Litigation costs: ducking under a high bar

Rule of thumb

In litigation, the rule of thumb is that the ‘loser’ pays the ‘winner’s’ costs (this is known as ‘costs following the cause’). That said it’s also possible for a Court to order that costs lie where they fall. To a certain extent the conduct of the parties in the proceedings will determine what order the Court is likely to make.

In making a costs order in a proceeding, the Court can order costs be paid on a number of different bases, including:

1. party/party costs

Party/party costs are those that one party recovers from another in litigation and arise out of a court order. In any event, party/party costs awarded should not exceed the amount of solicitor/client costs.

2. solicitor/client costs

Solicitor/client costs are the costs that the lawyer charges the client and are subject to contractual provisions between the client and the lawyer. Hence the determination of these costs may be more straightforward.

3. indemnity costs

Indemnity costs are those incurred by a party in litigation and represent a higher amount of costs that may be awarded by courts than on a party/party basis. Indemnity costs are ordinarily only awarded in circumstances involving misconduct in litigation or where there has been an unreasonable rejection of an offer of compromise.

A line in the sand

The recent case of Mijac Investments Pty Ltd v Graham (No 2) [2014] FCA 417 in the Federal Court, highlights:

the threshold over which the Court will award indemnity costs against a party to proceedings; and
the threshold under which solicitors will be immune from paying indemnity costs themselves.

A tax on hopelessness

The respondents made a submission that costs should be taxed on an indemnity basis, because the application was so ‘self-evidently hopeless‘ that it was unreasonable of the applicant to have made it. The Judge was persuaded that indemnity costs should be awarded, stating that:

‘…in this long history of litigation which the applicant has maintained against the respondents, the point has surely been reached when the latter should no longer be obliged to meet the differential between the costs which they actually incurred and the costs which are allowable under a taxation as between party and party.’

The respondents also submitted that it should be the solicitor who acted for the applicant, rather than the applicant itself, who should pay the respondents’ costs.

Judge’s reasoning

Essentially the Judge decided that because the application was not done ‘over the hand of a solicitor’, there was no basis for requiring the solicitor to pay indemnity costs prior to the date the application was made. The Judge made this decision despite noting that the solicitor was acting in a ‘hopeless case’.

His Honour determined that the obligation to pay the respondent’s costs lay where it naturally fell – on the applicant itself, which initiated the proceeding without any professional assistance. His Honour concluded by stating:

‘Of all litigants, the applicant is, in my view, pre-eminently eligible to shoulder the uncomfortable costs obligation of a losing party. It would be unjust for its solicitor to have to do so on its behalf.’

Setting the bar

Notwithstanding the relatively high threshold that Courts will impose on applications for indemnity costs against solicitors, this case serves to highlight the risks for practitioners acting in ‘hopeless cases’, in particular where proceedings have been commenced by unrepresented litigants.

This judgement also brings into sharp focus the need for lawyers to properly advise clients on the merits of their position prior to them ‘limbering up’ for litigation.

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