The Problem of Legal Costs: Lump Sum Costs Orders in the Federal Court

1.    Introduction

We have a vibrant legal profession in this country, which has a well-deserved reputation for excellence, both within Australia and internationally. Our best lawyers stand shoulder to shoulder with the best in the world in terms of their intelligence, creativity, hard work and adherence to professional standards.

However, it is an inconvenient truth that to some extent this excellence is underpinned by rules and practices that permit excessive legal costs.^[3] That will be even higher in Victoria and New South Wales because of the higher hourly rates charged in those States. It is not uncommon for partners in large law firms on the eastern seaboard to charge upwards of $800 per hour, and they litigate supported by a team of lawyers and paralegals with their own charge-out rates. Experienced Senior Counsel charge more than $10,000 per day, sometimes much more. The Full Court of the Federal Court recently said that pre-trial costs incurred in class action litigation commonly exceed $10 million by each side.^[4]

There is, of course, a tension between the quality of legal work and the effect of legal costs on access to justice. As Sir Anthony Mason, former Chief Justice of the High Court, has observed:

A first-class court system and a first-class legal profession are of no avail to a person who cannot afford to access them.^[5]

Access to justice is a fundamental human right^[6], the importance of which cannot be doubted. Legal rights are just an illusion, and the principle of equality before the law is meaningless, if legal costs effectively prevent people from enforcing or protecting their rights. Even if one puts the rights of the individual to one side, the importance of access to justice can be seen in the considerable economic and social costs that may arise if sizeable parts of society are effectively excluded from adequate redress through the courts.

That our system of justice has a fundamental problem in relation to legal costs is plain, and there is a rare unanimity of view amongst senior figures in the law that our legal system is unaffordable for many people.^[7] Chief Justice Martin of the Supreme Court of Western Australia said in 2012:

The hard reality is that the cost of legal representation is beyond the reach of many, probably most, ordinary Australians. … In theory, access to that legal system is available to all. In practice, access is limited to substantial business enterprises, the very wealthy, and those who are provided with some form of assistance.^[8]

In 2013 the Centre for Innovative Justice at RMIT University reported that “those in low to moderate income brackets - described by some as the ‘sandwiched class’ meaning neither rich nor poor, but sandwiched in the middle - are being increasingly left out of the market.”^[9] The Hon. John Doyle said: “Big business can afford access to the courts, but the ordinary Australian can’t.”^[10]

It should go without saying that a legal system that operates on the basis that individuals with legal problems in diverse areas such as criminal law, employment, discrimination, consumer matters, professional regulation, family law, housing, and many aspects of commercial law including franchising and small business, are unable to afford legal representation or are outgunned in any legal arena they are required by circumstance to enter, is unfair. Such unfairness must be rectified to protect equality before the law and to avoid corrosion of societal norms.

Of course, the problem is not new, as shown by the quotation with which I started. Nor is it a problem that is easily solved. In 2013 the Hon. Michael Black, former Chief Justice of the Federal Court, spoke of “the search for that elusive point of equilibrium at which the competing pulls of cost, speed, perfection and fairness are balanced in a way that produces substantial and accessible justice.”^[11] Governments and the Courts have undertaken numerous strategies to reduce legal costs, but they seem to march ever upwards.

Many respected judicial figures are convinced that charging by hourly rates underpins much of the problem^[12]. The former Chief Justice of the High Court, the Hon. Murray Gleeson said that time costing rewards delay, inefficiency and slow thinking. I tend to agree. I made my living as a litigation lawyer for more than 30 years, including as Senior Partner and as Chairman respectively of two large legal firms and much of my income was derived through hourly billings. In the course of running major litigation over many years I often saw work expand to fill the available time, and I saw work paid for in full notwithstanding sub-optimal work practices, even when there was no intent to ‘pad’ a bill or act unfairly. Even so, the problem goes far deeper than time costing and it must be said that other costing models have other problems.

If I may also appeal to baser instincts - it is also clear that the present approach is not sustainable in the medium to long term. Governments will be forced to take steps and/or market forces will operate so that a significant volume of the legal work that presently sustains Australian lawyers will be transferred into low or no cost jurisdictions or transferred overseas. The parable of the “Goose that laid the Golden Egg” comes to mind. One can see this happening in the diverse areas I enumerated, in the number of self-represented litigants (with concomitant costs and delays), in the increasing flow of legal work to low-cost international centres, and in the transition of domestic and international commercial litigation into lower cost arbitral processes. As has been seen in the USA^[13], Australian law firms are likely to experience decreased demand for their services as well as growing pressures of competition from non-legal service providers.

Through consultation with the profession the Court is aware that some lawyers are already adopting new methods to reduce costs, and for that I commend them. But more lawyers need to put their energies towards increased efficiencies in litigation, becoming expert in ADR, moving away from billable hours to more competitive fee structures, and promoting such sustainable practices with their clients, the relevant law society and government.

No doubt the judiciary can do more as well, including by:

• taking steps to eliminate process driven case management costs;
• taking a more interventionist approach in relation to costs, such as by making costs capping orders at an early stage;
• insisting on proportionality in legal costs;
• considering whether time costing is appropriate in a particular case; and
• dealing firmly with overcharging where it is seen.

This broad issue is the backdrop for today’s presentation rather than its focus, but when lawyers with an interest in legal costs assemble, as they have at this conference, it is a good occasion to reiterate warnings about unaffordable justice.

Today’s presentation focuses on just one aspect of reducing litigation costs. I do so by detailing the Federal Court’s revised approach to applications for lump sum costs orders. I will touch on the legislative framework and principles regarding lump sum costs orders and then look at the revised Costs Practice Note and how it reshapes the Court’s approach.

2.    A new procedure in relation to lump sum costs orders

As you know, costs disputes have become another species of litigation, with attendant further costs and delay. Some jurisdictions, including the Supreme Court of Victoria, have chosen to set up dedicated Costs Court to deal with such disputes.

Recently the Federal Court has embarked on a different course. In devising its new approach the Court consulted with leading costs experts and lawyers with an interest in the area, a number of whom are here today. The changes, brought in as part of the National Court Framework (NCF) reforms, are part of a broad ranging set of improvements which have expanded the use of more efficient methods of case management, expanded the use of processes to expedite hearings, focused on less expensive dispute resolution, and sought to reduce unnecessary process-driven practices by lawyers. These reforms, introduced through revised Practice Notes in October 2016, should operate to increase efficiency, reduce complexity and minimise legal costs.

I focus on one of the reforms, which is aimed at reducing costs and delay by encouraging speedy lump sum costs orders to be made by the docket judge.

3.    The legislative framework and principles regarding lump sum costs orders

Section 43 of the Federal Court of Australia Act 1976 (Cth) (FCA) provides a specific legislative power to award costs in proceedings before the Court. Section 43(2) provides that “except as provided by any other Act, the award of costs is in the discretion of the Court or Judge.” The discretion is absolute and unfettered subject to the requirement that it be exercised judicially^[14].

This provision is supported by rule 40.02 of the Federal Court Rules 2011 (Cth) (the Rules) which provides:

Other order for costs

A party or a person who is entitled to costs may apply to the Court for an order that costs:

…

(b) be awarded in a lump sum, instead of, or in addition to, any taxed costs; or

(c) be determined otherwise than by taxation.

Previously, Order 62 Rule 4(2) set out the Court’s power to make a lump sum costs order, doing so in similarly straightforward terms.

Having regard to s 43 and the Rules it is uncontroversial that the discretion in s 43 is wide enough to permit a judge to make an order for payment of costs in a particular amount, without taxation in the usual way^[15].

In the leading case of Beach Petroleum NL v Johnson (No 2)^[16] (Beach), heard in 1995, Von Doussa J considered the Court’s discretion to award lump sum costs instead of ordering a taxation. His Honour approved the principles enunciated by the UK Court of Appeal in Leary v Leary^[17], and expressed the purpose of the Rules as being to avoid the expense, delay and aggravation involved in protracted litigation arising out of a taxation of costs. His Honour said that the enormity and expense of drawing an itemised bill of costs in complex litigation demonstrates how inappropriate the old system of taxation is to the modern commercial world, and described the requirement to prepare a bill in taxable form as an “unrealistic demand which would require quite unreasonable time and expense.”

The cases disclose a number of considerations relevant to the exercise of the discretion including that:

• it is no impediment to the granting of a lump sum costs order that an earlier order has been made ordering a taxation of costs^[18];
• the chief purpose of the jurisdiction to award lump sum costs is to avoid the expense, delay and aggravation involved in protracted litigation arising out of taxation of costs. Exercise of the discretion is particularly apt in a lengthy and complex case where the process of taxation is likely to be unduly protracted or expensive^[19];
• there is, however, no particular characteristic of a case which must exist before a lump sum costs order can be made. It is a power which may be exercised whenever the particular circumstances of the case warrant it. The simplicity of a case may make such orders appropriate to save the parties the difficulties and convenience of a taxation or the complexity of the case, where the costs of taxing a bill might be quite considerable, may do so^[20];
• where the financial capacity of the unsuccessful party is such that the successful party is unlikely to recover the costs of a taxation, where the unsuccessful party’s assets are outside the jurisdiction, or where the unsuccessful party has a tendency not to comply with costs orders, the case for a lump sum costs order is more compelling^[21];
• a lump sum approach may be appropriate where one party has a tendency to litigate (generally without basis) and would likely abuse the taxation process^[22];
• the Court may take into account that the costs should bear some relationship to the size of the applicant’s victory and should be proportionate to the nature and importance of the case^[23];
• it is inconsistent with the objectives of a lump sum order that the costs be subject to the detailed scrutiny normally reserved for formal taxations. It has been said that the lump sum process gives efficiency at the expense of accuracy. The Court shall adopt a broad brush approach to fixing costs, shall not approach the task as one of arithmetic calculation or precision. Courts usually apply a discount to the amounts claimed, but the award must rest on the particular circumstances and on the evidence adduced^[24];
• to ensure that a weaker party is not disadvantaged by a lump sum costs order the Court may adopt a careful and conservative approach to fixing the costs.^[25]
• exercise of the discretion carries the duty to accord procedural fairness (or natural justice) to the litigants^[26].
• the Court must be confident that the approach taken to estimate costs is logical, fair and reasonable^[27];
• evidence from an independent costs consultant may prove useful for the purpose of fixing lump sum costs, although a judge is by no means bound by it. Evidence of the charges rendered to the party awarded costs is also highly relevant^[28]; and

The cases also show some of the considerations found to be relevant when the Court has refused to order lump sum costs. These include that:

• the evidence relating to costs must be sufficiently detailed and must clearly identify the components of the costs incurred and how they have been calculated^[29]; and
• the Court must arrive in an appropriate sum on a logical and reasonable basis and with sufficient confidence, as opposed to selecting figures at random on the basis of an arbitrary preference for one experts view over another’s.^[30]

It must be kept in mind that the cases do not set out a test for the Court’s exercise of the discretion to allow lump sum costs. The value in these cases is that they reveal the considerations previously deemed relevant and the weight accorded to them, such that they may be a guide for the future application of the Court’s discretion. Having said this, the exercise of the discretion tends to be heavily based on factual matters and it is generally imprudent to endeavour to extrapolate from the circumstances of one piece of litigation to those of another.^[31]

Notwithstanding the broad grounds upon which the courts have been prepared to make lump sum costs orders, it must be said that applications for such orders are infrequently made. For example, outside of settlement approval applications in class actions, in the five years that I have been on the bench I have never dealt with an application for lump sum costs. It seems that many lawyers have taken the view that applications for lump sum costs orders are appropriate only in large and complex litigation, as an exception to the general rule that costs are to be taxed in default of agreement.

Litigants are left with the result that in many cases, long after the substantive controversy between the parties as been resolved, disputes about legal costs continue and further legal costs are incurred.

4.    The revised Practice Notes

The Central Practice Note

On 25 October 2016 the Chief Justice issued the Central Practice Note: National Court Framework and Case Management. It set out the fundamental principles concerning the National Court Framework reforms and the key principles of case management procedure.

Parts 7.2 - 7.3 of this Practice Note provide that the parties and their lawyers are expected, and have a statutory duty, to co-operate with the Court and among themselves to assist in achieving the overarching purpose (in ss 37M and 37N of the FCA) of facilitating the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible. This cooperation requires (and the Court expects) that the parties and their lawyers think about the best way to run their cases conformably with the overarching purpose. The overarching purpose includes the elimination of unnecessary “process-driven” costs. The Court expects parties and their lawyers to have in mind at all times the cost of each step in the proceeding, and whether it is necessary.

Importantly, Part 17.1 makes it clear that the overarching obligations of the parties extend to the resolution of costs disputes. It states:

The Court recognises that the determination of the quantum of costs for a successful party should not be delayed. To this end the Court will:

• where appropriate, facilitate the making of lump-sum costs orders at the determination of, or as soon as possible after determination of, liability and quantum, with the assistance of registrars (as taxing officers, referees or mediators); or
• where a lump-sum costs order is not made the Court will endeavour to deal with costs issues promptly upon the filing of bills of costs (within 30 - 60 days, depending upon their complexity) using, where possible, ADR processes to resolve issues.

The Costs Practice Note

On the same day the Chief Justice issued the Costs Practice Note. Part 3 reiterates that the procedure for determining the quantum of costs of the successful party should not be delayed. Importantly, it also states that the process should be as inexpensive and efficient as possible.

Part 3.2 and 3.3 set out the parties obligations in more detail, including that:

• the parties are expected to make a genuine effort, wherever practicable, to negotiate with a view to resolving costs issues at the earliest opportunity;
• the parties are encouraged to utilise formal offers of compromise or otherwise make offers to settle costs disputes;
• where costs issues cannot be resolved by negotiation the Court’s preference is to avoid the making of costs orders that lead to potentially expensive and lengthy taxation of costs hearings;
• instead, the Court will seek to adopt and will encourage parties to utilise the appropriate use of sophisticated costs orders and procedures, including:
  • lump-sum costs orders;
  • consolidated costs orders;
  • estimate of costs processes; and
  • Alternative Dispute Resolution (ADR).

Part 3.3 states that “taxation of costs hearing should be the exception and be confined to those matters that have genuinely been unable to be otherwise resolved or determined.”

Given the Court’s statement as to its preference, if there was ever a basis for the view that applications for lump sum costs should be made only in complex cases, in special circumstances, or as an exception to the general rule, that has now been put to bed.

The new regime is intended to be speedier, cheaper, and more streamlined than existing procedures. The parties are encouraged to succinctly inform the Court and other parties of their view as to the appropriateness of utilising the lump sum costs procedure at the earliest practicable stage in the proceeding (Part 4.8).

Part 3.4 requires the early determination of the issue as to who is entitled to be paid the costs of a proceeding and on what basis e.g. on a party/party or indemnity basis (costs entitlement question). That question may be determined:

(a)  in the judgment following trial; or

(b)  otherwise be determined at the earliest practicable and appropriate time following judgment.

Part 3.5 provides that the determination of the quantum of the costs to be paid (quantum of costs question), will usually be determined by the Judge through a lump sum costs procedure, or by a Registrar through the estimate of costs procedure.

Applications for lump sum costs are to be dealt with speedily:

• in the case of short and simple cases or where straightforward costs orders are sought (described as “simple costs scenarios”) Part 4.6 provides that the costs hearing dealing with lump sum costs should take place during closing submissions at trial or as soon as possible thereafter. Because such a process may involve the parties preparing for costs matters in advance of trial, this process will only lend itself to the most straightforward of cases.
• in regular, lengthy and complex cases or where more complex costs issues arise (described as “regular costs scenarios”) Part 4.4 provides that the costs hearing will take place within six weeks following determination of the costs entitlement question.

The Judge may involve a Registrar to act a consultant on costs, facilitate any ADR process, assist in considering the relevant cost issues, attend the costs hearing with the Judge, to act as mediator or referee.

While the use of costs estimates has been the main means of resolving costs disputes in the Federal Court for many years, and taxations of costs have become more unusual, by indicating a preference for making a lump sum costs order the Court has taken the significant step of limiting matters which require the preparation of a bill of costs. That preference, together with the requirement that the application be heard within six weeks following determination of the costs entitlement question, marks out a significant change to existing practices.

Lump sum costs applications are not intended to be accompanied by excessive formalism or lengthy and expensive costs consultant’s reports. Parts 4.10 - 4.15 provide that:

• unless the Court otherwise directs, no formal application for a lump-sum costs order is required. The applicant must file an affidavit in support of the lump sum claim (called a Costs Summary) which essentially addresses the relevant matters set out in Annexure A to the Practice Note (Part 4.10);
• the Costs Summary must be clear, concise and direct. It should not resemble a bill of costs in taxable form, nor should it contain submissions on the law. The aim of the procedure is to streamline and expedite resolution of the quantum of costs question and not to replicate the taxation process (Part 4.11);
• unless leave is given in advance, the Cost Summary and any affidavit in response must not exceed 5 pages in length or10 pages in large or complex cases (Part 4.12);
• only if they are given leave to do so, the parties may file short written submissions addressing the law as to costs but such submissions must not exceed three pages (Part 4.15).

I expect that in the early days of this new procedure, costs practitioners will experience a period of learning or adjustment in relation to the form and extent of material required in support of (or in opposition to) such an application. A practical approach is appropriate and it will be important to keep in mind:

• the philosophy underpinning the change – namely a reduction in expense, formalism, and delay;
• to take a proportionate approach to the provision of materials. The amount in dispute will be highly relevant in deciding the materials to be put forward. In some cases and affidavit sworn by this solicitor with the conduct of the matter will suffice, in others it may be appropriate to have the affidavit sworn by a costs expert. It is not the intention of the reforms that the value of reducing the use of taxable bills be lost through a requirement for a costs expert’s report in every matter. It should be remembered that Judges regularly make orders for security for costs based on estimates provided by solicitors.

5.    Conclusion

Time will tell whether the profession embraces this reform, such that applications for lump sum costs become the norm and parties come to expect that any costs dispute will be over within a short period after resolution of the substantive dispute. The people in this room will be important to whether the intended benefits of this reform are achieved. Time will also tell whether the Judges of the Court encourage the use of a new procedure which involves them in dealing with matters previously left for others. However, I expect Judges will strive to meet the requirements of the Practice Note. The docket judge is uniquely positioned to make a broad brush assessment of the quantum of costs which the unsuccessful party should pay.

Considered alone, this change will be just one small step towards resolving disputes before the Court according to law and as quickly, inexpensively and efficiently as possible. However, in combination the NCF reforms should prove significant in moving towards the “elusive equilibrium” to which I earlier referred and to maintaining access to justice.

The Hon. Justice Bernard Murphy

17 February 2017