as provided by section 345 (Law practice not to act unless there are reasonable prospects of success)) that provided a basis for a reasonable belief that the claim or the defence on which they were provided had reasonable prospects of success, produce information or a document despite any duty of confidentiality in respect of a communication between the law practice or a legal practitioner associate of the practice and a client, but only if:

(a)    the client is the client to whom the legal services were provided or consents to its disclosure, or

(b)    the court is satisfied that it is necessary for the law practice or associate to do so in order to rebut a presumption arising under this section.”

263. Section 349(1) of the LPA stated the consequences if

“… the court (the trial court) hearing proceedings on a claim for damages finds that the facts established by the evidence before the court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success …” (Underlining added.)

264. By contrast s 348(1) sets out the orders that can be made “if it appears to a court in which proceedings are taken on a claim for damages that a law practice has provided legal services to a party without reasonable prospects of success”. (Emphasis added.)

265. By s 348(2) the Supreme Court may make an order under s 348(1) even though it was not the court in which the proceedings were taken. This reflects the Supreme Court’s disciplinary jurisdiction over the legal profession. Under s 349(2), if the Supreme Court is not the trial court, that is, if it is not the court hearing proceedings on a claim for damages, then, it may make a finding that gives rise to a rebuttable presumption that legal services were provided on a claim or defence which had no reasonable prospects of success. Such a finding is to be based on the judgment and findings of the trial court.

266. Section 349(1) does not provide that a court, other than the court hearing proceedings on a claim for damages or the Supreme Court, can make a finding that gives rise to a rebuttable presumption that legal services had been provided on a claim or defence without reasonable prospects of success. It does not provide that the court that has heard proceedings on a claim for damages can make such a finding.

267. Division 5C of Part 11 comprising ss 198J-198N of the Legal Profession Act 1987 (NSW) was introduced by the Civil Liability Act 2002 (NSW). Those sections were replicated in the Legal Profession Act 2004 and are again materially replicated in Schedule 2 to the Legal Profession Uniform Law Application Act 2014 (NSW). The context in which those provisions were introduced was that at common law a finding of fact by the trial judge in the proceeding in which the lawyer acted was admissible on the summary hearing of an application that the lawyer pay the whole or part of the successful party’s costs if, having regard to the solicitor’s connection with the proceedings, it was fair and just to do so (Brendon v Spiro [1938] 1 KB 176 at 192 per Scott LJ and at 195 per Swift J; Bahai v Rashidian [1985] 1 WLR 1337 at 1342.H-1343.A per Sir John Donaldson MR, at 1344.E-1344.F per Parker LJ; Symphony Group Plc v Hodgson [1994] QB 179 at 193.E-193.F per Balcombe LJ, 196.G per Staughton LJ; and Flinn v Flinn [1999] VSCA 134 at [4] ff).

268. In Symphony Group Plc v Hodgson Balcombe LJ said (at 193):

“(6)    The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action. Thus, subject to any relevant statutory exceptions, judicial findings are inadmissible as evidence of the facts upon which they were based in proceedings between one of the parties to the original proceedings and a stranger: see Hollington v. F. Hewthorn & Co. Ltd. [1943] K.B. 587; Cross on Evidence, 7th ed. (1990), pp. 100-101. Yet in the summary procedure for the determination of the liability of a solicitor to pay the costs of an action to which he was not a party, the judge's findings of fact may be admissible: see Brendon v. Spiro [1938] 1 K.B. 176, 192, cited with approval by this court in Bahai v. Rashidian [1985] 1 W.L.R. 1337 1343D, 1345H. This departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule.”

269. That statement of principle was endorsed by the Victorian Court of Appeal in Flinn v Flinn [1999] VSCA 134 at [4] and referred to by McColl JA in Lemoto v Able Technical Pty Ltd & Ors (2005) 63 NSWLR 300, 333 at [147]; [2005] NSWCA 153 (“Lemoto”).

270. Section 91 of the Evidence Act provides that evidence of a decision or of a finding of fact is not admissible to prove the existence of a fact that was in issue in that proceeding, even if that evidence is relevant for another purpose. It may be the case that, by reason of s 91 of the Evidence Act, findings of fact in the principal proceeding cannot be relied upon in an application for a wasted costs order, whether the application is made by the successful party against the solicitor for the unsuccessful party who might have been responsible for bringing a claim or defence that had no prospects of success or otherwise misconducted himself or herself, or whether it is brought by the unsuccessful party who both incurred costs and became liable to pay costs by fault of its lawyer. Whether that is the effect of s 91 is a question that has been raised but not determined (In the Matter of Condor Blanco Mines Ltd (No 3) [2017] NSWSC 65 per Barrett AJA at [9]-[11]; Young v Hughes Trueman Pty Ltd (No 4) [2017] FCA 456 per Lee J at [12]-[23]).

271. It is unnecessary for this Court to decide that question, which was not raised or argued by the parties in these proceedings. It is sufficient to observe that when ss 198M and 198N were enacted, and at all times thereafter, subject to the possible operation of s 91 of the Evidence Act, findings of fact made in the principal proceedings might be admissible against a lawyer on a subsequent application for a wasted costs order if that is fair and just, having regard to the lawyer’s involvement in the proceeding. (See Lemoto per McColl JA at [147], 333.)

272. In this context the difference in language between s 198M(1) of the Legal Profession Act 1987 on the one hand, and s 198N(1) on the other (their counter parts in the Legal Profession Act 2004 being ss 348(1) and 349(1)), is significant. The court that might make an order against a law practice that acted for a party without reasonable prospects of success under s 348(1) is the “court in which proceedings are taken on a claim for damages”. The finding of a court that gives rise to a presumption that legal services provided on a claim or defence were provided without reasonable prospects of success under s 349(1) is “the court (the trial court) hearing proceedings on a claim for damages”.

273. This distinction was not adverted to in the reasons of this Court in Lemoto. In that case the Court was concerned with the issue of how the principles of natural justice should be accommodated within ss 198M and 198N. In that case the primary judge had made a costs order against the solicitor without giving the solicitor the opportunity to be heard. The Court held that the legislation did not disclose an intention to displace ordinary requirements of natural justice (per Hodgson JA at [7]; per McColl JA at [123]). McColl JA observed that the procedure to be devised for dealing with an application under s 348 should be fair and as simple and summary as fairness permits (quoting Ridehalgh v Horsefield [1994] Ch 205 at 238 (at [143], 333)).

274. Hodgson JA said:

“[8] In some cases, particularly where an oral judgment is delivered, it may be possible for a judge, at the conclusion of the judgment, to indicate to a person or persons who provided legal services that the judge is contemplating a finding in terms of s 198N, for reasons then disclosed, and to invite submissions; and after hearing submissions, to make a finding in terms of s 198N(1) then and there.

[9] But in my opinion, it would usually be preferable to indicate the possibility of a s 198N(1) finding, and then to give directions with a view if possible to a single hearing in which all issues can be determined. If there is a question arising under s 198N(4), the legal adviser might not be able safely to serve evidence disclosing confidential communications on anyone other than the client with whom there were such communications, until that question is resolved; so if the other party to the proceedings is involved in the application for the s 198M order, it may be necessary to decide whether a s 198N(4) issue needs to be determined in advance of the hearing, so that this other party knows before the hearing what the legal adviser’s evidence is to be.”

275. McColl JA proposed that:

“[149] While recognising that the procedure to be adopted pursuant to Div 5C is a matter for the court considering making a s 198M order, I would suggest that such a court:

(1)    consider whether there is a prima facie case that a solicitor or barrister has provided legal services to a party without reasonable prospects of success within the meaning of s 198J; the solicitor or barrister should be given an opportunity to be heard on whether a prima facie case has been made out; full particulars of the basis of the application should be provided;

(2)    if the court considers there is a prima facie case, the legal practitioner should be given the opportunity to show cause why a s 198M order should not be made; again this requires giving the solicitor or barrister sufficient particulars of the prima facie case;

(3)    after any explanation is provided, the court should determine whether a finding that the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198J should be made; in considering this issue the onus of proof may differ depending upon whether or not the rebuttable presumption in subs 198N(1) and (2) is operative;

(4)    if the court concludes the legal practitioner has provided legal services to a party without reasonable prospects of success within the meaning of s 198L the court should consider whether it is, in all the circumstances, just to make a s 198M order;

(5)    if an order is made, it should specify whether it is a repayment order or an indemnity order and whether the solicitor or barrister is ordered to pay “the whole or any part of” the relevant costs;

(6)    provide reasons for the decision.”

276. Ipp JA agreed with both judgments.

277. Hodgson JA expressly contemplated at [8] 304 that a s 198N (later s 349(1)) finding could be made after judgment had been delivered on the claim for damages. McColl JA did not expressly so decide, but did propose a staged procedure where the court would first determine whether there was a prima facie case that the lawyer provided legal services where the claim or defence had no reasonable prospects of success. That was understood by the parties and the primary judge in this case as requiring a determination under s 349(1). This may not be what McColl JA intended, but it is possible to see why the parties and the primary judge adopted the understanding that they did. It is otherwise not clear why procedural fairness would require a separate hearing on whether a prima facie case is established.

278. The Court’s views in Lemoto as to the appropriate procedures to be followed on an application under s 198M were obiter and are therefore not binding.

279. In Firth v Wowk & Ors [2008] NSWCA 104 Mr Kennedy had made a claim for damages arising from a workplace injury. The proceedings were dismissed before the hearing date. The District Court found that the solicitor had provided legal services to Mr Kennedy without reasonable prospects of success, and made a costs order against the solicitor pursuant to s 348. Giles JA, with whom McColl and Bell JJA agreed, rejected the submission that the reference in s 349 to “the court … hearing proceedings on a claim for damages” had the effect that an order under s 348 could only be made by a court hearing a claim for damages. His Honour said:

“[17]The second [submission] was that the effect of s 349 was that an order can only be made by the District Court where it is the court hearing proceedings on a claim for damages, and that Mr Kennedy’s claim did not come to a hearing. Accordingly, it was said, only the Supreme Court could make an order against Mr Firth pursuant to s 348(2). I do not agree. Section 349 operates to establish a rebuttable presumption where the court has heard proceedings on a claim for damages and finds that the facts established by the evidence did not form a basis for a reasonable belief. The presumption may suffice to establish what must appear to a court as required by s 348(1), but is not necessary. For s 348(1) it is enough that it appears to the court that the law practice has provided legal services to a party without reasonable prospect of success, and that may appear for reasons other than a finding in a substantive hearing. The court for that purpose is the court ‘in which proceedings are taken on a claim for damages’, in the present case the District Court, and taking proceedings on a claim for damages is less than conducting a hearing.”

280. Although his Honour used the past tense “has heard” and the present tense “finds”, it appears from the context that his Honour was saying that the rebuttable presumption under s 349 arises where the court has heard proceedings on a claim for damages and has found that the facts established by the evidence did not form a basis for a reasonable belief. The present issue did not arise in that case.

281. The procedure proposed in Lemoto was followed by the parties in the present case, but with no regard to the admonition that procedures for hearing costs applications against lawyers should be as simple and summary as fairness permits and hearings should be measured in hours, and not in days or weeks (Lemoto at [92](g), 321-322 per McColl JA quoting Ridehalgh v Horsefield). After the principal judgment was delivered on 3 May 2013 there was a hearing over two days from 16 December 2013 (part of which related to an unrelated costs application by another party) on the application of s 349(1) of the Legal Profession Act; a further hearing over two days on 27 and 28 August 2014 that addressed the consequences of the s 349(1) findings; and a final hearing over six days in March 2016 of Androulla Costi’s s 348 application and the De Costi parties’ s 99 application.

282. The finding that the facts established by the evidence at trial did not form a basis for a reasonable belief that the claim of the cross-claimants against Androulla Costi had reasonable prospects of success, and the notation that the primary judge did not find under s 349(1) that the facts established by the evidence at the trial did not form a basis for a reasonable belief that the claim by the cross-claimants against the other De Costi parties had reasonable prospects of success, were not made in the hearing of the proceedings on the claim for damages. They were made at a separate hearing after the proceedings on the claim for damages had been determined. This is not a ground of appeal or cross-appeal.

283. When s 349(1) is read in the context that, at common law, findings of fact in the principal proceedings can be used in proceedings in which costs are sought against a lawyer, it can be seen that s 349(1) is engaged only if a court, on a hearing of proceedings on a claim for damages, makes a finding in terms of s 349(1) or a finding equivalent thereto; as in Metsikas v Quirk (No 2) [2010] NSWSC 757 at [3]-[4] per Brereton J (proceedings hopeless and doomed to fail from the outset). If such a finding is made, that finding creates a rebuttable presumption. Section 349(1) is narrower than the position at common law in that it requires a particular finding to be made that, on the evidence before the court, there was not a basis for a reasonable belief that the claim or defence had reasonable prospects of success. The section is also wider in that it creates a rebuttable presumption.

284. A party who contemplates seeking a costs order under s 348(1) may invite the court hearing the claim for damages to make such a finding. The making of such a finding by the court that hears the proceedings on a claim for damages is, at least arguably, a departure from the rules of natural justice that would entitle the lawyer to be heard on that question. However, it is not a significant departure having regard both to the fact that the finding is made only on the basis of facts established at the trial, and that a similar, although not identical, position existed at common law. To the extent there is a departure from the rules of natural justice, it is expressly provided for. The court would be guided by the principle that no such finding should be made unless it be fair and just to do so, having regard to the lawyer’s connection with the proceedings, by analogy to the principles at common law on the admissibility of factual findings in subsequent costs applications.

285. Unless an application is made to the Supreme Court for a costs order under s 348 (now cl 5 of Sch 2 to the Legal Profession Uniform Law Application Act) and the Supreme Court was not the trial court, there need be only one hearing for an order under s 348 which would ordinarily be expected to be heard with any application for a wasted costs order under s 99 of the Civil Procedure Act. That is because either the trial court would have made a finding under s 349(1) (now cl 6 of Sch 2) in its judgment on the hearing of the proceedings of the claim for damages or it would not. If it did, the applicant for the costs order would have the benefit of the rebuttable presumption which could be displaced on the hearing of the application for the order under s 348. If the trial court had not made such a finding then the application could simply proceed under s 348 with the onus being upon the applicant to establish that the law practice provided legal services to a party without reasonable prospects of success.

280. Section 349(2) (now cl 6(2) of Sch 2) supports this construction. Section 349(2) provided:

“349 Onus of showing facts provided reasonable prospects of success

…

(2)    If the Supreme Court (when the Supreme Court is not the trial court) is satisfied, either as a result of a finding of the trial court or otherwise on the basis of the judgment of the trial court, that the facts established by the evidence before the trial court do not form a basis for a reasonable belief that the claim or the defence had reasonable prospects of success, there is a presumption for the purposes of this Division that legal services provided on the claim or the defence (as appropriate) were provided without reasonable prospects of success.”

287. If the Supreme Court is not the trial court, there would have to be a separate hearing before the Supreme Court if the applicant for the costs order wished to obtain the benefit of the presumption under s 349(2) or cl 6(2) in advance of the hearing. But the Supreme Court’s determination of that matter is to be based not on evidence of primary facts that might be adduced at such a hearing, nor on the evidence adduced at the hearing for damages in the trial court, but on the findings of the trial court or otherwise on the basis of its judgment.

288. This indicates that the purpose of s 349(1) and (2) was to streamline the procedure for determining a costs application under s 348 by allowing for the judgment on the damages claim to create a rebuttable presumption in the applicant’s favour if sufficient findings were made. It points to the judgment of the trial court on the hearing of the proceedings on the claim for damages as being the judgment that can be relied upon under s 349(1) (or cl 6(1)), not a judgment of the trial court on a separate hearing after the claim for damages has been determined.

289. In Eurobodalla Shire Council v Wells [2006] NSWCA 5 the Court of Appeal (Ipp JA) relied in part on s 198N in finding that costs orders in relation to an unsuccessful application for leave to appeal should be made against the solicitor and barrister who provided legal services in connection with that application which was characterised as hopeless. His Honour said:

“[26]Having re-examined the material I am satisfied that there is no reason for me to alter my concurrence with the view expressed by the Court of which I was a member, namely, that the case below was ‘hopeless’. Simply put, the evidence adduced at trial did not establish necessary elements of Mrs Aldridge’s cause of action. This should have been obvious prior to the launching of Mrs Aldridge’s application for leave to appeal and her appeal.

[27]I am satisfied, in accordance with s 198N of the Act, that the facts established by the evidence before the trial Court do not form a basis for a reasonable belief that Mrs Aldridge’s claim had reasonable prospects of success. It follows that the presumption referred in s 198N applies and has not been rebutted.”

290. It is clear from his Honour’s earlier reference to s 198N(2) and (3) (at [12]) that his Honour was acting under s 198N(2).

291. The construction of the provisions advanced above does not accord with the views of Hodgson JA in Lemoto and may not be in accordance with the views of McColl JA. But their Honours, with respect, did not address the significance of the language of s 198N of the Legal Profession Act 1987, which provides that a presumption arising under s 198N(1) arises from a finding of the trial court “hearing proceedings on a claim for damages”. When due consideration is given to those words in the context of the common law principles relating to the use of findings of fact in principal proceedings in the exercise of the court’s summary jurisdiction to make costs orders against legal practitioners, it can be seen that the expensive and time consuming procedure adopted in this case was not warranted. It was not consistent with the apparent purpose of s 349(1); that is, to expedite the determination of an application for a costs order against a legal practice, and to give effect to the principle that the procedure for determining the application should be as simple and summary as fairness permits.

292. Clearly the law practice against whom an order under s 198M, s 348 or cl 5 of Sch 2, is sought must be given particulars of the grounds on which it is contended that an order under those provisions should be made. But the statutory provisions contain no indication that there should be a separate hearing on whether an applicant has a prima facie case for such an order. Such a procedure is not consistent with a simple and summary procedure and in at least most cases would not be required to provide fairness to the legal practice.

293. Just as the observations about the appropriate procedures to be adopted made by the court in Lemoto were obiter, so are these observations. They are not binding on lower courts. But trial judges asked to conduct a “threshold hearing” with a view to making findings that might trigger a rebuttable presumption under cl 6 of Sch 2 (formerly s 349) should consider these observations when deciding whether they have jurisdiction to do so. They should also consider these observations if an application for a costs order against a law practice is foreshadowed during the hearing of a claim for damages and they are asked to make a finding in terms of cl 6(1) in their judgment on the claim for damages.

**********

Amendments

27 March 2018 - Typographical error corrected in Headnote.

Decision last updated: 27 March 2018