Costs and Indemnity Costs PDF

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Costs and Indemnity Costs By a very smart tall student! The large majority of legal systems, including Australia, adopt an approach to costs which sees the winning party at least partially reimbursed for the costs incurred by undertaking the proceedings.1 There is a standard basis for a costs award which will be applied in most cases, whereby a successful party will recover their costs on a party and party basis. In cases where costs take a punitive form, there is an indemnity award, which may see the successful party recover their solicitor and client costs as well as their party and party costs. In some cases, the cost of the proceedings exceeds the amount subject of the action and a standard costs award would leave the successful party out of pocket. It is therefore common in this instance that a successful party will seek a costs order on an indemnity basis.2 Generally where a successful party remains out of pocket they cannot subsequently claim the costs as damages. However, as with most general rules there are some exceptions, which will be discussed below in Part III.

A Standard Costs In Australia, the losing party in litigation is liable for the other side’s costs,3 albeit only a portion of the costs actually incurred.4 In 2008, the Victorian Law Reform Commission sought to obtain empirical data to determine the disparity between the costs incurred by the winning party and the costs recovered from the losing party.5 The review sought empirical data to determine the disparity of costs incurred and costs awarded and many experienced practitioners wrote to the commission suggesting recovery in most instances is only about 50% of the total amount of actual costs.6 This is compared with the Manitoba Law Reform

1 Peter Schlechtriem, ‘Verfanhrenkosten als Schaden in Anwendung des UN-Kaufrechts (Legal Costs as Damages in the Application of UN Sales Law)’ (2006) 26(7) Journal of Law and Commerce 71, 73.

2 Adrian Bellemore, ‘Party and Party Costs or Solicitor and Client Costs’ (2013) 29(1) Building and Construction Law Journal 16, 16. 3 Rules of the Supreme Court 1971 (WA) O 66 r 1. 4 Ruddock v Vadarlis (2001) 115 FCR 229; Victorian Law Reform Commission, Civil Justice Review, Report No 14, 2008, 648 [3.2.1]. 5 Victorian Law Reform Commission, Civil Justice Review, Report No 14, 2008, 648 [3.2.1]. 6 Ibid.

Commission in 2005 that reported that in Australia successful parties generally recover ‘probably as much as 60-70%’.7 In an 1875 case, Smith v Buller, 8 Vice Chancellor Malins clarified party and party costs as:

Costs chargeable… between party and party are all that are necessary to enable the adverse party to conduct the litigation and no more. Any charges merely for conducting the litigation more conveniently… must be paid by the party incurring them. 9

This premise is generally unremarkable in Australia today.10 Comparatively in America, unless stipulated in a contract between parties or in the absence of a statutory provision to the contrary, each party bears their own costs,11 regardless of the outcome of the litigation.12 This is referred to as the ‘American Rule’ which will be discussed in relation to the Contracts for the International Sale of Goods Convention (‘the Convention’).13

B Indemnity Costs

In Australia, costs are normally awarded on the basis of party and party costs but courts have the discretion to award costs on an indemnity basis. There is English authority that suggests it is a common misconception that indemnity costs are only appropriate where there has been some deception or underhand conduct by the paying party.14 Justice Hollis expressed his dismay at the previous attempts of courts to define and therefore limit the circumstances in

7 Manitoba Law Reform Commission, Costs Awards in Civil Litigation, Report No 111 (2005) 25, citing E T Spink, Party and Party Costs (Unpublished, Alberta Law Reform Institute, 1995) 36, 129. 8 (1875) LR19Eq 473. 9 Smith v Buller (1875) LR19Eq 473, 475. 10 Rankilor v Circuit Travel Pty Ltd (No 5) [2012] WADC 138; Stewart v Fehlberg (No 3) [2008] QSC 329. 11 Harry Fletcher, ‘Recovering Attorneys’ Fees as Damages under the UN Sales Convention (CISG): The Role of Case Law in the New International Commercial Practice, with Comments on Zapata Hermanos v Hearthside Baking’ (2002) 22(2) Northwestern Journal of International Law & Business 121, 125. 12 Hensley v Eckerhart (1983) 461 US 424, 443; Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52. 13 United Nations Convention on Contracts for the International Sale of Goods, April 11, 1980 S. TREATY DOC NO. 98-9 (1983). 14 Munkenbeck and Marshall v McAlpine (1995) 44 Construction Law Reports 30.

which an indemnity costs order can be made.15 This suggests there should not be any limitations on the court’s discretion to award costs on an indemnity basis.

Circumstances that may give rise to an indemnity costs order include particular conduct that requires a different order or a contract between the parties that shows they ‘unmistakenly agreed to the making of a special cost order’.16 However, even where a contract contains an indemnity clause, if it does not specifically deal with legal costs the successful party is only likely to recover costs on a party and party basis.17 A general indemnity clause will not automatically equate to recovering legal costs on an indemnity basis. The following sections will deal with indemnity costs in both the aforementioned circumstances: in the context of settlement; and indemnity clauses in contracts.

1 Indemnity in Context of Settlement Indemnity of costs is often sought in the context of ‘Calderbank’18 offers.19 If a party has made an offer of settlement and the court determines the other party’s refusal of the offer was unreasonable, the offeror’s costs from the date on which the offer was made are to be taxed on an indemnity basis thereafter.20 Costs incurred prior to the date of the offer will remain to be taxed on a party and party basis.21

There are no ‘hard and fast’ rules as to the appropriate circumstances for an indemnity costs order to be made by the court.22 Ultimately, the court will exercise its discretion having regard to all the evidence put before it and the circumstances of the case to determine which party ought to pay what costs. The refusal of a Calderbank offer does not always lead to an award of indemnity costs.23 The rejection of the offer must be shown to have been imprudent or unreasonable. 24 Justice 15 Munkenbeck and Marshall v McAlpine (1995) 44 Construction Law Reports 30. 16 Chen v Kevin McNamara & Son Pty Ltd [2012] VSCA 229, [8]. 17 Irani v St George Bank Ltd (No 3) [2005] VSC 456. 18 Calderbank v Calderbank [1976] FAM 93; [1975] 3 All ER 333. 19 Texxcon Pty Ltd v Austexx Corp Pty Ltd (No 2) (2013) 276 FLR 401. 20 Rules of the Supreme Court 1971 (WA) O 24A r 10 (5A). 21 Anderson v AON Risk Services Australia Ltd [2004] QSC 180. 22 Anna Riley, ‘Indemnity Costs in Judicial Review’ (2004) 9 Judicial Review 202, 202. 23 Joshua Henderson and Lani Bajracharya, ‘Costs Issues in IP Litigation’ (2014) 27(7) Australian Intellectual Property Law Bulletin 179, 181. 24 Keays v JP Morgan Administrative Services Australia Ltd (2012) 224 IR 406; [2012] FCAFC 100.

Griffiths summarised the relevant principles which inform the exercise of the court’s discretion when determining a claim for costs to be awarded on an indemnity basis in circumstances where that claim is based upon the unreasonable or imprudent rejection of a Calderbank offer:25

The principles may be summarised as follows: -

Under section 43 of the Federal Court of Australia Act,26 the Court has a power to award costs, which includes a power to award costs on an indemnity basis. The discretion to award costs must be exercised judicially;

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While various cases have identified numerous relevant factors, the presence or absence of which may be persuasive as to whether indemnity costs are appropriate, the exercise of the discretion in a particular case must depend on all relevant circumstances of that case; 27

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The unreasonable or imprudent rejection of a Calderbank offer may result in indemnity costs being awarded. The mere rejection of a Calderbank offer followed by a result which is more favourable to the offeror and less favourable to the offeree than that represented by the offer does not automatically lead to the making of an order for payment of costs on an indemnity bases;28

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Part 25 of the Federal Court Rules,29 establishes a regime which, if utilised, gives rise to a presumptive entitlement to indemnity costs.30 But that regime was not employed here. It might also be noted that, under that regime, an offer to compromise has to be open to be accepted for a period of not less than 14 days after the offer is made.31

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The offeror needs to show that the conduct of the offeree was unreasonable and that conduct is to be viewed in light of the circumstances which existed at the time the offer was rejected. The fact that the offeree ultimately fails to make good their case does not mean that they acted unreasonably in rejecting an offer;32 and

-

A helpful but non-exhaustive list of circumstances which may be relevant in determining whether the rejection of a Calderbank offer is reasonable or not is set out in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) and includes: o

the stage of the proceeding at which the offer was received;

25 Specsavers Pty Ltd v Luxottica Retail Australia Pty Ltd (No 2) [2013] FCA 807, [10] [Griffiths J]. 26 Federal Court of Australia Act 1976 (Cth) s 43. 27 See MGICA Pty Ltd v Kenny & Good Pty Ltd (No 2) (‘MGICA’) (1996) 70 FCR 236, 238 [Lindgren J]. 28 Black v Lipovac (1998) 217 ALR 386, 432. 29 Federal Court Rules 2011 (Cth) Part 25. 30 See Specsavers Pty Ltd v The Optical Superstore Pty Ltd (2012) 208 FCR 78; MGICA (1996) 70 FCR 236, 240. 31 Federal Court Rules 2011 (Cth) r 25.05. 32 Alpine Hardwoods (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121, [28] [Weinberg J].

o

the time allowed to the offeree to consider the offer;

o

the extent of the compromise offered;

o

the offeree’s prospects of success, assessed as at the date of the offer;

o

the clarity with which the terms of the offer were expressed; and

o

whether the offer foreshadowed an application for an indemnity costs order in the event of the offeree’s rejection of it.33

This summary of relevant principles set out by Justice Griffiths is quite comprehensive and has been followed in a number of cases.34 The summary does bear in mind however, that an award of indemnity costs is nevertheless a discretionary matter and should not be presumed as a consequence flowing from a rejected Calderbank offer.

2 Indemnity Clauses in Contracts In a Victorian case, Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd, the trial judge gave the successful party legal costs on an indemnity basis because the contract that gave rise to the litigation provided for an indemnity ‘against all or any loss, damages, claims, costs and expenses’.35 These orders were set aside by the Court of Appeal when they decided the correct interpretation of the indemnity clause of the contract was that costs should only have been made subject of the indemnity on a party and party basis in the absence of unequivocally plain language providing for the indemnification of costs on a solicitor and client basis.36

Conversely, in Van der Velde v Ng,37 Justice Greenwood took the view that a clause which provided for a mortgagor to pay to the mortgagee ‘reasonable expenses reasonably incurred’ in the enforcement of the mortgage, entitled the mortgagee to the costs of the proceedings reasonably incurred on a solicitor and client basis.

33 (2005) 13 VR 435, [25]. 34 Bitech Engineering v Garth Living Pty Ltd [2013] FCA 881, [30]; Capitalcorp Finance & Leasing Pty Ltd v Aussie Car Loans Pty Ltd (No 2) [2014] FCA 992, [33]; Ollie & Norwood (No 2) [2015] FCCA 716, [10]. 35 Bellemore, above n 3, 17. 36 Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355; Bellemore, above n 3, 17. 37 [2011] FCA 594.

In Macquarie International Health Clinic Pty Ltd v Sydney South West Area Clinic (No 3),38 costs were awarded on an indemnity basis because the terms ‘reasonable costs’ and ‘legal costs and expenses on a solicitor and own client basis’ indicated the intention that in these circumstances the landlord was not to suffer any loss or incur any cost, in the context of monies outlaid for legal services.39 The court will always look at the terms used by the parties to discern their intentions, in this context; whether the indemnity clause predetermines a cost award on an indemnity basis.

A costs award on an indemnity basis may entitle the successful party to recover the majority, if not all their costs arising from the dispute. This differs from the usual Australian position where costs recovered on a party/party basis may be as low (or lower) than 50% of what the winning litigant has actually spent.

38 [2010] NSWSC 1139. 39 Bellemore, above n 3, 18....