Royal v El Ali

Federal Court of Australia|2016-12-22|Before: Davies J

Selliah v Minister for Immigration and Multicultural Affairs [1998] FCA 469 Shaw v Yarranova Pty Ltd & Anor [2010] VSC 567 Sunland Waterfront (BVI) Limited v Prudentia Investments Pty Ltd (No 4) [2013] VSC 669 Tomasetti v Brailey [2012] NSWSC 120 Ventouris Enterprises Pty Ltd v DIB Group Pty Ltd (No 4) [2011] NSWSC 720 Wentworth v Rogers [2006] NSWCA 145; (2006) 66 NSWLR 474

Date of hearing: 11 November 2016

Registry: New South Wales

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: General and Personal Insolvency

Category: Catchwords

Number of paragraphs: 56

Counsel for the Applicants: C Birch SC with P Thew

Solicitors for the Applicants: Watson Mangioni Lawyers Pty Limited

Counsel for the First Respondent: R Carey

Solicitor for the First Respondent: D Massey

Counsel for the Second and Third Respondents in NSD 1731 of 2013 and the Second Respondent in NSD 771 of 2014: D Barlin

Solicitors for the Second and Third Respondents in NSD 1731 of 2013 and the Second Respondent in NSD 771 of 2014: Bartier Perry

Solicitor for the liquidator of the Fifth Respondent in NSD 1731 of 2013: S McKenzie of Colin Biggers & Paisley Lawyers

Counsel for the Sixth Respondent in NSD 1731 of 2013 and the Third and Fifth Respondents in NSD 771 of 2014: A Fernon

BETWEEN: PETER PAUL ROYAL First Applicant

MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI Third Applicant

AND: NATHAN EL ALI First Respondent (and others named in the Schedule)

JUDGE: DAVIES J DATE OF ORDER: 22 DECEMBER 2016

The respondents pay the applicants' costs fixed in the sum of $442,668.
Order 1 be stayed until 2 February 2017 or until further order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

BETWEEN: MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI Applicant

AND: NATHAN EL ALI First Respondent (and others named in the Schedule) JUDGE: JUDGE DATE OF ORDER: 22 DECEMBER 2016

The respondents pay the applicants' costs fixed in the sum of $212,166.
Order 1 be stayed until 2 February 2017 or until further order. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

DAVIES J: 1 On 5 July 2016 I delivered judgment in both proceedings in Royal v El Ali [2016] FCA 782. Orders giving effect to the reasons for decision have been made (see Royal v El Ali (No. 2) [2016] FCA 1156) but the question of the appropriate costs orders that should be made has been the subject of a separate hearing. The applicants have contended that costs should follow the event of the litigation against the respondents and they seek an order in both proceedings that the respondents be severally and jointly liable to pay the applicants' costs of the proceedings fixed in a lump-sum amount. Those orders are opposed by the respondents (save for Ottoman Investments Pty Ltd (in liq) ("Ottoman") which made no submissions). 2 In short, the respondents have contended that: (a) the applicants are not liable to meet their lawyers' costs and an award of costs in their favour would be inconsistent with the indemnity rule; (b) if an award of costs is made: (i) costs should not be ordered on a joint and several basis; and (ii) the costs should be taxed "in the normal way", not fixed in a lump-sum amount. 3 Additionally: (a) Saracen Holdings Pty Ltd (in liq) ("Saracen") and Isaac & Jacob Pty Ltd ("Isaac & Jacob") have both contended that no order for costs should be made against them because, as against them, there is no "event" for costs to follow; and (b) Nathan El Ali ("Mr N El Ali") has contended that there would be no utility in a costs order against him because he is a bankrupt. 4 Saracen also initially opposed the making of any costs order against it on the basis that it would be an unjust result for it to be penalised by a costs order against it because of "the reality of Saracen's practical absence of culpability" and "its common representation in the proceedings with those who were the primary actors and culprits in the proceedings" who had interests in conflict with Saracen. In supplementary written submissions, the liquidator of Saracen no longer pressed that contention on the basis that any costs order that may be made against it will not be provable as a debt in Saracen's liquidation, citing Central Queensland Development Corporation Pty Ltd v Sunstruct Pty Ltd [2015] FCAFC 63; (2015) 106 ACSR 127. 5 For the sake of completeness, it is also noted that the applicants initially submitted that if a lump-sum costs order was not made, the Court should order costs on an indemnity basis from the date of the earliest of the Calderbank letters sent to the respondents. That claim was abandoned during the course of the costs hearing. 6 It is convenient to deal with these contentions in reverse order.

Should costs orders be made against saracen and isaac & jacob? 7 Saracen and Isaac & Jacob both contended that they should not be subject to a costs order against them because, whilst named as parties, no relief was sought against them and, they argued, there is no "event" for costs to follow. Those contentions cannot be accepted. Although no relief was sought against them that does not mean that there was no event for costs to follow. The "event" for costs to follow was the applicants' success on all of the issues involving those respondents, giving rise to the applicants' right to the relief that was ordered.

Should costs orders be made against Mr N El Ali? 8 It was submitted for Mr N El Ali that there was no utility in a costs order against him because he is bankrupt and all his property has vested in the trustee and therefore no order for costs should be made against him. That contention also cannot be accepted. It is well established that costs orders can be made against bankrupts and that impecuniosity or an inability to meet a costs order is not a basis for avoiding an adverse costs order: GE Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths Australia, 2013) at [8.28]; Fitzpatrick v Keelty (No 2) [2008] FCA 742; Selliah v Minister for Immigration and Multicultural Affairs [1998] FCA 469. The fact that Mr N El Ali is bankrupt does not warrant a departure from that general principle.

should a Lump-sum costs order be made? 9 The applicants seek an order in each proceeding pursuant to r 13.01 of the Federal Court (Bankruptcy) Rules 2016 (Cth), s 43(3)(d) of the Federal Court of Australia Act 1976 (Cth) and r 40.02(b) of the Federal Court Rules 2011(Cth) fixing the costs on a lump-sum basis. 10 Whilst the Court has a broad discretion to award costs orders, the Court's preference, wherever it is practicable and appropriate to do so, is to make a lump-sum costs order in order to finalise the costs issue and avoid, where possible, potentially expensive and lengthy taxation of costs hearings: Federal Court of Australia Practice Notes, Costs Practice Note (GPN-COSTS) 25 October 2016, at [3.3] and [4.1]. The expense, time and delay involved in a taxation of costs are all matters to take into consideration in determining whether to fix costs, bearing in mind s 37M of the Federal Court of Australia Act 1976 (Cth) and the objective of facilitating the just resolution of disputes as quickly, inexpensively and efficiently as possible. The financial capacity of the party liable to pay the costs is also a consideration where the successful party is already likely to be out of pocket in respect of costs and taxation would add an additional unrecoverable cost. There is no particular characteristic of a case though which must exist before a gross sum costs order can be made: Australasian Performing Rights Association Ltd v Marlin [1999] FCA 1006. The power may be exercised whenever the particular circumstances of the case warrant it: Beach Petroleum NL v Johnson (No 2) (1995) 57 FCR 119 ("Beach Petroleum v Johnson") at 122-123. If a lump-sum costs order is to be made, the Court should be confident that the approach taken to the estimate of costs is logical, fair and reasonable. The Court should be astute to avoid both overestimating the recoverable costs and underestimating the appropriate amount, for example by applying an arbitrary discount to the amounts claimed: Beach Petroleum v Johnson at 123. 11 In the present case, there are a number of considerations that make it appropriate for the award of a lump-sum costs order. There is unchallenged evidence from a costs consultant, Mr Ian Ramsey-Stewart ("Mr Ramsey-Stewart"), that, if the costs were to be taxed, the taxation process would take approximately one and a half years to complete and the costs of the taxation would be in the range of $80,000 to $110,000 plus GST. As both proceedings relate to the bankrupt estate of Mr N El Ali, it is plainly desirable that these proceedings, which have been on foot since 2013 (NSD 1731 of 2013) and 2014 respectively (NSD 771 of 2014) be finalised as soon as practicable and for any additional costs which the parties will incur to be minimised to the extent possible. Continuing litigation over the amount of costs payable to the applicants would be counterproductive to achieving finality and, having regard to Mr N El Ali's status as a bankrupt and the lack of evidence from the other respondents about their financial positions, would involve substantial additional expense which the applicants may be at risk of not recovering from the respondents. These matters provide cogent reasons for an order fixing costs in this case. 12 The fixed costs orders sought by the applicants are for the following amounts: (a) in NSD1731 of 2013 ("2013 proceedings"): $590,223.59; (b) in NSD 771 of 2014 ("2014 proceedings"): $282,888.23. 13 The amounts sought are 80% of the total professional costs and disbursements incurred, and likely costs to be incurred, by the applicants in respect of both proceedings (in the amount of $1,091,389.78) apportioned as between the two proceedings as follows: (a) 2013 proceedings: $737,779.49 (67.6%); (b) 2014 proceedings: $353,610.29 (32.4%). 14 The apportionment was based on an analysis by Mr Michael Lim ("Mr Lim"), a senior solicitor employed at Watson Mangioni, the solicitors for the applicants in both proceedings. Mr Lim had the day-to-day conduct of both proceedings. Mr Lim did not provide an affidavit, but his supervisor, Michael Edward France ("Mr France"), a senior consultant employed by Watson Mangioni, swore an affidavit in which he set out the analysis which Mr Lim undertook at Mr France's instruction. 15 The analysis was two tiered. Mr France instructed Mr Lim to review and identify the number of impugned transactions in each of the proceedings and to review the transcript of the cross-examination and apportion the number of pages to each of the proceedings. 16 The apportionment based on the number of impugned transactions in each proceeding was as follows: Proceedings No. of Impugned Transactions % of Total 2013 Proceedings 7 70% 2014 Proceedings 3 30% Total 10

17 In apportioning the pages of the transcript, where a witness was a party to both the 2013 proceedings and 2014 proceedings, Mr France instructed Mr Lim to apportion the number of pages equally between the proceedings. Mr France gave as an example that Mr N El Ali is a party to both the 2013 proceedings and 2014 proceedings and gave evidence in both proceedings. The total number of pages comprising his examination was 120 pages. Accordingly 60 pages were attributed to the 2013 proceedings and 60 pages were attributed to the 2014 proceedings. 18 The apportionment based on the analysis of the transcript was as follows: Pages Total No. Apportionment Witnesses From To of pages for witness 2013 Proceedings 2014 Proceedings Nathan El Ali 54 173 120 60 60 Mahmoud El Ali 184 237 54 27 27 Mahmoud Zreika 248 327 80 80 0 Otsi Stojanovski 332 391 60 60 0 John Nazloomian 406 439 34 0 34 Total pages 348 227 121 % Of total pages 100% 65.2% 34.8%

19 The averaging of the apportionment figures was: (a) 2013 proceedings: 67.6%; and (b) 2014 proceedings: 32.4%. 20 Mr France applied what he termed a "conservative recovery rate" of 80% to the total fees and costs claimable by the applicants. Mr France reasoned that, based upon his experience, recovery on a costs assessment on a party/party basis would usually be in the range of 65% to 75% of the total costs incurred; and on an indemnity basis, would usually be in the range of 85% to 95% of the total costs incurred. Mr France applied an 80% recovery rate, which is the mid-point of the ranges. It was Mr France's view at the time that the applicants were entitled to indemnity costs orders in the proceedings from the time of the Calderbank offers that had been made. Mr France deposed that for the purpose of avoiding further expense, delay and aggravation involved in protracted litigation and on the assumption that a party/party costs order and an indemnity costs order may be made, he applied "a conservative recovery rate being the mid-point of the ranges, namely 80%, to determine the amount recoverable in each of the proceedings". 21 As indemnity costs orders are no longer sought, the 80% recovery rate is excessive. If a lump-sum costs order is to be made, the recovery rate to apply is the rate that would apply to reasonable costs incurred on a party/party basis. 22 Mr Ramsey-Stewart, a lawyer who specialises in providing legal costing services to the legal profession, provided two expert reports on behalf of the applicants, one of which was in response to the expert evidence from Michelle Castle ("Ms Castle"), a costs assessor who provided two expert reports on behalf of the respondents. Relevantly, Mr Ramsey-Stewart opined that the analysis and methodology adopted by Mr France for quantifying the gross sum costs that may be recovered by the applicants "shows due consideration and an attempt to quantify the reasonable costs without the need to proceed to a lengthy and expensive costs assessment application"; and the methodology adopted by Mr France for apportioning costs across the two proceedings was, on his review, "the most efficient without undertaking a full bill drawing exercise". 23 Mr Ramsey-Stewart also opined that the costs allowable on a party/party basis are usually in the range of 60% to 69% of total costs incurred. In Mr Ramsey-Stewart's opinion, the total costs that would be allowed by a taxing officer of the Federal Court in respect of both proceedings would be in the range of $654,834 to $742,145 (inclusive of GST and rounded to the nearest dollar). Mr Ramsey-Stewart assumed the mid-point of this range, in the amount of $689,490, to apply for the purposes of apportionment of costs between the proceedings. Applying the apportionment methodology adopted by Mr France, Mr Ramsey-Stewart considered that: (a) in respect of the 2013 proceedings (67.6%): party/party costs would be $472,179; and (b) in respect of the 2014 proceedings (32.4%): party/party costs would be $226,311. 24 Ms Castle on the other hand, gave her considered view that recovery in this matter on a party/party basis would be between 50% and 65% of the actual fees incurred. 25 Ms Castle also expressed the opinion that the methodology applied by Mr France to apportion costs between the 2013 proceedings and 2014 proceedings was a simplistic way of determining the real costs of each matter and may result in burdening the respondents of one set of proceedings with the costs of the respondents in the other proceedings and that the risk is real in this case because there is not the same identity of defendants in both proceedings. Ms Castle opined that a better methodology would have been to allocate each item of work in each of counsels' attendances to one of three categories: the 2013 proceedings, the 2014 proceedings and joint work for both proceedings and then to have applied an apportionment. She opined that by applying this methodology, the risk that the apportionment would be unfair would have been diluted. 26 In addition, Ms Castle also raised some other matters which questioned the applicants' legal entitlement to claim costs. Those matters are dealt with below separately from the question of the quantum of the amount sought. 27 Neither expert was challenged on their evidence and both gave a reasoned justification for the opinions they expressed. In making a lump-sum order, the Court must be confident that the costs sought are logical, fair and reasonable and I consider that the analysis and assessment conducted by Mr Ramsey-Stewart enables the view to be formed that Mr France has not charged excessive fees to the applicants. Ms Castle's report though provides some basis for thinking that the recovery of those costs on a party/party taxation might not be at the highest end of the range estimated by Mr Ramsey-Stewart. On the other hand, Ms Castle's indicative range is based on a fair degree of speculation on her part. Bearing in mind that in making a lump-sum costs order, the Court is not required to undertake a detailed examination of the kind that would be appropriate in a taxation or formal costs assessment (Bitek Pty Ltd v IConnect Pty Ltd [2012] FCA 506; (2012) 290 ALR 288 at [23]), the Court can have some confidence based on the reports of both experts, that a recovery rate of 60%, being the mid-point of the discount ranges which the experts consider would apply and within the range accepted by Ms Castle, is appropriate to reflect the possible reductions that would be made on a taxation, without overestimating the appropriate amount. 28 Furthermore, notwithstanding the matters raised by Ms Castle concerning apportionment between the proceedings, I am not persuaded that the methodology that has been applied is too simplistic for a fair and reliable apportionment. I accept that other methodologies could have been used, but the availability of other methodologies does not gainsay that the methodology which was used was one that does not produce a fair and reasonable result. I am fortified in this conclusion by Mr Ramsey-Stewart's evidence that he was satisfied by his review that the apportionment methodology used was appropriate, fair and reasonable. 29 The respondents also argued that the lump-sum costs order was not appropriate because costs should not be ordered on a joint and several basis and, it was said, it followed that if joint and several liability is not appropriate, a lump-sum costs order cannot be made in that circumstance. For the reasons that later follow, I have concluded that an order on a joint and several basis should be made but, in any event, even if the cost orders were not made on that basis I am not persuaded that it would not be possible to apportion a lump-sum order as between the respondents in a way that allocates costs on a fair and reasonable basis. 30 Accordingly, subject to the question of the applicants' legal entitlement to any award of costs, I would fix the applicants' costs in the total amount of $654,834, being 60% of $1,091,390 (rounded), apportioned as follows: (a) in respect of the 2013 proceedings (67.6%): the sum of $442,668; (b) in respect of the 2014 proceedings (32.4%): the sum of $212,166. 31 In so concluding I have taken into account the respondents' submission that a reduction in the costs incurred by the applicants would be likely as a consequence of Watson Mangioni's alleged failure to comply with cost disclosure requirements under ss 309 and 310 of the (now repealed) Legal Profession Act 2004 (NSW) ("the Legal Profession Act"). Ms Castle opined that it was apparent that Watson Mangioni had failed to make a number of disclosures required by the Legal Profession Act, with the consequence that there is no amount currently payable by the applicants to their lawyers as a result of the application of s 317(1) and, further, that a costs assessor assessing the costs payable by the applicants would apply s 317(4) of the Legal Profession Act and most likely reduce the amount owing by the applicants proportionate to the seriousness of those failures. Ms Castle considered that the seriousness of the failures she identified would result in a reduction of the total amount payable by the applicants to their solicitors in the vicinity of 20% to 40%. It is, however, unnecessary for me to form a view on whether Watson Mangioni failed to comply with any disclosure requirements as asserted, or the likely impact on the costs recoverable by it from the applicants if they did, as it is well established any failure is only relevant to an assessment of costs as between solicitor and client, not to the assessment of costs as between party and party. A failure to comply with the disclosure requirements entitles a client to postpone payment of the costs until assessed by a cost assessor and until that has been done the lawyer has no actionable claim for those costs. If there has been non-disclosure, on an assessment, the costs assessor may reduce the amount of those costs by an amount proportionate to the seriousness of the failure to disclose. The section does not apply to a party liable for inter-partes costs. As between party and party, the section gives no right to the party liable to pay the costs of the other party to argue that the solicitor/client costs of the other party should be reduced by reason of some failure by the other party's lawyer in making disclosure to that party as required by statute: Catto v Hampton Australia (in liq) [2008] SASC 231, Shaw v Yarranova Pty Ltd & Anor [2010] VSC 567 at [25]; Sunland Waterfront (BVI) Limited v Prudentia Investments Pty Ltd (No 4) [2013] VSC 669 ("Sunland Waterfront") at [99]-[103]. 32 In her expert report, Ms Castle expressed her view that: I agree [with Mr France] that non-disclosure could give rise to complaints from the clients. However to the extent that this paragraph suggests that it is only the clients, I consider that this is not correct. A party ordered to pay costs has 'standing' to complain about breaches of the Legal Profession Act 2004 and any effect that may have on the liability of the clients to pay: see by analogy Ventouris Enterprises Pty Ltd v DIB Group Pty Ltd & Anor (No 4) [2011] NSWSC 720. 33 "This paragraph" was a reference to paragraph 13 of Mr France's affidavit of 13 October 2016 in which Mr France stated that it was his experience that any non-compliance with the disclosure requirements could give rise to a complaint from the applicants but they have not made such complaints. 34 Contrary to Ms Castle's assertion, Ventouris Enterprises Pty Ltd v DIB Group Pty Ltd (No 4) [2011] NSWSC 720 provides no support, by analogy or otherwise, for the proposition that a party ordered to pay costs can rely on a contravention of the disclosure requirements by the other party's solicitor to argue that the solicitor/client costs incurred by the other party should be reduced. That case concerned the recoverability of counsel's fees in a party and party taxation, where it was held that the costs agreement was void because it contained an uplift fee in contravention of s 324 of the Legal Profession Act. Section 327(4) of that Act provided that a law practice that has entered into a costs agreement in contravention of s 324(1) (conditional costs agreements involving uplift fees) "is not entitled to recover any amount in respect of the provision of legal services in the matter to which the costs agreement related". Slattery J held that the statutory language was intractable and wholly excluded the possibility of recovering fees on a quantum meruit or any other restitutionary basis outside the costs agreement itself. As a result his Honour disregarded the relevant legal fees in assessing the gross sum costs order to be made. The case is distinguishable and not authority that a party ordered to pay another party's costs is entitled to pursue an argument in an inter-partes assessment of costs that the other party's legal costs should be reduced because of a breach of the disclosure requirements by that other party's lawyer. 35 In this case, the applicants have not made any complaint to their lawyers that there may have been non-compliance with disclosure obligations and the evidence was to the effect that the applicants do not intend to have their solicitor/client costs assessed. In the circumstances, there is no basis for reducing the amount which the applicants are entitled to recover from the respondents because of alleged breaches of the disclosure requirements by the applicants' solicitors. 36 Ms Castle also expressed the view that the costs agreement between Mr Peter Royal and Mrs Judith Royal ("the Royals") and Watson Mangioni was a "conditional costs agreement" which did not comply with the requirements of s 323 of the Legal Profession Act. Ms Castle stated that if she was exercising the jurisdiction as a costs assessor under the Legal Profession Act, she would determine that the costs agreement was void by reason of s 327 of that Act and, if void, Watson Mangioni did not have any entitlement to recover fees pursuant to that agreement. Ms Castle stated that this would not necessarily result in no fees being recoverable but it would result in a costs assessor proceeding under s 319 of the Legal Profession Act and assessing fair and reasonable costs in the circumstances. Ms Castle stated that in her experience where a costs agreement is void the allowances under s 319 are often less and that a costs assessor would make substantial reductions to the costs charged by Watson Mangioni and that those reductions would be applied before any reduction pursuant to s 317(4). The short answer to the views expressed by Ms Castle is that even if the Royals' costs agreement contravened s 323 (about which I express no view and make no finding), for the same reasons given above as to why it is not open to the respondents to argue that the applicants' solicitor/client costs should be reduced because of their solicitors' alleged non-compliance with the disclosure provisions, it is not open to the respondents to rely on any contravention of s 323 to argue that their liability for the applicants' costs should be reduced: Sunland Waterfront at [99].

are there costs to be indemnified by a costs order? 37 In issue is whether the applicants are legally obliged to pay any legal costs to their solicitors. If not, a costs order in their favour against the respondents would offend the indemnity principle as there are no costs for them to recover from the respondents: Mainieri & Anor v Cirillo [2014] VSCA 227; (2014) 47 VR 127 ("Mainieri v Cirillo") at [43]. The indemnity principle does not require that the costs have been paid, but it does require that there be a legal liability to pay costs: Wentworth v Rogers [2006] NSWCA 145; (2006) 66 NSWLR 474 ("Wentworth v Rogers") at [126]. 38 The Royals' costs agreement with their solicitors contained the following provisions: • Estimated charges … We note that our fees will only be paid in the event that the litigation results in a recovery sufficient to ensure their payment. • Payment Terms We note that we have agreed to act for you on the basis that our fees will only be payable out of any monies which we recover on your behalf. • Disbursements & Service Fee Any disbursements incurred in relation to your matters will be charged to you. Where it is necessary to retain a barrister or other expert, we will disclose to you their fee structure before, or as soon as practicable after, their engagement. I note that Chris Birch SC and Penny Thew will also be acting on a contingency basis. Disbursements paid to third parties such as experts' fees, registration and filing fees and courier charges will be charged to you at cost. … • Billing Arrangements Usually, our bills will be rendered monthly. However, as we are acting on a contingency fee basis we will not render monthly accounts. 39 The respondents submitted that these terms made the solicitors' right to be paid fees contingent on the satisfaction of the condition precedent of "a recovery sufficient to ensure their payment". It was submitted that the Royals' liability to pay costs was therefore only triggered if they recovered some amount from the respondents and, moreover, an amount that was sufficient to enable those costs to be paid, which it was submitted has not happened. Based on dictum of Basten JA in Wentworth v Rogers, it was also submitted that to the extent that the Royals' legal liability to pay costs to their solicitors would be dependent upon obtaining actual recovery of costs awarded, the application of the indemnity principle would still be breached by an order for costs because there is no extant legal obligation to be indemnified when the costs order is made. In Wentworth v Rogers, the relevant costs agreement entered into by the client with his barrister expressly provided that his obligation did "not arise upon a cost order being made in [his] favour but on costs being successfully recovered as against" the other party. Basten JA stated at [111]: This agreement creates a real difficulty in applying the indemnity principle. 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. 40 In Wentworth v Rogers Santow JA expressed a different view. Santow JA considered that the indemnity principle would not be contravened in such a case. His Honour reasoned at [51] and [54] that: the [Legal Profession] Act now recognises conditional costs agreements of the kind where payment of the barrister's or solicitor's costs "is contingent on the successful outcome of the matter"; s186. No distinction is drawn between such a contingency expressed as a condition precedent or subsequent. I am inclined to the view that the application of the indemnity principle should not depend on that distinction either, though that is not necessary to decide. The costs agreement, to comply with the Act, must "set out the circumstances constituting the successful outcome of the matter". I consider that the indemnity principle must at least accommodate the kind of conditional costs agreement recognised by s186. Otherwise, it will operate as a powerful disincentive from using the now statutorily recognised conditional costs agreement, facilitating access to justice, if the lawyer concerned will not recover costs from the other party where successful against that other party. … The general law governing the indemnity principle with its emphasis on flexibility is, in my opinion, quite capable of accommodating conditional fee agreements of this kind. It should do so recognising the importance of such agreements in promoting access to justice which may otherwise be unaffordable. The residual undertaking to pay, though qualified, strengthens the case for conformance with the indemnity principle. It is reasonable, not just in this ferocious litigation but more generally, to recognise in a costs agreement that the unsuccessful party who is subject to a costs order may delay or defeat recovery. Hence predicating payment on successful recovery is not unreasonable. In the words of Bramwell B this gives no unjustified bonus to the successful party nor does it impose any punishment on the losing one, so as to invoke the rationale behind the indemnity principle. 41 In King v King [2012] QCA 81, Chesterman JA (with whom White JA agreed) said in obiter dicta that he preferred Basten JA's analysis. 42 In LM Investment Management Limited (Administrators Appointed) v The Members of the LM Managed Performance Fund [2014] QSC 54, Mullins J considered it unnecessary to analyse the competing views of Basten and Santow JJA in Wentworth v Rogers, concluding that as a matter of construction, the costs agreement in question in that case did not infringe the indemnity principle. Her Honour stated: The costs agreement sets up the basis for the respondents' solicitors to charge the respondents and their liability for the payment of professional costs and outlays, subject to the operation of the special condition. The special condition was in the following terms: No fees will be payable by you unless an order is made by the Supreme Court of Queensland in your favour for the payment of costs and those costs are recovered by us from other parties and any fees charged shall be limited to the amount of costs so recovered. 43 In Mainieri v Cirollo, the Victorian Court of Appeal preferred the analysis of Santow JA over that of Basten JA in Wentworth v Rogers, holding at [51]-[53]: Evidently, the weight of considered dicta favours the Basten JA view. Conscious as we are, however, of the importance of consistency among Australian intermediate courts of appeal, we agree with Santow JA that, as the Legal Profession Act now recognises conditional costs agreements of the kind where payment of costs is 'contingent on the successful outcome of the matter', and draws no distinction between such a contingency expressed as a condition precedent or subsequent, the application of the indemnity principle should not depend on that distinction. With all respect, we do not consider that either of the reasons identified by Basten JA as justifying the opposite view is persuasive. As to the first, although it may be that an obligation to pay fees which is conditional on the actual recovery of costs would not impose a sufficient obligation to warrant an order for costs in accordance with the indemnity principle, logically it does not follow that an obligation to pay costs which is conditional on obtaining a costs order ought not be regarded as sufficient. If concentration is confined to the latter situation, it would be remarkably arbitrary, and hence we think contrary to principle, if the law were that an order for costs may be made in favour of a party who, at the instant the order is made, is subject to a defeasible liability to pay costs; and yet an order for costs cannot equally be made in favour of a party who, at the instant the order is to be made, is at least contingently liable to pay costs and who, at the instant the order is made, becomes indefeasibly liable to pay them. To hold otherwise would be a triumph of form over substance. As to the second reason, although we agree with respect that an ongoing unconditional obligation is consistent with other aspects of the statutory scheme of fee regulation, so too surely is an ongoing contingent obligation of a kind for which the Act expressly provides and which, for the reasons adumbrated by Santow JA, the law regards as just and socially desirable. We add that we are fortified in that conclusion by the analysis recently undertaken by Mullins J in LM Investment Management Ltd (Administrators Appointed) v The Members of the LM Managed Performance Fund. (footnotes omitted) Section 323(1) of the Legal Profession Act (at the relevant time, now replaced by s 181(1) of the Legal Profession Uniform Law (NSW)) was relevantly identical to the provisions of the Legal Profession Act 2004 (Vic) referred to in Mainieri v Cirollo. 44 Mainieri v Cirollo is authority that the application of the indemnity principle does not depend on whether the contingency is expressed as a condition precedent or condition subsequent provided the client is contingently liable to pay legal fees "at the instant the costs order is to be made". In the present case, the Royals are contingently liable under their costs agreement with Watson Magioni to pay legal fees and disbursements to Watson Magioni for the legal services provided in relation to this litigation. The mere fact that the liability is contingent on sufficient recovery of moneys out of which to meet those costs does not mean that the indemnity rule would be contravened by an order for costs because at the time when that order is sought the contingency triggering the liability has not been satisfied. There is a contingent liability to pay fees and thus an obligation to be indemnified when a costs order is made. 45 Mourik v Von Marburg [2016] VSC 601 ("Mourik v Von Marburg"), on which the respondents also relied, likewise does not assist their case. The applicant in Mourik v Von Marburg, had obtained several interlocutory costs orders in his favour and had a right to have those costs taxed although the substantive hearing was still on foot. The costs agreement contained a clause stating that "where you are the beneficiary of [a costs] order" the firm "may give you an invoice" for the firm's costs "to an amount no greater than the amount recovered from another party". Wood AsJ held that the "inescapable conclusion" was that the applicant did not have any liability to his solicitors for professional costs because the obligation to pay fees was conditional on recovery of costs. It seems to me that the correctness of that decision is open to doubt but, in any event, Mourik v Von Marburg is distinguishable because it is not the case here that the obligation to pay fees is conditional only on recovery of costs. 46 It was also contended for the respondents that the applicants had not demonstrated that they have an obligation to pay counsels' fees. 47 Dr Birch SC's fee agreement relevantly provided that: Subject to any further express arrangements in writing or further disclosure under Clause 9 below, I intend to charge fees at the following rates and upon the following conditions for work in regard to which I am retained. Also please note:- (i) I am not charging these fees on a contingency basis, unless special arrangements have otherwise been made by me in writing the fees will be payable whatever the outcome of the proceedings. (ii) The fees are payable within 30 days of the rendering of my memorandum whether or not any costs have been taxed or any costs paid by the other parties to the litigation, unless special arrangements have otherwise been made by me in writing. 48 In the accompanying letter Dr Birch SC stated: … I understand that your firm holds no funds on account of my fees and that the Royals are not in a financial position to fund the existing litigation. In those circumstances I agree that my fees will only be paid in the event that the litigation results in a recovery sufficient to ensure their payment. Further in light of the fact that the substantial work in the matter is being undertaken by Ms Thew and yourself, it would be my intention to seek payment of some portion of my fees only in the event that the recovery was sufficiently large that it had firstly provided a dividend to the Royals and a substantial payment to you and Ms Thew. 49 Ms Thew's costs agreement relevantly provided that: I will conduct this matter on a contingency basis. Under these terms I will only render an invoice at the conclusion of the Legal Services and only in circumstances where a successful outcome has been achieved in the Royal's favour, being satisfaction in whole or in part of the judgment debt. 50 The legal services were stated to include: Appear and advise in relation to the satisfaction of the judgment and orders in Royal v Elali [2011] NSWSC 602 including providing any relevant assistance to the registered trustee in bankruptcy appointed to the bankrupt estate of Nathan Elali. 51 The respondents similarly submitted in relation to both counsels' fees, that as there were condition precedents to the payment of those fees that had not been fulfilled, the liability to pay those fees had not been triggered and there are no costs to be indemnified by an order for costs against the respondents. That submission is also rejected for the reason that the condition for payment of those fees does not depend only upon their recovery but in the case of Dr Birch sufficient recovery of moneys out of which to meet those costs and, in the case of Ms Thew, satisfaction in whole or in part of the judgment debt in Royal v Elali [2011] NSWSC 602. In each instance, there is a contingent liability to be indemnified in respect of those fees at the time of making the costs orders. 52 Counsel for Mr Nazloomian, Mr Stojanovski and Isaac & Jacob advanced the further argument that the only moneys that the applicants can recover in these proceedings are in respect of costs because the moneys ordered to be paid to Saracen and Ottoman are not moneys that have been recovered on behalf of the applicants and it is not part of the relief sought or obtained that those moneys be paid to the applicants. Accordingly, so the argument went, the indemnity principle is not brought into play. That argument is also rejected as the issue to bring the indemnity rule into play is whether a legal liability to pay costs exists, not the remoteness of the prospect of the applicants having to pay those costs. For the reasons already given, the fact that the applicants are contingently liable to pay those costs suffices to bring the indemnity rule into play.

Joint and SEVERAL LIABILITY 53 The applicants seek orders that costs be ordered against the respondents on a joint and several basis by reason of the general principle that unsuccessful parties bear the costs liability jointly and severally: ASIC v ActiveSuper Pty Ltd (in liq) (No 2) [2015] FCA 527; (2015) 106 ACSR 302 at [111] citing City of Swan v Lehman Bros Australia Ltd (No 3) [2009] FCA 1190; GE Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths Australia, 2013) at [11.2]. The general principle that multiple respondents are to be made jointly and severally liable for the costs of the successful party flows from the rationale that, because the successful party's prima facie entitled to its costs of the action, that party should not lose that entitlement if one of the parties against whom costs orders are made cannot, or will not, meet its share of the costs burden: Perigo v Workers Compensation Nominal Insurer & Anor (No 3) [2013] NSWSC 6 at [4]-[5], citing Trade Practices Commission v Nicholas Enterprises Pty Ltd (No 3) (1979) 42 FLR 213 and Rushcutters Bay Smash Repairs Pty Ltd v H McKenna Netmakers Pty Ltd [2003] NSWSC 670 at [16]; GE Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths Australia, 2013) at [11.2]. The general principle is that each unsuccessful party will be jointly and severally liable for the costs of the successful party, without differentiation between them, unless there are "special circumstances" warranting a departure from that principle: Tomasetti v Brailey [2012] NSWSC 120 at [30] and the authorities cited. 54 The general principles were not disputed. It was submitted for the respondents that a joint and several costs order should not be made because there was no common substratum of fact but, rather, a clear distinction between the factual and legal matters as between the various respondents providing a "clear reason" why costs should not be joint and several. The submission that costs should not be on a joint and several basis is rejected for the following reasons. 55 First, contrary to the respondents' submissions, although each of the transactions which the applicants sought to be impugned was separate and distinct in the sense that the relevant issue for determination was whether that particular transaction was a voidable transaction under s 37A of the Conveyancing Act 1919 (NSW) and/or s 121 of the Bankruptcy Act 1966 (Cth), there was a significant commonality of evidence, issues and in the substratum of facts concerning the impugned transfers of shares and properties, particularly given that each of the individual respondents (excluding Mr Stojanovski) were directors of one or more of the respondent companies at various times, and borne out by the fact that the evidence of the individual respondents, including Mr Stojanovski, traverse not only the particular transactions involving them, but also the other transactions the subject matter of the proceeding. It is also noteworthy that the respondents did not conduct separate and distinct defences not attributable to joint conduct of the respondents in defending the claims against them. Furthermore, the applicants were successful against all of the respondents. In the circumstances, I am not persuaded that costs should not be joint and several as between the various respondents.

Conclusion 56 In each proceeding there will be an order fixing the costs that the respondents are liable to pay the applicants, such costs to be payable on a joint and several basis, as follows: (a) in respect of the 2013 proceedings (67.6%): the sum of $442,668; (b) in respect of the 2014 proceedings (32.4%): the sum of $212,166. I certify that the preceding fifty-six (56) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.

SCHEDULE OF PARTIES NSD 1731 of 2013 Applicants First Applicant: PETER PAUL ROYAL Second Applicant: JUDITH LOUISE ROYAL Third Applicant: MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI Respondents First Respondent: NATHAN EL ALI Second Respondent: MAHMOUD EL ALI Third Respondent: MAHMOUD ZREIKA Fourth Respondent: SARACEN HOLDINGS PTY LIMITED Fifth Respondent: OTTOMAN INVESTMENTS PTY LIMITED Sixth Respondent: OTSI STOJANOVSKI

NSD 771 of 2014 Applicant Applicant: MICHAEL GREGORY JONES IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF NATHAN EL ALI Respondents First Respondent: NATHAN EL ALI Second Respondent: MAHMOUD EL ALI Third Respondent: JOHN RENE NAZLOOMIAN Fourth Respondent: SARACEN HOLDINGS PTY LIMITED Fifth Respondent: ISAAC & JACOB PTY LIMITED

Legal Profession Act 2004(NSW)

repealed) Legal Profession Act 2004(NSW)

Legal Profession Act 2004(Vic)

At a glance

Court

Decision date

Before

Source

Judgment (35 paragraphs)

Parties

Legislation Cited (8)

Cases Cited (27)