Wasted Costs Orders Against Lawyers in Construction Disputes—Just How Boutique Are They?

(No 5) [2014] VSC 400

The overarching obligations under the Civil Procedure Act 2010 (Vic) (the CPA) came into effect on 1 January 2011. These obligations significantly re-cast the duties owed by lawyers, among others, to the court. The recent decision of the Victorian Supreme Court in Dura (Aust) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 5)¹ considered the application of the overarching obligations to the duties and obligations of lawyers in the context of the conduct of a large construction dispute.

On 30 March 2012, Justice Dixon delivered reasons for judgment following a 31 day trial dismissing the claim by the plaintiff builder (Dura) and awarding damages to the defendant proprietor (Hue) on its counterclaim. Costs were awarded against Dura partly on a party and party basis and partly on an indemnity basis. Dura unsuccessfully appealed the judgment and subsequently went into liquidation -- presumably leaving the damages and costs orders unsatisfied.

Hue then applied for an order that the lawyers acting for Dura pay some or all of the legal costs of Hue in relation to the proceedings (amounting to approximately $3.1 million) on the grounds that Dura's lawyers continued a claim and a defence on behalf of Dura in circumstances where they knew, or ought reasonably to have known, that the claim and defence did not have a proper basis. The application was based on the conduct of Dura's lawyers in respect of:

• the briefing of Dura's experts;
• the preparation of Dura's lay evidence in reply; and
• the pursuit by Dura of an excessive and unjustified provisional sum claim.

Hue's application was brought under s 24 of the Supreme Court Act 1986 (Vic) (SCA), the court's inherent jurisdiction, r 63.23 of the Supreme Court (General Procedure) Rules 2005 (Rules) and s 29 of the CPA for the legal costs incurred by Hue from the date of a Calderbank offer (which articulated Hue's views concerning the weaknesses in Dura's position) by which time Hue's expert evidence had been provided to Dura, alternatively, from the date by which Dura's lay evidence had been served.

While the issues canvassed in the judgment are broad ranging, the court's comments in relation to the application of the CPA are of significance to Victorian practitioners and the comments in relation to the conduct of the litigation concerning the briefing of experts and lay evidence are of significance to practitioners more generally.

The court's jurisdiction under s 29 of the CPA to award costs against a lawyer is exercisable, in the court's discretion, where the court is satisfied, on the balance of probabilities, that the lawyer contravened an overarching obligation. The overarching obligations include obligations that lawyers:

• not make a claim or make a response to a claim in a civil proceeding that does not, on the factual and legal material available to the lawyer at the time of making the claim or responding to the claim, as the case requires, have a proper basis (s 18(d) of the CPA);
• subject to some limited exceptions, use reasonable endeavours to resolve a dispute by agreement between the persons in dispute, including by appropriate dispute resolution procedures (s 22 of the CPA); and
• subject to some limited exceptions, use reasonable endeavours to resolve issues in dispute and narrow the scope of the remaining issues (s 23 of the CPA).

The jurisdiction of the court to make an order for costs against a lawyer under s 24 of the SCA is regulated by r 63.23 of the Rules and is often referred to as a wasted costs order. The exercise of the wasted costs jurisdiction is founded on a breach of the duty owed by the lawyer to the court to perform his or her duty as an officer of the court in promoting, within his or her own sphere, the cause of justice. The duty is breached where the lawyer fails to act with reasonable competence and expedition. The concept of reasonable competence and expedition is to be understood in an untechnical way to denote acting in a way that no reasonably well informed and competent member of the profession would have done.

Expert evidence -- the complaints

Hue asserted that Dura's lawyers failed to act with reasonable competence in briefing Dura's experts in that:

• the experts did not have the requisite expertise;
• the experts gave irrelevant opinions;
• the experts failed to identify their assumptions or made assumptions that could never be proved rendering their opinions fatally flawed;
• Dura's lawyers wilfully or negligently withheld from the experts materials that were fundamental to the validity of their opinions; and
• Dura's lawyers allowed Dura's witnesses to brief or assist Dura's experts in the preparation of their reports thereby critically undermining the independence of the experts.

Some of the complaints were surprising in the context of a large construction dispute. For example, experts retained by Dura to prepare reports in response to Hue's defects claims were not provided with contract specifications or contract drawings, nor were they provided with Hue's defects evidence. Experts retained to provide programming reports did not include evidence of any specialised programming knowledge or expertise. During cross examination during the trial, it also emerged that some of the opinions in relation to program issues were based on subsequent changes made to the original program by Dura's lay witnesses without any rationale for the changes.

Justice Dixon also made reference to the fact that a number of experts were retained by Dura during the course of the contract and were subsequently retained by Dura's lawyers for the purposes of the litigation. While Dixon J regarded this approach as being understandable from the perspective of cost and convenience, he was of the view that the practice was not to be encouraged because it created a risk that the court as well as the parties would be deprived of impartial assistance with expert evidence.

Lay evidence -- the complaints

Hue asserted that Dura's lawyers failed to act with reasonable competence in preparing Dura's lay evidence in reply in that Dura's lawyers:

• produced statements littered with broad assertions and other irrelevant and inadmissible material;
• failed to protect the integrity of the lay witnesses by allowing them to interact during the preparation of their evidence; and
• produced statements which were not based on the witnesses' own knowledge.

The provisional sum claim -- the complaints

Dura's provisional sum claim depended for its success on the validity and payment by Dura of scaffolding subcontractor's invoices. Many of those invoices were marked "for information only" and "not for payment". During the litigation, the issue was repeatedly drawn to the attention of Dura's lawyers and, at the trial, Dixon J found that Dura's witnesses knew that the claim was false.

There was no doubt that prior to the commencement of the litigation, Dura's lawyers were on notice that there was an issue about whether Dura could prove that the invoices had been paid and Dura's lawyers also knew (or should have known) of the importance of payment of the invoices to the prospects of success in establishing that claim. The questions, however,were what did Dura's lawyers know about the payment of the invoices, or what would they have known, had proper inquiries been made, and when should Dura's lawyers have come to the realisation that the claim was doomed to fail.

Analysis and findings

Justice Dixon rejected Hue's argument that Dura's lawyers had breached the overarching obligation not to make or respond to a claim without a proper basis in briefing Dura's experts, in preparing Dura's lay evidence and in pursuing the provisional sums claim.

In coming to this conclusion, Dixon J held that this overarching obligation is not continuous or ongoing. The provision is addressed to the moment in time when a claim is made or responded to and did not expose a lawyer to an ongoing duty as assumed in the submissions advanced by Hue. At the time Dura's lawyers certified that the provisional sum claim had a proper basis, Dixon J was not persuaded that, based on the available information, Dura's lawyers breached the obligation.

Further, the overarching obligation was not engaged when the Calderbank offer to settle the proceeding was received, nor when Dura's evidence was served (which took place after the relevant certifications for the purposes of the CPA). Justice Dixon also held that, simply accepting that Dura's lawyers had sufficient materials to assess the merits of Dura's case did not establish a breach of the overarching obligations to use reasonable endeavours to resolve a dispute by agreement or to use reasonable endeavours to resolve issues in dispute and narrow the scope of the remaining issues. Accordingly, breaches of ss 22 and 23 were not made out.

That left the question as to whether the wasted costs jurisdiction had been enlivened by the conduct of Dura's lawyers in briefing Dura's experts or in preparing Dura's lay evidence.

Justice Dixon held that it was not appropriate, in the circumstances, to make a wasted costs order arising out of Dura's lawyers' briefing practices concerning expert witnesses. In coming to that conclusion reference was made to the fact that issues concerning experts' qualifications and assumptions were raised at a pre-trial directions hearing at which the parties were ordered to notify objections prior to trial which neither party did. Dura's lawyers submitted that the deficiencies in the expert reports would have been equally obvious to Hue's lawyers who chose to do nothing about it until day 17 of the trial. By this time Dura had to press on with what it had. Accordingly, Dixon J held that, having elected to adopt the course it did, it was not open for Hue to contend that Dura's lawyers failed to exercise the standard of competence required of a lawyer in promoting the proper administration of justice.

Justice Dixon also concluded that Hue was unable to identify a causative link between the costs claimed and the impugned conduct of Dura's lawyers in briefing its expert witnesses. Hue needed to establish that, but for the impugned conduct, Dura would have accepted the Calderbank offer. Hue could not establish a causative link without evidence from Dura's decision makers or a basis for necessary inferences to that effect.

Justice Dixon also held that it was not appropriate, in the circumstances, to make a wasted costs order arising out of Dura's lawyers' preparation of lay evidence. The issue in respect of the reply evidence was principally that Dura's witnesses had failed to address substantive issues concerning the state of the works in their primary statements. The failings associated with the lay evidence were seen as a product of Dura's lawyers being under resourced and that such resources, as were available to Dura's lawyers, were being applied with their best efforts. In those circumstances the Judge was not persuaded to exercise the wasted costs jurisdiction in relation to this issue.

Hue did, however, achieve a small measure of success with its complaints concerning the provisional sum claim. Justice Dixon was unable to make any finding about the instructions that Dura's lawyers sought, or obtained from, Dura. Dura did not waive the legal professional privilege which attached to those communications -- accordingly, the court could not ascertain whether appropriate inquiries and investigations were made or, for that matter, whether appropriate advice was given. Ultimately, however, Dixon J was persuaded that there was no reasonable basis for a belief by a competent lawyer specialising in construction litigation that the provisional sum claim had any prospects of success. In reaching this conclusion, Dixon J found that Dura's lawyers failed to ensure the business of the courts was expediently conducted consistent with the due administration of justice.

Dura's lawyers submitted that the conduct in question did not cause the loss because those costs would have been incurred in any event. Justice Dixon found that there was some merit to that submission but that it was not a complete answer. The end result was that Hue's claim for costs incurred in defending the provisional sum claim was discounted by 25% as an assessment of the extent to which Hue would in any event have incurred costs in respect of the issue in the proceeding. This resulted in Dura's lawyers being ordered to pay wasted costs of approximately $113,000.

Comment

As recognised in the judgment, wasted costs orders against the lawyers for a party to litigation may present a back door means of recovering costs not otherwise recoverable from an impoverished litigant. The discretion to award costs against a lawyer for a party needs to be approached with considerable caution. The balance must be weighed having regard to the respective competing interests. On the one hand there is a public interest that litigants not be financially prejudiced by the unjustified conduct of their opponent's lawyers. On the other hand, lawyers ought not be deterred from pursuing their client's interests due to a fear of incurring a personal liability. There is also a risk that, if unchecked, a wellresourced litigant might use the wasted costs jurisdiction to bludgeon an opponent's lawyers.

A lawyer should not be held to have acted improperly, unreasonably or negligently simply because he or she acts for a party who pursues a claim or a defence that has little prospect of success. The lawyer is not the judge of the credibility of the witnesses or the validity of the argument and a judge considering making a wasted costs order must make full allowance for the exigencies of acting for a party in that environment. Having made those allowances, it is only when it is clear that the litigation was conducted in a manner which was unjustified that a wasted costs order should be made.

These general statements in relation to wasted costs orders must, however, be tempered by the overarching obligations imposed by the CPA which, among other things, require lawyers, before filing a substantive document, to certify that on the factual and legal material available, each allegation of fact, each denial and each non-admission has a proper basis. The lawyer's determination for the purposes of a proper basis certification must be based on a reasonable belief of those matters at the time of making the certification. If that is done, the obligation is discharged. Ultimately, whether a claim is to succeed is a matter for the court. Victorian lawyers also have to adhere to the ongoing overarching obligations under the CPA to use reasonable endeavours to resolve the dispute, resolve issues and also to narrow the scope of remaining issues in contest between the parties.

This article first appeared in Australian Construction Law Bulletin 2015/Volume 27 No 1 -- February 2015