Applicants for taxation can call for other side’s costs agreement and bills

Update: for the incredible backstory to this latest piece in the litigation over $705 in repairs to Mr Kuek’s Toyota Camry, see this story at Justinian.  You will have to subscribe for $22.

The indemnity principle in costs law says that an award of party party costs must never exceed the beneficiary’s liability to his or her own lawyers.  That is, party party costs must not exceed solicitor-client costs.  Traditionally, however, those ordered to pay costs by a court have not been allowed to look at the costs agreement or bills between the party whose costs they have been ordered to pay.  Kuek v Devflan Pty Ltd [2011] VSCA 25 says that at least where there is some reason to believe that the indemnity principle might be infringed, the costs disclosure letters, costs agreement, and, probably, solicitor client bills may be inspected by the party ordered to pay the costs, and used to argue the application of the indemnity principle.

Justice of Appeal Hansen, with whom Justices of Appeal Neave and Harper agreed, said that the Taxing Master’s view that ‘the course proposed [requiring production of the costs agreement and costs disclosures, and having regard to them in the taxation] will lead to the taxation of two different bills with additional delay, expense and inconvenience … is a floodgates type argument which is no answer to a taxing officer’s fundamental duty to conduct each taxation on its own merits in accordance with law.’  His Honour continued:

‘This type of issue will not often arise because, in the ordinary case, party / party costs fall well short of the receiving party’s actual liability to its lawyers.  But, as I have noted, here the material is sufficient to suggest that the position may be otherwise.  It follows that the taxing officer must be satisfied that, as a question of fact, the party / party costs do not exceed the respondents’ liability to their lawyers.  Both the Taxing Master and the judge seemed to assume that the consequence of such a factual exercise would be the (inconvenient) step of requiring the respondents to produce a solicitor / client bill, and that there was nothing in the authorities to require a solicitor / client bill.  However it does not follow that the factual question posed can only be determined by reference to a solicitor / client bill.  It may be readily apparent on the face of the lawyers’ accounts that the receiving party has actually paid its lawyers more than the amount of the party / party bill.’

Many lawyers do not enter into proper costs agreements with their clients, because they trust them to pay the bills.  Most lawyers, for a variety of reasons, do not comply perfectly with the costs disclosure regime, but get away with it because their clients are happy with their services and charges, or are ignorant of the consequences of costs disclosure defaults.  This decision constitutes a reason why it is important to have a valid costs agreement and to comply with the costs disclosure obligations: otherwise the party may recover less on a party party costs award than he or she otherwise would.  The decision whether to do things properly is no longer just a decision about whether to take the risk that the client will unexpectedly take advantage of the law, but must be taken in the context of the lawyer’s duty of care to avoid foreseeable economic loss to the client.

* * *

Gabriel Kuek was unhappy with repairs to his car.  He sued in the Magistrates’ Court, in 2003, for $3,856. He lost, and appealed unsuccessfully to the Supreme Court and the Court of Appeal.  The defendants got an order for costs in the Supreme Court and sought $46,586. There was a taxation.  Mr Kuek required production of the defendants’ solicitors’ costs disclosures and retainer, but they were not produced.  The defendants’ costs were taxed at $39,105.

Mr Kuek sought review by the Taxing Master of his own decision, under the bizarre procedure then provided for by r. 63.56.1 of the Supreme Court Rules. The decision was largely upheld, and Mr Kuek was ordered to pay 90% of the defendants’ costs.  Mr Kuek appealed to a single judge in the trial division.  He lost.

Mr Kuek wanted to see the defendants’ cost agreement, and their solicitors’ costs disclosures because he suspected that the defendants’ lawyers were acting on a discounted basis, and that the amount the defendants were in fact liable to pay their lawyers might exceed the amount of costs they were claiming from the defendants.  Party party costs are said to be only a partial indemnity against solicitor-client costs.  Certainly, according to ‘the indemnity principle’, party party costs may never exceed solicitor client costs (though the comparison is done globally, not on a line by line basis).  Mr Kuek also wanted to argue that if there were costs disclosure defaults, then the indemnity principle should be tested not against the amount billed but against the amount which the Taxing Master ascertained, on the party party taxation, was properly payable by the defendants, reduced in accordance with s. 91 of the Legal Practice Act, 1996, which gave the Taxing Master power to reduce taxed costs proportionately to the seriousness of the costs disclosure defaults.

These arguments satisfied Justice Beach in the trial division that the documents Mr Kuek sought production of should be produced.  They were.  He then conducted the taxation over again, against Mr Kuek’s argument that it should go back to the Taxing Master and be done properly.  His Honour said that it was not for the defendants to prove that their solicitor-client costs exceeded the amount claimed by way of party party costs.  Rather, it was for Mr Kuek to prove that the party party costs claimed exceeded the solicitor client costs.  His Honour found that Mr Kuek’s indemnity principle objection had not been made out.

The documents produced upon demand by the defendants revealed that their solicitor had agreed to continue to charge for the Supreme Court and Court of Appeal phases of the proceedings on the same basis as he had in the Magistrates’ Court, and suggested that fees were otherwise being discounted.  The Court of Appeal criticised his Honour for focusing on opinions stated by the defendants solicitors in correspondence to the solicitors that party party costs would probably only indemnify as to 60-70% of solicitor client costs, and using that opinion as evidence of its truth.  The Court of Appeal held that Mr Kuek should have been given time to digest the documents produced, and to have had the opportunity to call for the production of further documents, namely the bills received by the defendants from their own solicitors. The decision that the indemnity point argument was not made out was described as being based on too much speculation and not enough evidence.

The Court of Appeal unanimously remitted the taxation back to the Costs Judge (the new name for the Taxing Master) for ‘determination according to law’, strongly hinting that the solicitor-client bills rendered to the defendants by solicitors ought to be the subject of scrutiny in that hearing.  Could be a case for Mr Kuek of third time lucky.