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  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.