Gilles v La Rosa

Judgment

1. THE COURT: The applicants seek leave to appeal from a lump sum costs order made by Emmett AJA on 21 June 2018 following the dismissal of the applicants' summons: Gilles v La Rosa [2018] NSWSC 920.
2. The applicants are solicitors who conduct their legal practice under the name Giles Payne & Co. It will be convenient to refer to the applicants as the Firm, as was done by Emmett AJA in the court below. The second respondent, Ms Rosa La Rosa, and her late husband, Mr Giovanni La Rosa (the Clients) had retained the Firm to act first in relation to a conveyancing transaction, in respect of which the first costs agreement was entered into. Mrs La Rosa, as executor of the estate of her late husband, is the first respondent and is the second respondent in her personal capacity.
3. The Clients also retained the Firm in respect of proceedings in the Federal Circuit Court in which a loan relating to the conveyance was raised as an issue in Family Court proceedings between their son, Mr Salvatore La Rosa, and his former wife. The Clients entered into a second costs agreement in respect of those services. Each costs agreement contained a clause in the following terms: "We shall have the right of security for our costs and disbursements for work performed pursuant to this Agreement including the right to lodge a caveat over your real and personal property to secure such payment."
4. At the time, the Clients owned real estate in Gladesville. The Firm lodged a caveat over that property, on the basis that moneys owed to them were secured by virtue of the purported security clause in the costs agreements.
5. On 30 May 2016 the Firm obtained costs assessments of bills of costs it rendered in respect of each agreement. On 14 October 2016 a costs review panel assessed the costs, after giving credit for moneys already paid, in an amount of $17,201.78. The assessments were the subject of an appeal to the District Court in which the Firm was unsuccessful.
6. The Firm was ordered to pay the Clients' costs of the Firm's unsuccessful District Court proceedings. As at the date of the hearing of the summons before Emmett AJA, those costs had not been assessed, nor any claim made on the Firm for their payment.
7. By summons filed on 14 December 2015, the Firm sought declaratory relief that they held a charge over the Gladesville property pursuant to the provisions of the two costs agreements that the Clients had entered into with the Firm. They also sought an extension of the caveat. Subsequently, in a Statement of Claim filed on 4 February 2016, the Firm sought a declaration pursuant to the second costs agreement that the Clients had charged their interest in the property in favour of the Firm. (No assessment had been undertaken at that time.)
8. The Clients cross-claimed, alleging that the second costs agreement was void and no money was therefore payable under the second agreement. The Clients also sought removal of the caveat over the property. The proceedings came on for hearing before Emmett AJA on 17 May 2018. On the morning of the hearing, the Clients also raised an argument that, even if they owed money to the Firm under the costs agreements, they had a set-off, in an amount that would be greater than the Firm's claim of $17,201.78, in respect of the costs ordered in their favour in the District Court. Although those costs had not been assessed, the Firm accepted, on the day of the hearing, that the amount of the District Court costs would exceed the Firm's claim.
9. Pursuant to s 21 of the Civil Procedure Act 2005 (NSW), the Firm's debt and the Clients' costs debt in the District Court, being between the same parties, were mutual debts, so that the District Court costs could be set-off, by way of defence, against the Firm's claimed debt. The consequence was, as his Honour observed at [34], that the Firm had no security over the Gladesville property. The Firm accepted that the proceedings therefore had no utility.
10. That left the costs of the proceedings for determination. Emmett AJA determined that a costs order should be made in favour of the Clients for the following reasons.
11. First, the proceedings were misconceived as the applicants had only sought interlocutory relief. His Honour observed at [36] that if it were found that there were monies owing under the costs agreements then it would have been open to the Firm to enforce the judgment by executing it against the Gladesville property. However, the Firm had chosen to commence proceedings only seeking a declaration that the Gladesville property was charged under the costs agreements. Accordingly, even if his Honour had been inclined to make the declarations sought, the Firm would have been required to bring further proceedings for the appointment of a receiver or for a judicial sale of the property.
12. Secondly, to the extent that the Firm sought an extension of the caveat on the Gladesville property, the relief was itself interlocutory and "intended to freeze the register and … preserve the status quo until the real issues in the proceedings are resolved": at [37].
13. Thirdly, his Honour indicated at [38] that it was uncertain that he would have made the declarations sought in circumstances where there was a question whether cl 20 of the respective costs agreements gave rise to a security interest at all, or merely amounted to an agreement to permit a caveat to be lodged.
14. Fourthly, his Honour noted at [39] that a solicitor is in a fiduciary relationship with a client and is presumptively in a relationship of undue influence, rebuttable by proof that the client provided a fully informed consent. His Honour considered that it was unlikely that sending the first costs agreement by post, as had occurred, would be sufficient to rebut the presumption of undue influence that arises when a solicitor advances his position, beyond making a costs agreement, by taking a security from his client for fees.
15. In relation to the second agreement, the solicitor with the carriage of the matter conceded that she had never explained the document to the Clients, had not informed them that they might seek independent legal advice, had not disclosed that the firm was in a position of conflict in taking the charge and had not asked for their informed consent to that position of conflict subsisting.
16. His Honour determined that the appropriate order was that the Firm pay the Clients' costs by way of a gross sum costs order in the amount of $30,000.
17. The Firm seeks leave to appeal against the costs order, contending that it was appropriate that there be no order for costs, with the intention that each party bear their own costs. The Firm does not contest the making of the costs order by way of a gross sum, nor the manner in which his Honour determined the gross sum payable.
18. The principles governing the grant of leave are well established and were not in dispute. In Lee v NSW Crime Commission [2012] NSWCA 262; (2012) 224 A Crim R 94, Bathurst CJ stated at [12]: " … Ordinarily it is only appropriate to grant leave concerning matters that involve issues of principle, questions of general public importance or where it is reasonably clear there has been an injustice in the sense of going beyond it being reasonably arguable that the primary judge was in error …" (citations omitted).
19. In the usual course, as the Firm accepted, the Court is disinclined to grant leave where the amount involved is small: Carolan v AMF Bowling Pty Ltd [1995] NSWCA 69. The Firm contended, however, that in this case, where the proceedings had been resolved effectively by consent, the primary judge erred in principle in awarding costs.

Submissions

1. The Firm also accepted that, costs being discretionary, it was necessary for them to demonstrate error in the sense stated in House v The King (1936) 55 CLR 499; [1936] HCA 40 at 504-505. The Firm raised three arguments in support of this submission.
2. First, the Firm submitted that his Honour ought to have considered whether the parties had acted reasonably in commencing and defending the proceedings and whether the conduct of the parties continued to be reasonable until the litigation was settled: Nichols v NFS Agribusiness Pty Ltd [2018] NSWCA 84.
3. Secondly, to the extent that his Honour considered whether the parties had acted reasonably, the Firm argued that he was incorrect to conclude that the proceedings were misconceived. This argument had a number of limbs, as follows: 1. the seeking of declaratory relief cannot be said to be interlocutory; 2. there is practical utility in making a declaration where it may concern the existence of a valuable right such as interests in real property; and 3. in this case, there was utility in making the declarations in that it would determine the rights and obligations between the parties, in so far as the second agreement was concerned, and give certainty as to whether the Firm had an equitable interest in the Gladesville property.
4. Thirdly, the Firm contended that his Honour should not have considered that the Clients would inevitably have succeeded, given the manner in which the parties had elected to dispose of the proceedings and the availability to do so earlier by reason of the claimed offset. They contended that his Honour effectively made a "judgement call" on the outcome of the proceedings on the basis of the assumption of undue influence, without embarking on a proper hearing of the merits, which they assert is contrary to the principles in cases such as Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6.
5. The Clients denied that the matter was resolved on the day of the hearing by consent. Rather, they submitted that the Firm conceded that their claim was wholly futile: see judgment at [34]. They had thus abandoned their claim, so that the matter came within the "prima facie rule" that costs follow the event.
6. The Clients accepted that they did not raise the question of set-off until the morning of the hearing. Nor did they challenge his Honour's observation that if the question of set-off had been raised when the matter was before him on 9 May 2018, there was a strong possibility that the Firm would have agreed to that course. However, they submitted that his Honour had taken this into account and had reduced the costs claimed by the respondents as a result.
7. The Clients further submitted that even if what occurred was correctly characterised as the matter having been resolved by consent, there was no error of principle, but only an error of application of principle in respect of a small sum.
8. The Clients submitted that the Firm had misconceived his Honour's statement that the proceedings were interlocutory. Rather, as was apparent from his Honour's reasons at [36], his concern was with the failure to bring all matters in issue in the one proceeding.
9. The Clients also submitted that there was no error in his Honour's assessment of the Firm's claim in relation to cl 20 of the costs agreements given the Firm's own evidence on these issues.

Consideration

1. Costs are in the discretion of the Court: Civil Procedure Act, s 98(1), subject, relevantly, to the rules of Court. Pursuant to the Uniform Civil Procedure Rules 2005 (NSW), Pt 42, r 42.1, the general rule is that costs follow the event. The Court may, prior to there being a referral for costs assessment, order a specified gross sum be paid: Civil Procedure Act, s 98 and UCPR, r 42.4.
2. In Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin, McHugh J stated at 624-625 the matters that were relevant to the exercise of a discretion where there had been no hearing on the merits, as follows.
3. First, where there has been no hearing on the merits, and whilst a court cannot try a hypothetical action, a court may be able to conclude that one party acted so unreasonably that the other should have the costs of the action. His Honour instanced, by way of example, that in an administrative law action, a defendant may have acted unreasonably in exercising or refusing to exercise a power such that the plaintiff had no reasonable alternative but to commence litigation.
4. Secondly, in some cases, the judge may feel confident that although both parties had acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried.
5. Thirdly, if it appeared that both parties had acted reasonably in commencing and defending the proceedings and their conduct thereafter had continued to be reasonable until the litigation was settled or its further litigation became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. His Honour observed that this approach had been adopted in a large number of cases.
6. Those statements may all be accepted but it does not follow that there was any error of principle in ordering costs in the present case.
7. Having considered each of the matters about which the Firm complains, Emmett AJ explained why he considered the declaratory relief sought to be interlocutory. Further, there was sufficient evidence before his Honour to allow him to assess the likely prospects of success. Further, as his Honour found, the Clients had available to them a set-off which operated as a defence to the Firm's claim. The Firm had to know that was the case, being the unsuccessful party in those proceedings.
8. Although the set-off was not raised until the morning of the hearing and notwithstanding that the Clients had not quantified the amount in question, his Honour was entitled in the exercise of his discretion to allow that matter to be raised. There was no appeal against his Honour having done so. Insofar as that matter was relevant to the question of costs, his Honour took it into account.
9. No error has been demonstrated in the exercise of the primary judge's discretion. The summons for leave to appeal should be dismissed with costs.
10. The Court makes the following orders: 1. Dismiss the summons seeking leave to appeal from the costs order made in the Equity Division. 2. Order that the applicant pay the respondents' costs fixed in the sum of $15,000. 3. Otherwise dismiss the respondents' motion filed 14 September 2018.

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