The current law in Australia: the indemnity principle
The purpose of a costs order is to compensate the successful party in litigation for those costs necessarily incurred to obtain justice (known as the indemnity principle).1 However, the indemnity principle can only operate where a successful litigant is under an obligation to pay his or her lawyer.2 This is a key concern in the context of pro bono representation since the successful party does not need to be compensated where no loss has been incurred.3
Although the indemnity principle itself is clear, its application by the courts has been ad hoc until the Victorian Court of Appeal, in Manieri & Anor v Cirillo  VSCA 227, confirmed that a conditional costs agreement, where a client being represented on a pro bono basis is liable to pay costs if a costs award is made in their favour, satisfies the indemnity principle. This decision, examined further on our Pro Bono Case Law page, brought much needed certainty to the issue of whether a party who is represented on a pro bono basis can be awarded costs.
All courts have a broad discretion to make costs orders. However under the current system, it is possible for a court to find that a litigant who is represented pro bono cannot recover their costs even if their claim is successful, whilst still being liable for the other party’s costs if his case is unsuccessful. The reverse is that an opponent of a litigant who is represented pro bono may benefit from not having to pay their opponent’s costs, even if they are unsuccessful.4
Attempts have been made by pro bono advocates through the use of a particular form of conditional fee arrangements to address this inequity. The client is required to contractually agree to be bound to pay the advocate in the event of being successful and being awarded a costs order.5 Many matters taken on a pro bono basis may not be of a type where costs orders are being sought or made. For those that are, the experience of the Centre is that these costs agreements have been reasonably successful in establishing an indemnity relationship sufficient for the court to make a costs order. Prior to the decision in Manieri, the case law contained considerable uncertainty and ambiguity as to what constituted the type of conditional costs agreement that accommodated the indemnity principle.6
While the Manieri decision has been a positive development, the Centre continues to advocate for legislative reform to allow courts to award cost in bono matters irrespective of whether the client has contractually indemnified the lawyer for costs. Acting pro bono is significantly different from acting on a no win/no fee basis and legislative reforms should occur to reflect this. This change has already occurred in the United Kingdom.
The key issue is not only costs recovery but ensuring that a level playing field exists between the parties in relation to their exposure to the risk of paying the other’s costs. Without this level playing field the party being represented on a pro bono basis is at a significant disadvantage when it comes to negotiating a settlement offer.
The Centre, along with several other public interest and pro bono referral organisations,7 has advocated for legislative change regarding the recovery of costs in pro bono matters. Below are links to various submissions made on this issue:
1 Dorne Boniface and Miiko Kumar, Principles of Civil Procedure in New South Wales (2009) at 87.
2Baker & Anor v Kearney  NSWSC 746 (total estimate of the costs to be paid by the client was furnished by counsel, but the agreement did not oblige the payment of fees).
3 “Where a party to an action has an agreement with their legal adviser that they do not have to pay any costs, then the general law principle states that that party cannot recover party and party costs against their adversary”: McCullum v Ifield  2 NSWR 329 at 330 per Taylor J citing Gundry v Sainsbury  1 KB 645.