Understanding Proportionality in Legal Costs: Insights from Shallhoub v Johnson

Litigation costs and proportionality considerations

The recent case of Shallhoub v Johnson [2023] NSWDC 555 is an important reminder that proportionality is a consideration in both the conduct of litigation and the assessment of legal costs to be awarded and paid post litigation.

Case Overview

The plaintiff and the defendant were neighbours who became embroiled in a legal dispute regarding property damage caused by certain works and the state of the retaining wall between their two properties.

The proceeding commenced in the Supreme Court of New South Wales as injunctive relief was sought, which is not obtainable in the District Court. The District Court only determined the costs aspect of the matter.

The plaintiff alleged that the defendant had negligently breached the duty of care they owed under section 177 of the Conveyancing Act 1919 (NSW) (the Act). Section 177 of the Act imposes a duty of care on any person not to do anything to their land, which may remove the support provided to neighbouring land. The plaintiff sought $22,700 in damages and an injunction to halt the defendant’s work and restore a retaining wall between their properties.

The plaintiff did not engage a Senior Counsel. The defendants were represented by both a Senior Counsel and a junior barrister. During the proceedings, the defendants offered to settle on two occasions, one of which was an offer to replace and pay for a new retaining wall, but the plaintiff rejected those offers and the defendant incurred costs of almost $500,000 in defending the proceeding.

The Proportionality Principle explained

Under Section 172 of the Legal Profession Uniform Law (NSW) (LPUL), costs must be fair, reasonable and also proportionate to the matter. In this case, the Court clarified that costs should be both proportionate and reasonable in how they are incurred and in their total amount. Specifically, the key consideration is whether the costs incurred have a reasonable relationship to the value and importance of the matter being litigated.

The Decision

The plaintiff lost the case.  The ‘loser pays’ principle applied in the usual way.  The Supreme Court ordered the plaintiff to pay the defendant’s costs on an ordinary basis (usually 65% to 75% of costs) until 21 May 2019, and on an indemnity basis thereafter (usually 85% to 95% of costs). The trial Judge held that the plaintiff’s refusal to accept a settlement offer was unreasonable and ordered the plaintiff to pay costs on an ordinary basis until the relevant offer date and thereafter on an indemnity basis. The defendant’s total costs were assessed at $478,255.89, significantly exceeding the plaintiff’s original claim.

The plaintiff contested this assessment by arguing that the costs were disproportionality high. However, both the review panel and the District Court upheld the costs assessment. The Court emphasised the proportionality principle includes multiple factors, not just the claim amount.

The court noted that the plaintiff’s conduct contributed significantly to the high costs. This conduct included the plaintiff seeking a complex injunction which necessitated expensive litigation in the Supreme Court and caused delays and required adjournments. Other relevant conduct included the plaintiff refusing a reasonable settlement offer.

In contrast, the defendants acted efficiently and responsibly. The Court considered the defendants’ decision to engage Senior Counsel to be justified given the complexity of the case and the need for extensive expert evidence. The defendants’ use of Senior Counsel was deemed economical and effective as evidenced by the trial’s completion within four of the allocated five days.

Takeaways

This case serves as a critical reminder that legal costs can quickly exceed the amount of a smaller claim and both solicitors and clients should keep the proportionality and reasonableness of legal fees in mind during the litigation process.

The decision also illustrates that the amount claimed as costs of litigation is only one element in determining the proportionality of legal costs and the amount that ultimately will be awarded. The conduct of the parties, the complexity of the matter and the decisions made during litigation may significantly influence the assessment of costs.