Party-party recovery of pre-proceedings costs

Her Honour Davies J considered the recoverability of pre-action costs in the context of an application for security for costs.  The defendant sought security for $1 million already expended prior to the commencement of the proceedings against it, but after the plaintiffs gave media publicity to their intention to proceed them.  Her Honour decided that such costs could form part of the costs in respect of which security for costs may be ordered, and did include an allowance for such costs in her grant of security in the sum of $6 million.  My fellow blogger Liz Harris of Harris Costs Lawyers’ expert opinion as to the NAB’s likely costs was largely accepted. The decision is Pathway Investments Pty Ltd v National Australia Bank Limited [2012] VSC 97. In relation to the basic principle relating to the recoverability of pre-action costs, more usually claimed by plaintiffs, her Honour said:

‘Rule 63.29 of the [Victorian Supreme Court rules] provides that:

On a taxation on a party and party basis all costs necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed shall be allowed.

Authorities on r 63.29 (and cognate provisions) make it clear that costs of a party allowable as between party and party are not necessarily limited to work done once the proceeding is commenced because the basis for the allowance is whether the costs were “necessary or proper”.[2]  Legal costs incurred for work undertaken in reasonable anticipation of litigation in principle can be allowable[3] although the simple fact that the costs were so incurred does not mean that they will be allowable on taxation.[4] Such costs must be shown to have been “necessary or proper for the attainment of justice” and the satisfaction of that test requires some real relationship between the work done and the subject matter of the litigation, once commenced.[5]  Whether that can be shown will be fact specific to the particular case. As Professor G E Dal Pont wrote in the Law of Costs:

Drawing the line between what is, and what is not, allowable on taxation in respect of pre-proceedings costs, is not capable of precise determination simply by statements of principle; the matter remains based in the discretion of the taxing officer dependant upon the particular facts of each case.[6]

Moreover, whether the Court has the power under r 62.02 of the SCR or s 1335 of the Act to order security for such costs is a separate question to whether pre-commencement costs may be allowable on a taxation.

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Quite plainly, pre-commencement costs incurred in anticipation of litigation could not be recovered under r 63.29 (and cognate provisions) unless a proceeding was actually instituted and an award of party/party costs made by the Court. A party could not obtain security for pre-commencement costs unless there was a proceeding. But if proceedings are initiated, an award of party/party costs made in that proceeding will include pre-commencement costs that satisfy the “necessary or proper” test in r 63.29 of the SCR (and cognate provisions) as such costs fall within the scope of costs allowable under taxation.[14]