Legal costs and tax losses complicate damages fight with major law firm

Former HWL Ebsworth (HWLE) client Gregory Lindsay-Owen and his company, Dairycorp, challenged several aspects of the referees’ report that sought to calculate the damages arising from the firm’s earlier negligence, including the treatment of tax liabilities and carried-forward losses.

Lindsay-Owen also claimed this report – the last out of three provided by the referees – should be rejected by NSW Supreme Court’s Justice Ian Harrison for being “perverse and [involving] manifest unreasonableness”, in that it was “directly inconsistent” with findings made in the earlier reports.

Citing the “high bar” before a court will reject a referee’s report, HWLE submitted Lindsay-Owen and Dairycorp failed to establish error, “let alone error of the requisite kind”. It added the conclusions “were not only open but plainly correct”.

Lindsay-Owen’s first issue concerned the referees’ decision to use the actual tax figure of $4,368,871 without adjusting it to remove the tax benefit associated with certain payments.

It arises because the court previously found one payment – the Winton payment – should be excluded when calculating losses.

Lindsay-Owen argued the payment had reduced his taxable income, generating a tax benefit that should also be excluded from the calculation. Removing that benefit, he submitted, would increase the tax figure used to calculate the damages.

He added the actual tax figure did not properly reflect the court’s earlier finding about the Winton payment and proposed the adjusted tax figure of $8,219,111 instead.

Justice Harrison rejected the challenge, finding no inconsistency between the reports when read together and no sufficient reasons to interfere with the conclusions due to their accounting and taxation expertise. However, he did not independently determine the actual tax figure was substantively correct.

Lindsay-Owen also fought against the referees’ right to factor in the $4.6 million in carried-forward tax losses, having argued this particular issue was not formally referred to them.

Justice Harrison found the tax losses were relevant to the damages calculation and Lindsay-Owen or Dairycorp had not suffered a fundamental procedural disadvantage.

The final issue concerned whether damages should account for the potential impact of recoverable legal costs on capital gains tax (CGT) liability and the resulting tax gross-up.

The amount of unrecovered legal costs could affect the cost base used to calculate any capital gain. Lower unrecovered costs could mean a smaller cost base, a higher capital gains tax liability, and a larger tax gross-up in the damages award.

The referees declined to quantify unrecovered costs before damages were determined by the court.

Justice Harrison agreed the referees could not be expected to speculate about a future costs order, and rejected Lindsay-Owen’s challenge to the report on this issue.

Justice Harrison invited submissions on whether final orders should be postponed until it became clear whether the issue had a practical effect on the damages calculation.

Citation: Lindsay-Owen v HWL Ebsworth Lawyers [2026] NSWSC 1324.