Costs recovery in pro bono cases in Victorian state courts: Part 2

I was asked to talk to my colleagues at the Victorian Bar recently in relation to costs recovery in pro bono cases. It is now more certain that costs may be recovered from the other side by victorious litigants who engage their lawyers in a greater variety of pro bono bases. That is as a result of both recent developments in the judge-made law and changes to the Supreme and County Courts’ rules. Over the next few days, I will publish, in digestible chunks, the paper I distributed. What follows is the second part. Part one of this article is here.


Case law

The Court of Appeal declared that the indemnity principle is not offended by a costs agreement which is conditional on the client obtaining a costs order in Mainieri v Cirillo (2014) 47 VR 127. In that case, the successful party’s solicitors’ costs agreement said:

(a) the client would not have to pay any professional fees out of their own pocket;

(b) the solicitors would only issue a bill if a costs order (or a settlement including costs) was made; and

(c) they would not ask the client to pay more than the amount recovered for legal costs, ‘even if that amount is less than the amount of our bill’. (para [44])

The Court of Appeal treated that costs agreement as one which was not conditional on receipt of money under the costs order, but rather that it was conditional only on the making of a costs order: para [45], and said ‘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’ at [52].

The Court made this obiter comment despite citing with approval (para [53]) LM Investment Management Limited v The Members of the LM Managed Performance Fund [2014] QSC 54. In that case, the Court said there was no indemnity principle problem with a costs agreement providing for an unconditional liability to pay in the general conditions, but which said in 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.’

At this point, it may be observed that a Supreme Court and a Court of Appeal had awarded costs in circumstances where the solicitors had promised not to ask the client to pay any more than the amounts recovered under costs orders, but the Court of Appeal did not treat the costs agreement in Mainieri as being conditional on recovery as opposed to on the making of a costs order.

In Mourik v Von Marburg [2016] VSC 601, however, the Costs Judge found that the successful party was not entitled to a party party costs award in respect of work done by his solicitor. The solicitor had said that the client would not be liable to pay fees unless ‘you are the beneficiary of [an order for costs]’ in which case ‘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.’

In these cases there is endless analysis of the difference between conditions precedent and conditions subsequent, and general conditions cut down by special conditions. I have not sought to explain it because I cannot find a rational way to do so.  But the Costs Judge was presented in this case with a fairly stark version of the most problematic kind of costs agreement which said very plainly that a bill would not even be given until after the party party costs were recovered.

Though counsel’s costs agreements were exclusively with the solicitor, whose costs agreement was found to infringe the indemnity principle, the Costs Judge allowed the successful party to claim costs for the barristers’ work because the barristers’ costs agreements were conditional only on the making of a costs order rather than recovery under such an order.

The correctness of the Costs Judge’s decision was promptly doubted by Davies J, a Victorian judge, in the Federal Court decision of Royal v El Ali (No 3) [2016] FCA 1573. In that case, the liability to pay fees was conditional on actual recovery by the successful client of money in the litigation (i.e. compensation or costs). Since the fees liability was not conditional only on actual recovery under a costs order, however, her Honour distinguished the Costs Judge’s decision in Mourik, and made a costs order. She said:

‘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.’

(Incidentally, the case provides an illustration of another legally acceptable approach. Senior counsel said he was not acting no win = no fee 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].’)

LM Investment Management, Mainieri’s Case, Mourik v Von Marburg, and Royal v El Ali (No 3) are summarised in more detail in this blog post.

Supreme Court Rules

The new Supreme Court Rules[1] allow for costs awards, taxation and recovery by successful litigants in the Supreme Court[2] (and in some cases recovery directly by the pro bono lawyer) in circumstances:

(a) which would not otherwise be permitted for so long as Mourik v Van Marburg remained good law in Victoria, namely where fees are recoverable by the successful party’s lawyer only once the unsuccessful party has actually paid up under a costs order[3]; and

(b) in circumstances which have never been permitted by the case law, namely where the lawyers promise to do the work for free.

Lawyers may contract with their clients to charge and be paid disbursements regardless of the outcome, and that would be what most lawyers would usually do. What is a disbursement and what is a professional fee is sometimes ill-understood (e.g. photocopying done in the lawyer’s office) and care should be taken to avoid inadvertently taking a costs agreement outside of the operation of the rules by providing for payment regardless of the outcome of what is in truth a professional fee on the basis that it is a disbursement.

Three limitations on the application of the rules are worth noting.

First, a costs agreement which provides for the successful party to receive costs under a settlement agreement would not appear to be one which provides for work to be done on a ‘pro bono basis’, and so would not fall within the scope of the rules. That is because such an agreement would not provide for the receipt of professional fees ‘only to the extent that a costs order … is made’ or ‘to the extent that payment is made in satisfaction or part satisfaction of such an order’. That is not to say that a costs agreement could not be arrived at, within the operation of the rules, which allowed for remuneration in the event of a settlement which included an allowance for the successful party’s costs, but the costs order would have to contemplate the making of a consent order as a consequence of the settlement.

Secondly, a costs agreement which provides for the successful party’s solicitor to receive fees under a settlement agreement where the client receives compensation or some other benefit such as the recovery of property (as opposed to a favourable costs order) would not be within the rules. (One would usually go with the other, but not always.)  The costs agreement considered by the Federal Court in Royal v El Ali was such a costs agreement. Once again, the problem is that such an agreement would not provide for the receipt of professional fees ‘only to the extent that a costs order … is made’ or ‘to the extent that payment is made in satisfaction or part satisfaction of such an order’

Thirdly, a costs agreement which provides for the successful party’s solicitor to receive fees if and to the extent that the court makes costs orders generally is not within the rules. The only kind of costs order on which the liability for fees may be conditional is ‘an order for costs covering such professional fees’. So the costs agreement would have to say something like ‘you will only have to pay our fees if the Court makes a costs order, and then only to the extent that the order covers the work to be billed’.

Lawyers who simply promise to do the case for free may have more scope to argue for a more generous costs order than those who say they will accept only such payment as is recovered under a costs order. That is because, as soon as it has been established that the lawyer was acting ‘on a pro bono basis’ the Court is free to make whatever order it likes as if the practitioner had not been charging in the usual way. If the successful client obtained a substantial benefit or considerable compensation but only a modest cost order (through no fault of counsel), the Court might make a pro bono costs order which is not limited by the value of the costs order, to be paid by the client out of the compensation received. Presumably a court would be more likely to do so where the lawyer had not contractually promised to be satisfied with payment only out of a costs order.

County Court and Magistrates’ Court Rules; VCAT

The County Court has made the same changes to its civil procedure rules as the Supreme Court.[4] They commenced on 6 June 2017.[5] For the sake of simplicity, I refer in this paper principally to the Supreme Court’s rules.

Rule 63.63 of the Magistrates’ Court’s rules specifies that ‘Subject to these Rules and to any Act or order of the Court, costs under this Part must be taxed as provided by the Supreme Court Rules.’ What the operation of this rule might have in the context of this paper remains to be worked through, but I am not convinced that the rule necessarily means that the Magistrates’ Court can use the new Supreme Court rules to make costs orders in the Magistrates’ Court, or that party party costs orders taxed by the Costs Court will be governed by the new Supreme Court rules.

The position in VCAT is different again.  It is a presumptively costs free jurisdiction (unless you’re in the Legal Practice List of course, in which there is a presumption that the Legal Services Commissioner will get his costs on County Court Scale and not have to pay costs when he loses).  It has no rules about pro bono cases’ costs.  If a VCAT member really wanted to, I daresay he could use s. 98(1)(b) of the VCAT Act 1998 to adopt this aspect of the ‘rules, practices or procedures applicable to courts of record’ such as the Supreme Court.

[1] The Supreme Court (Chapter I Recovery of Pro Bono Costs Amendment) Rules 2017 commenced on 1 April 2017, inserting a new Part 3A in Order 63, which is the single order containing almost all the rules about costs. The new provisions are rr. 63.34.1 – 63.34.3.

[2] The Costs Court taxes costs orders made by the Supreme Court, the County Court, the Magistrates’ Court and VCAT and also in some cases under the Commercial Arbitration Act 2011. But the new Supreme Court rules contain a requirement for connection with proceedings in ‘the Court’ within the definition of ‘assisted party’ via the definition of ‘legal assistance’. The Federal Courts tax party-party costs themselves, though the Federal Circuit Court’s costs orders which require taxation are done by the Family or Federal Court as appropriate.

[3] Remember, though, that the costs agreements in Mainieri (VSCA) and LM Investment Management (QSC) seemed to provide, in effect, for recovery by the lawyers only in the case of and to the extent of payment of costs by the unsuccessful party, so if equipped with this knowledge at the outset, the structure of those costs agreements could be aped so that the same result could be achieved without resort to the new rules.

[4] County Court (Chapter I Recovery of Pro Bono Costs Amendment) Rules 2017 (SR no. 36 of 2017).

[5] Ibid, reg. 3.

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