In the matter of Ryals Hotel Pty Ltd

By my judgment delivered on 21 December 2020 ([2020] NSWSC 1906), I dismissed an application brought by the Plaintiff, Zhaos Pty Ltd (“Zhaos”) to wind up the Defendant, Ryals Hotel Pty Ltd (“Ryals Hotel”) in insolvency or alternatively on the just and equitable ground.

I observed (at [23]-[24]) that Zhaos had not established Ryals Hotel’s insolvency, had also not established that Ryals Hotel’s suggested failure to pay rent was inconsistent with the position which would have existed had Zhaos complied with the Retail and Other Commercial Leases (COVID-19) Regulation 2020, and that it had also not established any basis for winding up on the just and equitable ground. I also observed (at [28], [30] and [33]) that:

After I delivered my ex tempore judgment in respect of the winding up application, Mr Elliott (who appeared for Ryals Hotel) indicated that it proposed to seek a special order as to costs or a gross sum costs order. I made orders for the filing of evidence and submissions in that respect.

Ryals Hotel now seeks an order for indemnity costs on a gross sum basis, and relies on the affidavit dated 6 January 2021 of its solicitor, Mr Hidayat, in support of that application, Mr Hidayat there refers to a costs agreement between Ryals Hotel and his firm, to an invoice issued by his firm on 27 November 2020, and to his firm’s intention to issue a further invoice for costs incurred to the date of the affidavit. Mr Hidayat also identified the costs billed by his firm as $7,000; unbilled costs to the date of the hearing on 21 December 2020 as $19,270; unbilled costs in relation to the application for a gross sum costs order as $1,710 and Counsel’s fees as $15,427.50.

An initial question arose on the face of Mr Hidayat’s affidavit, since a substantial part of the costs claimed by Ryals Hotel were both unbilled by its solicitors and unpaid by it, and I requested further submissions from the parties as to that question. By those further submissions, Ryals Hotel accepted that the only invoice which had been paid by it to date was Counsel’s invoice dated 13 October 2020 (Hidayat 6.1.21, Annexure “D”).

Broadly, the indemnity principle in respect of costs permits recovery of costs by a successful party which is under a legal liability to pay them, although that liability may be qualified: Mourik v Von Marburg [2016] VSC 601 at [20]ff. Mr Elliott also rightly submits that that principle has the result that costs are usually confined to those that the successful party is primarily and potentially legally obliged to pay to his solicitor and the existence and scope of the successful party’s duty to pay his or her own solicitors is central to that party’s ability to recover costs: Shaw v Yarranova Pty Ltd [2011] VSCA 55 at [9]. Mr Elliott accepts that, although that principle does not require that that party has already paid those costs, it does require that it be liable to pay them: Wentworth v Rogers (2006) 66 NSWLR 474; [2006] NSWCA 145 at [126]; Maineri v Cirillo (2014) 47 VR 127; [2014] VSCA 227 at [43]. Mr Elliott also points to authority that the indemnity principle does not require that an invoice had been rendered: eInduct Systems Pty Ltd v 3D Safety Services Pty Ltd (2015) 90 NSWLR 451; [2015] NSWCA 284; Gibson v Drumm [2016] NSWSC 570. In the latter case, Young AJ referred to the decision of the Federal Court of Australia in Angar Pty Ltd v Ilick Motor Co (1992) 37 FCR 65 at 71 and observed (at [15]) that:

Mr Elliott also submits that Ryals Hotel has led sufficient evidence to establish that it is liable to pay the costs of its solicitors and counsel and the indemnity principle does not prevent recovery of costs although part of the amount claimed has not yet been billed and the relevant bills are largely unpaid. Mr Johnson accepts, in submissions in response, that evidence of payment of the relevant costs is not necessary to establish Ryals Hotel‘s claim to an order for costs and an obligation to pay those costs is sufficient, and Mr Johnson also does not submit that the fact that costs were unbilled by Ryals Hotel’s solicitor prevents their recovery by Ryals Hotel before that occurs. Mr Johnson also does not submit that the relevant principles differ in respect of a gross sum costs order, whether made on a party/party or an indemnity basis. I therefore proceed on the basis that an order for costs, including a gross sum costs order, can be made although Ryals Hotel has not been billed a significant amount of the costs that are claimed under that order.

I summarised the circumstances in which costs may be ordered on an indemnity basis and on a gross sum basis in Re Beverage Freight Services Pty Ltd [2020] NSWSC 509 at [73]-[74] as follows:

Mr Elliott in turn submits that costs may be awarded on an indemnity basis where proceedings amount to an abuse of process; that an indemnity costs order fully compensates a party for costs incurred, where 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; and he refers to the findings that I have quoted above from paragraphs 28 and 30 of the earlier judgment. Mr Elliott also refers to the circumstances in which the Court may make a gross sum costs order as summarised by Beazley JA in Hamod v State of New South Wales [2011] NSWSCA 375 and in my judgment in Re Beverage Freight Services Pty Ltd [2020] NSWSC 797 at [19] as follows:

Mr Elliott also submits that, while Courts often apply a discount in assessing costs on a gross sum basis, the Court need not do so if it can be confident that there is little risk that the sum includes costs that might be disallowed on assessment: Hancock v Rinehart (lump sum costs) [2015] NSWSC 1640 at [57]-[58]; Re Beverage Freight Services Pty Ltd above at [18].

Mr Johnson responds that, unless the Court orders otherwise or the rules otherwise provide, costs are to be assessed on an ordinary basis and that whether an indemnity costs order should be made depends, at least in part, on whether there was a relevant delinquency on the part of the unsuccessful plaintiff. Mr Johnson submits that this is not a case where the proceedings were manifestly devoid of merit or where a party, properly advised, should have known that it had no chance of success. Mr Elliott submits, in reply, that this case involved both an abuse of process and a situation where Zhaos, properly advised, would have known that it had no chance of success. While I would not necessarily go as far as that, it seems to me that Zhaos should at least have appreciated that its claim for a winding up of Ryals Hotel faced substantial obstacles in the circumstances to which I referred in the earlier judgment.

It seems to me that the winding up application was brought, as my observations in the earlier judgment indicated, where it would have been apparent to Zhaos that the course it sought to adopt in these proceedings would subvert the legislative intention in respect of lessors’ responses to the COVID-19 pandemic, where Zhaos had not taken adequate steps to moderate Ryals Hotel’s obligations under the lease in response to the COVID-19 pandemic. It seems to me that these matters, combined with my finding in the judgment that the winding up application amounted to an abuse of process in the relevant sense, are sufficient to support an order for indemnity costs in favour of Ryals Hotel and against Zhaos, so that Ryals Hotel is not left out of pocket by reason of a partial recovery of the costs it incurred in defending the winding up application.

Mr Elliott submits that a gross sum costs order should be made where a fair determination of Ryals Hotel’s costs may be made based on the evidence before the Court, including invoices and a work-in-progress report in respect of the solicitors; the charge-out rates adopted by solicitors and counsel are not excessive and are at the lower end of commercial rates; the attendances by the legal representatives are reasonable; and the costs incurred are a relatively modest sum in respect of a substantive proceeding. Mr Elliott submits that either no discount should be allowed or alternatively a discount of 10% on solicitors’ fees and no discount on Counsel’s fees and disbursements would be appropriate. Mr Johnson fairly acknowledges, in response, that there are cases in which lump sum costs orders have been made in relation to short cases and relatively modest amounts of costs, and that the Court is entitled to have regard to the evidentiary material before it, its observations of the proceedings and the Judge’s own experience. Mr Johnson also fairly accepts that a “fail safe” discount would not be applied if to do so would give rise to injustice to the successful party, and that a discount may not be applied to disbursements, which are payable to third parties as incurred. Mr Johnson also accepts that this was an appropriate matter in which a lump sum costs order could be made, whether on the ordinary basis or on the indemnity basis, having regard to the overriding purpose and according to accepted legal principles. It is therefore common ground between the parties that this is a proper case for a gross sum costs order.

As to the quantum of costs, Mr Johnson took no objection to the daily rate of $3,000 per day claimed for Counsel, exclusive of GST, corresponding to $3,300 per day inclusive of GST or to the hourly rate charged by Counsel. Mr Johnson challenged the amount of time spent by Counsel in preparation but I am not persuaded that that challenge was well-founded having regard to the range of the evidence, the matters in issue and the significance of a winding up order for Ryals Hotel. Mr Johnson also submitted that the work carried out by Ryals Hotel’s solicitors could have been carried out by a person having a lower charge-out rate than a partner, but I am not persuaded that that challenge has significant weight, where more experienced staff may complete work more quickly than less experienced staff, and the amount of solicitors’ costs charged to Ryals Hotel is modest for a substantive hearing. Mr Johnson also raises the possibility of duplication of work carried out by Counsel and work carried out by solicitors, but I am not persuaded that duplication rather than a sharing of work between Counsel and the solicitors is established.

In reply, Mr Elliott responds and I accept that the narrations and time entries in the billing records on which Ryals Hotel relies are sufficient to establish that the costs are fair, reasonable and proportionate so as to support a gross sum costs order. Mr Elliott also submits, and I also accept, that Mr Hidayat’s charge-out rate was also at the lower end of commercial rates for a person of his experience. I am satisfied that the amounts billed to Ryals Hotel were reasonable and proportionate in the relevant circumstances, and that they should be fixed at the amount claimed by it rather than at the lower amounts (inclusive of disbursements and Counsel’s fees) of $16,000 for which Mr Johnson contended on the ordinary basis or $20,000 for which Mr Johnson contended on an indemnity basis. A percentage discount is not appropriate in the circumstances, where it would not ordinarily be applied to Counsel’s fees or disbursements and I can be confident that there is little risk that the amount claimed includes costs that might be disallowed on assessment.

Mr Johnson contended that GST should not be included in the amount of costs, and I accept that GST would not normally be allowed where Ryals Hotel appears to be a trading entity and that GST would ordinarily be recoverable by it. Mr Elliott points out, in response, that the amounts claimed in Mr Hidayat’s affidavit are GST exclusive and no question of Ryals Hotel seeking to recover GST arises.

I did not understand Mr Johnson to have contended that the Court could order that costs be set-off against any amounts due under the Lease, if Ryals Hotel did not submit to such a set off, and I do not make such an order. I note, for completeness, that Mr Elliott submits that Zhaos has no judgment or order for the payment of money against Ryals Hotel against which the costs judgment can be set-off and that there is no basis for an equitable set-off in the relevant circumstances.

I am therefore satisfied that Ryals Hotel has established its claim for costs on an indemnity basis in the gross sum amount claimed. I direct the parties to bring in orders to give effect to this judgment within 7 days.