Is solicitor-director of ILP which acted for him to be treated as self-represented?

A NSW solicitor was partially successful in a defamation suit.  But for the circumstance that he had retained an incorporated legal practice with which he was associated and for part of the time the director and the file handler, the Court was willing to order the defendant to pay his costs on an indemnity basis.  In respect of the period in which the solicitor was — the fictions of corporations law aside — substantially self-represented, his costs were ordered to be assessed on the ordinary basis.   What McCallum J said in McMahon v John Fairfax Publications Pty Ltd (No 8) [2014] NSWSC 673 is:

‘Ardent Legal Pty Ltd

  1. There is a further issue of some complexity raised by Mr McMahon’s application. It relates to the fact that he is a solicitor and has, for at least part of the case, acted for himself.
  1. At all times, the solicitor on the record for Mr McMahon has been a solicitor from Ardent Legal Pty Ltd. That company was incorporated on 2 July 2007. It has been known by the name Ardent Legal Pty Ltd since 9 October 2007, a date which happens to fall between the publication of the two matters complained of. Mr McMahon’s wife has been a director since the company’s inception.
  1. The evidence in the proceedings included an employment contract dated 15 October 2007 between Mr McMahon and Ardent Legal. Under that contract, Mr McMahon is entitled to a fixed annual salary of $52,000. However, the contract also provides for fee sharing in the event that he reaches an annual target of $170,040 of professional fees “rendered and collected”. Accordingly, he has a personal interest in seeing the firm he retained charge and recover higher fees. Since 1 November 2010, Mr McMahon has also been a director of the company. As at 17 March 2011, its sole shareholder was Mr McMahon’s wife (exhibit 29).
  1. The proceedings were commenced by statement of claim filed on 28 April 2008. The statement of claim identified Mr Quah-Smith of Ardent Legal as the solicitor for the plaintiff. On 28 April 2011, a notice of change of solicitor was filed in the following (quaint) terms:

Bryan Francis McMahon, plaintiff, has appointed Bryan Francis McMahon of Ardent Legal Pty Ltd to act as the plaintiff’s solicitor in these proceedings in the place of Gordon Quah-Smith of Ardent Legal Pty Ltd.

  1. From that date until 11 December 2011, Mr McMahon was the plaintiff, the solicitor on the record for the plaintiff as an employee of Ardent Legal and a director of that company, the other director and sole shareholder being his wife.
  1. On 11 December 2011, a further notice of change of solicitor was filed re-appointing Mr Quah-Smith in place of Mr McMahon as Mr McMahon’s solicitor.
  1. The defendants submit that, in the circumstances, Mr McMahon is not entitled to any costs “in respect of his own conduct of the proceedings”. That was said to be so for two reasons. First, it was submitted that to award such costs in the present case would entail a breach of the indemnity principle. Secondly, it was submitted that Mr McMahon is a solicitor litigant and that the principles relating to such litigants preclude him from recovering the costs of representing himself.

The indemnity principle

  1. The indemnity principle holds that the sole purpose of a costs order is to indemnify the successful party. If the successful party is under no legal obligation to pay lawyers fees, no amount is necessary to meet that purpose. In that event there can be no basis for making an order for costs (other than disbursements).
  1. The defendants submitted that, on the evidence, Mr McMahon has no obligation to pay Ardent Legal in respect of the legal services he performed for himself as an employee of the firm. It was further submitted that, in the absence of any liability to pay any such costs, a costs order in Mr McMahon’s favour that extends to the costs of his own professional services would entail a breach of the indemnity principle.
  1. It may be accepted, and indeed appeared to be common ground, that the evidence does not establish one way or the other what obligation (if any) Mr McMahon has to pay Ardent Legal in respect of the work either he or Mr Quah-Smith performed on this case.
  1. Mr McMahon submitted that the indemnity principle allows the recovery of costs in all cases where there exists a liability between lawyer and client in respect of costs, even if the prospect of the client discharging that liability is remote. It was submitted that, unless there was an agreement with the solicitors that the client would not be liable for costs, recovery is allowed in accordance with the decision in Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495. Mr McMahon noted that the decision in Adams has been applied in a number of decisions in Australia.
  1. On that basis, Mr McMahon submitted that the defendants bear the onus of establishing the existence of an agreement exculpating him from any liability to Ardent Legal. It was further submitted (with some ingenuity) that “of course there was no such agreement”, since it would make no sense to enter into such an agreement and the Court would accordingly be reluctant to infer its existence. That is a rhetorical submission which hardly proves the existence or non-existence of any fact.
  1. The defendants relied on an answer given by Mr McMahon in evidence to the effect that his time recorded in these proceedings is recorded as “non-chargeable time”.
  1. The defendants also pointed to the likely existence of an agreement exculpating Mr McMahon from any costs (or at least the absence of any liability to pay costs to Ardent Legal) by reference to time costing records in MFI 11. As the reference suggests, that is a document that has only been marked for identification. It is not in evidence. The defendants asserted in their written submissions that they tender it on the costs issue but I had by that point determined that the costs argument would proceed on written submissions. The simple fact is that the document is not before the Court. For the reasons that follow, I do not think it is necessary to afford any further opportunity to tender that document.
  1. As noted in Mr McMahon’s submissions in reply, assuming the position is as he said (that the firm’s time records record time spent on this matter as non-chargeable), that is hardly determinative as to the existence of any obligation he may have to pay Ardent Legal. Equally non-probative, conversely, was Mr McMahon’s assertion in the same submissions that Mr Quah-Smith has recorded his time and that “Ardent Legal intends to bill for it”. Having regard to the corporate details, that appears to amount to an assertion that Mr McMahon has instructed his counsel, for the purposes of a costs application, that he has decided to bill himself for Mr Quah-Smith’s time (or that his wife has said she intends to do so). The submission is that the whole amount should be recoverable against the defendants whether or not Mr McMahon has any intention or ability to pay such a bill.
  1. There is accordingly a measure of artificiality in treating this as an ordinary application of the indemnity principle. Mr McMahon knows whether or not he has any present liability to Ardent Legal. Further, he appears to be in a position to control or influence the quantum of any future liability. The determination of those issues, which are potentially of considerable significance in the assessment of costs, should not be left to speculation or inference based on inadequate evidence. It is not, in my view, an issue which should rest on the defendants’ failure to discharge an alleged onus of proof. Mr McMahon is an officer of the Court. Whatever the authorities say about the indemnity rule, the Uniform Civil Procedure Rules expressly assume that indemnity costs, at least, are awarded to indemnify a party in respect of costs in fact incurred (see r 42.5(b)). Assuming the corporate structure is being respected, if Mr McMahon has no liability to Ardent Legal, the allowance of those costs would be a windfall to him rather than an indemnity.

Solicitor litigants and the Chorley Rule

  1. That leads me to the second issue raised by the defendants, which relates to the contention that Mr McMahon was at all times a litigant in person. There is a measure of tension between that and the first point since, to the extent that he was, he has no need of any indemnity against costs payable to another.
  1. The defendants acknowledge that a litigant in person who is a solicitor can, in some circumstances, recover fees for representing himself. They submit, however, that that cannot be allowed in the present case. They relied on the fact that it was an aspect of Mr McMahon’s special damages claim that his new firm had the capacity to do the lost Lumley work and that the firm had not filled the gap left by the loss of that work. It was submitted that, since Mr McMahon had the capacity to attend to his own case, he is not entitled to recover for that time because, in acting for himself, he has not lost the opportunity to do any other paying client work.
  1. A threshold issue is whether Mr McMahon is properly to be regarded as a “solicitor litigant” (that is, a litigant who, being a solicitor, represents himself in the proceedings). Mr McMahon submitted that he is not a solicitor litigant since he was represented at all times by Ardent Legal. He noted that the law has been “tolerably clear” since Salomon v Salomon & Co [1897] AC 22 that a company is a separate legal entity, even as against its own members.
  1. The defendants submitted that Mr McMahon should be regarded as a solicitor litigant notwithstanding the legal structure through which he operated. They relied upon the decision of Brereton J in McIlraith v Ilkin & Anor (Costs) [2007] NSWSC 1052. In that case, there was an issue as to whether a solicitor litigant was entitled to profit costs for work done by himself. His Honour said (at [11]):

Strictly speaking, Mr Ilkin did not act for himself; a solicitor corporation of which he is the director was the solicitor. However, I have attributed no significance to this distinction, and proceed on the basis that Mr Ilkin is to be regarded as having acted as his own solicitor.

  1. Mr McMahon submitted that it is not clear from the judgment whether that case is on all fours with the present. It is at least relevant in holding that, in considering costs claimed by a solicitor plaintiff who has appeared in his own cause, it is appropriate to lift the corporate veil. There is an obvious public interest in doing so.
  1. However, there appear to be two significant differences between McIlraith and the present case. The first is that the solicitor in McIlraith appears to have been the only director of the solicitor corporation, whereas Mr McMahon and his wife are each directors. I should not assume that Mr McMahon’s wife had no autonomy in that role. The second is the fact that, in the present case, another employed solicitor was the solicitor on the record for most of the proceedings, albeit possibly under Mr McMahon’s control (if Mr McMahon was the principal of the firm, as its origins would suggest).
  1. I have concluded that professional services provided by Mr McMahon to himself should be treated as work undertaken by a solicitor litigant, while services provided by Mr Quah-Smith should be regarded as having been provided by the separate corporate entity, Ardent Legal.
  1. Accordingly, as to professional services provided by Mr McMahon to himself, it is necessary to consider the defendants’ submissions concerning the “Chorley rule”. The general rule is that a litigant appearing in person is not entitled to recover from the unsuccessful party any compensation for time spent preparing and conducting the case.
  1. In England in 1884, a rule of practice was recognised to operate as an exception to that general rule, providing that a self-represented solicitor is entitled to professional costs. It is known as the Chorley rule or the Chorley exception after the decision in which it was unequivocally recognised, London Scottish Benefit Society v Chorley (1884) 13 QBD 872. In that decision it was explained that, according to the authorities establishing the rule, a solicitor litigant:

does not recover such costs in such circumstances in the capacity of a solicitor, but because, he happening to be a solicitor, his costs are able to be quantified by the Court and its officers.

  1. In 1976, the High Court held that the Chorley rule applies in Australia to allow a solicitor who acts for himself in litigation to recover his professional costs: Guss v Veenhuizen (No 2) (1976) 136 CLR 47.
  1. The defendants’ submissions noted a series of subsequent decisions in which doubts have been expressed about the continuing appropriateness of the rule. However, as cogently explained by Brereton J in McIlwraith, since the High Court has authoritatively endorsed it, it is not open to this Court to discard it: see McIlwraith at [12] to [26].
  1. The defendants submitted, however, that the Chorley rule is properly characterised as allowing an indemnity (in the case of solicitor litigants) against “opportunity cost” rather than the direct cost of the solicitor’s professional time, citing Atlas v Kalyk [2001] NSWCA 10 per Handley JA at [9], Meagher and Sheller JJA agreeing at [13] and [14] respectively. It is appropriate to consider the whole of the relevant passage:

It might be said, with respect, that although solicitors representing themselves in litigation have no need of any indemnity against professional costs paid or payable to another practitioner, there is still scope for the indemnity principle. Such solicitors will have spent time and trouble representing themselves and, to that extent, they will have lost the opportunity of using that time doing professional work for other clients and being remunerated accordingly. The indemnity in the case of solicitor litigants is, therefore, against the opportunity cost rather than the direct cost of their professional time spent on their own case.

  1. The defendants relied upon the fact that, in the proceedings before me, Mr McMahon gave evidence (in support of his claim for special damages) that as a result of the publication of the matters complained of he had lost the Lumley work and had been unable to replace it. Specifically, he said that he only had enough work to fill approximately 20 hours per week (T344.15 – 49). On that basis, the defendants argued that, by working on his own case, Mr McMahon did not lose any real opportunity of doing other paying work (since he would not have had a full load of other paying work in any event).
  1. Mr McMahon submitted that that is a selective statement of the rationale for the Chorley rule which does not reflect the principle approved by the High Court in Guss. Regrettably I feel compelled, if not bound, to accept that submission. In Khera v Jones [2006] NSWCA 85, the Court of Appeal refused leave to appeal in a case in which it was argued that there should be an exception to the Chorley rule in the case of an unemployed solicitor who was arguing the case in his spare time: Khera v Jones [2006] NSWCA 85. Although a decision to refuse leave does not stand as binding authority, the Court’s reasons provide a clear statement of the present law.
  1. The Chorley rule did not emerge unscathed. The Court said (at [3]):

If the “rule of practice” deserves continuing application, the present case is a most undeserving applicant for inclusion. Indeed, it casts further doubt on the sustainability of the Chorley rule.

  1. Had the issue been “uncluttered by authority”, the Court would have favoured the approach of the Full Court of the Supreme Court of Western Australia in Dobree v Hoffman (1996) 18 WAR 36 in which the Chorley rule was abandoned. However, the Court concluded, following the decision in Atlas v Kalyk, that the decision in Guss is binding, reiterating the High Court’s admonition that it is for that Court alone to determine whether one of its previous decisions is to be departed from or overruled: see Garcia v National Australia Bank Ltd (1998) 194 CLR 395 at 403.
  1. The rationale for the Chorley rule explained in Guss is, quite simply, that unlike the case of an ordinary layman, work done by a solicitor can be quantified on a taxation of costs: at 52.6. Neither the appropriateness of the rule nor the untested assumption that work done by “ordinary laymen” cannot be quantified appears to have been in dispute. The decision turned on differing views as to the significance of the fact that, due to an error in the registry, the particular solicitor’s name had not been entered in the Register of Practitioners of the High Court, raising an issue as to whether his costs could indeed be “quantified on a taxation” in accordance with the rules of court. The case accordingly did not afford the occasion for a particularly satisfactory analysis of the competing considerations for exempting people who happen to be solicitors from the general rule that a litigant who represents himself cannot recover compensation for the time spent doing so.
  1. Ultimately, however, that is the authority that binds me. It follows, in my view, that if Mr McMahon is properly characterised as a solicitor litigant, he is entitled to the benefit of the Chorley rule notwithstanding his own evidence suggesting that he was able to act for himself during what would otherwise have been spare time. As already explained, I am of the view that Mr McMahon is to be regarded as a solicitor litigant as to those legal services provided by himself.
  1. It remains to consider the significance of those considerations in the context of the application for indemnity costs under s 40(2) of the Defamation Act. Under an assessment on the ordinary basis, “party/party” costs are assessed by determining appropriate fair and reasonable costs: see ss 364 and 365 of the Legal Profession Act 2004. However, where party/party costs are assessed on an indemnity basis, the assessor is to allow all costs other than those that appear to have been unreasonably incurred or appear to be of an unreasonable amount: s 364(4) of the Legal Profession Act r 42.5 of the Uniform Civil Procedure Rules 2005.
  1. The position is complicated by the fact that the evidence is inconclusive as to whether Mr McMahon has any liability to Ardent Legal.

Conclusion

  1. I have concluded that, as to professional services provided to Mr McMahon by himself, the interests of justice require that the costs of those services be awarded on the ordinary basis, notwithstanding my conclusion that the defendant unreasonably failed to make a settlement offer so as to attract the sanction of s 40(2) of the Defamation Act. That is because there is a clear risk that a solicitor acting in his own cause will not bring to bear the impartiality required to serve the overriding purpose of facilitating the just, quick and cheap resolution of the real issues in the proceedings. I consider it appropriate that those costs be subjected to the undemanding astriction of having to be fair and reasonable.
  1. As to professional services provided to Mr McMahon by others including Mr Quah-Smith, those costs should be awarded on an indemnity basis. In the event that those costs are not agreed and are required to be assessed, the assessment should be conducted on the basis that it remains for Mr McMahon to establish that he has a liability to Ardent Legal for such costs. It would be open to the costs assessor under s 358 of the Legal Profession Act to require Mr McMahon to produce such documents or written information as the costs assessor sees fit in order to determine that issue.
  1. Disbursements should be awarded on an indemnity basis.’

See also:

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