Introduction
In litigation that concludes without a trial on the merits, the question of costs allocation frequently emerges as a contentious issue. The courts have consistently demonstrated reluctance to engage in hypothetical assessments of how a matter might have been determined had it proceeded to trial. This principle, articulated in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 ("Ex parte Lai Qin"), has been reaffirmed and applied in the recent decision of Lygina v Lawley Legal [2025] WASC 68. This article examines the tension between the presumption that successful parties should receive costs and the judicial reluctance to conduct hypothetical merits assessments when proceedings conclude without substantive adjudication.
The Lygina Decision: Facts and Context
In Lygina v Lawley Legal [2025] WASC 68, the plaintiff, Ms. Lygina, a former client of the defendant law firm, commenced proceedings in June 2022 seeking orders under s 288(2) of the Legal Profession Act 2008 (WA) to set aside costs agreements and requiring Lawley Legal to re-issue bills based on the relevant costs scale. Ms. Lygina's statement of claim alleged various failures by Lawley Legal to comply with obligations under the Legal Profession Act.
Significantly, Lawley Legal did not file a defence. Instead, on 10 November 2022, Registrar Whitbread made orders setting aside the costs agreements and requiring Lawley Legal to re-issue bills drawn on the relevant costs scale. These orders were made in terms proposed by Lawley Legal, which notably did not admit the allegations made in the statement of claim.
After securing these substantive orders, Ms. Lygina sought costs on an indemnity basis, arguing that the defendant's non-compliance with cost disclosure obligations was severe, that Lawley Legal had maintained an untenable defence, and that its conduct fell below professional standards.
Justice Palmer was therefore confronted with a costs application following proceedings that concluded without trial by virtue of the defendant effectively capitulating to the primary relief sought, while expressly not admitting the factual allegations that would ordinarily justify such relief.
The Ex parte Lai Qin Principles and Their Application in Lygina
In Ex parte Lai Qin, McHugh J articulated the fundamental challenge in determining costs where proceedings have been resolved without trial:
"When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order."
McHugh J distinguished between two categories of cases:
Cases where "one party, after litigating for some time, effectively surrenders to the other"; and
Cases where "some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs."
Justice Palmer in Lygina determined that the case fell into the first category, finding that "Lawley Legal's decision to agree to the substantive orders sought by Ms. Lygina involved a capitulation by Lawley Legal that establishes that Ms. Lygina was the successful party in these proceedings."
However, Justice Palmer declined to order indemnity costs, stating:
"Determination of whether Lawley Legal engaged in 'severe' non-compliance with its obligations, could not defend the proceedings because of that non-compliance, or engaged in unprofessional conduct as claimed by Ms. Lygina, would require the determination of the principal disputed matters of fact in these proceedings. I am not satisfied that it would be possible to properly determine these matters on the basis of the evidence presently available to the court."
Justice Palmer relied upon Basten JA's observation in Nichols v NFS Agribusiness Pty Ltd [2018] NSWCA 84 that an order for costs should only be made "where that judgement is manifest by reference to known circumstances, not in dispute between the parties. If the question cannot be answered without reviewing large swathes of evidence and resolving, on a tentative basis, disputed questions of fact, the task should not be embarked upon."
The Tension: Success Without Trial vs. Avoiding Hypothetical Adjudication
The Lygina decision exemplifies the tension courts face: on one hand, recognising that a party who secures the relief sought should ordinarily receive costs; on the other hand, refusing to engage in what would amount to a "trial on the papers" solely for costs purposes.
Justice Palmer resolved this tension by:
Determining that Ms. Lygina was the successful party based on Lawley Legal's capitulation to the primary relief sought;
Ordering costs on a party/party basis, reflecting her success; but
Rejecting indemnity costs, which would have required judicial determination of disputed factual matters central to the substantive case.
This approach honours both the principle that successful parties should receive costs and the principle that courts should not conduct hypothetical merit assessments of untried cases.
A Worked Example: Application of the Principles
Consider a hypothetical scenario involving Smith v Jones Professional Services:
Smith is employed by Jones Professional Services as an accountant. Their employment agreement contains a restraint of trade clause. When Smith subsequently leaves Jones and begins servicing former clients, Jones commences proceedings alleging breach of the restraint clause and seeking an injunction and damages.
After discovery reveals potentially problematic drafting in the restraint clause, Jones agrees to consent orders discontinuing the proceedings, with the orders expressly stating that Jones does not admit any of Smith's defences or counterclaims.
Smith then seeks indemnity costs, arguing that:
Jones knew the restraint was unenforceable when proceedings commenced;
Jones engaged in intimidatory conduct; and
Jones deliberately pursued unmeritorious litigation for an improper purpose.
Applying the Lygina principles, the court would likely:
Identify that Jones' agreement to discontinue constituted a capitulation, making Smith the successful party;
Award Smith costs on a party/party basis reflecting this success; but
Decline to award indemnity costs, as determining whether Jones knew the restraint was unenforceable or had improper purposes would require the very trial the consent orders avoided.
Key Takeaways
Capitulation vs. Settlement Distinction: Courts distinguish between a party's capitulation (which will normally result in costs following the event) and settlement due to supervening circumstances (which may result in no order as to costs).
Evidence Required for Indemnity Costs: Mere allegations of unreasonable conduct, improper purpose, or untenable defence will not suffice for indemnity costs if these allegations remain untested and disputed. Courts will not conduct a "hypothetical trial" solely for costs purposes.
Strategic Implications for Consent Orders: Parties agreeing to consent orders should carefully consider the costs implications. A non-admission clause will not shield a party from ordinary costs if the court characterises the consent as effective capitulation.
Threshold for Determining "Special Circumstances": Courts require clear, undisputed evidence of "special or unusual features" to award indemnity costs in matters resolved without trial. This evidence must be "manifest by reference to known circumstances, not in dispute."
Documentation of Conduct: Parties seeking indemnity costs should document the opposing party's conduct contemporaneously and seek to have unreasonable conduct acknowledged in correspondence or court proceedings, rather than relying solely on contested allegations.
Conclusion
The Lygina decision reinforces the courts' adherence to the Ex parte Lai Qin principles, demonstrating judicial reluctance to engage in hypothetical merits assessments solely for costs determination. While courts will identify "successful parties" based on practical outcomes (including capitulation through consent orders), they will not delve into contested factual matrices to determine whether conduct warrants special costs orders unless those facts are manifest and undisputed.
This approach balances efficiency with fairness: successful parties receive their costs without courts having to conduct "paper trials" of factual disputes that the parties themselves chose not to litigate to conclusion. Practitioners should therefore be mindful that while non-admission clauses in consent orders may protect against substantive liability findings, they will not shield a capitulating party from normal costs consequences.