Update: 9 February 2008: A good wrap up of the American debate here at Legal Blog Watch.
Original post: In Wentworth v Rogers  NSWCA 145, the NSW Court of Appeal seemed to pave the way for a future declaration as to the efficacity of a costs agreement that says the solicitor will get paid only if the client recovers costs from the other side, and only to the extent of that recovery, so long as there is some lip service paid to a residual obligation in the client to pay the lawyer regardless. Until I read this learned judgment I thought perhaps I was the only doubting Thomas in the world who thought that these agreements, increasingly de rigeur amongst the more switched on pro bono set, had their problems. So I was glad to see that the problems were recognised, and even more glad that such costs agreements seem likely in the future to be certified kosher.
The headnote says:
“[The Court considered whether] the Appellant, having been unsuccessful in civil proceedings brought in the Court, could be liable to a costs order in favour of the successful party, the Respondent, if he himself had incurred no liability to pay legal costs to his solicitor and barristers.
By Santow JA:
1. The definition of ‘costs agreements’ s184(1) of the Legal Profession Act 1987 should be read to include a costs agreement favourable to the client: at .
Clare v Joseph  2KB 369, distinguished.
2. Whether the current costs agreement was rendered void by s184 of the 1987 Act can only be determined definitively by a court, upon oral evidence from the principals, able to be tested in cross examination: at .
3. The indemnity principle continues to exist but should be applied flexibly rather than made into a rigid rule. No distinction should be drawn between a contingency expressed as a condition precedent or subsequent. The indemnity principle must at least accommodate the kind of conditional costs agreement recognised by s186 of the 1987 Act: at –.
New Pinnacle Group Silver Mining Co. v Luhrig Coal and Ore Dressing Appliances Co (1902) 2 SR(NSW) 50; Dyktynski v BHP Titanium Minerals Pty Ltd (2004) 60 NSWLR 203, applied.
4. Depending on the nature of the residual obligation as determined more definitively by a court, it may in any event satisfy the indemnity principle: at 
By Basten JA:
5. The fundamental purpose of an order that one party to litigation pay the legal expenses or ‘costs’ of another party is to provide an indemnity in relation to the whole, or usually part, of the legal obligation incurred by the other party to his or her lawyers. The indemnity principle states that if that party is under no legal obligation to pay lawyers’ fees, no amount can be recovered from the unsuccessful party: at .
Gundry v Sainsbury  1 KB 645, cited.
6. The indemnity principle does not require that the costs have been paid, but it does require that there be a legal liability to pay costs: at .
Oshlack v Richmond River Council (1998) 193 CLR 72, applied.
7. In cases where payment is to be on a contingency basis, there is an immediate and quantifiable obligation imposed on the client when the retainer is created, the contingency operating as a condition subsequent: at .
8. A costs agreement which is rendered void, if not in writing or evidenced in writing, pursuant to s184(4), should not be read to include a costs agreement favourable to the client, which required no statutory authority for its enforceability: at .
Clare v Joseph  2 KB 369, applied.
9. No entitlement to costs on a quantum meruit basis can arise inconsistently with the terms of an express contractual provision. Accordingly, if, because of an agreement initially oral, the lawyers had no legal entitlement to require the client to pay costs, no basis for imposing a restitutional obligation can arise: at .
Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221
10. The ‘nominal party exception’ had no applicability in this case. A successful party should not always be treated as a ‘nominal party’ in relation to the costs dispute as it would result in the universal subversion of the indemnity principle: at .
Dyktynski v BHP Titanium Minerals Pty (2004) 60 NSWLR 203; New Pinnacle Group Silver Mining Co v Luhrig Coal & Ore Dressing Appliances Co (1902) 2 SR(NSW) 50; Cachia v Hanes (1994) 179 CLR 403, distinguished.
11. There is no relevant aspect of the statutory regime which requires a different understanding or application of the indemnity principle: at .
Hislop J: agreeing with Santow JA (except expressing no view as to 5) and with Basten JA (except expressing no view as to 8).”
- More on the indemnity principle
- What does ‘pro bono’ mean? Are ‘semi-pro bono’ costs agreements legally efficacious?
- Winner gets indemnity costs but recovers less when loser proves winner’s costs agreement with his solicitors void
- Applicants for taxation can call for other side’s costs agreement and bills
- Costs disclosure obligations and consequences of not complying: part 1