At general law, a party will only be entitled to claim legal costs from its counterparty upon an order for costs (on either the standard or indemnity basis) being made in litigation. The parties are free however to allocate all legal costs, whether or not relevant to litigation, as they see fit via contract. The most common clause in this regard is inserted into legal documents to clarify that each party is to bear is own legal costs associated with the contract itself.
Example:
Each party shall bear its own expenses in negotiating, executing and of performing its obligations under, this Agreement.
A range of clauses can be used to implement a different outcome. Clauses requiring the payment of legal costs of enforcement in addition to any amounts owed are used in a range of commercial transactions to incentivise the performance of obligations.[1]
Example:
The Purchaser agrees to indemnify the Vendor for all reasonable losses, liabilities & costs including, but not limited to, reasonable legal costs incurred by the Vendor on an indemnity basis, in relation to the enforcement of any rights under the Agreement.
Clauses in loan contracts, guarantees and mortgages typically provide for the lender to recover its costs from the borrowers and guarantors on a full indemnity or solicitor and own client basis. In commercial leasing transactions standard leases generally include a clause requiring the tenant to pay the landlord’s costs of negotiating the lease, any subsequent consent, assignment, amendment or renewal, or arising from any default of the tenant. Such provisions are negotiable, and commercial landlords may remove part of the wording or agree to a fixed amount for the legal costs involved in finalising specific documents.
As a general principle, such a clause does not override the relevant rules of court which provide discretion as to when to award costs.[2] If the relevant clause states the amount is to be paid on a “full indemnity basis” or some other basis, the discretion will ordinarily be exercised in a way which corresponds with the contractual entitlement.[3] Where the clause is silent as to how the legal costs will be calculated a dispute as to calculation can arise. Such a clause will not be a reason for the court to order payment of costs on an indemnity basis.[4] The court’s decision though to award costs in a proceeding is a separate and distinct question to the right of a party to enforce the contractual right to costs. Agreements as to costs are valid and enforceable at common law.[5] As a result there are potentially alternative claims available for either costs awarded under the relevant court rules or a debt claim arising under the clause itself.
Alternative wording may create an obligation to pay legal costs which is triggered by “enforcement or attempted enforcement”, suggesting that the payment obligation arises even where claims are unsuccessful. In Tarkington v Kingdrake it was held that such a clause did allow recovery of costs for aborted claims ancillary to the successful claim, though in the circumstances there was no allegation that the costs were incurred unreasonably.[6]
[1] See also section [18.11].
[2] Kyabram Property Investments Pty Ltd v Murray [2005] NSWCA 87; Lee v Australia and New Zealand Banking Group Ltd [2013] QCA 284 at [9].
[3] Lee v ANZ n19 at [9]; Clarence Property Corporation Limited v Sentinel Robina Office Pty Ltd [2019] QSC 13 at [8].
[4] Noosa Cruises Pty Ltd v Saltwater Noosa Pty Ltd & Ors [2023] QDC 19.
[5] Mansfield v Robinson [1928] 2 KB 353 at 359.
[6] Tarkington Pty Ltd & Anor v Kingdrake Pty Ltd [2000] VSCA 98 per Chernov JA at [17].