Shalhoub v Johnson and the meaning of proportionality

The case emphasised that the amount of the claim is only one of the factors to be considered in the proportionality principle and that costs awarded to the winning party may be much higher than the claim amount.

The proportionality principle

Section 172 of the LPUL provides that legal costs must be fair and reasonable and that, when charging legal costs, such costs be ‘proportionate and reasonable’.[1]

In Shalhoub, the Court held that the proportionality principle under Section 172 of LPUL means that costs must be both proportionately and reasonably incurred and proportionate and reasonable in amount.  When determining whether costs have been reasonably and properly incurred, it is relevant to consider whether those costs bear a reasonable relationship to the value and importance of the subject matter in issue.

Facts of the case

In Shalhoub, the plaintiff and defendants were neighbours.  The plaintiff commenced proceedings against the defendants in the Supreme Court for an alleged negligent breach of duty of care under section 177 of the Conveyancing Act 1919 (NSW).  The plaintiff claimed for both damages and an injunction directing the defendant to cease work and restore support to a wall between their properties.

The proceeding commenced in the Supreme Court because injunctive relief is not available in the District Court.  The amount of damages claimed by the Plaintiff was $227,000.

The defendants retained a Senior Counsel with a junior.  The plaintiff did not engage a Senior Counsel.

During the proceedings, the defendants had made a settlement offer to replace and pay for a new retaining wall.  However, the plaintiff did not accept the offer and continued with the claim.

The plaintiff was unsuccessful in her claim. The trial judge in the Supreme Court ordered the plaintiff to pay the defendants’ cost of the proceedings up to and including the date of offer of settlement on the ordinary basis but thereafter on an indemnity basis.

The costs assessor assessed the defendant’s cost at $478,255.89, which is larger than the original amount claimed by the plaintiff. The plaintiff sought a review of the costs assessor’s determination on the ground that the costs had been unreasonably incurred.  The Review Panel affirmed the determination of the costs assessor. The plaintiff appealed against the Review Panel’s determination at the District Court.

The plaintiff appealed on the basis that it was neither reasonable nor fair for the defendant to be awarded costs which is disproportionately higher than the claim amount.  The plaintiff also argued that the defendants did not require the services of a Senior Counsel.

Decision of the Court

The Court held that the plaintiff had not discharged the onus of proof of establishing that there was disproportionality and the appeal was dismissed.

The Court was satisfied that the Review Panel had applied the proportionality principle appropriately.  It held that the claim amount was only one factor of the proportionality principle and noted that the plaintiff’s conduct was responsible for the high costs incurred by the defendants, as they:

• had sought a complex injunction in the Supreme Court, an expensive jurisdiction for legal proceedings;
• were responsible for slippages in time and required adjournments which inflated the costs; and
• refused to accept a settlement offer which warranted the trial judge to award indemnity costs.

The Court noted that, in contrast, the defendants’ conduct was responsible and efficient.

On the issue of the defendant engaging a Senior Counsel, the Court decided the decision was warranted given the complexity of the case and large number of witnesses and expert reports on liability and quantum.  The Court further noted that:

• the defendants had utilised its Senior Counsel to the best effect as the Senior Counsel was briefed only one week before the trial and acted without a junior;
• the case was run with economy and skill with the hearing taking only 4 of the 5 days allotted; and
• the economies and scale of the defendants’ use of Senior Counsel should be taken into account as issues relevant to proportionality.

The key takeaway from Shalhoub is that the claim amount is not the only factor for considering whether legal costs is proportionate and that such considerations may include the conduct of the parties. The case serves as a good reminder that it is always possible for the Court to award a costs order against the losing party at an amount higher than the amount claimed in the proceedings.

Duty of a solicitor in a civil claim with no reasonable prospects of success

One incidental issue that has not been discussed in the case is the solicitor’s duty to the Court in civil claims which has no reasonable prospects of success. Arguably, from the time when the plaintiff in Shalhoub rejected the settlement offer, which is what the plaintiff had claimed for, there was no reasonable prospects of success for the plaintiff’s claim.  What appropriate actions should the plaintiff’s solicitor take if their client has refused a reasonable settlement offer and insisted to continue with a claim that is unlikely to succeed?

Section 56 of the Civil Procedure Act provides that the overriding purpose of the Act is to facilitate just, quick and cheap resolution of the real issues in the proceedings.  A solicitor is under a duty to assist the court to further the overriding purpose.  Section 5 of the Schedule 2 of the Legal Profession Uniform Law Application Act 2014 (Application Act) provides that a law practice must not provide legal services on a claim that does not have reasonable prospects of success.  Section 5 also empowers the court to make a costs order directing the solicitor to pay and indemnify the costs payable by a party in the proceedings.

The proper course for the plaintiff’s solicitor is to advise the client, preferably in writing, to accept the reasonable settlement offer and to discontinue the proceedings as there is no reasonable prospect of success.  The solicitor should also highlight the adverse consequences of continuing with the claim in that the plaintiff would be responsible for their own costs and the defendant’s costs, possibly on the higher indemnity basis.

If the plaintiff acted against the advice and insisted on continuing with the proceedings, the plaintiff solicitor should consider ceasing to act.  The risks of a solicitor continuing to represent a party in a civil claim that has no reasonable chance of success is that an adverse costs order may be made against the solicitor.  It may also constitute unsatisfactory professional misconduct or professional misconduct on the solicitor under Section 4 of the Application Act.  Logically, a solicitor should avoid these risks by ceasing to act.

The NSW Law Society’s Professional Support Unit provides free and confidential guidance to legal practitioners about their compliance, costs and ethical obligations under the Uniform Law.

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[1] See section 172(1) of the Legal Profession Uniform Law.