Entitlement to indemnity costs in the Federal Court
Aug 2016 |
As the gap widens between the amount of costs clients pay their solicitors and the amount they can recover on a standard basis in matters litigated in the Federal Court, solicitors are increasingly requested by their clients to seek indemnity costs orders in both interlocutory hearings and at trial.
In Hamod v New South Wales (2002) 188 ALR 659; [2002] FCA 424 [665] (ALR) (per Gray J, Carr and Goldberg JJ agreeing), the Full Federal Court explained the principle for an award of indemnity costs as follows:
‘Indemnity costs are not designed to punish a party for persisting with a case that turns out to fail. They are not awarded as means of deterring litigants from putting forward arguments that might be attended by uncertainty. Rather, they serve the purpose of compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs.’
While indemnity costs orders are not easy to obtain, this newsletter considers when, and in what circumstances, the Federal Court may order a party to pay another party’s costs on an indemnity basis.
The basic principles in relation to costs orders
As a general statement of principle, costs orders are discretionary.1 However, that discretion must be exercised judicially.
The Federal Court is free to make any order which the court considers appropriate in the interests of justice.2 In addition, the court has the power to make any award of costs at any stage in a proceeding, including ordering a party’s costs to be paid on an indemnity basis.3
However, the ordinary rule in the Federal Court is that costs are awarded on a standard basis and the court ought not usually make an order for the payment of costs on a basis other than a standard basis unless the circumstances of the case justify the court departing from the usual course.4
As his Honour Justice Davies stated in the recent decision of TSG Franchise Management Pty Ltd v Cigarette & Gift Warehouse (Franchising) Pty Ltd (No 3),5 it is well-settled law that indemnity costs should not be ordered unless there is some ‘special or unusual feature’ of the case that justifies departure from the ordinary practice.6
So, what amounts to a special or unusual feature?
The categories in which the discretion may be exercised to award indemnity costs are not closed.
In Colgate-Palmolive Company v Cussons Pty Limited, his Honour Justice Sheppard (as he then was) referred to the case law and helpfully identified the following circumstances where the exercise of the court’s discretion was warranted to award costs on an indemnity basis:
- Where a party makes allegations of fraud knowing them to be false or makes irrelevant allegations of fraud;7
- Where there is evidence of misconduct that causes a loss of time to the court and to the other parties;8
- Where proceedings were commenced for some ulterior motive;9
- Where proceedings were commenced or continued in wilful disregard of known facts or clearly established law;10
- Where allegations were made which ought never to have been made;11
- Where the proceeding was unduly prolonged by groundless contentions;12 or
- Where there was an imprudent refusal of an offer to compromise.13
Federal Court Rules
In addition to the above, the Federal Court Rules provide (in certain prescribed circumstances) that a party must be awarded indemnity costs. However, despite the use of the word ‘must’, these rules are themselves discretionary.
Failure to beat a genuine offer made by an applicant
If an offer is made by an applicant and not accepted by a respondent and the applicant obtains a judgment that is more favourable than the terms of the offer, the applicant is entitled to an order that the respondent pay the applicant’s costs:
- Before 11.00 am on the second business day after the offer was served on a party and party basis; and
- After the time mentioned in paragraph (a), on an indemnity basis.14
These costs orders are still discretionary as the Federal Court has the power to make an order inconsistent with the rules15 and if the respondent is able to show that another order should be made, it is open to the court to make that order.
Failure to beat a genuine offer made by a respondent
If an offer is made by a respondent which is not accepted by an applicant and the applicant obtains a judgment that is less favourable than the terms of the offer:
- The applicant is not entitled to any costs after 11.00 am on the second business day after the offer was served; and
- The respondent is entitled to an order that the applicant pay the respondent’s costs after that time on an indemnity basis.16
If an offer is made by a respondent and an applicant unreasonably fails to accept the offer and the applicant’s proceeding is dismissed, the respondent is entitled to an order that the applicant pay the respondent’s costs:
- Before 11.00 am on the second business day after the offer was served, on a party and party basis; and
- After the time mentioned in paragraph (a), on an indemnity basis.17
Again, given the court has the power to make an order inconsistent with the rules, if the applicant can show that another order should be made, the court may make that order.
Issues arising
In light of the above, it remains the case that if a party wishes to seek indemnity costs, the onus is on that party to show that there is a special or unusual feature of the case that justifies a departure from the usual costs order that the costs of a successful party are paid by the unsuccessful party on the standard basis.
However, in a situation where a party does not beat a genuine offer made by another party, the presumption is that costs are payable on an indemnity basis as set out in the rules. The onus then shifts to that party who must show that another order should be made. In either case, the court will need to be persuaded by evidence or submissions.
In practical terms, the most effective way to achieve some measure of costs protection to assist in an application for indemnity costs remains the making of a carefully formulated offer of settlement as soon as possible in the proceedings.
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1 Section 43(2) of the Federal Court Act 1976 (Cth).
2 Section 23 of the Federal Court Act 1976 (Cth) and rule 1.32 of the Federal Court Rules 2011 (Cth).
3 Section 43(3).
4 Colgate-Palmolive Company v Cussons Pty Limited (1993) 118 ALR 248 [248].
5 [2016] FCA 828.
6 Colgate-Palmolive Company v Cussons Pty Limited (1993) 118 ALR 248; Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151; [1996] FCA 1942 [152-153] (Black CJ) and [156-158] (Cooper and Merkel JJ) (FCR).
7 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397.
8 Tetijo Holdings Pty Ltd v Keeprite Australia Pty Ltd (Fed C of A, 3 May 1991, unreported).
9 Ragata Developments Pty Ltd v Westpac Banking Corporation (Fed C of A, 5 March 1993, unreported).
10 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397.
11 Ragata Developments Pty Ltd v Westpac Banking Corporation (Fed C of A, 5 March 1993, unreported).
12 Ibid.
13 Messiter v Hutchinson (1987) 10 NSWLR 525; Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721.
14 Rule 25.14(3) of the Federal Court Rules 2011 (Cth).
15 Rule 1.35 of the Federal Court Rules 2011 (Cth).
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