For far too long, the law was unclear about whether costs agreements which said ‘We’ll only charge you if you win and only for work in respect of which we get a costs order’ actually worked. The problem was that losing parties invoked the indemnity principle in the law of costs, arguing that what was recoverable under a costs order was nil. The indemnity principle says that party-party costs awards are in no way punitive; they are wholly compensatory. Party-party costs orders are awarded as a partial indemnity to the winning party’s liability for their lawyers’ fees and other expenses of the litigation. If the winning party has no such liability at the time of the costs order, there is nothing for the losing party to be ordered partially to indemnify. Where the winner’s liability to pay their lawyer was conditional on a party-party costs order, there was, at the moment of making the costs order, nothing to indemnify. Wentworth v Rogers  NSWCA 145 was the leading case for many years. Justice Santow’s dictum was favourable to pro bono solicitors while Justice Basten’s was unfavourable. The third judge did not weigh in on this question.
What the judges in that case said, however, was obiter dicta. Now there is a unanimous decision of the Victorian Court of Appeal which actually decides that this kind of costs agreement works; the winning party may obtain from the losing party a party-party costs order by way of a partial indemnity against the liability to pay their lawyers. The case is Mainieri v Cirillo  VSCA 227 and Nettle, Hansen and Santamaria JJA expressly preferred Justice Santow’s reasoning in Wentworth. It may be expected that state courts, including Courts of Appeal, elsewhere in Australia will follow the Victorian Court’s decision: Farah Constructions Pty Ltd v Say-Dee Pty Ltd  HCA 22 at  and .
That is the good news though. The bad news is that an unfortunate level of confusion still prevails in relation to costs agreements which are even closer to pure pro bono in that they say ‘We won’t charge you anything unless you get a costs order, and then we will only charge you so much as you are actually able to recover from the person ordered to pay costs under the costs order’. A costs agreement which was, as a matter of substance, to that effect was found not to present a problem in LM Investment Management Limited v The Members of the LM Managed Performance Fund  QSC 54. Then in Mainieri, the Court of Appeal left open in obiter dicta the possibility that a costs agreement in which the winning party’s liability to pay their solicitors was conditional on recovery of costs from the losing party might not work. Subsequently, in Mourik v Von Marburg  VSC 601 the Costs Judge in Victoria decided that such an agreement in fact does not work, but the correctness of that decision has subsequently been doubted in dicta of a Victorian Federal Court judge sitting in Sydney. What a mess. But I am not convinced that the pro bono sector should give up on obtaining judicial recognition of a costs agreement which, as a matter of substance, predicates recovery of costs on the actual recovery of costs from the other side.
The starting point is Wentworth v Rogers, where Santow J said at :
‘It is reasonable, not just in this ferocious litigation but more generally, to recognise in a costs agreement that the unsuccessful party who is subject to a costs order may delay or defeat recovery. Hence predicating payment on successful recovery is not unreasonable.’
The costs agreement there was oral, but evidenced by the following writing:
‘(1) [my solicitor]’s legal services and disbursements are provided to me on a pro bono basis in that I am not obliged to pay [her] (subject to paragraph 3 below) if I am unable to recover any costs against [the other side] in this litigation.
(2) My obligation to pay such reasonable fees and disbursements does not arise upon a costs order being made in my favour but on costs being successfully recovered as against [the other side].
(3) In the event that such reasonable fees and disbursements cannot be recovered from [the other side] I undertake to pay same when and if I am in a position to do so.’
It is a curiosity of this line of authority that little attention seems to have been given to the third clause by the Court of Appeal (though Santow J acknowledged at  that depending on how it was construed it might provide sufficient obligation on the part of the winning party to pay its lawyers’ fees to satisfy the indemnity principle).
Then, in LM Investment, the Supreme Court of Queensland had to consider a costs agreement which said the solicitors would charge the winning party costs in the ordinary way, but included a special condition:
‘No fees will be payable by you unless an order is made by the Supreme Court of Queensland in your favour for the payment of costs and those costs are recovered by us from other parties and any fees charged shall be limited to the amount of costs so recovered.’
Even though the parties’ costs agreements were substantially identical, that in LM Investments was construed as a condition subsequent which, it was said, made all the difference. It was not even necessary to consider the debate between Santow and Basten JJ, according to Justice Mullins at . It is true that Basten J — the judge whose reasons were unhelpful to pro bono lawyers — acknowledged in Wentworth that an existing obligation to pay subject to a condition subsequent would not give rise to an indemnity principle problem:
‘133 Although it may seem arbitrary to insist that, for the purposes of the indemnity principle, there must be a contractual entitlement to charge fees, subject to a condition subsequent, rather than an entitlement which arises as a result of a successful outcome, there are reasons why that is not so. First, as appears from the costs agreements presented in the present case, a successful outcome will usually involve not merely obtaining a costs order, but actual recovery of costs. It is not possible to make the existence of a right to charge dependent on recovery of the moneys from which the charges would be paid. That would be to take the circularity noted at  above one step too far.’
Mainieri v Cirillo  VSCA 227
The costs agreement under consideration by the Court of Appeal in Mainieri said:
2. How we calculate what we charge you
2.1 You will not have to pay us anything out of your own pocket for any of the work done by our lawyers on your matter (professional time).
3.Issuing a bill for payment by another party
3.1 We will only issue you with a bill for our professional time if one of the following things happens:
(a) a Court or other tribunal or statutory scheme orders another party to pay your legal costs; or
(b) the case is settled, and part of the settlement includes payment of your legal costs.
3.2 If one of these two things happens, we will issue a bill which includes our professional time and all disbursements which we have incurred in this matter. We will not ask you to pay any more under the bill than the amount recovered for legal costs in paragraph 3.1(a) or 3.1(b), even if that amount is less than the amount of our bill.
The Court seems to have endorsed Santow J’s reasoning (which, as we have already seen, expressly said that liability conditional on actual recovery did not give rise to an indemnity principle problem), and the Court referred with apparent approval to LM Investments where, as we also already have seen, a costs agreement which provided in substance for a liability to pay fees conditional upon actual recovery was found not to offend the indemnity principle. Nevertheless, the Court said:
’51. Evidently, the weight of considered dicta favours the Basten JA view. Conscious as we are, however, of the importance of consistency among Australian intermediate courts of appeal, we agree with Santow JA that, as the Legal Profession Act now recognises conditional costs agreements of the kind where payment of costs is ‘contingent on the successful outcome of the matter’, and draws no distinction between such a contingency expressed as a condition precedent or subsequent, the application of the indemnity principle should not depend on that distinction. With all respect, we do not consider that either of the reasons identified by Basten JA as justifying the opposite view is persuasive.
52. As to the first, although it may be that an obligation to pay fees which is conditional on the actual recovery of costs would not impose a sufficient obligation to warrant an order for costs in accordance with the indemnity principle, logically it does not follow that an obligation to pay costs which is conditional on obtaining a costs order ought not be regarded as sufficient. If concentration is confined to the latter situation, it would be remarkably arbitrary, and hence we think contrary to principle, if the law were that an order for costs may be made in favour of a party who, at the instant the order is made, is subject to a defeasible liability to pay costs; and yet an order for costs cannot equally be made in favour of a party who, at the instant the order is to be made, is at least contingently liable to pay costs and who, at the instant the order is made, becomes indefeasibly liable to pay them. To hold otherwise would be a triumph of form over substance.
53. As to the second reason, although we agree with respect that an ongoing unconditional obligation is consistent with other aspects of the statutory scheme of fee regulation, so too surely is an ongoing contingent obligation of a kind for which the Act expressly provides and which, for the reasons adumbrated by Santow JA, the law regards as just and socially desirable.’ (my emphasis added)
Obviously, though the practical effect of the costs agreement was the same as that in Wentworth, the Court did not regard the clause as providing for a liability to pay costs which was conditional on the actual recovery of costs. The Court spent little time explaining why that was the appropriate construction of the costs agreement notwithstanding cl. 3.2 of the costs agreement.
The tension between endorsement of Santow J’s reasoning and leaving open for decision on another occasion the efficacy of a costs agreement where liability to pay was conditional upon actual recovery of costs was noted by the Costs Judge in Mourik v Van Marburg at .
Mourik v Van Marberg  VSC 601
Mourik is a decision of the Costs Judge, an Associate Justice who is in charge of the Costs Court, an administratively separate part of the Trial Division of the Supreme Court of Victoria. It stands as authority for the proposition that a costs agreement which requires the winning party to pay their lawyers only upon the actual recovery of costs from the losing party offends the indemnity principle and does not work.
His Honour so found despite recognising at  the public policy in favour of allowing what might be called ‘pro bono conditional costs agreements’:
‘there are public policy considerations that should encourage the profession to offer pro bono services. An agreement that restricts a client’s liability to a figure equal to the costs orders from the opposing party is to be encouraged. It is uncontentious that the indemnity principle is a flexible one designed to allow for a just result.’
The facts were as follows. Solicitors and counsel acted pro bono for Mr Mourik in various senses. He obtained some costs orders against Mr Von Marburg. The solicitors’ costs agreement said straight out that they would not charge professional costs ‘except as provided for below’ but would charge for disbursements. Their costs estimate of the total legal costs of the matter, in respect of professional costs, was nil. Further on in the costs agreement, it said:
‘Where you are the beneficiary of such an order [i.e. an order for costs], we may give you an invoice for our charges, including our professional fees, to an amount no greater than the amount recovered from another party.’
The Costs Judge said that Mr Mourik was not entitled to anything under the party party costs order in respect of the professional work done by the solicitors because the trigger for his liability to pay them was recovery from the losing party and the indemnity principle was offended (see ).
Mr Mourik was entitled to a party party costs order by way of a partial indemnity against his liability to pay counsel’s fees, however. Counsel had costs agreements exclusively with the solicitors. By the end, both counsel had conditional costs agreements which said effectively ‘I will only charge you if you get a costs order in your favour or if the case is settled and the settlement includes payment for costs’ (see ). Not being predicated on actual ‘recovery of costs’ under a costs order, but being predicated on the obtaining of a costs order, the indemnity principle was not offended.
That situation arose only after junior counsel entered into a second costs agreement which was said to have retrospective operation back to a date earlier than the date of the first costs agreement. The first costs agreement had had a similar problem as the solicitors’ costs agreement. No issue arose about the efficacy of the retrospective costs agreement (unlike in King v King  QCA 81 where the retrospective costs order was entered into after all the work in the case had been done, after trial, and just a few minutes before judgment was delivered). It is a useful reminder that problems with pro bono costs agreements can be rectified by entering into new costs agreements with retrospective operation: see also D’Aleessandro and D’Angelo (a firm) v Cooper, unreported, Supreme Court WA, Owen J, 9 May 1995, BC9503598; Holmes v Alfred McAlpine House (Yorkshire) Ltd  EWHC 110; Hawkins v Clayton (1986) 5 NSWLR 109 per McHugh JA; Dal Pont, Law of Costs (2013) at [3.6].
Royal v El Ali (No 3)  FCA 1573
Royal is a decision of a Victorian judge, Justice Jennifer Davies, of the Federal Court. The Court was sitting in Sydney. The winning party’s costs agreement said ‘our fees will only be paid in the event that the litigation results in a recovery sufficient to ensure their payment’ and ‘our fees will only be payable out of any monies which we recover on your behalf’.
I observe that liability was not contingent on actual recovery of costs under a costs order, but on actual recovery of money in the litigation, so at the time when the costs order came to be taxed, damages may already have been obtained and the costs might be paid out of the damages. The distinction between liability contingent on recovery of costs from the other side and recovery of monies more generally seems to have been important to Davies J in distinguishing Mourik: see  and .
Her Honour found that the indemnity principle was not infringed, observing that:
’44. Mainieri v Cirillo 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”. In the present case, the [successful parties] are contingently liable under their costs agreement with [their solicitors] to pay legal fees and disbursements to [them] for the legal services provided in relation to this litigation. The mere fact that the liability is contingent on sufficient recovery of moneys out of which to meet those costs does not mean that the indemnity rule would be contravened by an order for costs because at the time when that order is sought the contingency triggering the liability has not been satisfied. There is a contingent liability to pay fees and thus an obligation to be indemnified when a costs order is made.
45 Mourik v Von Marburg  VSC 601, on which the respondents also relied, likewise does not assist their case. The applicant in Mourik v Von Marburg, had obtained several interlocutory costs orders in his favour and had a right to have those costs taxed although the substantive hearing was still on foot. The costs agreement contained a clause stating that “where you are the beneficiary of [a costs] order” the firm “may give you an invoice” for the firm’s costs “to an amount no greater than the amount recovered from another party”. Wood AsJ held that the “inescapable conclusion” was that the applicant did not have any liability to his solicitors for professional costs because the obligation to pay fees was conditional on recovery of costs. It seems to me that the correctness of that decision is open to doubt but, in any event, Mourik v Von Marburg is distinguishable because it is not the case here that the obligation to pay fees is conditional only on recovery of costs.’
Her Honour found that counsel’s costs agreements did not offend the indemnity principle either. Senior counsel had said he was not charging on a conditional basis, but ‘it would be my intention to seek payment of some portion of my fees only in the event that the recovery was sufficiently large that it had firstly provided a dividend to the [clients] and a substantial payment to you and [junior counsel].’ See . Junior counsel said she would do the case on a ‘contingent basis’ (apparently intended to mean a conditional basis): ‘I will only render an invoice at the conclusion of the Legal Services and only in circumstances where a successful outcome has been achieved in the [clients’] favour, being satisfaction in whole or in part of the judgment debt [the recovery of which seems to have been the purpose of the retainer]’.
Three more things
The law in relation to costs in pro bono matters and proposals for reform are canvassed in the NSW Law Reform Commission’s Report no. 137 (‘Security for Costs and Associated Costs Orders’), pp. 57 et seq
In some jurisdictions, there are statutory schemes which provide for awards of costs to pro bono lawyers, effectively abrogating the indemnity principle. See Dal Pont, Law of Costs (2013) at [7.15], citing provisions in the Federal Court Rules, High Court Rules and Western Australian rule.
In relation to the debate about these questions in the US, see this blog post. In Canada, tehy don’t even recognise the indemnity principle problem: Dal Pont, loc cit; 1465778 Ontario Inc v 1122077 Ontario Ltd (2006) 82 OR (3d) 757 at 
- Costs recovery in pro bono cases in Victorian state courts: Part 2
- What does ‘pro bono’ mean? Are ‘semi-pro bono’ costs agreements legally efficacious?
- No problems with right to costs contingent on recovery from other side on costs order?
- Costs recovery in pro bono cases in Victorian state courts: Part 3
- Costs recovery in pro bono cases in Victorian state courts: Part 1