United Petroleum Australia Pty Ltd v Herbert Smith Freehills
[2020] VSCA 15
•13 February 2020
SUPREME COURT OF VICTORIA
COURT OF APPEAL
S APCI 2018 0087
S APCI 2018 0145
S APCI 2018 0146
| UNITED PETROLEUM AUSTRALIA PTY LTD (ACN 164 398 832) (and others according to the attached schedule) | Applicants |
| v | |
| HERBERT SMITH FREEHILLS | Respondent |
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| JUDGES: | WHELAN, McLEISH and NIALL JJA |
| WHERE HELD: | MELBOURNE |
| DATE OF HEARING: | 4 September, 28 November 2019 |
| DATE OF JUDGMENT: | 13 February 2020 |
| MEDIUM NEUTRAL CITATION: | [2020] VSCA 15 |
| JUDGMENT APPEALED FROM: | [2018] VSC 501 (Elliott J) |
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LEGAL PRACTITIONERS – Retainer – Two retainers – First but not second retainer signed by client – Whether acceptance by conduct – Application for leave to appeal refused.
COSTS – Firm of solicitors acting for itself in proceeding – Whether entitled to costs order in respect of work done by employee solicitors and other staff – Costs not recoverable – No error in form of order – Bell Lawyers Pty Ltd v Pentelow (2019) 93 ALJR 1007; [2019] HCA 29 – Appeals dismissed.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr B W Walker SC (28 November 2019) with Mr M D Wyles QC Mr C E Shaw SC and Ms J D Little | Norton Rose Fulbright |
| For the Respondent | Mr P Crutchfield QC with Mr D Fahey | Herbert Smith Freehills (in proceedings S APCI 2018 0087 and S APCI 2018 0145) Clyde & Co (in proceeding S APCI 2018 0146) |
WHELAN JA
McLEISH JA
NIALL JA:
Summary of facts
The respondent Herbert Smith Freehills (‘Freehills’), a firm of solicitors, provided legal services to the applicants[1] in relation to a public offering in shares. For reasons that do not presently matter, the public offering did not proceed as scheduled.[2] Freehills sued to recover its outstanding professional fees. The applicants sued Freehills in negligence. Freehills was successful in both proceedings, obtained judgment for its fees[3] and special costs orders in its favour in both proceedings.[4]
[1]It is generally not necessary to differentiate between the various United Petroleum entities for the purpose of these reasons, who for convenience are called ‘United’.
[2]A fuller explanation of the background is set out in the reasons of the Court in United Petroleum Australia Pty Ltd v Hudson [2020] VSCA 14.
[3]United Petroleum Australia Pty Ltd v Herbert Smith Freehills (2018) 128 ACSR 324; [2018] VSC 347 (‘Principal Judgment’).
[4]United Petroleum Australia Pty Ltd v Herbert Smith Freehills (No 2) [2018] VSC 501 (‘Costs Judgment’).
In the first application for leave to appeal, the applicants seek leave to appeal the judgment in the fees proceeding on the single basis that the judge erred in identifying the relevant retainer.[5] There were two potential retainers: the first in December 2014 and the second in August 2016. The first was signed by the clients and provided that the fees were to be reduced by 25 per cent in the event the public offering did not proceed. The second was not signed by the client but permitted full fee recovery even if the offering was not completed. The judge held the second retainer was agreed between the parties notwithstanding that it had not been executed by the clients. Simply expressed, the issue is whether the judge was correct in holding that the August 2016 document constituted a binding agreement.
[5]Proceeding S APCI 2018 0087 being an application from the decision of the primary judge given on 26 June 2018 in the Principal Judgment.
By two further applications, the applicants also seek to challenge the special costs orders.
The second application for leave[6] is from the decision of the judge to order indemnity costs in the fees proceeding. Put simply, the judge held that Freehills obtained judgment in the fees proceeding that was no less favourable than the terms of an offer to settle that it had proffered to the applicants and that, correspondingly, the applicants acted unreasonably in not accepting the offer.
[6]Proceeding S APCI 2018 00145 being an application from the decision of the primary judge on costs given on 25 September 2018 in the Costs Judgment.
The third application for leave[7] is from the decision of the judge[8] to order indemnity costs in the negligence proceeding on the basis the proceeding was hopeless.
[7]Proceeding S APCI 2018 00146.
[8]Also contained in the Costs Judgment.
The issues that are common to both costs applications for leave to appeal is whether Freehills is precluded from cost recovery because it acted for itself in the proceeding and whether the judge erred in exercising his discretion in each case to order indemnity costs. Resolution of those issues requires consideration of the judgment of the High Court in Bell Lawyers Pty Ltd v Pentelow[9] which was delivered on the first day of the hearing of these applications for leave to appeal.
[9](2019) 93 ALJR 1007; [2019] HCA 29 (‘Bell Lawyers’).
Part 1: The retainer
On 8 December 2014, Freehills sent a revised engagement letter to United (‘8 December 2014 Letter’).[10] The 8 December 2014 Letter was addressed to Avi Silver and Eddie Hirsch as directors of United Australia Pty Ltd and stated that:
(a)the offer could be accepted by returning a signed copy of the letter or by continuing to instruct Freehills in the matter;
(b)fees were to be capped at $2 million if listing occurred on or before 30 June 2015, and capped at $2,250,000 if listing occurred after that date but on or before 31 December 2015; and
(c)there would be a discount/uplift arrangement, which provided inter alia that if there was no successful outcome for United Australia, Freehills agreed to charge 75 per cent of their standard hourly rates.[11]
[10]The letter was identical in all material aspects to an earlier retainer sent on 5 December 2014 but with an additional provision for monthly invoicing between January and June 2015 and a rebate scheme.
[11]Principal Judgment [45].
The 8 December 2014 Letter was executed by Silver on behalf of United Australia, work was done and invoices rendered and paid.[12]
[12]Ibid [47]–[48].
In February 2015, Jim Mooney, chief financial officer at United Petroleum, raised the fact that the work to be performed no longer included the possibility of seeking funds from United States markets and he sought a reduction in the proposed fee.[13]
[13]Ibid [49].
For one reason or another, work on the public offering had a couple of false starts.[14] In April 2015, after an hiatus, work resumed on the public offering. By agreement the fee cap was reduced from $2 million to $1.78 million.[15]
[14]Ibid [42]–[43], [50]–[54].
[15]Ibid [51].
In June 2015, Freehills issued a revised fee arrangement in relation to the public offering.[16] This was followed up in late July 2015 with an email from the responsible Freehills partner, Michael Ziegelaar, to Mooney giving a further estimate of fees and the scope of works involved. By September 2015, work on the project again ceased.[17]
[16]Ibid [52].
[17]Ibid [54].
By 4 November 2015, the public offering was back on the agenda with a new timetable.[18] By June 2016, a revised timetable provided for the prospectus drafting to be completed by late September 2016, with the financial section to be completed by the end of August.[19]
[18]Ibid [55].
[19]Ibid [59].
On 27 June 2016, Alex Mackinnon, a senior associate at Freehills, sent Mooney a fee explanation memorandum that had been foreshadowed and enquired whether it was possible for Ziegelaar to meet with Silver to discuss the explanation in the week after next.[20] The fee explanation included the following:
Further, we agree to the discount / uplift arrangement in respect of our fees for the current project such that:
·If United becomes a listed entity, we will charge 125% of our standard hourly rates (or capped amount if our hourly rates are in excess of this);
·If United decides not to proceed with the listing process (for example if it undertakes a trade sale or REIT IPO instead), we will charge 100% of our standard hourly rates (or capped amount if our hourly rates are in excess of this);
·If United proceeds with the listing process but does not become a listed entity due to external market factors (eg market conditions impacting on the IPO market generally) we will charge 75% of our standard hourly rates (or capped amount if our hourly rates are in excess of this).
[20]Ibid [60].
It was common ground that the fee explanation memorandum which detailed an increase in Freehills’ fees and an intention to charge a discount/uplift arrangement was seen and considered by Mooney and Silver and discussed with Ziegelaar.[21]
[21]Ibid [62]–[63].
Silver gave evidence that he had read the fee explanation memorandum which included the proposed discount/uplift arrangement. He said that he probably read it in April or May 2016. Later in his evidence he said he had read it possibly in May but earlier than August. Differences in dates may be explained by the fact that copies of the memorandum were resent at different times.
Silver accepted that he understood from the memorandum that there was a discount/uplift arrangement which provided that if United was listed Freehills would charge 125 per cent of its standard hourly rates, if the listing did not proceed it would charge 100 per cent of its standard hourly rates, but that if the listing did not proceed due to external market forces Freehills would charge 75 per cent of its standard hourly rates.
Mooney gave evidence that the issue of fees had not been resolved and discussions continued. He said a meeting was held in June or July 2016 between Ziegelaar, Silver and Mooney at which invoices were discussed. According to Mooney, there had been an earlier discussion about invoicing and the 25 per cent uplift or discount factor was discussed, with Silver saying in that regard ‘that’s not negotiable Michael [Ziegelaar]. You need to go away and think about that’.[22] Ziegelaar’s account was somewhat different. He noted that at a meeting on 21 July 2016, Silver said he would look at the fees and get back to Freehills.[23]
[22]Ibid [62].
[23]Ibid [63].
On 22 August 2016, Mackinnon sent an email to Mooney, copied to Peter Larsen, United’s general counsel and company secretary, and others. The email attached a further engagement letter for the public offering (‘22 August 2016 Letter’). The email said:[24]
[24]Ibid [68].
Here is our engagement letter for the IPO.
It states that our capped fee is $1,225,000. It also includes the 25% discount and uplift arrangement and other agreed matters. It excludes banking work.
The $1,225,000 has been arrived at as follows:
· When we initially proposed our fee for this year’s IPO in February, we said we would do it for a cap of $1.2m. At that stage, we already had $950k on the clock for the process last year. Hence, the total amount would have been $2,150,000.00, which was $370,000 higher than our original cap of $1,780,000. The $1,780,000 excluded a US offer, which had been added back at the time we proposed the $1.2m cap.
· We later reduced the $370,000 to $300,000 as a result of the decision to exclude the US offer. This resulted in a cap of $1,130,000.
· We later agreed to provide a 10% discount on the increased $300,000, so that the increase was $270,000, which resulted in a cap of $1,100,000.
· Finally, we have now added $125,000 for the work involved in undertaking the Dalby restructure as referred to in the schedule Michael gave you. This results in a fee cap of $1,225,000.
Please have this engagement letter signed and returned to us.
The 22 August 2016 Letter which was attached to the email:
(a)stated that the offer could be accepted by returning a signed copy of the letter or continuing to instruct Freehills in the matter and that the engagement letter supersedes and terminates any previous engagement letter between United and Freehills in relation to the potential initial public offering of United;
(b) stated that the fee cap of $1.225 million excluded GST and disbursements;[25]
(c)set out the discounted hourly rates (excluding GST) of key Freehills personnel working on the public offering; and
(d) included Freehills’ entitlement to 100 per cent of its hourly rates if United decided not to proceed with the public offering.[26]
[25]Ibid [68].
[26]Ibid. See also n 20.
The letter included within the scope of work advice relating to a refinery in Dalby, Queensland which had been included in the public offering at the request of Silver.[27] In his evidence Silver explained that there was some concern about including Dalby because it was a major hazards facility.
[27]Ibid [69].
In relation to the ‘uplift/discount arrangement’ the 22 August 2016 Letter provided:
We agree to the discount/uplift arrangement in respect of our fees for the current project such that:
·If United becomes a listed entity, we will charge 125% of our hourly rates (or capped amount if our hourly rates are in excess of this);
·If United decides not to proceed with the listing process (for example if it undertakes a trade sale or REIT IPO instead), we will charge 100% of our hourly rates (or capped amount if our hourly rates are in excess of this);
·If United proceeds with the listing process but does not become a listed entity due to external market factors (eg market conditions impacting on the IPO market generally) we will charge 75% of our hourly rates (or capped amount if our hourly rates are in excess of this).
The judge found that the 22 August 2016 Letter was received by Mooney and Larsen, and that Mooney provided a copy to Silver.[28]
[28]Ibid [453].
Silver said that he had seen the email but that he was concentrating on the dollar figure and assumed that the discount/uplift arrangement had not changed. The judge asked Silver whether he had read the email at the time, to which the witness answered that he had read the email at the time, ‘concentrating on the dollar bit’.[29]
[29]Ibid [69].
On 9 September 2016, Freehills sent a tax invoice to United, with respect to legal services for the public offering. The covering letter to the invoice referred to work done with respect to ‘the Dalby restructure’.[30] The invoice identified the hourly rates of Ziegelaar and Mackinnon as being those advised in the 22 August 2016 Letter,[31] which were different to the rates in the 8 December 2014 Letter.[32]
[30]Ibid [72].
[31]See also paras [19]–[20] above.
[32]Principal Judgment [72].
Throughout September and October 2016, work on the public offering continued to progress until the project was terminated on 23 October.
On 4 November 2016, Silver, through his personal assistant, sent an email to Ziegelaar and others called ‘IPO Costs’. The email sought a reconciliation of Freehills bills, noting several parameters, including ‘[t]he agreed fee cap of $1.2m’.[33] Ultimately United refused to pay the outstanding invoice.
[33]Ibid [429].
Outcome of the proceedings and primary issues at trial
The issue presented was whether the unsigned 22 August 2016 Letter had been accepted by conduct. The judge identified the relevant principle as follows:[34]
The fact that the 22 August 2016 letter was not signed by the [client] or anyone on their behalf, is not determinative of whether a new agreement was entered into. A written offer may be accepted by the conduct of the offeree. The issue is whether the conduct of the offeree, including its silence, would be regarded by a reasonable bystander as signalling to the offeror that the offer had been accepted. Specifically, a client may accept a solicitor’s written engagement terms by continuing to instruct. However, whether in fact a client does so depends on the circumstances of the case.
[34]Ibid [456] (citations omitted).
The judge cited ample authority in support of those propositions. No criticism is levelled at the judge’s articulation of principle.
The judge rejected the submission that United had not indicated agreement with the new terms. His Honour referred to Silver’s evidence that the offer of Freehills to perform work relating to the Dalby refinery was accepted, in circumstances where there was no suggestion by United that there was a separate agreement in relation to Dalby outside the 22 August 2016 Letter. The judge found that Freehills invoiced United in early September 2016, in terms which clearly indicated that invoice was being remitted pursuant to the new agreement. United continued to instruct Freehills after its receipt, thereby signifying their agreement with the new fee structure. Thus, the judge concluded, the conduct of continuing to instruct Freehills after 22 August 2016 was not, as United contended, entirely consistent with the retainer created by the 8 December 2014 Letter.[35]
[35]Ibid [457].
Accordingly, his Honour held that United had accepted the 22 August 2016 Letter by conduct.[36] On that basis, as the public offering did not eventuate because United had decided not to proceed, Freehills was entitled to 100 per cent of its standard hourly rates.[37] He dismissed the negligence proceeding. No appeal is sought to be brought in that regard.
[36]Ibid [458].
[37]Ibid [460].
Submissions
The applicants submit that the 22 August 2016 Letter was not accepted by the United parties on the basis that it was not read by Silver. The applicants accept that Silver read the covering email of 22 August 2016 but contend that the judge was in error in finding that he had read the attached letter. Secondly, payment of some invoices reflecting the August 2016 rates did not evidence performance of the August 2016 retainer because it was open to Freehills to increase the fees charged under the 2014 agreement.
Analysis
The judge’s conclusion that Silver had read the email and attached 22 August 2016 Letter is unimpeachable. In answer to a question of the judge, Silver said he had read the email. In context, it is clear that the reference to the email included the attached letter. What the witness meant by his answer, and whether it was confined to the covering email and not the attached letter was, we consider, a matter of fact affected by impressions about the credibility and reliability of the witness formed by the trial judge as a result of seeing and hearing him give his evidence. In our view, the judge’s finding is not glaringly improbable or contrary to compelling inferences and we would not disturb it.[38]
[38]Fox v Percy (2003) 214 CLR 118, 126-7 [25] (Gleeson CJ, Gummow and Kirby JJ); [2003] HCA 22; Robinson Helicopter Co Inc v McDermott (2016) 90 ALJR 679, 686-7 [43] (French CJ, Bell, Keane, Nettle and Gordon JJ); [2016] HCA 22; Lee v Lee (2019) 93 ALJR 993, 1002-3 [55] (Bell, Gageler, Nettle and Edelman JJ); [2019] HCA 28.
Notably, when the application for leave to appeal was originally filed there was no challenge to the judge’s finding in this respect. Further, the agreed summary of facts filed by the parties recorded as an agreed fact that Silver had read the email and attached letter.
In any event, even if Silver had not read the attachment, that would not avail the applicants. That is so for the following reasons.
First, Silver had read the fee explanation memorandum before August 2016. It explained the discount/uplift arrangement. That arrangement differed from the 2014 arrangement because it allowed full recovery if the public offering did not proceed, unless it was due to a change in external market factors, whereas the 2014 arrangement provided that if United did not become a listed entity for any reason Freehills would charge 75 per cent of standard hourly rates.[39]
[39]The relevant clause provided ’if there was no successful outcome (ie [United] does not become a listed entity, there is no trade sale nor is a third party shareholder introduced), [Freehills] will charge 75% of standard hourly rates’.
Secondly, Silver read the email of 22 August 2016. The first substantive paragraph provided that the attached engagement letter ‘includes the 25 per cent discount and uplift arrangement and other agreed matters.’ In context, this can only be a reference to the discount/uplift arrangement identified in the fee explanation memorandum.
Relatedly, the email referred to the fee cap of $1,225,000 contained in the attached letter. Having read and understood the email Silver must have appreciated that the email was summarising some of the terms identified in the attached letter and that the two went together.
Thirdly, Freehills invoiced for work done in relation to the Dalby restructure, which was specifically introduced by the 22 August 2016 Letter. As well, Freehills invoiced at the rate identified in the 22 August 2016 Letter. After receipt of the 22 August 2016 Letter, United continued to instruct Freehills in relation to the public offering,[40] and did not raise any objections to its terms.[41]
[40]Principal Judgment [454], [457].
[41]Ibid [459(6)].
Although the applicants submit, correctly, that Freehills could have increased the fees under the 2014 retainer, that would have required the consent of the client. The more probable conclusion was that the fees were being invoiced under the 2016 arrangements.
The conduct of Silver and the corporate entities, in the context just described, would be regarded by the reasonable bystander as signalling to Freehills that the offer in the 22 August 2016 Letter had been accepted. It follows that there is no error in the judge concluding that the 22 August 2016 Letter was accepted by the United entities.
Finally, as already noted, the agreed summary recorded as an agreed fact that although the letter was not sent directly to Silver, he saw it and read it.[42] No explanation was given as to why the applicants sought to resile from that agreed position. Given our conclusions, it is not necessary to determine whether the applicants ought be bound by that document.
[42]Citing Principal Judgment [69].
Conclusion on liability orders
The judge was correct to conclude that the applicants were bound by the second retainer. No error of principle was identified. Leave to appeal should be refused.
Part 2: Costs
Orders for costs are made
In the fees proceeding, the judge gave judgment in favour of Freehills’ claim for $648,159.39 with interest of $54,032.74.[43] The judge held that while Freehills ultimately succeeded, it did so on evidence which, in different circumstances, may not have established that an agreement as alleged was reached and there was nothing in the way the case was run that warranted a departure from standard costs.[44] However, on 16 June 2017, Freehills had made an offer of compromise to the defendants by which Freehills offered to accept $750,000.00 inclusive of GST, interest and costs in full settlement of the fees proceeding (‘Freehills Offer’). The Freehills Offer was rejected by the United parties on 26 June 2017.[45]
[43]Order of Elliott J in Herbert Smith Freehills v United Petroleum Australia Pty Ltd (Supreme Court of Victoria, S CI 2017 00237, 26 June 2018).
[44]Costs Judgment [54]–[55].
[45]Ibid [10(1)].
The judge held that Freehills obtained judgment that was no less favourable than the terms of the Freehills Offer.[46] The judge further held that the rejection of the Freehills Offer, viewed objectively as at the date of the offer, was unreasonable.[47] Accordingly, the judge ordered that Freehills’ costs of the fees proceeding be awarded on the standard basis up to 11.00 am on 20 June 2017 and on an indemnity basis after that time.[48]
[46]Ibid [10(1)], [62].
[47]Ibid [63].
[48]Ibid.
We note that on 9 August 2017, Freehills made a second without prejudice offer of compromise to the defendants in the fees proceeding.[49] As will appear, it is not necessary to deal with that offer.
[49]Freehills offered to accept $925,000.00 inclusive of interest, but exclusive of GST, on the basis that the parties would bear their own costs. The judge said that this offer was not beaten and its rejection unreasonable. Ibid [10(2)], [65].
The judge dismissed the negligence proceeding. On costs, he held that the case against Freehills was so lacking in substance that Freehills ought to be awarded its costs on an indemnity basis from the commencement of the proceeding, including reserved costs.[50] The judge also held, in the alternative, that he would have awarded indemnity costs from 11.00 am on 15 September 2017, being two days after Freehills made an offer to walk away and bear its own costs.[51]
[50]Ibid [69].
[51]Ibid [71].
Proposed grounds of appeal and issues
In the fees proceeding the applicants contend that Freehills is not entitled to recover professional fees when it acted for itself. Alternatively, once costs are reduced to take into account that Freehills cannot recover its own costs, Freehills did not do better than the Freehills Offer.
In the negligence proceeding, the applicants repeat the argument that Freehills cannot recover costs of having acted for itself. Separately, they contend that the judge erred in his discretion to make a special costs order on the basis the case was hopeless.
In answer to the question whether Freehills can recover fees when representing itself, Freehills raises as a threshold issue that the applicants should not be permitted to run the point as they did not run it below. The threshold point is raised as a discretionary point in opposition to leave to amend and as an estoppel. However, Freehills accepted, in the light of the High Court decision in Bell Lawyers, that it could not recover costs in respect of work undertaken by partners of the firm.
Facts on the costs application
Although Freehills acted for itself in the negligence proceeding and in the fees proceeding, it was not contended before the judge that a firm of solicitors, that acts for itself, is not entitled to recover costs for its own legal work. The law, as understood at the time of trial, permitted solicitors to recover professional costs in acting for themselves. This entitlement, known as the ‘Chorley exception’,[52] was an exception to the general rule that a self-represented litigant may not obtain any recompense for the value of his or her time spent in litigation.
[52]London Scottish Benefit Society v Chorley (1884) 13 QBD 872, 875 (Brett MR, Bowen LJ agreeing at 876, Fry LJ agreeing at 877) (‘Chorley’). The rule of practice was acknowledged prior to the decision in Chorley by Faucett J in the Supreme Court of New South Wales in Pennington v Russell (No 2) (1883) 4 LR (NSW) Eq 41, 43, 46.
On 4 September 2019[53] the High Court delivered judgment in Bell Lawyers[54] holding that the ‘Chorley exception’ is not part of the common law of Australia.[55]
[53]The first day of the hearing of the present applications for leave to appeal.
[54]Bell Lawyers (2019) 93 ALJR 1007; [2019] HCA 29.
[55]Ibid 1018 [39] (Kiefel CJ, Bell, Keane and Gordon JJ).
In response to the applicants’ reliance on Bell Lawyers, Freehills relies on an affidavit sworn by one of its partners Alan James Mitchell.
Mitchell deposes that Freehills is an unincorporated Australian partnership comprising a large number of Australian partners.[56] Freehills, together with separate member firms, is part of the international legal practice known as Herbert Smith Freehills (‘HSF’). Freehills is the legal entity that is the party to engagement terms in respect of the provision of Australian legal services. Freehills is divided into practice groups including the corporate group, the dispute resolution group, and the alternative legal services group (‘ALT’).
[56]During the period of the litigation at first instance the number of partners ranged from 181 to 154.
In addition, HSF has a global in-house legal department called General Counsel and Risk (‘GC&R’). That group is headed in Australia by William Mills, an employee of Freehills, based in Melbourne. Mitchell deposes that the role of the GC&R team includes:
(a) providing independent advice to HSF concerning legal, regulatory, contractual and governance obligations;
(b) managing HSF’s professional risk profile; and
(c) advising HSF and its partners and employees on ethics and best practice.
When the fees proceeding was commenced, Freehills acted for itself and a number of employed solicitors from the commercial litigation team,[57] supported by ALT, were deployed to run the day-to-day conduct of that proceeding and, when it was commenced, the negligence proceeding.
[57]A specialist team within the dispute resolution group.
During the course of the proceedings, Freehills were the solicitors on the record for the fees proceeding and in the applications for leave to appeal arising from that proceeding. Freehills were also the solicitors on the record in the negligence proceeding until 19 January 2018, at which point it retained a firm of solicitors, Clyde & Co, to represent it. Thereafter Clyde & Co continued to act in the negligence proceeding and the appeal arising therefrom. In the meantime, Freehills’ staff continued to carry out substantive legal work in defence of the allegations in the negligence proceeding, in conjunction with its solicitors Clyde & Co.
Freehills engaged counsel to act in both proceedings.
Each of the employed solicitors at Freehills working on the proceedings held a practising certificate. Each of them were members of the commercial litigation team or ALT and were not members of the equity capital markets team[58] which was the team involved with the transaction that is the subject of the proceedings. A confidentiality regime was put in place which separated the information in relation to the proceeding being shared with other staff at Freehills, in order to preserve the independence of the team. Those employee solicitors working on the proceedings recorded their time in the usual way.
[58]A specialist team within the corporate group.
Freehills seeks to recover costs in respect of work performed by employed solicitors and other employed staff, but (as mentioned) does not seek to recover any costs in respect of work performed by partners of the firm.
Should the applicants be permitted to rely on Bell Lawyers?
It is convenient to deal first with the question whether the applicants should be permitted to contend, for the first time, that Freehills is not permitted to recover professional fees for acting for itself in both proceedings. This point was not taken before judgment in Bell Lawyers was given and required leave to amend the applications for leave to appeal.
Freehills submits that leave to amend should be refused because substantial unfairness would be visited upon Freehills if the applicants were permitted to challenge the entitlement to professional costs. Further, it submits that the applicants are estopped from denying Freehills’ reliance on the Chorley exception by reason of the following.
The applicants are said to be estopped because: as Freehills offered to settle on the basis of an entitlement to recover its professional costs in accordance with the Chorley exception, the applicants must have known the respondent was proceeding on the basis of an assumption that it was entitled to rely on the Chorley exception; the applicants did not take issue with Freehills’ reliance on the Chorley exception; and Freehills acted in reliance on the assumption that the exception applied by continuing to act for itself in the proceedings.
In our view, it is appropriate to permit the applicants to rely on the decision of the High Court in Bell Lawyers. The well-established position is that the High Court does not prospectively overrule its own decisions.[59] Bell Lawyers states what the law is and was at the time Freehills acted for itself in the proceedings. The applicants did not induce Freehills to act for itself. Freehills obtained advice from an independent legal costs consultant that the Chorley exception operated in its favour and proceeded on that basis. Freehills should bear the consequences, if any, of its decision to act for itself. We observe that there is no evidence that Freehills would have engaged external solicitors from the outset had it known that the Chorley exception was inapplicable.
[59]See, eg, Ha v New South Wales (1997) 189 CLR 465, 503-4 (Brennan CJ, McHugh, Gummow and Kirby JJ); [1997] HCA 34, cited in Bell Lawyers (2019) 93 ALJR 1007, 1020 [55] (Kiefel CJ, Bell, Keane and Gordon JJ); [2019] HCA 29.
Further, the question of principle may arise on any application for costs in the present applications for leave to appeal in the event that Freehills succeeds. That is because Freehills are the solicitors on the record in the applications for leave to appeal arising from the fees proceeding. The Court would be required to resolve the issue in the event the applicants fail in either of those applications for leave to appeal and Freehills seek to recover fees for acting for itself. It is appropriate that questions of costs at trial and this Court should be determined according to the same principle.
It follows that the applicants should be given leave to amend the applications for leave to appeal in each matter so as to permit them to rely on Bell Lawyers.
Applicants’ submissions on application of Bell Lawyers
Put simply, the applicants submit the ratio of Bell Lawyers is that lawyers cannot recover recompense for the value of their own time, or that of their employees, when representing themselves.
The applicants submit that a party can only recover legal costs incurred in retaining a lawyer to act for it in a professional capacity. The requirement that the lawyer act in a professional capacity connotes sufficient professional detachment and an obligation to pay the lawyer for the provision of legal services to the client. The costs indemnify or reimburse the party for the liability to pay its lawyer. The applicants submit that these requirements are not satisfied where the party is a lawyer representing itself in a proceeding.
The applicants’ submissions accept that underpinning costs orders is the concept of indemnity. That is, costs are ordered to reimburse costs incurred, by way of an indemnity, usually partial, for a liability incurred for the provision of legal services. But here there was no separation between the party and the lawyers, and no obligation to pay or indemnify in relation to legal costs incurred.
They also accept that a party, which is not a lawyer, such as a government entity or corporation, may recover costs in respect of legal services provided by employed lawyers. Those cases fall within the indemnity principle even though no liability to pay a third party is incurred. However, this was said to reflect a ‘well-established understanding in relation to in-house lawyers employed by governments and others’.[60] Within that understanding there is both a difference between the client and lawyer and a functional equivalence between paying external lawyers and offsetting the overhead costs incurred in employing lawyers to act on behalf of their employer.
[60]Bell Lawyers (2019) 93 ALJR 1007, 1020 [50] (Kiefel CJ, Bell, Keane and Gordon JJ); [2019] HCA 29.
It is submitted that where the party is a lawyer representing itself, there is no well-established understanding, outside of the Chorley exception, that would allow for a costs order. It is submitted that lawyers who act for themselves have only been permitted to recover costs on the basis of the Chorley exception and this exception was overruled in Bell Lawyers. To retain the ability of law firms to recover costs on the basis that the legal work was undertaken by employed solicitors, rather than the owners of the firm, would, it was argued, undermine the outcome in Bell Lawyers.
Freehills’ submissions
Freehills submits that Bell Lawyers can be distinguished because the statutory power to order costs under the Supreme Court Act 1986 and the Supreme Court (General Civil Procedure) Rules2015 permits recovery independently of the common law position propounded in Bell Lawyers.
Secondly, it submits that recovery is permitted for the services provided by employed solicitors in circumstances where they operate independently from the partners and solicitors who were the subject of the litigation on the basis that a costs order will indemnify them for the overhead costs of employment. It relies on the evidence of Mitchell as establishing that there were information barriers between the solicitors involved in the litigation and those who acted for the United parties in the aborted public offering. It submits that there was a functional separation between lawyer and client.
Before resolving the competing arguments, it is convenient to refer to the statutory context and the reasons for judgment in Bell Lawyers.
The statutory provisions
Section 24 of the Supreme Court Act1986 relevantly provides that the costs of and incidental to matters in the Court are in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid. That provision is subject to any express provision contained in the Act or any other Act, or by the Rules. Section 3 of the Act provides that ‘costs’ includes fees, charges and disbursements.
Rule 63.02 of the Supreme Court (General Civil Procedure) Rules2015 provides that the power and discretion of the Court as to costs under s 24 of the Supreme Court Act 1986 should be exercised subject to and in accordance with O 63. Rule 63.31 provides that, except as provided by the Rules, or any other order of the Court, costs shall be taxed on the standard basis. On a taxation on the standard basis, all costs reasonably incurred and of reasonable amount shall be allowed.[61] Where taxation of costs is to proceed on an indemnity basis all costs shall be allowed except in so far as they are of an unreasonable amount or have been unreasonably incurred. Any doubt which the Costs Court may have as to whether the costs were unreasonably incurred or were unreasonable in amount shall be resolved in favour of the party to whom the costs are payable.[62]
[61]Supreme Court (General Civil Procedure) Rules 2015 r 63.30.
[62]Ibid r 63.30.1(2).
Rule 63.01 supplies an inclusive definition: ‘costs includes disbursements and reasonable costs of recording and transcript’.
The decision in Bell Lawyers
Although the power to award costs in this Court, both at trial and on appeal, is statutory, as a matter of practice the statutory power is subject to general rules which have been developed by courts over time.[63] One of those general rules is that a self-represented litigant may not obtain any recompense for the value of his or her time spent in litigation. Up until the decision in Bell Lawyers, there was an exception to that general rule that applied if the self-represented litigant was a solicitor. That exception provided that where a solicitor is a self-represented litigant the solicitor may recover his or her professional costs of acting in litigation — the ‘Chorley exception’.[64]
[63]Bell Lawyers (2019) 93 ALJR 1007, 1021 [59] (Gageler J), 1026 [83] (Edelman J); [2019] HCA 29.
[64]Chorley (1884) 13 QBD 872, 875 (Brett MR, Bowen LJ agreeing at 876, Fry LJ agreeing at 877).
The Chorley exception was criticised by a majority of the High Court in Cachia v Hanes as ‘somewhat anomalous’.[65] The anomaly lies in the preferential treatment accorded to solicitors who can recover professional costs in respect of their own time, which is not a benefit given to other self-represented litigants. In Cachia the majority took the view that to permit a self-represented solicitor to recover costs gives rise to the possibility of allowing the solicitor to profit from his or her participation in the conduct of litigation.
[65](1994) 179 CLR 403, 411-2 (Mason CJ, Brennan, Deane, Dawson and McHugh JJ); [1994] HCA 14 (‘Cachia’).
In Bell Lawyers, the plurality[66] held that the Chorley exception was not only anomalous, ‘it is an affront to the fundamental value of equality of all persons before the law’ as it favoured solicitors over other self-represented litigants and could not be justified by considerations of policy.[67]
[66]Kiefel CJ, Bell, Keane and Gordon JJ.
[67]Bell Lawyers (2019) 93 ALJR 1007, 1012 [3]; [2019] HCA 29.
The plurality identified two reasons supporting the exception: the solicitor is able to take the steps ordinarily taken by lawyers in a proceeding; and the professional skill and labour of lawyers, unlike non-lawyers, is both recognised and easily measurable by the law. Neither justification was held to be persuasive. Importantly, the plurality proceeded on the implicit foundation that an order in favour of a self–represented solicitor provides recompense for time spent and not for the provision of legal services. Presumably, this was because the solicitor does not provide professional legal services to himself or herself.
Their Honours also said it was not self-evident that allowing legal practitioners to recover the costs of acting for themselves might result in lower costs. They observed that a lack of objectivity, together with self-interest (where the lawyer might profit from conducting the litigation), may result in higher, rather than lower, legal costs.[68]
[68]Ibid 1014 [18].
In assessing whether abandoning Chorley would give rise to unacceptable inconvenience[69] the plurality addressed a submission that, if Chorley were abandoned, governments and corporations that are represented by an employed solicitor would thereby cease to be able to recover legal costs.
[69]As part of determining whether Guss v Veenhuizen (No 2) (1976) 136 CLR 47; [1976] HCA 57 should be overruled.
The plurality held that recovery of such costs is not based on the Chorley exception but is independently ‘outside the general rule’[70] because it is accepted that the recovery of the professional costs of such in-house solicitors enures by way of indemnity to the employer.[71] In that respect, the courts have proceeded on the footing that the actual cost to the government or corporation of the legal services provided by employed solicitors would not exceed, in any substantial amount, the sum recoverable by it for professional legal costs.[72]
[70]That a self-represented litigant may not obtain any recompense for the value of his or her time spent in litigation.
[71]Bell Lawyers (2019) 93 ALJR 1007, 1019 [47] (Kiefel CJ, Bell, Keane and Gordon JJ); [2019] HCA 29.
[72]Ibid; see also 1023 [68] (Gageler J).
They concluded:
A decision by this Court that the Chorley exception is not part of the common law of Australia would not disturb the well-established understanding in relation to in-house lawyers employed by governments and others, that where such a solicitor appears in proceedings to represent his or her employer the employer is entitled to recover costs in circumstances where an ordinary party would be so entitled by way of indemnity.
Whether the same view should be taken in relation to a solicitor employed by an incorporated legal practice of which he or she is the sole director and shareholder stands in a different position. It might be queried whether such a solicitor has sufficient professional detachment to be characterised as acting in a professional legal capacity when doing work for the incorporated legal practice. And it might be queried whether costs claimed by an incorporated legal practice for work of its sole director and shareholder are within the expansive view of indemnity that has been adopted in the authorities. In this regard, in McIlraith, Brereton J was disposed to attribute ‘no significance’ to the circumstance that the party seeking an order for costs was an incorporated legal practice whose director was the solicitor who actually performed the work for which costs were sought. It is neither appropriate nor necessary to come to a conclusion as to whether Brereton J was correct in this regard.
The resolution of this question may require close consideration of the legislation which provides for incorporation of solicitors’ practices and the intersection of that legislation with the provisions of the Civil Procedure Act in light of the general rule; and so the resolution of this question may be left for another day, when all the legislation that bears on the question has been the subject of argument.
It is sufficient for present purposes to say that whether or not an incorporated legal practice that is a vehicle for a sole practitioner should be able to obtain an order for costs for work performed by its sole director and shareholder is ultimately a matter for the legislature. Whether the Chorley exception is part of the common law of Australia is a matter for this Court. [73]
[73]Ibid 1019-20 [50]–[52] (citations omitted) (emphasis added).
Pausing there, the applicants submit that the ‘well-established understanding’ in relation to employee solicitors does not apply here, where the firm itself was both the party and the legal representative for that party. They say the balance of the paragraphs just quoted simply identifies an issue for the future that does not arise in this case. It will be necessary to return to these matters shortly.
Gageler J, writing separately but agreeing in the result, also held that recovery of costs in respect of employed solicitors is not an incident of the Chorley exception and should not be seen as falling within it. His Honour started with the general principle that ‘costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation’.[74] His Honour described Chorley as an exception to that rule that permits a legal practitioner to be indemnified for time spent acting on his or her own behalf where no outgoing had been incurred.
[74]Ibid 1021 [60], citing Cachia (1994) 179 CLR 403, 410-12 (Mason CJ, Brennan, Deane, Dawson and McHugh JJ); [1994] HCA 14.
In relation to the use of an employed solicitor, his Honour said:
Recovery of costs by a party using an employed solicitor predated introduction of the Chorley exception. The better view … is that recovery of costs by a party using an employed solicitor is an application of the general principle rather than an exception to it. The general rule is engaged on the basis that the costs of using the employed solicitor are still awarded as indemnity for professional legal costs actually incurred in the conduct of litigation by the employer who is a party to the litigation, albeit that those professional legal costs are incurred in the form of an overhead and are therefore not reflected in a severable liability. [75]
[75]Ibid 1023 [68] (citations omitted).
Nettle J agreed that the appeal should be allowed but on the narrow basis that the Chorley exception does not apply to barristers. However, his Honour did not consider that the Chorley exception in its application to solicitors should be abolished.
In reaching that conclusion, Nettle J accepted that the Chorley exception was undesirable, not because it was anomalous, or treated solicitors advantageously compared to other litigants and therefore offended the principle of equality before the law, but because it permitted the solicitor, who obtains a costs order, to profit from the conduct of the litigation.[76] Notwithstanding his conclusion that the exception was undesirable, Nettle J concluded that whether it should remain in whole or part was a matter for the relevant legislatures.[77]
[76]Ibid 1023 [71].
[77]Ibid 1023 [73].
Relevantly, Nettle J drew attention to the practice of being able to recover costs where the legal work is undertaken by solicitors employed by a party. In that respect, he said:
It has long been accepted, and costs have long been taxed on the basis, that firms of solicitors, corporations and government and semi-government agencies that employ solicitors may, under the Chorley exception, recover the taxed costs of the work performed by such employee solicitors in representing their employers. Logically, abolition of the Chorley exception would mean that the entitlement to do so ceases to exist. It may be open to declare, as the plurality do, that the abolition of the Chorley exception should not be taken to disturb the well-established understanding in relation to in-house solicitors employed by governments and others. But why should there be a distinction? There are potentially many forensic and social considerations relevant to a determination of whether the employed solicitor rule should be permitted to survive the Chorley exception, and, if so, in what form; and none of that analysis has been or can be undertaken in this proceeding. [78]
[78]Ibid 1024 [75] (citations omitted).
Like the plurality, Edelman J concluded that the Chorley exception was unjustifiable as matter of principle. As we read his Honour’s reasons, the anomaly is in the preferential treatment afforded solicitors when compared to other unrepresented litigants. He concluded:
If the general rule is not to change then, as a matter of principle, it is impossible to justify an exception that recognises costs for expenditure of time in litigation by an unrepresented solicitor litigant who performs work on the case but not by any other unrepresented litigant. If a distinction were said to lie in the skill often possessed by unrepresented solicitors but not by other unrepresented litigants then costs should be permitted for the time of an unrepresented builder, plumber, engineer, architect, or accountant who relies on their expertise to perform work on their own case including preparing submissions on matters within their expertise. In the Court of Appeal in Chorley, Bowen LJ thought it ‘absurd’ to ‘permit a solicitor to charge for the same work when it is done by another solicitor, and not to permit him to charge for it when it is done by his own clerk’. Whether or not that is correct, it would be equally absurd to permit the builder, plumber, and engineer to recover costs for the same skilled work when it is done by another for the litigation, but not to permit them to recover when it is done by themselves. [79]
[79]Ibid 1028 [91] (citations omitted).
Edelman J noted that a solicitor who is both a party and the lawyer who appears on the record is, relevantly, unrepresented. In those cases the solicitor does not represent himself or herself and the solicitor’s role as an agent for another is absent.[80]
[80]Ibid 1028 [92].
Analysis
The reasons for judgment in Bell Lawyers do not expressly answer whether a firm of solicitors, which is itself a party to litigation, is entitled to recover professional costs in relation to legal and other services provided by its employees.
It is clear, in our opinion, that the answer does not lie in any differences between the statutory powers to award costs in Victoria and those of New South Wales considered in Bell Lawyers. The analysis undertaken by the High Court involved a discussion of the broader question whether the Chorley exception should be recognised as part of the common law of Australia. That exception developed as a rule of practice grafted on to generally expressed powers to order costs.[81] Its abolition reflects a development of the common law rather than the application of any statutory language particular to New South Wales. There is no reason to treat the Victorian provisions as giving rise to any different result. Like the New South Wales provisions, they are expressed in very general terms. The definition of ‘costs’ in s 3 of the Supreme Court Act 1986, on which Freehills relied, includes ‘fees, charges and disbursements’, but it does not provide any basis for recovery independently of the common law principles.
[81]See n 63.
Applying the approach of the plurality, the issue is whether a claim by a firm of solicitors to recover costs for the work of its employees fits within the general rule and is only justified under the Chorley exception, or whether it fits within the ‘well-established understanding’ relating to employed solicitors and stands outside the general rule. If it is the former, then as a matter of logic and principle the claim must fail once the Chorley exception was abandoned as part of Australian law. If it is the latter, then costs would appear to be recoverable on the same basis as in the case of other employed solicitors.
Does Freehills fit within the general rule?
In considering the application of Bell Lawyers, it is convenient to start by repeating the general rule identified by the plurality:[82]
a self-represented litigant may not obtain any recompense for the value of his or her time spent in litigation. Under an exception to the general rule, a self-represented litigant who happens to be a solicitor may recover his or her professional costs of acting in the litigation.
[82]Ibid 1012 [1] (Kiefel CJ, Bell, Keane and Gordon JJ) (citations omitted).
Freehills was a self-represented litigant in the proceedings. The Freehills partnership was a party, with each of the partners jointly and severally liable, and the partnership was also the solicitor on the record.[83] The employed solicitors did not represent their employer. They worked on the relevant matters as employees of the firm and under the supervision of partners who had overall responsibility for the carriage of the litigation.
[83]See para [56] above.
Would recovery of costs in respect of work done by employees amount to recompense for time spent by Freehills in the litigation? As a matter of both substance and form, the work of the employee solicitors was done for and on behalf of the partnership. The time of the employed solicitors was time that the firm had available to deploy as it saw fit. The same is true of the work and time of other employees.
In the present case, although Freehills is not seeking to recover costs for the time spent by Mitchell, the lawyers who did the work reported to him and he had oversight and control of the litigation. He retained a critical role at the apex. Although there was a degree of functional separation between the partners and employee lawyers who had acted in the matters that gave rise to the litigation, Mitchell remained jointly and severally liable for the profits and losses arising from acting and from the result of the litigation. If complete functional separation has any significance, which we doubt, it cannot be said to exist here.
It might also be said that the partnership should be permitted to ameliorate the opportunity cost of not having the employees available to do external remunerative work. However, to use the examples given by Edelman J, a plumber, engineer, architect, or accountant who is a party to a proceeding is not entitled to recover the value of his or her own labour or that of an employee who has to spend time in the conduct of the litigation. As a matter of principle, given the outcome in Bell Lawyers, a different answer is not given because the lawyer uses his or her time, or that of his or her employees, to provide legal services. At least for the purpose of determining whether the general principle is engaged, there is no reason to treat the employees of a solicitor differently. It follows that to allow a solicitor to recover costs referable to the work done by its employees would recompense that solicitor for its time spent in the litigation.
Does Freehills’ claim fit within the ‘employed solicitor rule’?
The plurality in Bell Lawyers concluded that an ‘in-house solicitor’ who ‘appears in proceedings to represent his or her employer’ has been treated as ‘outside the general rule’ because an order for costs reflects a functional reimbursement of the expenditure, in the form of salary and overheads, that the party incurs in obtaining legal assistance.[84]
[84]Bell Lawyers (2019) 93 ALJR 1007, 1019-20 [47]–[50] (Kiefel CJ, Bell, Keane and Gordon JJ); [2019] HCA 29.
First, and most significant, the relevant class of cases does not include self-represented litigants. The applicants rightly point out that a government, government agency or corporate litigant may be represented in litigation by employed solicitors. In those cases the party is separate and distinct from the solicitor on the record. In no meaningful sense would a government or a corporation, represented by an employed solicitor, be described as a self-represented litigant. That is not true of Freehills in the present proceedings. The firm is the solicitor on the record, and the litigation is under the control of one of its partners, albeit no claim for costs is sought in respect of the partners.
It seems to us that all of the members of the Court in Bell Lawyers recognised a distinction between the position where solicitors who are parties represent themselves, and the position where a party is represented by an employed solicitor. In the latter case the party is not unrepresented or self-represented. It is represented by the employed solicitor, and an issue which has then arisen at times is what amount of costs should be recoverable given the employment relationship.
The plurality recognised this distinction in the passage we quoted earlier when they said, referring to lawyers employed by governments and others, that ‘such a solicitor appears in proceedings to represent his or her employer’. In the same passage they referred to Brereton J’s judgment in McIlraith v Ilkin (Costs)[85]. They did so because in McIlraith Brereton J, in considering the Chorley exception and determining he was bound to apply it, said that a solicitor defendant, who had been represented by a solicitor corporation of which he was the director, was to be treated as having acted as his own solicitor.[86] The plurality were not prepared to say Brereton J was correct in that approach and left that issue undetermined.
[85][2007] NSWSC 1052. (‘McIlraith’)
[86]Ibid [11].
Gageler J, in the passage we quoted earlier, said that the issue of a party ‘using an employed solicitor’ was an application of the general rule rather than an exception to it. A review of the authorities he cited (and relevant authorities they cite) confirms that he was addressing the position where a party is represented in the proceeding by a solicitor who is an employee of the party (or of a related interested person or entity), usually a government officer or instrumentality.[87]
[87]Attorney-General v Shillibeer (1849) 4 Ex 606; 154 ER 1356 (Crown Solicitor); Raymond v Lakeman (1865) 34 Beav 584; 55 ER 761 (different issue — not costs of litigation as such); Registrar of Titles v Watson [1954] VLR 111 (Crown Solicitor briefing salaried counsel); Commonwealth Bank of Australia v Hattersley (2001) 51 NSWLR 333; [2001] NSWSC 60 (‘Hattersley’) (Solicitor on the record, L E Taylor, was a bank employee); In Re Eastwood (Deceased) [1975] Ch 112 (Attorney-General represented by employed solicitor); Galloway v Corporation of London (1867) LR 4 Eq 90 (City of London represented by the City Solicitor); Lenthall v Hillson [1933] SASR 31 (Crown Law Officer representing complainant police officer); Nolan v George: Ex parte George [1959] Qd R 315 (Crown Solicitor prosecuting prisoners); Blackall v Trotter (No 1) [1969] VR 939 (Solicitor for Insurance Commissioner representing a party); McCullum v Ifield [1969] 2 NSWR 329 (Solicitor for Government Insurance Office representing a party).
Nettle J, in the passage we have quoted, expressly described the relevant position in this context as one where the employee solicitors are ‘representing their employers’, although he expressed the view that the distinction between that position and the self-represented solicitor lacked merit.
Edelman J, in the passages which we have quoted and to which we have referred, emphasised that where the solicitor is both party and lawyer the solicitor is ‘unrepresented’, and the solicitor’s role as an agent for another is absent. That is Freehills’ position here. It is not the position where an employed solicitor represents, and is the solicitor on the record for, their employer.
Secondly, allowing a solicitor to recover fees when acting for him or herself would perpetuate the unequal treatment that Bell Lawyers sought to eradicate. The fact that the work was done by an employee is not, in that respect, significant. There is no reason why a firm of solicitors should be permitted to recover in circumstances where an individual solicitor cannot.
It is to be remembered that in Chorley itself Bowen LJ thought it absurd to ‘permit a solicitor to charge for the same work when it is done by another solicitor, and not to permit him to charge for it when it is done by his own clerk’.[88] In other words, a significant rationale for the Chorley exception was to permit a solicitor to recover for the time spent by his or her employees.
[88]Chorley (1884) 13 QBD 872, 877, cited in Bell Lawyers (2019) 93 ALJR 1007, 1015 [21] (Kiefel CJ, Bell, Keane and Gordon JJ), 1028 [91] (Edelman J); [2019] HCA 29.
Thirdly, none of the cases referred to in Bell Lawyers establishes that solicitors employed by a law firm have been treated as falling within the employed solicitor rule. In part, that may be explicable because the Chorley exception rendered such an analysis redundant. The firm could recover costs under Chorley and had no reason to seek recourse to the employed solicitor rule. The fact that no authority stands in support of the proposition is a factor in the mix, but it is not particularly powerful as it may be explained by the fact that costs were recoverable by another route.
We note that in his reasons Nettle J, although in dissent on the point of principle, included firms of solicitors within the category of employer covered by the employed lawyer rule. His Honour referred, without distinction, to firms of solicitors, corporations and government agencies. However none of the cases cited by his Honour involved a firm of solicitors as a party.[89]
[89]See Bell Lawyers (2019) 93 ALJR 1007, 1024 [75]; [2019] HCA 29.
Against these matters, the most powerful consideration that might justify allowing costs recovery is that an order for costs relating to employed solicitors is more than compensation for the loss of time. It also compensates the employer/litigant for the cost of employment. Left unrecompensed, the firm has lost more than the time of its partners. It has also incurred the expense of the salary and overheads associated with those of its employees who are engaged in the litigation. If the organising principle in relation to costs orders is to ensure that costs are an indemnity or reimbursement for expenses actually incurred then they should be recoverable in respect of employed solicitors regardless of whether the employer is a solicitor or not. The functional equivalence between a payment to a third party and an overhead expense that justifies the ‘well-established understanding’ is applicable equally to lawyers and non-lawyers.
That appears to have been the approach taken by Ward CJ in Eq in Ratkovic v Hadzic.[90] The costs orders made in that case in favour of a firm of solicitors arose in particular circumstances. The underlying dispute was a claim brought in probate proceedings. The firm of solicitors acted for the defendant. On behalf of their client, the solicitors held on trust substantially the whole of the estate in the form of cash and a certificate of title. By notice of motion, the plaintiff sought an injunction in relation to the disposition of the estate and joined the solicitor who held the property. The solicitor was separately represented on the motion.
[90][2019] NSWSC 1627.
After various interlocutory skirmishes, an agreement was reached between the plaintiff and defendant, a term of which provided that the plaintiff was to bear the burden of any order for costs made in favour of the solicitor in relation to the injunction. Subsequently, an issue arose as to the quantification of the costs and ultimately, relying on Bell Lawyers, the plaintiff submitted that the lawyers were only entitled to an order for costs ‘to the extent that those [costs] included costs that it had not incurred as a self-represented litigant’.[91]
[91]Ibid [19].
In the course of submissions, the plaintiff referred to that part of the plurality judgment that identified the general rule, and to passages from the judgment of Gageler J in relation to employed solicitors.
Ultimately her Honour concluded that ‘in light of the agreement reached between the plaintiff and the defendant, and in light of the position taken by the plaintiff on the current application’ it was appropriate to make an order for costs in favour of the solicitors.[92] Her Honour also ordered that the costs be in the form of a gross sum costs order.[93] Although not expressly saying so, her Honour appears to have treated the employed solicitor rule as applying because she indicated that costs were recoverable to the extent they extended to the costs of external counsel and disbursements, and the costs attributable to the time incurred by the employed solicitor but not the costs of the partner. We do not regard her Honour as having sought to resolve the present question. The case turned to a significant extent on its particular facts, including the agreement between the parties.
[92]Ibid [34].
[93]Ibid [35].
Although not decisive in Bell Lawyers, it emerges clearly enough that there is a risk of a lack of objectivity and professional detachment when lawyers appear for themselves in litigation. Although there may be a degree of separation within the firm, and each lawyer has their own professional obligations, nevertheless the person ultimately responsible for the legal conduct of the litigation is likely to be a partner in the firm with a direct personal interest in the outcome. That was so in this case.
In Bell Lawyers, Nettle J regarded the fact that a costs order may entail a degree of profit as critical factor weighing against the Chorley exception.[94] The plurality likewise regarded the possibility of a solicitor profiting from conducting their own litigation as ‘unacceptable in point of principle’.[95] However, that prospect is also present where there is recovery for an employed solicitor in government or the private sector. In that context, it has not been regarded as decisive. As Gageler J noted, in those cases recovery is of costs incurred in the form of an overhead. The avoidance of profit can be achieved by a limit on the amount recovered rather than by entirely precluding recovery. That has been the approach taken in relation to employed solicitors generally.[96]
Conclusion on Bell Lawyers and the form of order
[94]Bell Lawyers (2019) 93 ALJR 1007, 1023 [71]; [2019] HCA 29.
[95]Ibid 1017 [32].
[96]See, eg, Hattersley (2001) 51 NSWLR 333, 339-40 [22]–[26] (Davies AJ); [2001] NSWSC 60.
Ultimately, we have come to the conclusion that to treat employee solicitors of a legal firm as falling within the ‘well-established understanding’ would considerably undermine Bell Lawyers. It would extend the ‘well-established understanding’ to cases of self-represented legal firms and perpetuate a significant degree of special treatment not accorded to non-lawyer litigants, referred to in Chorley as ‘ordinary litigants’.
In substance it would, anomalously, allow firms of solicitors to recover for their own time spent in the litigation. It would also mean that a legal practice with employees could recover fees when a sole practitioner could not.
It follows that, in our view, Bell Lawyers prevents recovery of costs in favour of Freehills for the time spent by its own employees. That does not mean that it is not entitled to an order for other costs. In Bell Lawyers, costs orders were made by the High Court in favour of Bell Lawyers in respect of the first instance proceedings, in the intermediate appellate court and in the High Court notwithstanding that the firm was both a party and the solicitor on the record.
Freehills is entitled to a costs order and will be entitled to recover costs in respect of disbursements incurred by it in the course of the litigation and in so far as it retained external solicitors to act for it. The orders made by the trial judge are apt to achieve that result. In other words, of itself the applicants’ success on the Bell Lawyers point does not lead us to overturn the orders for costs made by the judge.
It remains to deal with the grounds that contend, in relation to the fees proceeding and the negligence proceeding, that the judge erred in ordering indemnity costs.
Grounds other than Chorley exception
The principles
The making of a costs order entails the exercise of a discretion. Accordingly, the principles in House v The King[97] apply to any application for leave to appeal. More specifically, this Court has observed that appeals from orders as to costs are rightly treated as exceptional and require this Court to exercise particular restraint.[98] The authorities explained that the main rationale for that caution is that the trial judge is almost always best placed to assess in whose favour and to what extent the discretion as to costs should be exercised.
[97](1936) 55 CLR 499; [1936] HCA 40.
[98]AJH Lawyers v Mathieson Nominees Pty Ltd [2015] VSCA 227, [89] (Hansen and McLeish JJA, Robson AJA agreeing at [92]); Transport Accident Commission v O’Reilly (1999) 2 VR 436, 457 [46] (Ormiston JA); [1998] VSCA 106; PCCEF Pty Ltd v Geelong Football Club Ltd [No 2] [2019] VSCA 148 [38]–[41] (Whelan, McLeish and Emerton JJA).
In relation to offers of compromise, the principles are also well established. The judge recorded that Calderbank letters must represent a genuine compromise, as opposed to an invitation to capitulate.[99] Where an offer is not accepted and the offeree does not achieve a more favourable outcome than that contained in the offer, there is a basis for awarding costs at a higher level. The unreasonable refusal to accept an offer of compromise provides a basis for indemnity costs to be awarded in favour of the offeror.
[99]Costs Judgment [18].
Fees proceeding
In the fees proceeding Freehills obtained judgment in its favour in the sum of $702,192.13[100] plus costs. The Freehills Offer made on 16 June 2017 was for United to pay Freehills the sum of $750,000 inclusive of GST, interest and costs and including a number of unrelated invoices rendered by Freehills to the United entities and amounting to $142,965.65.
[100]$648,159.39, with interest in the sum of $54,032.74.
The judge referred in unexceptionable terms to the principles that apply where a special costs order is sought on the basis of an offer of compromise or Calderbank offer.
The judge held that the offer referable to the claims made in the fees proceeding was less than the judgment sum awarded. In doing so, the judge took into account the outstanding invoices, or a component of them, and interest. Having regard to those matters, United did not do ‘better’ regardless of whether an amount for costs is included.[101]
[101]Costs Judgment [10(1)].
The issue is whether the applicants have established that the judge erred in proceeding on the basis that the applicants did not achieve a more favourable outcome than they would have obtained had they accepted the Freehills Offer.
In practical terms it means that the applicants must establish that the judge was wrong to proceed on the basis that the value of the additional invoices would have exceeded $47,807.87, being the difference between the judgment amount and the amount of the Freehills Offer. In our view no error has been shown in this respect.
The costs in respect of which the special order may attach will be subject to the conclusion reached above in relation to the Chorley exception.
Negligence proceeding
The judge dismissed the negligence proceeding. He ordered indemnity costs because, in his view, the proceeding should not have been brought. Additionally, he would have, in any event, made an indemnity costs order based on the offer made by Freehills in respect of the negligence proceeding on 13 September 2017, that Freehills ‘walk away’ and bear its own costs (‘Third Freehills Offer’).
In relation to costs in the negligence proceeding, the applicants advanced 16 proposed grounds of appeal. First, they contend that the judge erred in holding that there was no proper basis to bring the proceeding; that the judge’s adverse findings in relation to Silver that he ‘did not take kindly to, and was most unaccepting of, anyone who crossed him with respect to the issues relating to these proceedings’[102] were not supported by the evidence and the applicants did not have an opportunity to respond to those matters. Secondly, they contend that the judge erred in holding that the Third Freehills Offer was a genuine offer to settle which it was unreasonable of the applicants not to accept. Thirdly, the judge ought to have held that the respondent could not recover the costs of acting for itself in the negligence proceeding.
[102]Ibid [50].
The judge held that the case against Freehills was so lacking in substance that Freehills ought to be awarded costs on the indemnity basis from the commencement of the proceeding.[103] The judge held that the principal reasons for the ‘comprehensive failure of the United Parties’ claims were all within the knowledge of the United Parties’.[104]
[103]Ibid [69].
[104]Ibid [45].
In circumstances where there is no appeal from the orders dismissing the proceeding against Freehills, we have not been asked to consider in any detail the evidence in the negligence proceeding brought against Freehills.
Having read the reasons closely, we are satisfied that there was ample foundation for the judge’s conclusions. More importantly, the applicants have not discharged their onus of establishing any error on the part of the judge. The quantification of the legal costs and whether or not they include Freehills fees for acting for itself is irrelevant to the form of the order made by the judge.
Again, the costs in respect of which the special order may attach will be subject to the conclusion reached above in relation to the Chorley exception.
Conclusion and orders
In the application for leave to appeal the judgment in the fees proceeding leave to appeal should be refused.
In the two applications for leave to appeal concerning the judge’s decisions on costs, the applicants should be given leave to amend to raise the Bell Lawyers point, leave should be granted in each proceeding but the appeals must be dismissed.
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SCHEDULE OF PARTIES
S APCI 2018 0087
S APCI 2018 0145
BETWEEN
| United Petroleum Australia Pty Ltd (ACN 164 398 832) | First Applicant |
| United Petroleum Pty Ltd (ACN 085 779 255) | Second Applicant |
| and | |
| Herbert Smith Freehills (A Firm) (ABN 98 773 882 646) | Respondent |
S ACPI 2018 0146
BETWEEN
| United Petroleum Australia Pty Ltd (ACN 164 398 832) | First Applicant |
| United Petroleum Pty Ltd (ACN 085 779 255) | Second Applicant |
| United Petroleum Holdings Ltd (ACN 610 690 849) | Third Applicant |
| Avi Silver | Fourth Applicant |
| Eddie Hirsch | Fifth Applicant |
| Kinlee Pty Ltd (ACN 075 196 093) as trustee for the Kinlee Silver Trust | Sixth Applicant |
| Apson Pty Ltd (ACN 075 196 084) as trustee for the Apson Hirsch Trust | Seventh Applicant |
| and | |
| Herbert Smith Freehills (A firm) (ABN 98 773 882 646) | Respondent |
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