Local Court of New South Wales CITATION: Vero Insurance Ltd v Kennedy [2006] NSWLC 34 JURISDICTION: Civil PARTIES: Vero Insurance Ltd Michelle Louise Kennedy FILE NUMBER: 2212/05 PLACE OF HEARING: Downing Centre Local Court DATE OF DECISION: 07/20/2006 MAGISTRATE: Magistrate H Dillon CATCHWORDS: Costs - Departure from general rule - Indemnity costs - Liability of unsuccessful party under the Legal Aid Commission Act for costs - Whether plaintiff entitled to indemnity costs by virtue of its contract with defendant - Whether plaintiff must elect to rely on contractual term or Rules for costs oder - Whether contractual obligation to indemnify plaintiff a matter to be taken into account by court in considering application for indemnity costs - Whether costs are a species of damage LEGISLATION CITED: Legal aid Commission Act 1979 ss42, 47(1) and 47(8) CASES CITED: Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45 Maher v Network Finance Ltd (1986) 4 NSWLR 694 Mr A Casseldon - Counsel REPRESENTATION: Gadens Lawyers - Solicitors Ms M Fraser - Counsel Kydon Segal Lawyers ORDERS: The defendant to pay the plaintiff's costs of the proceedings in a sum agreed or assessed on an indenity basis. JUDGMENT 1. On 10 April 2006 this matter concluded with a verdict and judgment being entered for the plaintiff. 2. The agreement between the parties included a term that the defendant "unconditionally and irrevocably indemnifies" the plaintiff "against all actions, claims, demands, liabilities, losses, damages, costs and expenses of whatever nature including legal costs on a full indemnity basis which [the plaintiff] may suffer, incur or sustain…" Pursuant to that terms of its contract with the defendant, the plaintiff sought costs on an indemnity basis. 3. That application was resisted by the defendant. I sought written submissions on the question as the defendant raised what I considered to be a novel legal issue. 4. In summary, the defendant's argument is that in seeking costs the plaintiff is, in effect, seeking a form of damages for which the defendant would be personally liable. This, it is said, would require an amendment of the pleadings, for which the court's leave would be required. 5. The defendant also argues that such an order would be incompatible with s.47(1) of the Legal Aid Commission Act 1979. That section provides: (1) Where a court or tribunal makes an order as to costs against a legally assisted person: (a) except as provided by subsections (2), (3), (3A), (4) and (4A), the Commission shall pay the whole of those costs, and (b) except as provided by subsections (3), (3A), (4) and (4A), the legally assisted person shall not be liable for the payment of the whole or any part of those costs. 6. (In this case none of the exceptions are relevant.) 7. The argument is that the order for costs against the defendant sought by the plaintiff would be incompatible with the scheme of s.47, in particular s.47(1)(b), because the defendant would become liable for the plaintiff's costs but the Legal Aid Commission would not be liable to pay them on her behalf. As I understand it, the defendant contends that the Legal Aid Commission will pick up the defendant's costs only if there is a costs order made by the court pursuant to the Rules but not if an extra-curial contractual obligation is enforced by the court. 8. It is also argued that the plaintiff ought be deprived of some or all of its costs because of the way in which the plaintiff chose to conduct its case. In particular, it is said that the plaintiff recast its case at a late stage, served evidence late and, in any event, was merely put to proof by the defendant. 9. The plaintiff contends that it is entitled to rely on the contract for a costs order, conceding that costs are, of course, in the discretion of the court. Its argument is that the defendant's contention is misconceived because the court may, and should, make an order pursuant to the Rules on an indemnity basis where the defendant has a contractual obligation to indemnify the plaintiff. 10. The defendant, in response to that submission, says that indemnity costs ought only to be ordered if the case falls into one of the usual category of cases in which indemnity costs are awarded, such as one of misconduct on the part of the losing party or a hopeless case being pursued, and says that this case is not in any of the usual categories. Consideration and conclusions 11. As is agreed by the parties, costs are in the discretion of the court. In my view, costs are not, and cannot be, a species of damages. I do not understand that argument for which no authority is advanced. They are the costs of recovering the loss or damages occasioned to a party and no more. Ordinarily costs will follow the event on a party and party basis. In certain cases, however, costs may be awarded on an indemnity basis. 12. I accept that this case does not fall within the usual range of cases in which indemnity costs are ordinarily ordered. The defendant had an arguable case and there is no suggestion of untoward conduct or any other special reason, other than that contended for by the plaintiff, for making an order on the indemnity basis. That, however, is not the end of the argument. 13. In Abigroup Ltd v Sandtara Pty Ltd [2002] NSWCA 45, the Court of Appeal, dealing with a question whether a contractual obligation to pay indemnity costs was extinguished by the making of another costs order by a court, said (at [7]-[10]): The appellant submitted that because s 76 of the Supreme Court Act says that costs shall be in the discretion of the court and Part 52A rule 8 of the Supreme Court Rules says that a party cannot recover costs except under an order of the court, the Act and rules displace any contractual entitlement to recover costs. Even if that not be correct, it submitted that once the Supreme Court has spoken on costs, that is an end of the issue, thus removing any right to recover costs on any other basis. In other words, it submitted that any contractual right is extinguished or overridden. Further, it was open to Sandtara to seek indemnity costs in the Supreme Court on the basis of cl 18.02, indeed on one occasion it did so, but unsuccessfully. Reliance was placed by the appellant on the English Court of Appeal decision in Gomba Holdings Ltd v Minories Finance [1993] Ch 171. In that case the court held that under the terms of a mortgage the defendants were entitled to recover their actual costs and expenses and that they were contractually entitled to payment on an indemnity basis. The court said that normally the court's discretion as to costs should be exercised to correspond with the contractual entitlement (194). My reading of Gomba , however, does not assist the submission of the appellant. It certainly does not support the proposition that the power to make an order for costs or the making of an order for costs in a court extinguishes or overrides a contractual right to costs. It is, of course, correct that a court is not bound to give effect to any extra curial contract as to costs when exercising its discretion to award costs. It does not follow, however, that the discretion takes over from the contract and the exercise of discretion against giving effect to the contract precludes enforcement of the contract as to costs. As Salter J said in Mansfield v Robinson [1928] 2 KB 353 at 359, agreements as to costs are common practice and perfectly valid and enforceable. Gomba did not overrule Mansfield , as seems to have been suggested by the appellant. Although Scott LJ noted that some of the dicta in Mansfield was not easily reconcilable, the judgment of the court is consistent with Mansfield , see for example at 194 – 195. For other relevant examples see In Re Shanahan (1941) 58 WN (NSW) 132 at 134; Maher v Network Finance Ltd (1986) 4 NSWLR 694; and Elders Trustee & Executor Co Ltd v Eagle Star Nominees Ltd (1986) 4 BPR 9205. The contractual right simply stands independently of the curial power and order. In so far as enforcement of the contractual provision as to costs is concerned, there is no issue on the costs judgments in the Supreme Court proceedings which is capable of giving rise to a res judicata . The validity or enforceability of the indemnity provision as to costs in cl 18.02 was never an issue in the Supreme Court. Moreover, the contractual claim for costs had not crystallised until the conclusion of all of the Supreme Court proceedings. Following judgment, there still may have been costs and expenses which would have been incurred by the respondent within cl 18.02. The respondent would have been unable to claim any such costs prior to the conclusion of the Supreme Court proceedings. Accordingly, I can see no basis for any suggestion that Sandtara's contractual rights merged into the judgments for costs made in the Supreme Court. 14. The plaintiffs argue from this that it is open to the court, in the exercise of its discretion, to make an order on the indemnity basis against the defendant. The defendant seeks to distinguish the decision, contending that it merely stands for the proposition that the contractual right to pursue the indemnity is not extinguished by a costs order on a party and party basis. 15. The defendant does not argue that it is not open to the court to award costs pursuant to the contractual condition but says that the plaintiff must elect either to be awarded costs under the contract or pursuant to the Rules. 16. Counsel for the defendant has provided no authority for that novel proposition and I do not accept that to be the case. Were it to be, the plaintiff would be obliged to bring further proceedings to recover its costs. In Abigroup, the Court of Appeal, by citing the English authority of Gomba with implicit approval, clearly left it open to courts to exercise their discretions in relation to costs in the way sought by the plaintiff. 17. Section 42 of the Legal Aid Commission Act provides: A court or tribunal which may order the payment of costs in proceedings before it shall, where a legally assisted person is a party to any such proceedings, make an order as to costs in respect of the legally assisted person as if he or she were not a legally assisted person. 18. In my view, this means that a court awarding costs against a legally aided person is required to ignore the fact that a party is legally aided when making a costs order. 19. Section 47(1), as we have seen above, transfers liability for the payment of any costs order made by a court against a legally-aided party to the Legal Aid Commission (except in certain defined circumstances which do not obtain here). Section 47(8) provides that "Any amount paid by the Commission under this section shall be deemed to have been paid by the legally assisted person on whose behalf it is paid." 20. While it is true that the curial and extra-curial liabilities of parties to costs order are independent, and the defendant is only able to call on her statutory indemnity under the Legal Aid Commission Act in relation to a costs order made by a court, the only way Ms Kennedy may become liable if an order for something less than the indemnity costs were ordered against her. (See Maher v Network Finance Ltd (1986) 4 NSWLR 694 at 698 per McHugh JA). It is not clear to me that this would necessarily follow because if the plaintiff successfully sought to enforce its contractual right to indemnity costs in other proceedings, it would obtain a court order to that effect. It seems to me that this would then trigger s.47(1) in favour of the defendant. 21. Whether that view is correct or not, and it was not argued before me, in my opinion, if the Legal Aid Commission provides legal assistance to a party it takes on, or should be prepared to take on, whatever costs risk that party would otherwise bear, including the risk of an indemnity costs order pursuant to a contractual obligation. That surely is the policy underlying s.47 (taking into account the relevant exceptions to the general rule). 22. It follows from all the above that, as a matter of discretion, it is open to the court to take into account the fact that a party has agreed in its contract with another party to indemnify that party when making an order for costs. Moreover, as discussed in Abigroup, there is good authority for exercising the discretion in that manner. 23. Further, to make another order, absent some serious default on the part of the successful party, would be to multiply the proceedings and consequent costs. In considering how to dispose of the real issues between the parties in the most efficient way, the most just, quick and cheap way, it may well be best to make an indemnity costs order in circumstances such as those that obtain in this case. 24. In my view, while there was some late service of evidence by the plaintiff and some rejigging of its case, there was no major prejudice caused to the defendant which, as her counsel admitted, merely sought to put to the plaintiff to proof. That the plaintiff was ultimately able to fill the gaps which, no doubt, the defendant had, until then, been hopeful of exploiting caused her, in my opinion, no unfair prejudice of any consequence. I do not see any reason to deny the plaintiff a costs order or to reduce the amount of costs simply because the defendant lost a forensic advantage she had relied on until the plaintiff removed it by producing evidence to fill the gaps. This was not the sort of impropriety or unreasonable conduct that might justify a reduction in the costs to which the plaintiff would otherwise be entitled. 25. In the circumstances, I propose to make the order sought. (Although it is not a factor I have taken into account in reaching this decision, I cannot help observing that if, as her counsel suggests, the defendant would otherwise be at risk of bearing a costs order personally, such a course is likely to be of advantage to her as she should then be given the protection of the Legal Aid Commission Act.) Order 26. The defendant is to pay the plaintiff's costs of the proceedings in a sum agreed or assessed on an indemnity basis. Hugh Dillon Magistrate DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.