Allen v O'Donnell [No 2][2021] QSC 149

SUPREME COURT OF QUEENSLAND

1. [1]
   This application has its genesis in personal injuries proceedings brought by the plaintiff/applicant, Mr Allen, following a motor vehicle accident which occurred on 6 January 2015.
2. [2]
   In April 2021, I gave judgment for approximately $2.5m in favour of the plaintiff, however, the judgment amount did not exceed the defendant’s mandatory final offer. As such, the plaintiff is liable for the second defendant’s costs from 17 December 2019 (the day on which offers were exchanged) on a standard basis.
3. [3]
   Rather prudently, the plaintiff has attempted to formulate a written offer to settle the costs liability pursuant to r 733 of the Uniform Civil Procedure Rules 1999 (Qld) (“UCPR”). As is shown by the correspondence exhibited to the affidavit of  Mr Smith filed 2 June 2021,^[1] the plaintiff has requested from the second defendant a copy of the costs agreement between itself, that is, RACQ Insurance Limited (“RACQ”), and their solicitors, Cooper Grace Ward (“CGW”).
4. [4]
   The rationale espoused by Mr Smith for the plaintiff in that correspondence is that to properly formulate any offer to settle costs, the plaintiff must be in a position to understand the liability as between the second defendant and their solicitors. The second respondent has refused to supply the costs agreement. The plaintiff now seeks an order from the court that the second defendant provide to the plaintiff a “copy of its Costs Agreement with its solicitors Cooper Grace Ward together with any copies of any variations to that Agreement from the time of its original instructions to Cooper Grace Ward to date of this application.”^[2]
5. [5]
   In the application’s supporting affidavit, Mr Smith deposes that costs agreements between CTP insurers and their solicitors could contain provisions for stage-based assessments and payments of costs and outlays which may result in the liability of the insurers to its solicitors for a given period being less than the costs assessed on the standard basis for that period. Mr Smith asserts that the plaintiff seeks the costs agreement as it may assist him in negotiating or arriving at an appropriate offer to settle the costs.
6. [6]
   Following the filing of the application, the second defendant filed their costs statement pursuant to r 705 of the UCPR. The costs statement claimed costs of $150,205.24, outlays of $188,448.27 for a total of $338,653.51.^[3] The plaintiff, with the costs application having been filed by the defendant, persists with the application to have access to the costs agreement and associated documents on what now appears to be a two-pronged basis:

   1. (a)
      Firstly, and as above, to table an appropriate offer to settle the costs pursuant to r 733; and
   2. (b)
      Secondly, absent the documents it is impossible for the plaintiff to determine whether or not the indemnity principle may be offended in this particular case.
7. [7]
   Mr Cockburn for the second defendant has deposed that the indemnity principle has not been offended insofar as the “total legal costs and outlays” payable by RACQ to CGW exceeds the amount contained in the costs statement.^[4]

The Indemnity Principle

8. [8]
   The indemnity principle has been a feature of the common law for over 150 years.  In Harold v Smith (1860) 157 ER 1229,^[5] Bramwell B said:

“Costs as between party and party are given by the law as an indemnity to the person entitled to them; they are not imposed as a punishment on the party who pays them, nor given as a bonus to the party who receives them. Therefore, if the extent of the damnification can be found out, the extent to which costs ought to be allowed is also ascertained. Of course, I do not say that there are not exceptional cases in which certain arbitrary rules of taxation have been laid down; but, as a general rule, costs are an indemnity, and the principle is this, – find out the damnification, and then you find out the costs which should be allowed.”

9. [9]
   More recently, the Court of Appeal of the Supreme Court of Victoria in Shaw v Yarranova Pty Ltd [2011] VSCA 55, per Redlich and Mandie JJA explained the indemnity principle in these terms:^[6]

“[8]   An order for costs against the unsuccessful litigant aims to provide the successful party with some level of indemnity for the legal costs the successful party would not have incurred had it not been necessary to uphold his or her rights in court. Such an order does not entitle the successful litigant to recover more than he or she has paid or is liable to pay to his or her own lawyer. The rule limits the successful party’s right to indemnification to the ‘necessary or proper’ costs incurred to obtain justice in the case. The costs are usually confined to those that the successful party ‘was primarily and potentially legally obliged to pay to his solicitor’. Hence the existence and scope of the successful litigant’s duty to pay his or her own solicitors is central to the ability to recover costs.

[9] As this case and the recent decision of this Court in Kuek v Devflan Pty Ltd & Anor illustrate, an unsuccessful party may wish to investigate the scope of the successful party’s obligation to pay their solicitors’ costs by reference to the retainer of the successful party’s solicitors. As it was known that MAB Corporation had paid or was intending to pay all or part of the respondents’ costs, the applicant endeavoured to obtain documents before Wood AsJ for the purpose of establishing that the respondents had no liability to the solicitors who acted for them, or had a liability that was less than might be calculated by a standard party/party taxation.  Relying upon the decision of Beach J in Kuek v Devflan Pty Ltd and the New South Wales Court of Appeal in Dyktynski v BHP Titanium Minerals Pty Ltd, the applicant sought production of ‘relevant retainer letters, costs agreements, invoices, proof of payments of invoices and actual costs paid.’  He submitted before Wood AsJ that the respondents should be required ‘to provide evidence of the terms of the retainer outlining the circumstances and any limitations on the fees or liabilities the defendants may have to their solicitors and actual costs paid by them’, so as to establish their liability to pay costs to their solicitors in amounts at least as great as the amounts of the costs the applicant had been ordered to pay pursuant to the costs orders.

[10] Wood AsJ accepted that production of retainer letters and any costs agreements may be justifiable but refused to direct the respondents to produce bills or invoices rendered or other proof of payment.  He thus ordered that the respondents produce any relevant document and any costs agreement that established the method of calculation of legal fees in relation to acting for the respondents in the substantive proceedings.  In response to that order the solicitors for the respondents advised Wood AsJ that there were no such documents, save for actual bills or invoices rendered as proof of payment, noting that the production of those documents was not required.  Following that advice, the applicant renewed his request for the production of invoices and receipts for payments.  Wood AsJ again refused to so order and in his reasons for confirming on review the taxation figures stated –

 At the hearing on 27 April 2010 the defendants confirmed that there were no documents that fell within the description of the order of 19 February 2010.  By default therefore the liability of the defendants for legal costs performed on their behalf is on the Supreme Court scale.  The taxation took place on that basis and therefore there is nothing to suggest the indemnity principle has been offended.

[11] Beach J concluded that Wood AsJ was correct to have required the respondents to produce any relevant document and any costs agreement that established the method of calculation of the relevant legal fees and was also correct in refusing to order the production of invoices and receipts.  Beach J considered that a flexible and reasonable application of the indemnity principle did not mandate a fishing exercise by the unsuccessful party in the hope of finding something in the successful party’s documents that would displace the right to indemnity when there was presently no evidentiary foundation to do so.”

(Emphasis added.)

10. [10]
    The position in Queensland is also couched in very similar terms. In King v King [2012] QCA 81, Chesterman JA with whom White JA agreed, said:^[7]

“[7]  An order for costs operates as an indemnity to a successful party in litigation. Costs are awarded to recompense a successful party in respect of what it cost to bring or defend successful proceedings. A corollary is that the unsuccessful litigant is not required to pay any more than the costs incurred by his successful opponent. See Oshlack v Richmond River Council (1998) 193 CLR 72. Before the right to indemnity can arise the successful litigant must be under a legal liability to his solicitors to pay costs. Another corollary is that if a successful litigant’s lawyers act for him without charge he is not entitled to an order for costs. There is nothing to indemnify him against. See McCullum v Ifield [1969] 2 NSWR 329 at 330 cited by Santow JA in Wentworth v Rogers (2006) 66 NSWLR 474 at 486.”

11. [11]
    In King v King,^[8] Chesterman JA further considered the NSW case of Wentworth v Rogers and said:^[9]

“[8] In Wentworth the court considered a cost agreement to the same effect as the applicant’s. The point of present significance, whether it gave rise to a liability against which the applicant is entitled to an indemnity by way of a costs order, was discussed but was not critical to the result. Different views were expressed. The nature of the contingencies which might arise in costs agreements and their consequences on the need for an indemnity, by way of a costs order against that liability, was discussed most fully by Basten JA. His Honour said (504):

‘As a matter of logic, it may seem curious that an order of the Court, which arguably should not be made unless there is a legal liability, should be relied upon as the justification for its own existence. On the other hand, it would be surprising if the long-standing practice by which lawyers appear in Australian courts on a “speculative” basis or “no win/no fee” basis, was based on a misconception, and did not allow for a costs order from which fees could be recovered, in the event of success. However, the conflict is more apparent than real. As noted by Millet LJ in Thai Trading Co … conditional fee agreements gave effect to the principle that “there is nothing improper in a lawyer acting in a case for a meritorious client who to his knowledge cannot afford to pay his costs if the case is lost”. As his Lordship continued … “Not only is this not improper; it is in accordance with current notions of the public interest that he should do so.”

Once that practice was accepted, it was equally appropriate to formalise the arrangement in contractual terms which would provide that the lawyer would accept a reduced fee in full settlement of his or her account, or would waive his or her right to require payment, in the event that the proceedings were unsuccessful. In each case, there is an immediate and quantifiable obligation imposed on the client when the retainer is created, the contingency operating as a condition subsequent.’

[9]  His Honour drew a distinction between that kind of contractual arrangement and that, like the present, in which a client has no obligation to pay his own lawyers unless and until an order is made by a court that he recover costs from an opponent in litigation. Basten JA said (505):

‘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 … one step too far.’

[10] The circularity ‘noted’ was explained by his Honour (at 500):

‘If the entitlement to recover costs from another party to the proceedings is dependent upon the legal liability to pay those costs to one’s legal advisors, but the obligation to pay is contingent upon establishing a right to recover, the circularity is readily apparent. However, if, as in the present case, the obligation to pay depends not on a right to recover an identifiable amount of costs, but on the actual recovery of those costs, there may be no extant legal obligation to be indemnified even when a costs order is made.’”

12. [12]
    Chesterman JA, with whom White JA agreed, noted that in Wentworth v Rogers Santow JA expressed differing views from Basten JA. Santow JA preferred a view that conditional costs agreements of both kinds ought to be regarded as giving rise to a liability to pay sufficient to justify the indemnity afforded by a costs order. Chesterman JA preferred the view of Basten JA, stating “when properly analysed there is no obligation on the applicant to pay costs until a costs order is made, and a costs order cannot be made until there is a liability in the successful litigant to pay his own lawyer’s costs”.^[10]
13. [13]
    As was noted in Dyktynski v BHP Titanium Minerals Pty Ltd (2004) 60 NSWLR 203, it may be that the agreement between a successful litigant and their solicitors is ultimately to the benefit of their adversary. In this regard, Mason P, with whom Davies A-JA said,^[11] “[a]lternatively, if the solicitor-client agreement caps the amount of costs recoverable, this enures to the benefit of the client's adversary.”
14. [14]
    In Kuek v Devflan, Hansen JA said:^[12]

“[59]  The common thread running through these cases is the proposition that the receiving party cannot recover costs from the paying party in circumstances where the receiving party is not liable to his or her own lawyers. That is logically so because a party cannot seek indemnification where there is no loss. In the present case, the applicant does not claim that the respondents have no liability to pay their lawyers. Rather, he says that the extent of the liability is limited because of the special arrangement whereby the lawyers agreed to act for a reduced fee. As to this type of case, in Wentworth v Rogers Basten JA stated:

The principle does not apply only to the case in which the party has no financial obligation at all to his or her lawyer. It must also operate in the case where the lawyer has agreed to appear at a reduced fee, below that which might, in the ordinary course, be recoverable …”

(Footnotes omitted; Emphasis added.)

15. [15]
    In the present case, it is not alleged by the plaintiff that there was no legal obligation between RACQ and CGW, but rather that a stage-based costs agreement may exist, which would provide for reduced fees (less than the standard amounts under the UCPR) at certain stages of the proceedings, therefore resulting in the indemnity principle being infringed, at least for that period. 
16. [16]
    As noted by Basten JA in Wentworth v Rogers,^[13] the indemnity principle applies in cases, not only where there was no legal obligation at all, but also in cases where there was a reduced liability.^[14]
17. [17]
    The second defendant submits that any consideration of the indemnity principle as grounds for ordering the production of the costs agreement is irrelevant, because, firstly, any complaint by the plaintiff about their liability for costs is essentially a complaint about the quantum of costs which ought to be addressed under the appropriate provisions of the UCPR, and secondly, that the indemnity principle applies to the “totality” of the costs as opposed to, as is put by the plaintiff, “stages”.

Quantum of costs

18. [18]
    A party on whom a cost statement is served may, within 21 days, file an objection to the statement detailing any objections and specifying the reason for and the basis of the objection.^[15] I do not accept the defendant’s characterisation of the application as essentially a matter dealing with the quantum of a costs statement. The application to have the cost agreement procured was filed prior to the cost statement being filed. The plaintiff’s current complaint is not with the amounts as assessed under the cost schedules of the UCPR nor, necessarily, with the billing practices of CGW, but rather, the allegation is that under the cost agreement, RACQ may not have been liable (for at least a time between 17 December 2019 and present) on a full-fee basis. This complaint cannot be addressed by appealing the cost statement produced by a cost assessor who’s only consideration was the cost schedules; the liability under the cost agreement as between RACQ and CGW is relevant and ought to be investigated.

Totality of costs

19. [19]
    On the totality of costs point the defendant further submits that:^[16]

“[10] Any suggestion that the Second Defendant may have been charged less by its solicitors for some component of the work than an amount provided under the scale for that component is irrelevant. The indemnity principle applies to the totality of costs incurred by a litigant when compared with the totality of costs as assessed in accordance with UCPR 702(2) which provides:

‘When assessing costs on the standard basis, a costs assessor must allow all costs necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being assessed.’”

(Original emphasis. Footnotes omitted.)

20. [20]
    The defendant’s submissions is perhaps better understood, when one takes the reference to r 702 of the UCPR as an implied comparison to r 703 of the UCPR (which deals with an assessment of costs on an indemnity basis), which requires a cost assessor to have mind to any cost agreement between a party and a party’s solicitors.
21. [21]
    However, the defendant did not direct me to any cases which considered that the indemnity principle only applied to the totality of costs. The cases as analysed above show that the liability as between a party and their solicitor is essentially a question of contractual interpretation and that where there was no “immediate and quantifiable obligation imposed on the client”,^[17] there could be no liability for which the successful party could be indemnified from. Furthermore, the principle may apply in scenarios where “the lawyer has agreed to appear at a reduced fee, below that which might, in the ordinary course, be recoverable”.
22. [22]
    In my view, if a cost agreement provides that for a certain time period (or other period specified in reference to other events) that the party’s lawyers will act for reduced fees (or some other form of reduction), then the liability as between the two is similarly reduced such that the party cannot be “indemnified” for a liability that never existed, per se. Further, it stands to reason, in my view, that the liability ought to be assessed pursuant to whatever conditions exists under the costs agreement; if the fees are reduced for one period and then increased the next, then likewise, the liability increases or decreases.
23. [23]
    With respect, r 702 of the UCPR is concerned with the mechanics by which a cost assessor is to act when directed to assess costs on a standard basis and is not relevant to determining whether the indemnity principle has been offended.
24. [24]
    It is logical and in line with the above authorities that if, for example, a period of several months, the financial obligation between a client and their solicitors was of a reduced fee, then it could equally be expected that that reduced fee would be the cost recoverable, not the standard costs as would be assessed under the schedules to the UCPR.

Circumstances in which production should be ordered

25. [25]
    As a general rule, a costs agreement does not attract legal professional privilege. Lindgren J said in Cook v Pasminco Ltd [2000] 107 FCR 44:^[18]

“[47]   In my opinion, generally, an agreement between solicitors and their prospective client as to the terms of retainer of the solicitors does not attract either kind of legal professional privilege mentioned: the agreement is not created for the dominant purpose of the giving or receiving of legal advice or of being used in existing or anticipated legal proceedings. A costs agreement is a bundle of mutual and reciprocal commitments between intending solicitor and client. It is entered into by parties whose interests are, at the time, generally opposed. Generally speaking, the solicitors are entitled to negotiate the terms of the agreement in their own interests. Once it is appreciated that a costs agreement is an agreement between persons who are about to enter into the relationship of solicitor and client, there is no obvious reason why such an agreement, as a class of document, should be the subject of legal professional privilege.”

26. [26]
    Of course, that is not an unyielding rule, as an agreement may contain material that expressly or impliedly conveys legal advice, however, there is no evidence before the court that such issue arises in this case.
27. [27]
    In considering circumstances in which production of a costs agreement should be ordered, Redlich and Mandie JJA said in Shaw v Yarranova Pty Ltd:^[19]

“…The principles governing an application for an order that documents be produced are not different from those governing applications for access to documents produced in answer to a subpoena…”

28. [28]
    Their Honours went on to identify that in situations such as this, an applicant must identify a legitimate forensic purpose for which access is sought and establish that it is “on the cards” that the documents will materially assist his case.^[20]
29. [29]
    What is now for determination is whether the evidence put before the court is sufficient to warrant the court ordering that the costs agreement between the RACQ and CGW is disclosed. As the cases demonstrate, the material must show that the cost is agreement is sought for more than just a fishing expedition,^[21] but need only be “sufficient to suggest” that the assessed costs are greater than the actual liability.^[22] 
30. [30]
    In a case such as the present, the evidence will be limited. The applicant party will be attempting to produce evidence about a document which they do not have in their possession.
31. [31]
    Here, the evidence for the plaintiff is the deposition of Mr Smith that it is “not uncommon” for stage-based cost agreements to exist between CTP insurers and their solicitors.^[23]  Conversely, the defendant put forward evidence that the “total” legal costs and outlays actually payable by the second defendant are less than what has been assessed in the costs statement.^[24]
32. [32]
    The submissions on behalf of the respondent focussed greatly on the lack of evidence which the applicant could point to as to positively say whether the indemnity principle had been infringed. Counsel for the second defendant points to depositions made by Mr Cockburn of CGW acknowledging that second defendant “cannot profit from the costs orders” and “can assure you [the plaintiff] that there is no factual basis whatsoever for your concern.”^[25] In this regard, a deposition that the cost agreement between RACQ and CGW was not a stage-based agreement would have been more informative.
33. [33]
    In Kuek v Devflan,^[26] Hansen JA said:

“[66]In my view, none of these matters relied on by the judge, considered alone or in combination, established that the respondents’ liability to their lawyers was in an amount equal to or greater than the amount allowed by the Taxing Master on the party/party bill. As ground 12 in the proposed notice of appeal states, there was insufficient evidence to enable the judge to make such a finding. The solicitor’s expression of opinion in the letters was merely that. By accepting it at face value, the judge effectively allowed the respondents’ solicitor to decide whether the indemnity principle had been breached, rather than the court determining the matter on proper materials. There was sufficient in the retainer letters referred to to [sic] indicate that the respondents’ lawyers would charge, and had charged, reduced fees, indeed that the solicitors were charging on a basis considered appropriate for a Magistrates’ Court case. Thus, a real issue arose as to whether the respondents’ liability to their lawyers exceeded the party/party costs claimed.”

(Emphasis added.)

34. [34]
    While evidence in favour of the plaintiff is limited, the court must also be careful, as Hansen JA noted, of simply accepting the assertion of the defendant’s solicitors that the indemnity principle is not breached. Whether the indemnity principle has been breached is something which can only be tested by a party or a court upon the proper materials.
35. [35]
    Further, as I stated above the mere fact that the total cost assessed does not exceed the actual amount charged, does not necessarily mean the indemnity principle has not been breached where the costs order is for a defined period.
36. [36]
    In my view, Mr Smith’s evidence is “sufficient to suggest”^[27] that the assessed costs may be greater than the actual liability, such that a breach of the indemnity principle is “on the cards”.^[28] Therefore, I order that a copy of the Costs Agreement between RACQ and its solicitors CGW together with any copies of any variations to that Agreement from the time of its original instructions to CGW to date of this application be provided to the plaintiff.
37. [37]
    I will hear from the parties as to the costs of this application.