Wellington v Metcalf (No 2)
[2025] VSC 243
•8 May 2025
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COSTS COURT
S ECI 2023 04390
BETWEEN:
| HEATHER WELLINGTON | Applicant |
| v | |
| KIRSTY METCALF | Respondent |
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JUDGE: | Ierodiaconou AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 12 February 2025 |
DATE OF RULING: | 8 May 2025 |
CASE MAY BE CITED AS: | Wellington v Metcalf (No 2) |
MEDIUM NEUTRAL CITATION: | [2025] VSC 243 |
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COSTS – Indemnity principle – Where there was an initial costs agreement – Where failure of law practice to comply with ongoing costs disclosure – Where applicant and her solicitors subsequently entered into an oral costs agreement – Where oral costs agreement was conditional on no-win/no-fee – Cost agreement void – Whether applicant is liable to pay legal costs despite the void cost agreement – Whether taxation should be stayed until a costs assessment is conducted – Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 ss 172, 174, 178, 180, 181, 184, 185, 196, 198–200 – Legal Profession Uniform General Rules 2015 r 72A – Shaw v Yarranova [2011] VSCA 55 – Kuek v Devflan (2011) 31 VR 264 – Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 4) [2013] VSC 669 – Royal v El Ali (No 3) [2016] FCA 1573 – Wills v Woolworths [2022] FCA 1545.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr S Buchanan | Verduci Lawyers |
| For the Respondent | L A Warren Lawyers |
TABLE OF CONTENTS
Evidence
Background
LPUL
Indemnity Principle
Is there an obligation to pay legal costs despite the void costs agreement?
Is the applicant liable to pay legal costs to her solicitors?
Should the taxation be stayed until a costs assessor conducts a costs assessment?
Conclusion
HER HONOUR:
This proceeding concerns the taxation of costs. The application of the indemnity principle is in dispute between the parties. That is, whether the applicant is seeking costs from the respondent that exceed the applicant’s liability for costs to her solicitors. The respondent contends that the applicant is not liable to pay costs to her solicitors because of a void cost agreement. The applicant concedes the cost agreement was void but says liability remains.
There are three central questions to resolve. First, is there an obligation to pay legal costs despite the void cost agreement? Second, is the applicant liable to pay her solicitors’ costs? Third, should the taxation of costs be stayed until a costs assessment between the applicant and her solicitors is conducted?
Evidence
The respondent relies on the affidavits of her solicitor, Leonard Adrian Warren, affirmed on 29 May 2024 and 10 September 2024.
The applicant relies on her affidavit sworn on 11 July 2024 (‘applicant’s affidavit’), the affidavits of her solicitor, Francine Lastrina sworn on 10 July 2024 (‘first Lastrina affidavit’) and 10 September 2024 (‘second Lastrina affidavit’), and the affidavit of her former solicitor, James McIntyre sworn on 10 September 2024 (‘McIntyre affidavit’).[1]
[1]During the course of the hearing, I ruled a number of paragraphs in the affidavits of Francine Lastrina sworn on 10 September 2024 (‘second Lastrina affidavit’) and James McIntyre sworn on 10 September 2024 (‘McIntyre affidavit’) to be inadmissible.
Both parties made oral submissions at hearing.
Turning now to the background, focusing on the costs agreements between the applicant and her legal practitioners, and the dispute between the parties regarding the application of the indemnity principle.
Background
On 23 November 2020, Mr McIntyre, on behalf of Verduci Lawyers, emailed a costs disclosure and costs agreement to the applicant (the ‘initial costs agreement’).[2] Relevantly, the initial costs agreement states:
[2]Exhibit ‘JEM-1’ to the McIntyre affidavit, 8–15.
1. The work we will carry out
The work we have been instructed to do is:
(a) initially, send a concerns notice to Kirsty Metcalf
(b)if required; represent you as the plaintiff’s solicitor’s in Supreme Court defamation proceedings against Kirsty Metcalf; and
(c)Brief Junior Counsel and Senior Counsel as and when the need may arise.
2. Our fees and disbursements
Fees
In this instance it is impractical to quote a fixed fee in advance because, it is impossible to tell with any degree of certainty what work is going to be involved. However, we estimate our fees and disbursements will be in the order of $50,000 plus GST (if proceedings are issued). This is broken down to $25,000 for our fees and $25,000 for disbursements. Whilst this estimate is not binding on us it is based on our experience of similar matters. Should the scope of work change significantly we will keep you informed of the likely effect on our costs and on disbursements and update our estimate.
The major variables that might affect the calculation of these costs are:
(i) Whether or not proceedings are required;
(ii) Whether or not the matter settles and, if so, at what stage the matter settles; and
(iii) The length of any final hearing.
Our fees will be calculated as follows:
Those members of the firm who work on your matter will record the time they spend and charge according to the following rates.
[table of type of employee and their hourly rate]
The firm’s fees are determined by applying these hourly rates to the units of time recorded by each staff member on your matter. […]
3. Billing and payment arrangements
[…]
(b) Each month, or on the completion of specific tasks, we will render accounts and ask that you authorise us to transfer funds from our trust account to pay them in full. If there are insufficient funds we will ask you to pay the balance and we may also ask you payment additional sums on account of further costs and disbursements. [3]
[3]Exhibit ‘JEM-1’ to the McIntyre affidavit, 10–15.
On 22 February 2021, Verduci Lawyers issued an invoice to the applicant for $18,672.00, comprised of $6,380.00 in the firm’s professional fees (inclusive of GST) and $12,292.00 in disbursements.[4] The applicant paid the invoice.[5]
[4]Ibid 18–22.
[5]McIntyre affidavit, [18(a)], [19].
On 11 September 2021, according to the applicant’s bill of costs filed in the current proceeding, the original fee estimate was exceeded.
On 18 October 2021, Verduci Lawyers issued an invoice to the applicant for $16,241.23, comprised of $9,724.00 in the firm’s professional fees (inclusive of GST) and $6,517.23 in disbursements (inclusive of GST).[6] The applicant paid the invoice.[7]
[6]Exhibit ‘JEM-1’ to the McIntyre affidavit, 23–27.
[7]McIntyre affidavit, [18(b)], [19].
On 9 February 2022, Mr McIntyre emailed the applicant (‘McIntyre 9 Feb 2022 email’). The email attached, among other things, disclosure statements from senior and junior counsel briefed for trial and provided an estimate of trial costs of $317,000. This amount comprised $254,000 in counsel fees, $55,000 in the firm’s professional fees, and $8,000 in disbursements. The email then stated:
While we can enter into a payment arrangement with you in respect of our fees, we will need to be placed in funds in respect of counsel's fees prior to the trial. Elle’s work is ongoing, and so she may render invoices on an ongoing basis rather than at conclusion of trial.[8]
[8]Exhibit ‘JEM-1’ to the McIntyre affidavit, 16.
On 6 April 2022, Verduci Lawyers issued an invoice to the applicant for $30,796.72, comprised of $28,468.00 in the firm’s professional fees (inclusive of GST) and $2,328.72 in disbursements.[9] The applicant paid the invoice.[10]
[9]Exhibit ‘JEM-1’ to the McIntyre affidavit, 28–37.
[10]McIntyre affidavit, [18(c)], [19].
On the evidence before me, it is unclear whether the following conversations occurred ‘shortly after’ the McIntyre 9 Feb 2022 email or in April 2022. While it is ultimately peripheral to my decision, for clarity, I find that it is more likely these conversations occurred in April 2022. I make this finding on the basis of the applicant’s evidence, which is that she did not receive another invoice from Verduci Lawyers after her conversation with Mr McIntyre.[11] Accepting this evidence, and accepting that the applicant paid the invoice dated 6 April 2022,[12] it is clear the following conversations occurred after 6 April 2022.
[11]Affidavit of Heather Wellington sworn on 11 July 2024 (‘applicant’s affidavit’), [5].
[12]McIntyre affidavit, [18(c)], [19].
In April 2022, the applicant said she called Mr McIntyre to discuss her concern that she would not be able to afford the legal costs.[13]
[13]Applicant’s affidavit, [3].
Mr McIntyre deposed that he spoke with his principals, Mr Verduci and Ms Lastrina. Mr McIntyre said they discussed the firm entering into a payment agreement with the applicant to defer payment of the firm’s professional fees and disbursements for the preparation and conduct of trial unless and until the applicant was successful at trial.[14] Ms Lastrina said they discussed continuing to act for the applicant on a no win/no fee basis.[15] I accept the evidence of Mr McIntyre and Ms Lastrina. I find both topics were discussed.
[14]McIntyre affidavit, [13]–[14].
[15]Affidavit of Francine Lastrina sworn on 10 July 2024 (‘first Lastrina affidavit’), [2]–[3].
Consistent with Mr McIntyre’s discussion with Mr Verduci and Ms Lastrina, there was a further telephone conversation with the applicant. Mr McIntyre said he made an offer to ‘enter into a payment arrangement’ to ‘defer payment’ of the firm’s fees and disbursements for the conduct and preparation of the trial until after the trial had concluded. Further, he told the applicant that the firm would not seek to recover those fees and disbursements unless the applicant was successful at trial.[16] The applicant’s recollection of this telephone conversation varies slightly, insofar as she recalled Mr McIntyre advising that Verduci Lawyers would continue to act for her on a no win/no fee basis.[17]
[16]McIntyre affidavit, [13]–[14].
[17]Applicant’s affidavit, [4].
I accept the evidence of Mr McIntyre and the applicant regarding the telephone conversation. I find that in or about April 2022, there was an oral costs agreement between the applicant and her solicitors. The terms of the initial costs agreement continued to apply save for a key aspect: a no win/no fee agreement (the ‘oral costs agreement’). Any costs liability was deferred until after the determination of the trial. Consistently with the oral costs agreement, Verduci Lawyers remained retained by the applicant in the County Court defamation proceeding but no further invoices were rendered. Verduci Lawyers recorded payments in a costs register.[18]
[18]This costs register appears to have been referred to by the respondent as a ‘pre-billing guide’ in her notice of objection filed on 25 March 2024 (‘respondent’s notice of objections’). See also, second Lastrina affidavit, [10]; exhibit ‘FL’1’ to the second Lastrina affidavit, 6.
In August 2022, the County Court defamation proceeding was heard and determined, with the trial judge finding in favour of the applicant on 21 November 2022.[19] The County Court ordered the respondent to pay the applicant’s costs on an indemnity basis.
[19]See: Wellington v Metcalf [2022] VCC 1759.
The current proceeding commenced on 19 September 2023 via a summons for taxation and a bill of costs. I reiterate the background to this proceeding given in another cost ruling: [2024] VSC 454.
On 25 March 2024, the respondent filed a notice of objections, including General Objection 1. General Objection 1 is an objection to the bill of costs on the basis that the applicant is in breach of the indemnity principle. The respondent says she cannot be held liable for any fees beyond the applicant’s liability to her solicitors, and that liability appears to be about $482,340.83.
On 2 April 2024, the applicant filed a response to the notice of objections. The applicant says General Objection 1 cannot be sustained, stating:
The Applicant contends that the indemnity principle has not been breached. The Law firm had initially provided invoices to the Plaintiff however, during the course of the proceedings, the Plaintiff could not afford or have the necessary resources to continue to fund the cost of the litigation. Accordingly, the Law firm continued to act on behalf of the Applicant on a “no win, no fee” basis and ceased to provide invoices other than Counsel fees incurred.
On 8 April 2024, the Costs Court provided a notice of estimate of $547,280. The respondent filed a notice of objection to the estimate on 17 April 2024.
On 29 May 2024, the respondent filed a notice to the Court and the applicant seeking various orders, including an order that the applicant produce for inspection ‘all documents relevant to General Objection 1’.
On 8 and 10 July 2024, the Court made orders by consent that the applicant produce copies of all documents relating to General Objection 1. The respondent took issue with the documents produced by the applicant and the matter was listed before a Costs Registrar. The Costs Registrar made orders on 16 July 2024 for further and better production.
The hearing of arguments about the respondent’s General Objection 1 was listed on 11 September 2024. On 10 September 2024, the respondent sought and was granted an adjournment of this hearing to consider recently served affidavits, namely the McIntyre and second Lastrina affidavits. In ‘Other Matters’ of the orders made on the same date, it is recorded that the respondent foreshadowed seeking leave to cross-examine the applicant, Ms Lastrina and Mr McIntyre. Subsequently, the respondent confirmed her intention to seek leave.
The hearing of the respondent’s General Objection 1, including the respondent’s application for leave to cross-examine, proceeded on 12 February 2025. At the hearing, the applicant conceded that any oral agreement with her solicitors was void under Schedule 1 of the Legal Profession Uniform Law Application Act 2014 (Vic) (‘LPUL’). Based on this concession, the respondent withdrew her application for leave to cross-examine.
It is common ground that there was a costs retainer between the applicant and her solicitors but that any oral costs agreement is void per the LPUL. The dispute between the parties centred on the effect of this. The respondent contends that the applicant has no liability for costs to her solicitors, or alternatively, there is no liability from about the time the initial costs estimate was exceeded, or about the time of the oral costs agreement. However, the amount disputed by the respondent is about $135,000. This focuses the dispute on the unpaid fees claimed by the applicant based on the oral costs agreement.
LPUL
At the outset, it is necessary to outline the relevant legislative provisions in pt 4.3 (legal costs) of the LPUL. The objectives of pt 4.3 include consumer protection.[20] The requirements for disclosure and costs agreements are prescribed, together with the consequences for non-compliance. Turning now to the applicable sections.
[20]See, eg, Able Demolitions and Excavations Pty Ltd v Barry Kenna & Co [2016] VSCA 312, [88]-[90]; see also Russells v McCargel [2014] VSC 287, [10].
Section 169 states that the objectives of pt 4.3 are:
(a) to ensure that clients of law practices are able to make informed choices about their legal options and the costs associated with pursuing those options; and
(b) to provide that law practices must not charge more than fair and reasonable amounts for legal costs; and
(c) to provide a framework for assessment of legal costs.
Division 3 of pt 4.3 relates to costs disclosure. Relevantly, s 174 provides for disclosure obligations of law practices regarding clients. Section 174(1) states that the main disclosure requirement is that a law practice:
(a) must, when or as soon as practicable after instructions are initially given in a matter, provide the client with information disclosing the basis on which legal costs will be calculated in the matter and an estimate of the total legal costs; and
(b) must, when or as soon as practicable after there is any significant change to anything previously disclosed under this subsection, provide the client with information disclosing the change, including information about any significant change to the legal costs that will be payable by the client—
together with the information referred to in subsection (2).
Sections 174(2) provides additional information, and s 174(3) provides for the client’s consent and understanding. Section 174(6) states that a disclosure under s 174 must be made in writing.
Section 178 relates to non-compliance with disclosure obligations under pt 4.3. It relevantly states:
(1) If a law practice contravenes the disclosure obligations of this Part—
(a) the costs agreement concerned (if any) is void; and
(b)the client or an associated third party payer is not required to pay the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority; and
(c)the law practice must not commence or maintain proceedings for the recovery of any or all of the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority or under jurisdictional legislation; and
(d)the contravention is capable of constituting unsatisfactory professional conduct or professional misconduct on the part of any principal of the law practice or any legal practitioner associate or foreign lawyer associate involved in the contravention.
Division 4 of pt 4.3 of the LPUL relates to costs agreements. Section 180(2) states that a costs agreement ‘must be written or evidenced in writing’.
Section 181 outlines conditional costs agreement as follows:
(1)A costs agreement (a conditional costs agreement) may provide that the payment of some or all of the legal costs is conditional on the successful outcome of the matter to which those costs relate.
(2) A conditional costs agreement must—
(a) be in writing and in plain language; and
(b)set out the circumstances that constitute the successful outcome of the matter to which it relates.
(3) A conditional costs agreement must—
(a) be signed by the client; and
(b)include a statement that the client has been informed of the client’s rights to seek independent legal advice before entering into the agreement.
(4)A conditional costs agreement must contain a cooling-off period of not less than 5 clear business days during which the client, by written notice, may terminate the agreement, but this requirement does not apply where the agreement is made between law practices only.
…
(6)A conditional costs agreement may provide for disbursements to be paid irrespective of the outcome of the matter.
…
(8)A contravention of provisions of this Law or the Uniform Rules relating to conditional costs agreements by a law practice is capable of constituting unsatisfactory professional conduct or professional misconduct on the part of any principal of the law practice or any legal practitioner associate or foreign lawyer associate involved in the contravention.
Section 183 prohibits contingency fees.
Section 184 provides that, subject to the LPUL, a costs agreement may be enforced like any other contract.[21]
[21]See, eg, Petselis v Tatarka (2019) 57 VR 375, [60].
Section 185 states:
Certain costs agreements are void
(1) A costs agreement that contravenes, or is entered into in contravention of, any provision of this Division is void.
Note
If a costs agreement is void due to a failure to comply with the disclosure obligations of this Part, the costs must be assessed before the law practice can seek to recover them (see section 178(1)).
(2) A law practice is not entitled to recover any amount in excess of the amount that the law practice would have been entitled to recover if the costs agreement had not been void and must repay any excess amount received.
(3) A law practice that has entered into a costs agreement in contravention of section 182 is not entitled to recover the whole or any part of the uplift fee and must repay the amount received in respect of the uplift fee to the person from whom it was received.
(4) A law practice that has entered into a costs agreement in contravention of section 183 is not entitled to recover any amount in respect of the provision of legal services in the matter to which the costs agreement related and must repay any amount received in respect of those services to the person from whom it was received.
Division 7 of pt 4.3 of the LPUL concerns costs assessment. Section 196 states it ‘applies to legal costs payable on a solicitor-client basis.’ Section 198 provides that applications for costs assessment may be made by a client, a third party payer (who has paid or is liable), the law practice, or another law practice retained by the primary law practice. Section 198 does not allow the respondent to apply for the costs between the applicant and her solicitors to be assessed.
Section 199(1) relevantly provides that costs assessors will conduct legal cost assessments. Section 199(2) states that on a costs assessment, the costs assessor must:
(a) determine whether or not a valid costs agreement exists; and
(b)determine whether legal costs are fair and reasonable and, to the extent they are not fair and reasonable, determine the amount of legal costs (if any) that are to be payable.
Note
A costs agreement can be void under section 178 or 185.
Section 200(1) states that in considering ‘whether legal costs for legal work are fair and reasonable, the costs assessor must apply the principles in s 172’ insofar as they are applicable. Section 172(1) requires law practices to charge legal costs ‘that are no more than fair and reasonable in all the circumstances’ and that are proportionately and reasonably incurred and are a proportionate and reasonable amount. Section 172(2) lists the factors to consider in deciding whether costs are no more than is fair and reasonable. In considering whether costs are fair and reasonable, the costs assessor must have regard to whether the legal costs comply with requirements of the LPUL and the Legal Profession Uniform General Rules 2015 (‘Uniform Rules’),[22] and may have regard to any disclosures made.[23]
[22]LPUL s 172(3).
[23]Ibid s 200(2)(b).
Section 172(4) provides that a ‘costs agreement is prima facie evidence that legal costs disclosed in the agreement are fair and reasonable’ if the provisions of div 3 (costs disclosure) have been complied with and the costs agreement does not contravene div 4 (costs agreements). As well as the principles in s 172, per s 200(2), in considering whether the legal costs for legal work are fair and reasonable, the costs assessor may have regard to other relevant matters.
The Uniform Rules are made under pt 9.2 of the LPUL by the Legal Services Council.[24] Rule 72A provides:
[24]LPUL s 6 definition of ‘Uniform Rules’.
Non-compliance with disclosure obligations—disapplication of section 178(1) and (2) of the Uniform Law
(1)This rule applies where a law practice has contravened the disclosure obligations of Part 4.3 of the Uniform Law in relation to a particular matter.
(2)Section 178(1) and (2) of the Uniform Law do not apply in relation to the law practice (so far as they would otherwise apply to the matter concerned) in circumstances where the relevant authority, a costs assessor, a court or a tribunal is satisfied that—
(a)the law practice took reasonable steps to comply with the disclosure obligations of Part 4.3 of the Uniform Law before becoming aware of the contravention, and
(b)the law practice, no later than 14 days after the date on which it became aware of the contravention, rectified the contravention, as far as practicable, by providing the client with the necessary information required to be disclosed under Division 3 of Part 4.3 of the Uniform Law (including, where relevant, an estimate or revised estimate of the costs), and
(c)the contravention was not substantial and it would not be reasonable to expect that the client would have made a different decision in any relevant respect.
(3)Subrule (2)(b) applies even though the information or estimate is not provided at the times required by the disclosure obligations of Part 4.3 of the Uniform Law.
(4) In this rule—
client includes (where relevant) an associated third party payer.
relevant authority means the designated local regulatory authority for section 178 of the Uniform Law. [25]
[25]Rule 72A was applied in Schmid v Skimming [2020] VSC 493 and Burke v Ash Sounds Pty Ltd (No 5) [2020] VSC 772. See also Palmos v Pravlik [2020] VSC 112.
Rule 72A was inserted into the Uniform Rules in 2016. A media release issued by the Legal Services Council at the time said that ‘new Rule 72A will remove a concern of some law practices that their costs agreements will be void if they contravene a costs disclosure requirement of the Uniform Law’.[26] Wood AsJ has referred to subsection 178(3) and r 72A as constituting a basis to ‘ameliorate the draconian effect of s 178(1)(a)’.[27] In Malvina Park Pty Ltd v Johnson,[28] Walton J interpreted r 72A as ‘intended to cover circumstances in which there has been an inadvertent contravention of the disclosure obligations which is rectified and the contravention was not material to the client's decision’.[29]
[26]Legal Services Council, ‘Clients kept in the know by Uniform Law’ (Media Release, 22 April 2016).
[27]Johnston v Dimos Lawyers (2019) 59 VR 16 (‘Johnston’), [13].
[28][2019] NSWSC 1490 (‘Malvina Park’).
[29]Malvina Park, [85] (Walton J also determined that s 174(3) was a disclosure obligation, disagreeing with the approach of Gourlay JR in Frigger v Madgwicks [2018] VSC 281).
Now, I turn to the indemnity principle and the applicable authorities.
Indemnity Principle
I adopt the definition of the indemnity principle (referred to as the indemnity rule) given by the Court of Appeal in Shaw v Yarranova (‘Shaw’):[30]
An order for costs against the unsuccessful litigant aims to provide the successful party with some level of indemnity for the legal costs the successful party would not have incurred had it not been necessary to uphold his or her rights in court. Such an order does not entitle the successful litigant to recover more than he or she has paid or is liable to pay to his or her own lawyer. The rule limits the successful party’s right to indemnification to the ‘necessary or proper’ costs incurred to obtain justice in the case. The costs are usually confined to those that the successful party ‘was primarily and potentially legally obliged to pay to his solicitor’. Hence the existence and scope of the successful litigant’s duty to pay his or her own solicitors is central to the ability to recover costs.[31] (citations omitted)
[30][2011] VSCA 55 (‘Shaw’).
[31]Ibid [8].
In Shaw, the Court of Appeal noted that ‘an unsuccessful party may wish to investigate the scope of the successful party’s obligation to pay their solicitors’ costs by reference to the retainer of the successful party’s solicitors.’[32] This is because, as cited earlier, the successful litigant’s liability to pay their solicitors is central to being able to recover costs. There is a presumption of a retainer. A ‘retainer is a contract between the solicitor and the client for the provision of legal services by the solicitor for a fee. Proof of its existence may, like any other contract, be implied from conduct.’[33] The Court of Appeal continued:
Courts generally accept the existence of a contract of retainer when a solicitor has performed work on behalf of a person with his or her knowledge and assent, in circumstances which are consistent with that person being the solicitor’s client. The existence of a contract of retainer and the liability of the client for the solicitor’s costs will be presumed, and the party who challenges the existence of the retainer in such circumstances bears the onus of establishing the absence of it.[34] (citations omitted)
[32]Shaw, [9] (citation omitted).
[33]Ibid [17].
[34]Ibid [19].
The unsuccessful litigant seeking to displace the presumption of a retainer needs to ‘prove that under no circumstances does the client have any liability to pay costs to his or her solicitors.’[35]
[35]Ibid [20].
The Court of Appeal rejected the submission that the primary judge, Beach J (as his Honour then was), had erred in not conducting an assessment per s 91 of the LegalPractice Act 1996 (Vic) (‘Legal Practice Act 1996’) to determine the extent the solicitors had failed to make disclosures under the Act and to then reduce costs.[36] Beach J held:
Underlying part of the plaintiff’s submissions was a contention that every party ordered to pay another party’s costs is entitled to pursue an argument (and seek all relevant documents for the purposes of the pursuit of that argument) that there may have been non-compliance with disclosure obligations under (in this case) the Legal Practice Act 1996. The argument would then run that the party ordered to pay costs is entitled to rely on a failure to give information by the lawyers for his opponent to his opponent in reduction of the opponent’s liability to his lawyers — and thereby bring the indemnity principle into play. Wood AsJ rejected this proposition. His Honour was correct to do so. A taxation of costs ordered to be paid by another party is not an occasion for an inquiry into what (if any) failures there have been in relation to disclosure requirements and what the “seriousness” of any such breach might be. The flexible and reasonable application of the indemnity principle, as the authorities show, does not permit such an approach.[37] (citations omitted).
[36]Ibid [31]-[32].
[37]Shaw v Yarranova Pty Ltd [2010] VSC 567, [25].
The Court of Appeal held it was not for Beach J to undertake an assessment and review of all the relevant bills of costs per s 115(1) of the Legal Practice Act 1996, and nor could his Honour have ordered a further assessment except in special circumstances per s 116(4) of the Act. A complaint about non-compliance with disclosure requirements, from a party who has been ordered to pay costs, did not constitute a special circumstance.[38]
[38]Shaw, [32].
In Kuek v Devflan (‘Kuek’),[39] the Court of Appeal held the primary judge had correctly concluded that the disclosure and retainer letters were relevant to identify the extent of the successful party’s costs liability to their lawyers and were therefore relevant as to whether the indemnity principle had been breached.[40] The primary judge erred by purporting to re-exercise the taxing master’s discretion to determine whether the contention about the application of the indemnity principle was meritorious, but did so without ascertaining the extent of the successful party’s liability to their lawyers, and made speculative findings.[41] None of the matters showed their liability to be equal or greater than the amount allowed by the taxing master.[42] The Court of Appeal remitted the matter to the Costs Judge to determine whether the indemnity principle had been breached.[43]
[39](2011) 31 VR 264 (‘Kuek’).
[40]Ibid [60].
[41]Ibid [64]-[65].
[42]Ibid [66].
[43]Ibid [68]-[69].
Kuek was distinguished by the Court of Appeal in Shaw because there was material before the Costs Court to raise the likelihood that the party/party costs may exceed the successful party’s liability to its lawyers.[44]
[44]Shaw, [28].
In eInduct Systems Pty Ltd v 3D Safety Services Pty Ltd (‘eInduct’),[45] the NSW Court of Appeal upheld the primary judge’s decision declining to amend a summons to allow an appeal against a costs assessor concerning the indemnity principle. Basten JA held that legal liability is not within the matters conferred upon a costs assessor for determination.[46] Legal liability depends not upon the rendering of an invoice but rather primarily on the costs agreement.[47] A costs assessment affects an order requiring one party to pay the other’s costs. There is no basis for the cost assessor to contradict or redetermine the order.
[45](2015) 90 NSWLR 451 (‘eInduct’).
[46]eInduct, [26] (Basten JA).
[47]Ibid [25] (Basten JA).
eInduct was before the LPUL coming into effect; the relevant provisions were ss 364 and 365 of the Legal Profession Act 2004 (NSW) (‘LPA (NSW)’). Basten JA doubted those provisions gave the costs assessor power to determine the extent of the contractual obligations between a party and their solicitor on an inter partes cost assessment.[48]
[48]Ibid [26] (Basten JA).
In Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 4),[49] Wood AsJ held that ‘reductions to legal costs for non-compliance form part of consumer protection legislation and have application in reviews of costs under that legislation’.[50] His Honour noted that the client had initiated no review under the Legal Profession Act 2004 (Vic) (‘LPA’). The unsuccessful party was ‘seeking to take advantage of a section that [was] not applicable to them’.[51] Further, there was no obligation on the Costs Court to initiate a disclosure inquiry. His Honour stated:
It is not the obligation of a Court dealing with an inter partes taxation … to perform a de facto review under the Act and reduce the costs recoverable from the party liable. … a de facto application by a party liable to pay costs who is not the client is not appropriate.[52]
[49][2013] VSC 669 (‘Sunland Waterfront’).
[50]Ibid [99].
[51]Ibid.
[52]Ibid.
In Royal v El Ali (No 3),[53] Davies J considered the application of the indemnity principle. The respondents had been ordered to pay costs. They contended that the applicants were not liable to pay legal costs, and so an award of costs in their favour would breach the indemnity rule. Her Honour rejected the submission that ‘a party ordered to pay costs can rely on a contravention of the disclosure requirements by the other party’s solicitor to argue that the solicitor/client costs incurred by the other party should be reduced.’[54] The case cited by the respondents was ‘not authority that a party ordered to pay another party’s costs is entitled to pursue an argument in an inter-partes assessment of costs that the other party’s legal costs should be reduced because of a breach of the disclosure requirements by that other party’s lawyer.’[55] Her Honour held that in that case, the applicants had not made any complaint to their lawyers that there had been non-compliance with disclosure obligations and the evidence was that they did not intend to have their solicitor/client costs assessed. Davies J held that in the circumstances, there was:
no basis for reducing the amount which the applicants are entitled to recover from the respondents because of alleged breaches of the disclosure requirements by the applicants’ solicitors.[56]
[53][2016] FCA 1573 (‘Royal’).
[54]Royal, [34].
[55]Ibid [34].
[56]Ibid [35].
Davies J considered whether the applicants were legally obliged to pay any legal costs to their solicitors because the indemnity principle would be otherwise offended, citing Manieri v Cirillo (‘Manieri’).[57] Her Honour stated, citing Wentworth v Rogers (‘Wentworth’),[58] that the indemnity principle does not require that the costs have been paid, but it requires a legal liability to pay costs.[59] Davies J considered s 323(1) of the LPA (NSW), noting it is now replaced by s 181(1) of the LPUL, which was relevantly identical to the provisions of the LPA referred to in Manieri.[60] As her Honour stated, Manieri:
is authority that the application of the indemnity principle does not depend on whether the contingency is expressed as a condition precedent or condition subsequent provided the client is contingently liable to pay legal fees “at the instant the costs order is to be made.”[61]
[57](2014) 47 VR 127 (‘Manieri’), [43].
[58](2006) 66 NSWLR 474 (‘Wentworth’), [126] (Basten JA).
[59]Royal, [37].
[60]Ibid [43].
[61]Ibid [44].
In the circumstances before Davies J, there was a ‘contingent liability to pay fees and thus an obligation to be indemnified when a costs order is made.’[62] Her Honour held that ‘the issue to bring the indemnity rule into play is whether a legal liability to pay costs exists, not the remoteness of the prospect of the applicants having to pay those costs.’[63]
[62]Royal, [44]. Further, her Honour distinguished Mourik v Von Marburg [2016] VSC 601 because the obligation to pay fees was not conditional only on recovery of costs: see Royal, [45].
[63]Royal, [52].
In Wentworth, the Court of Appeal considered, amongst other things, the indemnity principle and conditional costs agreements. It was held that the indemnity principle should be applied flexibly to assessments per the Legal Profession Act 1987 (NSW) (‘LPA 1987 (NSW)’) and must accommodate conditional costs agreements recognised by s 186. ‘The principle does not require that the cost have been paid, but it does require that there be a legal liability to pay costs.’[64] Further, the Court of Appeal considered whether a costs agreement had been rendered void by s 184(4) of that Act and if so, whether there was liability to pay fees on some other basis such as quantum merit. Like s 180 of the LPUL, it provides that a costs agreement is void if it is not in writing or evidenced in writing. An agreement may be effective and enforceable under the LPA 1987 (NSW) even if it does not comply with the requirement to be in writing or evidenced by it.[65]
[64]Wentworth, [126] (Basten JA).
[65]Ibid [160] (Basten JA).
In Wills v Woolworths (‘Wills v Woolworths’),[66] Beach J noted that even if a costs agreement is found to be void due to a failure to comply with disclosure obligations, the law practice is still entitled to be paid fair and reasonable legal costs per s 199(2) of the LPUL.[67] Similarly, in Johnston v Dimos Lawyers (‘Johnston’), Wood AsJ held that irrespective of whether or not there is a costs agreement, the Court must still determine what is fair, reasonable and proportionate per s 172(1) of the LPUL.[68] In that case, costs were still to be assessed based on the cost agreement, even though it was void.[69] In Bennett (A Pseudonym) v Farrar Gesini Dunn Pty Ltd,[70] Wood AsJ held that although two costs agreements were void, as a general principle costs were to be assessed based on the hourly rates specified in them.[71] His Honour observed that regardless of whether there was a costs agreement, or a valid or void one, ‘the obligation on the Costs Court remains the same, namely to assess what is fair and reasonable (ss 172(1) and 200(1)).[72]
[66][2022] FCA 1545 (‘Wills v Woolworths’).
[67]Ibid [33].
[68]Johnston, [25].
[69]Ibid [46].
[70][2019] VSC 744 (‘Bennett (A Pseudonym)’).
[71]Ibid [62].
[72]Bennett (A Pseudonym), [64].
The review of authorities above exposes the following propositions relevant to the indemnity principle.
First, it is appropriate for the Costs Court to investigate whether the successful party has any legal liability to pay the legal costs. If there is no liability, the indemnity principle will be breached if the successful party claims legal costs against the unsuccessful party.
Second, whether there is any liability is not dependent on the rendering or payment of invoices. The primary focus is on the contract of retainer, typically evidenced by a cost agreement. The costs assessor may determine the terms of the retainer.
Third, there is a presumption of a retainer between a client and their legal practitioners. To overcome this presumption, it must be established that there is no liability at all for costs.
Fourth, an unsuccessful party cannot seek to reduce its costs in an inter partes assessment by relying on a lack of disclosure by the successful party’s legal practitioners to the successful party.
Fifth, an inter partes taxation of costs is not the occasion for the unsuccessful party to seek an assessment of costs as between the successful party and their solicitors. This is reinforced by s 198 of the LPUL. The unsuccessful party has no right to apply for such an assessment.
Is there an obligation to pay legal costs despite the void costs agreement?
Although the oral costs agreement is void, it does not follow that there is no legal obligation to pay legal costs. In a case such as this, where the legal practitioners were retained, there was a no-win/no-fee agreement, and the applicant obtained a favourable outcome at trial, there remains an obligation to pay legal costs. Verduci Lawyers does not have an enforceable right per the LPUL for those costs until they are assessed, however the applicant may elect to pay outstanding invoices per the initial cost agreement, the updated estimate in the McIntyre 9 Feb 2022 email, and the oral costs agreement.
If the applicant decides to challenge outstanding legal fees, she may seek an assessment under div 7 of pt 4.3 of the LPUL. In that case, she will be liable for legal costs that are fair and reasonable in all the circumstances, proportionately and reasonably incurred, and of a reasonable amount. In at least two instances, the Costs Court has used the hourly rates in a void costs agreement as the starting point for the basis of assessment.[73]
[73]See, Johnston, [42], [45]-[46]; Shi v Mills Oakley [2020] VSC 498, [48].
There was an additional issue raised by the respondent: whether or not the initial costs agreement was void because of later non-disclosures by the applicant’s solicitors to her. There is a divergence in the authorities about whether a cost agreement is void ab initio or in futuro.[74] It is unnecessary to resolve that issue, given that I find the applicant remained liable to her solicitors for costs throughout the retainer. I turn now to that issue.
[74]See, Wills v Woolworths; Bevan v Bingham (2023) 111 NSWLR 7; Bingham v Bevan [2023] NSWCA 86.
Is the applicant liable to pay legal costs to her solicitors?
I find the applicant is liable to pay legal costs to her solicitors. She was liable to pay under the terms of the initial costs agreement and did so. On 11 September 2021, the original costs estimate was exceeded. A further disclosure statement should have been sent before this per s 174(1)(b) of the LPUL. It was not sent until the McIntyre 9 Feb 2022 email. By 11 September 2021, the initial costs agreement became void per 178(1)(a). However, the applicant continued to retain Verduci Lawyers. It is evident from this conduct that there remained a contractual liability for costs. Verduci Lawyers rendered invoices to the applicant for costs between 11 September 2021 and February 2022 and the applicant paid them.
On 4 February 2022, senior counsel sent a disclosure statement and junior counsel sent a memorandum of updated fee estimate, which were emailed to the applicant in the McIntyre 9 Feb 2022 email.[75] There is no controversy regarding this.
[75]See, exhibit ‘JEM-1’ to the McIntyre affidavit, 16; see also, exhibit ‘LAW-1’ to the affidavit of Leonard Warren affirmed on 10 September 2024, 51-53, 64-65.
The terms of the retainer changed with the oral costs agreement in April 2022. At that point, the agreement became a no-win/no-fee agreement. The applicant succeeded in the County Court proceeding, and accordingly, she became liable for costs under the oral costs agreement.
The oral costs agreement was not in writing as required by ss 180 and 181 of the LPUL. Had it been in writing and contained the necessary information, it may have been a conditional costs agreement under s 181. As properly conceded, the oral costs agreement is void.
However, the applicant is liable to pay legal costs to Verduci Lawyers. That liability arises because she continued to retain Verduci Lawyers, and they performed work on her behalf. Accordingly, the liability arises on a contractual or quantum meruit basis. If the applicant wishes, she can elect to have the costs assessed per the LPUL, as described above. That is a matter for her. At no stage has the applicant challenged her liability for legal costs or the quantum of costs. Accordingly, the taxation must proceed on the basis agreed between the applicant and Verduci Lawyers, namely the initial costs agreement as updated by the McIntyre 9 Feb 2022 email, and then as varied by the oral costs agreement in April 2022.
As for counsel’s fees, during the hearing the respondent indicated they were not the subject of the challenge based on the indemnity principle.
Should the taxation be stayed until a costs assessor conducts a costs assessment?
The respondent says that the taxation should be stayed until a costs assessor undertakes a costs assessment. I reject that submission for the following reasons.
Neither the applicant nor Verduci Lawyers has applied to have costs assessed. As discussed above, s 198 of LPUL does not permit the respondent to make such an application. There is no basis to stay the taxation until an assessment is conducted. The applicant has not challenged her costs agreements with Verduci Lawyers.
Moreover, for the same reasons, I decline to conduct an assessment per s 199 of the LPUL to determine whether the amount the applicant owes to her legal practitioners is fair and reasonable.
The taxation should proceed because the applicant is liable for legal fees. As for quantum, because she has not challenged the legal fees, the taxation should proceed on the basis she is liable for the amount of legal fees per the costs agreements between her and Verduci Lawyers.
Conclusion
The applicant is liable for legal costs, and they should be assessed based on the costs agreements between her and Verduci Lawyers.
I reject the respondent’s submission that the amount claimed in taxation exceeds the applicant’s liability to pay her solicitor by about $133,500. The respondent essentially says that the applicant is not liable for these costs, save for the costs of taxation. On the other hand, the applicant says she is liable for these costs.
I have already found that the applicant is liable for costs for the whole retainer period. I accept the evidence of the applicant’s solicitor, Ms Lastrina, that the amounts owing include billed and unbilled costs, and that the taxation costs are yet to be concluded.[76] The unbilled costs are subject to the no-win/no-fee oral costs agreement.
[76]Second Lastrina affidavit, [8], [11]-[12], [14]-[16] (noting the phrase ‘[i]n addition to the professional fees owing to the Firm’ was ruled inadmissible and struck-out at hearing).
The billed costs amount to $482,340.83 for paid costs and disbursements. The costs yet to be billed have been calculated. The unbilled costs include $344,130.95 for professional fees. There will be additional costs regarding the taxation. They are yet to be invoiced to the applicant, and amount to about $52,218.[77] The total amount (billed, unbilled and taxation costs) is $878,689.78. The amount claimed in the applicant’s bill of costs, being $664,674.60, is significantly less. It is about 75% of the total amount.
[77]The respondent does not quibble with the calculation of the costs of taxation.
The objection based on the indemnity principle is disallowed. The taxation of costs should continue.
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