Costs as between lawyer and client

9.50 This section considers whether and, if so, when, lawyers, rather than their clients, should bear the costs of discovery or be prohibited from charging more than the actual costs they incurred in conducting discovery.

9.51 In Chapter 12, the ALRC considers a number of potentially unethical discovery practices and argues that these may sometimes amount to professional misconduct. Sometimes, however, lawyers may perform costly, inefficient and unnecessary discovery work that, on any reasonable assessment, should not have been done, but this may not amount to professional misconduct. Unreasonableness, of itself, is not necessarily misconduct. A similar distinction was made by Ipp J in D’Allesandro v Legal Practitioners Complaints Committee:

The standards applied under the court’s duty to monitor the taxation of bills of costs and costs agreements, and the court’s duty to supervise the disciplining of legal practitioners are not necessarily the same and do not serve identical purposes. A fee that a solicitor may seek to charge by way of a bill of costs may, upon taxation, be found to be unreasonable and therefore subject to appropriate reduction. It does not, however, necessarily follow that the fees so charged by the bill of costs are so excessive as to constitute a breach of ethics.^[54]

9.52 The high cost of discovery is often attributed to the army of junior solicitors, paralegals and clerks required to work through a request for discovery of documents. The plight of ‘discovery soldiers’ conscripted in Trade Practice Commission v Santos Limited & Sagasco Holdings Limited^[55] was later remarked upon extra-curially by the trial judge, the Hon Justice Peter Heerey:

Practitioners were recruited into a burgeoning army engaged in discovery, inspecting, filing, listing, copying, storing, carrying about and otherwise dealing with 100,000 documents which had been accumulated for the purposes of the litigation. An expression that developed amongst junior practitioners who had been ensnared in the discovery process was ‘I have been Santossed’.^[56]

9.53 Law firms have been criticised for using this army of employees to generate profits from the discovery process. In its Civil Justice Review, the Victorian Law Reform Commission (VLRC) singled out for criticism the fees charged for certain discovery work:

In some instances, clerks or law students may be engaged to assist in connection with document review. They may be paid at a relatively low hourly rate (eg, $30 per hour) but charged to clients at significantly higher hourly rates (eg, between $150 and $250 per hour). It has been suggested that this is one of the major reasons for the very large costs associated with discovery.^[57]

9.54 The Hon Chief Justice James Spigelman of the NSW Supreme Court has noted that the difficulty with legal costs is that a lawyer ‘does not have a financial incentive’ to complete the legal work as quickly as possible. However, he argued, ‘the control is of course, the practitioner’s sense of professional responsibility’.^[58]

Disallowing costs

9.55 Section 43(3) of the Federal Court of Australia Act provides that the Court or judge may, among other things, ‘make different awards of costs in relation to different parts of the proceeding’ and ‘order a party’s lawyer to bear costs personally’. As noted above, s 43(3) codifies powers in relation to costs formerly prescribed by the Rules or at law.^[59] The relevant rule concerning awarding costs against a lawyer personally is O 62 r 9 of the Federal Court Rules, which provides that the Court may disallow costs as between a lawyer and his or her client where the costs are ‘incurred improperly or without reasonable cause, or are wasted by undue delay or by any other misconduct or default, and it appears to the Court that a lawyer is responsible’.^[60] The Court may also ‘direct the lawyer to repay to the client, costs which the client has been ordered to pay to another party’ or ‘direct the lawyer to indemnify any party other than the client against costs payable by the party indemnified’.^[61]

9.56 The power in O 62 r 9 should be ‘exercised with care and in clear cases only in which there has been conduct on the part of the solicitor which amounts to a serious dereliction of duty’.^[62] The Full Court of the Federal Court has summarised the relevant principles as follows:

in a claim under Order 62 rule 9, it is necessary for a client to demonstrate a serious dereliction of duty by the legal practitioner or a failure on the part of the legal practitioner to fulfil a duty owed to the Court to aid in promoting, in the practitioner’s own sphere, the cause of justice. It will often be difficult for a court to know all of the details and circumstances of a legal practitioner’s instructions. Further, the Court must be concerned about the risk of a practice developing whereby legal practitioners endeavour to brow beat their opponents into abandoning clients, or particular issues or arguments, for fear of a personal costs order being made.

Nevertheless, it is equally important to uphold the right of the Court to order a legal practitioner to pay costs wasted by the practitioner’s unreasonable conduct of a case. What constitutes unreasonable conduct will depend upon the circumstances of the particular case. However, unreasonable conduct must be more than acting on behalf of a client who has little or no prospect of success. There must be something akin to an abuse of process. Using a proceeding for an ulterior purpose or conducting a proceeding without any, or any proper, consideration of the prospects of success in the proceeding would be sufficient to justify an order against a legal practitioner who was responsible for that conduct.^[63]

9.57 Where a party to Federal Court proceedings has concerns about the amount charged by lawyers for discovery, the client may also apply for taxation of the lawyer’s fees under the Legal Profession Act of the relevant jurisdiction.^[64]

Not acting consistently with the overarching purpose

9.58 The need to demonstrate a ‘serious dereliction of duty’ may suggest that O 62 r 9 can rarely be applied to discovery practices that are wasteful and unnecessarily costly. However, since the enactment of s 37N of the Federal Court of Australia Act, this rule may apply more broadly, particularly considering that a note to O 62 r 9 now refers to s 37N. Section 37N has been discussed earlier in this chapter in relation to awarding costs between parties, but the section also concerns when a lawyer may be ordered to bear costs.

9.59 Section 37N(2) provides that a party’s lawyer must take account of the duty imposed on the party to conduct the proceeding in a way that is consistent with the overarching purpose in s 37M and assist the party to comply with the duty. Section 37N(4) provides that, in exercising the discretion to award costs, the Court or a judge ‘must take account of any failure to comply with the duty imposed by subsection (1) or (2)’. Section 37N(5) provides that if the Court or a judge orders a lawyer to bear costs personally, because of a failure to comply with the duty imposed by subsection (2), the lawyer must not recover the costs from his or her client. The purpose of s 37N(5) is ‘to ensure that lawyers take responsibility for their own failure to comply with their duty under subsection 37N(2)’.^[65]

Limiting costs to actual costs

9.60 Short of disallowing costs entirely, courts may make other orders to limit the costs charged by lawyers to their clients for discovery work. For example, the VLRC recommended that Victorian courts be given the power to limit the costs charged for discovery to the actual cost to the law practice of such work, including a reasonable allowance for overheads, but excluding a mark-up or profit component.^[66] Order 62 of the Federal Court Rules arguably equips the Federal Court to make orders for actual costs, and in the Consultation Paper, the ALRC asked whether the Federal Court should be given explicit statutory powers to make such orders.^[67]

9.61 Most submissions that addressed this question opposed the introduction of this power.^[68] The existing regulation was said to be sufficient: practitioners must inform their clients of likely costs under the legal profession legislation and it was said that the Federal Court of Australia Act and the various state and territory costs and professional discipline regimes ‘are capable of dealing with instances where law firms engage in inappropriate charging practices’.^[69]

9.62 A group of large law firms argued that discovery was important work needing ‘legal input and oversight’ and the fees for this work were ‘legitimate costs incurred in the course of resolving a dispute’.^[70] It was submitted that capping costs treated discovery as ‘a minor administrative process’, which was inconsistent with ‘a policy of reinforcing the professional and ethical responsibility of lawyers and their duties to their clients and the Court’:^[71]

Solicitors owe significant and weighty obligations to the Court and their clients. Solicitors are charged with the duty of advising their clients on the nature of discovery, scoping the discovery and obtaining and reviewing the material required to be discovered … It is a legitimate expense and fundamental to the adversarial system of litigation that is adopted in Australia.^[72]

9.63 It was observed that the market for legal services was, in any event, highly competitive and clients involved in large-scale litigation (and their in-house counsel) were generally ‘commercially astute’, ‘litigation savvy’, and in a position to negotiate legal fees and costs and monitor work.^[73]

9.64 Concern was also expressed that creating an additional costs order power would give rise to litigation about what constitutes ‘actual’ or ‘reasonable’ costs.^[74]

9.65 Cost capping might encounter some of the other objections noted above with respect to orders requiring parties to pay costs in advance, namely, that the costs of litigation, and particularly discovery, may be difficult to estimate, and there was no evidence of widespread overcharging for discovery anyway.

9.66 One submission expressed support for cost reforms on the basis that early,
cost-effective discovery should:

be considered an aid to early dispute resolution and so long as discovered documents are truly relevant, full discovery is best, and a presumption of advance payment and statutory powers to limit costs must be of value. Such a proposal would reduce the view of lawyers that discovery means ‘billable hours’ and the obvious abuse, and focus on the role of discovery as an aid to disputes resolution.

The only education relevant here is to promote early resolution of disputes in the most cost-effective manner. The lawyers’ financial interests should not be promoted over those of parties and clients with legitimate causes of action and defences. Obviously some clients are well resourced, have no legitimate claim and will fight no matter what. Some see litigation as a negotiating or business tool. In those cases lawyers can justify full fees. Not so the often poor ‘innocent’ on the other side of that type of dispute.^[75]

ALRC’s views

9.67 The ALRC has insufficient evidence suggesting that legal practices make an unreasonable profit from discovery work to justify the introduction of a statutory power limiting any profit from discovery work. The amount charged to clients for discovery is generally a matter for cost assessment or review under existing legal profession legislation.

9.68 However, the ALRC considers that it is open to the Federal Court to disallow discovery costs between lawyers and their clients on the grounds that the discovery costs were incurred without sufficient regard to the need to resolve disputes quickly, inexpensively and efficiently and at a cost proportionate to the importance and complexity of the matters in dispute. Indeed, this appears to be the clear intention of s 37N of the Federal Court of Australia Act: failing to comply with the duty is a matter the Court ‘must’ consider when awarding costs. Further amendments to the Federal Court of Australia Act or the Federal Court Rules are therefore unnecessary to empower the Court to make orders that reflect any failure of a lawyer to assist the parties to conduct litigation properly in accordance with the overarching purpose.

9.69 The ALRC notes that taking compliance with s 37N into account when awarding costs may present real difficulties to the Court where it involves intervening in the client-lawyer relationship. Further, any assessment of a lawyer’s compliance with s 37N of the Federal Court of Australia Act might itself be a costly exercise that the Court may be reluctant to undertake. However, the judicial training and education that the ALRC recommends in Chapter 7 should not only encourage judges to be alert to this requirement, but also provide broad guidance on how to reflect compliance with s 37M of the Act in costs orders.

9.70 Practitioners should also be prepared to address the Court on this matter. Accordingly, the ALRC recommends that Federal Court practice notes should provide that the Court will expect practitioners to ensure that they have complied with their duty to assist the parties to give discovery and take inspection in accordance with the overarching purpose in s 37M of the Federal Court of Australia Act. The ALRC considers that the relevant practice note should also provide that practitioners should be prepared to address the Court on how they have complied with their duty, and on reasonable consequences for any failure to comply with that duty.

9.71 However, the ALRC considers that the Court should not necessarily rely on practitioners to apply for these orders. There may be little incentive for lawyers to challenge the proportionality of discovery costs, and their clients may not know to instruct them to do so. Where, based on the information before the Court, the costs of discovery appear disproportionately high, those costs should be interrogated and practitioners should be asked to show why the costs are reasonable. This would be consistent with the robust judicial case management the ALRC recommends in Chapter 7.