Introduction
The landscape of costs recovery in Australian litigation has undergone a significant transformation with two landmark High Court decisions: Bell Lawyers Pty Ltd v Pentelow (2019) 269 CLR 333 and Birketu Pty Ltd v Atanaskovic [2025] HCA 2. Together, these decisions establish a coherent framework based on the principle of equality before the law, while maintaining important distinctions that have practical implications for law firms engaged in litigation. This article examines how these decisions collectively reshape the ability of legal practitioners to recover costs when representing themselves or their firms, and the practical implications for litigation strategy.
Background: Bell Lawyers v Pentelow
In Bell Lawyers v Pentelow, the High Court abolished the so-called "Chorley exception" to the general rule that self-represented litigants cannot recover professional costs. This long-standing exception had permitted self-represented solicitors, uniquely among all professions, to recover costs for their own time spent in litigation.
The High Court held that the Chorley exception was an "affront to the fundamental value of equality of all persons before the law" and thus had no place in the common law of Australia. However, the Court made clear that its decision did not disturb the "well-established understanding" that where an in-house solicitor appears in proceedings to represent their employer, the employer remains entitled to recover costs.
The decision left open a critical question: could a law firm recover costs for work done by its employed solicitors (as distinct from partners) when the firm itself was a party to the proceedings?
Facts of Birketu v Atanaskovic
The Birketu case directly addressed this unresolved question. Atanaskovic Hartnell, an unincorporated legal practice, had commenced proceedings in the Supreme Court of New South Wales against former clients Birketu Pty Ltd and WIN Corporation Pty Ltd to recover legal fees. Mr. Atanaskovic, a partner of the firm, was the solicitor on the record throughout.
The firm was successful in the litigation, and Hammerschlag J ordered that Birketu pay Atanaskovic Hartnell's costs. When Atanaskovic Hartnell sought to recover costs, it claimed $305,463 for professional fees for work done by its employed solicitors, while making no claim for work done by Mr. Atanaskovic or any other partner.
Birketu objected, arguing that following Bell Lawyers, the firm could not recover costs for work done by its own employed solicitors. This question proceeded through the courts, with Brereton JA at first instance ruling that the firm could not recover such costs, the Court of Appeal (by majority) overturning that decision, and finally the High Court dismissing Birketu's appeal, thereby affirming the Court of Appeal's decision and allowing recovery of costs for employed solicitors.
Legal Reasoning in Birketu
The High Court's decision featured both majority and minority opinions.
The majority (Gageler CJ, Gordon, Edelman, Gleeson and Beech-Jones JJ) held that "an order for costs in favour of an unincorporated law firm entitles the firm to obtain recompense for legal work performed by an employed solicitor of the firm." They reasoned that the general common law principle applies to a litigant solicitor or unincorporated law firm in the same way as it applies to other litigants. Like any other litigant, the solicitor or firm cannot obtain recompense for their own legal work. But also like any other litigant, the solicitor or firm can obtain recompense for legal work done by their employees.
The majority distinguished this situation from the Chorley exception by emphasising that the expenses of salaries and overheads associated with having legal work done by employees constitute professional legal costs actually incurred by the solicitor or firm. The recompense is to the solicitor or firm for professional legal costs thereby actually incurred.
Justice Steward dissented, arguing that allowing recovery would "make a mockery of what was decided in Bell Lawyers, and would, in substance, resurrect the Chorley exception." He reasoned that when employed solicitors work under the supervision of a firm, that is the work of the firm itself. The time of employed solicitors is the firm's time, and when those solicitors work on the firm's own litigation, the firm loses the value of those hours which might otherwise have been profitably utilised for clients.
Justice Jagot also wrote separately, siding with Justice Steward's position.
Quantification of Recoverable Costs
The High Court in Birketu provided important guidance on the quantification of recoverable costs for employed solicitors. The Court addressed this in paragraphs 31-36 of the judgment, under the heading "Quantification."
The majority noted that concerns about law firms potentially profiting from litigation through employed solicitors relate not to "the availability of such recompense by way of an order for costs but to its quantification by way of assessment" (para 31). This is an important distinction—the principle of recoverability is separate from the method of quantification.
The Court explained the traditional approach in paragraph 33:
"The plurality in Bell Lawyers noted that 'the traditional approach has been to award costs on a basis comparable to the costs which would have been incurred and allowed ... had an independent solicitor been engaged' on the 'assumption', or more accurately the 'sensible and reasonable presumption', that application of the approach will not ordinarily result in an employer-litigant obtaining more than an indemnity for expenses actually incurred."
Critically, paragraph 34 establishes that this presumption is rebuttable:
"The presumption on which the traditional approach is founded has never been treated as more than a presumption of fact, it being open to an objecting party to show that application of the approach in a particular case would in fact result in the employer-litigant receiving more than an indemnity for expenses actually incurred."
The Court further noted in paragraph 35 that in assessment proceedings, while an assessor might investigate whether the principle of indemnity would be infringed, "this task is not one which should be undertaken without a good and sufficient cause." The mere fact that costs are being sought for work done by employed solicitors of a litigant law firm is not sufficient to trigger such an investigation.
The judgment also mentioned in paragraph 36 that there might be an alternative approach involving a different conception of "indemnity" which could affect quantification differently, though this was not fully developed as it wasn't necessary for resolving the case.
The Combined Impact of Both Decisions
Read together, Bell Lawyers and Birketu establish a framework for costs recovery that can be summarised as follows:
The general rule is that self-represented litigants cannot recover professional costs for their own time spent in litigation.
This rule applies equally to solicitors and law firms that represent themselves (the Chorley exception is abolished).
A law firm can recover costs for work done by its employed solicitors when the firm is a party to the proceedings.
The "in-house solicitor rule" remains intact: when a government department, corporation, or other entity is represented by its employed solicitor, that entity can recover costs.
In quantifying recoverable costs, courts will generally use the traditional approach of comparing the costs to those that would have been incurred had an independent solicitor been engaged, but this is subject to the presumption not resulting in the litigant obtaining more than an indemnity.
This framework has significant implications for litigation strategy for law firms that become involved in litigation themselves.
A Worked Example
Consider a hypothetical scenario from a former client's perspective:
Acme Corporation is sued by its former solicitors, Smith & Jones LLP, for unpaid fees totalling $500,000. Smith & Jones succeeds in the litigation, with Ms. Smith (a partner) acting as the solicitor on the record and the firm's employed solicitors performing most of the legal work. The court orders Acme to pay Smith & Jones' costs.
Smith & Jones submits a bill claiming $140,000 for work done by its employed solicitors, calculated at rates comparable to what would have been charged by independent solicitors. Acme, hoping to reduce this amount, considers challenging the quantification.
Following Birketu, Acme understands that while Smith & Jones can recover costs for work done by employed solicitors, the High Court emphasised that these costs should represent a true indemnity. Importantly, the Court noted (at paragraph 35) that although a costs assessor might investigate whether the principle of indemnity is being infringed, "this task is not one which should be undertaken without a good and sufficient cause." The mere fact that costs are being sought for work done by employed solicitors is not sufficient to trigger such an investigation.
To challenge the quantification of costs, Acme faces a multi-step task to establish that the assessment should be limited to a true indemnity rather than market rates:
Step 1: Understand what constitutes a "true indemnity"
A true indemnity in this context means the actual expense incurred by Smith & Jones in having employed solicitors work on the litigation. This comprises primarily:
Salary costs: The portion of the employed solicitors' annual salaries attributable to the time spent on this matter (e.g., if a solicitor earning $60,000 annually spent 10% of their working time on the matter, the salary component would be $6,000)
Overheads: The additional costs necessarily incurred in employing the solicitors, including office space, equipment, administrative support, professional indemnity insurance, and other practice costs that would not have been incurred but for the employment of these solicitors
Opportunity costs: Though more controversial, potentially the value of other billable work the employed solicitors could have undertaken for paying clients during the time spent on this litigation. Arguments for including opportunity costs suggest they represent real economic loss to the firm and are consistent with the High Court's recognition in Birketu that firms incur actual costs when deploying employed solicitors on their own litigation. Arguments against contend that opportunity costs are speculative, difficult to quantify, and their inclusion might reintroduce the profit element that Bell Lawyers sought to eliminate from self-representation.
Step 2: Establish a prima facie case of "good and sufficient cause"
Acme must identify specific grounds suggesting that Smith & Jones' claimed costs substantially exceed a true indemnity. This requires more than mere assertion—Acme needs evidence suggesting a significant disparity.
Step 3: Gather available evidence
Without access to internal firm records, Acme must rely on indirect evidence such as market knowledge, prior dealings with Smith & Jones, and expert testimony about typical employment costs for comparable firms.
The critical challenge for Acme is meeting the threshold of "good and sufficient cause" with limited information, as the High Court has intentionally set a high bar to avoid routine investigations into firms' internal cost structures.
As a former client with limited insight into Smith & Jones' internal operations, Acme considers what might constitute "good and sufficient cause" and what evidence it could realistically obtain:
Evidence of profitability disparity: Acme could argue that allowing recovery at standard market rates would provide Smith & Jones with a significant profit rather than mere indemnity:
Publicly available financial information showing the firm's profit margin and ratio of revenue to salary costs
Evidence that the firm's business model relies on large markups between employed solicitor costs and billing rates
Comparison between the firm's published charge-out rates to clients (which include profit components) and the rates claimed in costs recovery
Alternative fee arrangements and discounting practices: Acme could demonstrate:
That Smith & Jones routinely offers substantial discounts from their standard rates to clients
Evidence the firm uses fixed fee arrangements that effectively discount hourly rates
Marketing materials where the firm promotes itself as cost-effective or offering competitive rates
Internal versus external rate disparities: Acme could seek to establish:
Different rates being charged to different clients for identical work by the same employed solicitors
Evidence from recruitment advertisements showing salary ranges that, even with overhead allocations, would result in costs substantially below claimed rates
Historical client relationship evidence: Acme could leverage its former relationship:
Prior invoices showing the firm's actual billing rates for the same employed solicitors
Records of fee discussions where the firm provided cost estimates at rates lower than now claimed
Evidence of how the firm described its fee structure during the client relationship
Contemporaneous records of which employed solicitors worked on Acme matters and their experience levels
Firm structure and staffing patterns: Acme could argue:
The firm's high leverage ratio (number of employed solicitors per partner) indicates a business model reliant on marking up junior solicitor time
That work claimed at senior solicitor rates was likely performed by junior staff under limited supervision
The firm has re-graded fee earners as more senior for costs recovery than how they were presented to clients
The key for Acme is establishing that quantification based on standard market rates would amount to providing Smith & Jones with a profit rather than a true indemnity for costs actually incurred. This aligns with the High Court's emphasis in Birketu that costs awards should provide indemnity for expenses actually incurred by the law firm, not a vehicle for profit from self-representation.
If Acme succeeds in establishing "good and sufficient cause," the costs assessor might then investigate whether the claimed $140,000 genuinely represents an indemnity for costs incurred by Smith & Jones. The costs assessor could potentially reduce the recoverable amount to more closely reflect the firm's actual expenditure on employed solicitors for the litigation.
However, without establishing such "good and sufficient cause," Acme would likely be required to pay costs based on the traditional approach—what would have been incurred had independent solicitors been engaged—even if this exceeds Smith & Jones' actual employment costs.
Key Takeaways
Partner/employee distinction matters: Law firms cannot recover costs for work done by partners representing the firm, but can recover costs for work done by their employed solicitors.
Quantification follows indemnity principle: The principle of indemnity governs quantification, with a rebuttable presumption that costs comparable to engaging independent solicitors is appropriate.
Burden on objecting party: The burden is on the objecting party to demonstrate that the assessed costs would exceed a true indemnity, and costs assessors should not investigate this issue without good cause.
Structure enables strategic choices: Different structural arrangements for legal representation provide strategic options for law firms involved in litigation, particularly regarding the allocation of work between partners and employed solicitors.
Balance of principles retained: The decisions balance the principle of equality before the law with the principle that costs orders should provide indemnity for expenses actually incurred.
Conclusion
The combined effect of Bell Lawyers and Birketu represents a nuanced approach to costs recovery for legal practitioners. While abolishing the special privilege that solicitors historically enjoyed to recover costs for their own time, the High Court has maintained the principle that litigants—including law firms—should be indemnified for actual expenses incurred, including those relating to employed solicitors.
For law firms, these decisions require thoughtful consideration of how to structure their representation when they themselves are parties to proceedings. While the costs associated with partner time remain non-recoverable, the ability to recover costs for employed solicitors provides significant strategic flexibility.
The decisions also highlight the importance of proper cost recording and allocation, as challenges to quantification may arise where the assessed amount would exceed a true indemnity. Law firms should ensure they maintain clear records that demonstrate the actual costs incurred through the deployment of employed solicitors on their own litigation matters.