ABIGAIL AND CO v DAVIES SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL MAHONEY, CLARKE and MEAGHER JJA 22 November 1993, 14 December 1993 [1993] NSWCA 303 COSTS — INDEMNITY COSTS COSTS — Indemnity costs award by Master in compromised proceedings — appealed — respondent suffered at injury at work — appellant was the former solicitor of the respondent — appellant was sued and admitted liability consequent upon her failing to commence proceedings on respondent's behalf within the limitation period — award by Master of indemnity costs. HELD: The award was incorrect in principle and was based upon matters which had no relevance to the action compromised. These matters included: the fiduciary relationship of solicitor and client; pain and suffering occasioned to the respondent; commencing of proceedings by solicitors for the respondent against other parties in respect of whom no action lay. Discussion of the basis upon which an order for indemnity costs may be made. Mahoney JA I agree with the judgment of Clarke JA and generally with his reasons. In deference to the arguments addressed to the court, I shall add some additional reasons of my own. A decision as to costs involves a discretionary judgment. The judgment is no less of a discretionary nature because the decision involves the choice between different bases of costs. Accordingly, this Court may interfere with such a decision only if it appears that the decision involves an error or otherwise a departure from principle: see generally Lippe v Hedderwick (1922) 31 CLR 148 at 154, 155; Federal Commissioner of Land Tax v Jowett (1930) 45 CLR 115 at 121. I agree with Clarke JA that the reasons given by the Master for making an order for indemnity costs disclose no, or an erroneous, basis for his exercise of the discretion and his award of indemnity costs. The Master properly indicated why he made that order. He was, I think, impressed by the fact that though, in his opinion, "the plaintiff was forced to take this action", ie, to sue the three defendants, the order for costs to be made in the plaintiff's favour "ought not include costs of the first and third defendants". And he was impressed by the fact that, because of the negligence of the second defendant, her original solicitor, she had had to incur costs additional to the costs she would have incurred if she had not, because of that solicitor's negligence, "lost the cause of action" against her employer the first defendant and had been able to recover damages by suing the employer upon it. It was, he said, "in the light of that I am of the view that the plaintiff is entitled to costs against the second defendant on an indemnity basis". In my opinion, those reasons cannot and do not justify the making of an order for indemnity costs. If in order to succeed against the second defendant and to recover a proper verdict from her, it was necessary for the plaintiff also to sue the first and third defendants unsuccessfully, the appropriate costs order would, I think, be that the plaintiff pay the costs of the first and third defendants, that the second defendant pay the plaintiff's costs, and that those costs include the costs paid by the plaintiff to the first and third defendants. The burden cast upon the 2 UNREPORTED JUDGMENTS plaintiff by what the Master relied upon is not properly to be compensated for by ordering the second defendant to pay the plaintiff's costs on an indemnity basis. If the Master's order is to be set aside, it is necessary for this Court to determine what order for costs should be made. The court must decide this upon the basis of the evidence which is now before the court. I do not think that that evidence justifies the making of a special order. It is not clear whether the assumption to which I have referred was justified or to what extent. I agree with Clarke JA that the appropriate order is that the second defendant pay the plaintiff's costs on a party and party basis. Clarke JA The respondent was injured in the course of her employment with Franklins Supermarket, Rose Bay, on 21 January 1980. In August or September of that year she retained the appellant as her solicitor for the purpose of taking appropriate proceedings to recover compensation and damages against Franklins. For reasons which did not appear from the evidentiary material before this court, but which were apparently related to the appellant's belief that the respondent did not have a cause of action at common law, the appellant failed to institute proceedings at common law before the expiry of the relevant limitation period. In July 1986, that is, six months after the expiry of the limitation period, the respondent instructed Quinns, the purchasers of the appellant's practice, to take action on her behalf. They did not take this action and the appellant retained her present solicitors who issued a statement of claim on 2 June 1989. There were three defendants sued. The first defendant was Franklins Ltd, the second was the present appellant and the third defendant was a group being the partners of Quinns. Why action was taken against the first and third defendants is a mystery. The time for taking action against Franklins Ltd had well and truly expired by the time of the institution of the proceedings and that organisation had an unanswerable defence to the claim. Further, the third defendants were not consulted until after the expiry of the statutory period of limitation and there could have been no suggestion that they were guilty of breaches of duty which caused loss to the respondent. Accordingly, the claims against the first and third defendants were misconceived and this seems to have been recognised for in due course they disappeared from the proceedings. The case was, however, maintained against the appellant whose solicitors took steps early in 1990 in an endeavour to compromise the claim against their client. These endeavours were unsuccessful and when it finally became apparent that the respondent had a good cause of action against Franklins the appellant admitted liability. This occurred in February 1993. The proceedings were not compromised and in June 1993 Master Greenwood assessed damages in the sum of $284,000 and awarded the respondent costs against the appellant on an indemnity basis. There has been no challenge to the assessment of damages but the appellant sought and was granted leave to appeal from the costs order. The sole point which arises for consideration on the appeal is whether the Master was in error in making the special costs order to which I have referred. At the outset it should be said that the learned Master expressly stated that he made the order in the exercise of his general discretion and not pursuant to SCR Pt52 R7. This is understandable for the ultimate judgment was for a sum less than the amount which the plaintiff had indicated that she would accept by way of compromise. The question is whether the exercise of that discretion miscarried. Pursuant to the Supreme Court Act 1970 s76(1)(c) the Court is empowered to order that costs be "taxed or otherwise ascertained on a party and party basis or on any other basis". URJ ABIGAIL AND CO v DAVIES (Clarke JA) 3 Notwithstanding the general principle is that costs are awarded upon a party and party basis unless the court makes a special order that costs be taxed on an indemnity basis pursuant to R28A, the common fund basis pursuant to R28A, the common find basis pursuant to s30 or on the trustee basis pursuant to R31 (SCR Pt52 R23). Until the early 1980's the making of a costs order on an indemnity basis, except in cases of contempt of court, was almost unheard of. Application was however made in 1983 for an order for indemnity costs in Degmam (In Liq) v Wright (No 2) [1983] 2 NSWLR 354. At that time SCR Pt52 R28A did not exist (it was introduced into the rules in 1989) and Holland J was first concerned to determine whether court had power to make such an order. Having decided that the power did exist his Honour went on to consider whether an order for indemnity costs should be made upon the ground that the defendant had misconducted herself in defending the proceedings and in unduly prolonging the trial by reliance upon defences and allegations of fact which she knew to be false. In the course of deciding that an indemnity costs order should be made his Honour said (at 358): "The discretion which the court has as to costs is, as has been said many times, to be exercised judicially, that is to say upon proper grounds and the court will not lightly depart from standard practice in the awarding of costs. " [In the light of SCR Pt52 R28A the doubts that were expressed in Woodworking Co Pty Ltd v Siganisucie (Court of Appeal, 30 November 1989, unreported) about the court's authority to order that costs be paid upon an indemnity basis no longer exist.] Since Degmam a number of similar costs orders have been made upon the ground of the defendant's misconduct in presenting and maintaining a defence. In other cases where the conduct of a party has been so unsatisfactory as to represent an abuse of process of the court an order for payment of costs on a solicitor/client basis has been made (see Packer v Meagher [1984] 3 NSWLR 486; Australian Guarantee Corporation Ltd v De Jager [1984] DR 483). However, in Balfic Shipping Co v Dillon [1991] 22 NSWLR 1, Kirby P (with whom Gleeson CJ agreed) expressed the view that the court was not confined to a consideration of the conduct of the defendant in determining whether a costs order on a solicitor and client basis should be made. His Honour thought that in the case before him there were other relevant considerations one of which was determinative and that was that the case was taken as a 'test case' on the issue of liability in negligence. The reasoning of Kirby P was applied by Morling J in Australian Federation of Consumer Organisations Inc v Tobacco Institute of Australia Ltd (1991) 100 ALR 568 in making an order that the respondent should pay the applicant's costs on an indemnity basis. Two factors influenced Morling J. They were, the fact that the proceedings were in the nature of a test case on the issue whether passive smoking is a hazard to the health of non smokers and, secondly, the applicant incurred the legal costs in the public interest. The importance of this decision, with which I respectfully agree, is that it makes it clear that an order for costs on an indemnity basis may be made without the necessity of establishing that the party against whom the order was made had misconducted itself in the conduct of the litigation. What can be drawn from the cases is that the court is vested with a discretion to make such costs order, including an order that costs be taxed on an indemnity basis, as is appropriate in the circumstances. That discretion must, however, be exercised judicially, that is, on proper grounds and the court will not 4 UNREPORTED JUDGMENTS lightly depart from standard practice (that is, the party and party basis) in the awarding of costs. Although it has now been judicially determined that a costs order may be made on an indemnity basis in the circumstances referred to in Degmam and also where the litigation in question is a test case or has been prosecuted in the public interest these circumstances should not be regarded as exhaustive and there may be other circumstances which would justify a court in awarding costs upon the special basis under discussion. The reasons given by the learned Master in this case were as follows: "T took the view that the plaintiff was in a position where she was forced to bring this action. This must be looked at in the context of the relationship that exists between an attorney and a client. It is a special relationship of a fiduciary nature and brings with it obligations on the solicitor to look after the plaintiff's special needs. The plaintiff is ill and has suffered considerable distress and, whilst this does not sound in damages so far as the solicitor is concerned, in my view, it is a matter which ought to be taken into account when considering the duty which the solicitor owed to this particular client. This is reflected in a number of ways, not only by the delay which the plaintiff encountered in getting the matter before this court but also, as I indicated, by the distress that has been caused to the client over this period of time. Bearing in mind that this came about because of this special type of relationship, action was necessary or had to be taken by the party because the second defendant had failed the plaintiff in this relationship. In my view it is appropriate in the circumstances of this case that an order of indemnity cost be made. I am not saying that in any case where a client has to sue a solicitor that indemnity costs are appropriate. What I do say is that in the circumstances of this case indemnity costs are appropriate." The first reason given was that the respondent was forced to bring the action. This statement is a little difficult to understand in that every successful plaintiff has obviously been forced to take action. However, reference to an earlier passage in the judgment leads me to the view that the master was saying that the respondent had been forced to bring the action against all three defendants as a consequence of the appellant's breach of duty. In the earlier passage the learned Master said: "Tn light of this the costs order ought not include costs of the first and third defendants. However, I am satisfied that the plaintiff was forced to take this action because of the negligence of the second defendant. She has lost the cause of action because of that negligence and she has incurred additional costs in pursuing the claim to enable her cause of action to be valued. In light of that I am of the view that the plaintiff is entitled to costs against the second defendant on an indemnity basis." In order to avoid confusion I should point out that after the learned Master made the order quoted in the above passage counsel for the appellant appeared before him and complained that he had been denied an opportunity of putting submissions on the issue. Accordingly, the learned Master reopened the question of costs and, for the reasons which I have set out in full, affirmed his earlier order. What, I think, emerges from the earlier passage is that the learned Master concluded that the respondent was forced to take the action against all three defendants because of the negligence of the second defendant. This was, in my opinion, an erroneous view for nothing that the appellant did could be regarded as forcing the respondent to sue all three defendants. As I have earlier pointed out URJ ABIGAIL AND CO v DAVIES (Meagher JA) 5 the proceedings against the first and third defendants were misconceived and, having no prospects of success, should never have been brought. The fault in bringing them lay at the door of persons other than the appellant and the learned Master was in error, in my opinion, in putting forward the proposition that the respondent was forced to bring the action in support of the special order. Obviously the respondent was forced to bring the action against the appellant but this does not present as a reason for making an indemnity costs order The learned Master did not, however, consider this aspect in isolation for he thought that insofar as the relationship between an attorney and client imported obligations of a fiduciary nature the fact that the respondent was forced to bring the action took on a special complexion. I must confess that I am not sure what it is that the Master drew from the fact that the proceedings were between an attorney and client. It is true that obligations of a fiduciary nature are owed by an attorney to a client but no breach of those obligations was pleaded in the respondent's statement of claim and when the appellant admitted liability she admitted only that she had breached her contractual duty to the respondent. Insofar as the proceedings only related to the assessment of the damages suffered as a consequence of the breach of contract there was no examination in evidence of the question whether there had been a superimposed breach of a fiduciary duty. I conclude, therefore, that the first ground given provides no justification for the making of the order. Whether it would be appropriate to make a special costs order in a case involving breaches of fiduciary obligations would, in my opinion, depend upon the circumstances of the case but insofar as no breaches were asserted or proved in this case that question does not arise. The second reason given by the learned Master is that "the plaintiff is ill and has suffered considerable distress". It is axiomatic that if there is a causal connection between a plaintiffs illness and distress and the defendant's breach of contract then those matters should be taken into account in the assessment of damages. In fact in this case a claim of that nature was made based upon the delay in the finalisation of the litigation resulting from the appellant's breach. However, the Master rejected that claim. The obvious basis for the rejection was that the respondent had not established that any distress she suffered was causally connected with the appellant's breach of duty. In those circumstances it was wrong in principle, in my opinion, to base a special costs order upon the evidence led in support of the rejected claim for damages. It follows that neither of the two reasons given by the learned Master justifies the order which he has made and it should be set aside. The question which then arises is what costs order should be made? Nothing which occurred during the attempts to compromise the action would support a departure from the usual order. Indeed it would appear that the appellant was much more enthusiastic in her endeavours to compromise the action than the respondent but insofar as the ultimate decision fell between the competing offers there is no reason to consider that aspect further. What was shown by the evidence was that the appellant breached her duty to exercise reasonable care and skill and that that breach caused considerable loss for which the respondent was awarded damages. Nothing was, however, shown in the evidence which would in my view justify any departure from the normal order. In these circumstances I would propose that: Meagher JA I agree with Clarke JA. (1) The appeal be allowed; 6 UNREPORTED JUDGMENTS (2) The costs order made by the Master on 4 June 1993 be set aside and in lieu thereof order that the appellant pay the respondent's costs of the trial; (3) The respondent should pay the appellant's costs of the appeal and is to 5 have a certificate under the Suitors Fund Act in respect of those costs. Counsel: Appellant - M L Willlams 10 Respondent - D W Elliott Solicitors: Appellant - Ebsworth and Ebsworth 15 Respondent - Duffield and Duffield