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An Adelaide law firm’s eleventh-hour decision not to cross-examine one of its founders has tipped the balance in a costs fight.
An alleged covert buyout at LK Law – an Adelaide-headquartered, international firm – has sparked a protracted legal dispute between its co-founders, which has since included a recusal request, a stay application and, most recently, a costs fight over them both.
As reported by Lawyers Weekly in late June, LK Law’s Scipio John Lipman was alerted in September 2021 to a secret deal struck between his co-founder, Jason Demetrios Karas, and the firm Mischon de Raya (MdR) for ownership of LK’s Hong Kong office.
The Federal Court found Karas breached his duties by attempting to sell off the Hong Kong office to MdR and for his disclosure of confidential information, including employees’ remuneration and leave entitlements, performance reports, and financial accounts.
Karas was ordered to pay the sum of $36,458,048, while MdR – which was found to have knowingly assisted with Karas’ contraventions – was ordered to pay just over $21 million.
When the matter was last before the courts, Karas had filed a notice of appeal but was fighting an order that he pay $10 million into the court.
Justice Nye Perram said the sum was disproportionate and swapped it for an undertaking that Karas not dispose of, charge, mortgage, or otherwise encumber any of his assets, other than for the purpose of meeting his living, business and ongoing litigation expenses.
Amid these decisions, Karas made an application that Justice Patrick O’Sullivan recuse himself and requested the court determine whether there should be a stay of the enforcement of judgment.
The recusal application was refused but the stay was successful, subject to certain conditions. Karas has since applied for leave to appeal from the orders on the stay application.
In the most recent decision, published late last week, LK Law and Karas have each applied for costs in the two applications.
Given that the recusal application was refused, LK Law submitted that costs should follow the event. However, Justice O’Sullivan’s decision turned on their eleventh-hour decision not to cross-examine Karas.
On Karas’ application, the absence of the cross-examination and disavowal of any attack on his credit on the stay of enforcement application meant there was a “compelling case” for recusal.
While Justice O’Sullivan accepted they were important factors in the recusal application decision, they were not the only ones: “As I made clear in LK Law Pty Ltd v Karas (No 6), there must be a logical connection between the identified source of apprehended bias and the feared deviation from deciding the case on its merits”.
“In particular, I found that there was no logical connection between the adverse credit findings made in the primary judgment and the exercise of the discretion as to whether or not there should be a stay of enforcement of the judgment against Karas,” the Justice said.
Justice O’Sullivan did not accept Karas’ submission that there was a compelling case to recuse himself, given the absence of cross-examination and the disavowal of an attack on his credit.
“That is because there is no logical connection between the adverse credit findings in the primary judgment and the exercise of the discretion on the stay application,” Justice O’Sullivan said.
However, Justice O’Sullivan accepted LK Law “specifically disavowing any attack” on Karas’ credit still carried weight.
LK Law was ordered to pay Karas’ costs up to and including the day prior to the hearing day, but Karas is to pay costs from then on.
As for the costs of the stay application, Karas submitted he succeeded in that the court ordered a stay of an enforcement; however, rather than making a costs order in his favour, Karas said the “appropriate course” is for the costs of the application to follow the appeal.
While it was “always the case” there was going to be a stay due to the “draconian effects” of not staying the primary judgment, Karas provided information “which was not complete and took a position which was in some respects unsubstantiated, such that the application focused on the terms of the stay rather than a stay per se”.
It was in relation to the terms of the stay that Karas was unsuccessful, Justice O’Sullivan clarified.
For those reasons, LK Law was awarded costs for the stay application.
An order was made that the enforcement of these costs be stayed pending the outcome of the appeal.
Citation: LK Law Pty Ltd v Karas (No 8) [2026] FCA 952.
