(published in adapted format in Law Society Journal, November 2011, Volume 49, page 34)
This article examines the recent Supreme Court decision of Ventouris Enterprises Pty Ltd v Dib Group Pty Ltd & Anor (No. 4)  NSWSC 720 (28 June 2011) where Ms Ward provided expert opinion for the costs respondent.
The decision confirmed the view of Ms Ward that breaching particular costs provisions of the New South Wales Legal Profession Act 2004 [specifically, section 324(1)-(2)] will result in significant and drastic consequences for a law practice.
The article also provides a helpful explanation of the relationship between party party and solicitor client costs and the indemnity principle.
Breach of LPA disclosure provisions prevents recovery of counsel fees
by Suzanne Ward[note]Director, Pattison Hardman Pty Limited – The Legal Costing Company.[/note]
A recent decision of the Supreme Court of New South Wales confirms the significant and drastic consequences of breaching particular disclosure provisions of the Legal Profession Act 2004.
In Ventouris Enterprises Pty Ltd v Dib Group Pty Ltd & Anor (No. 4)[note] NSWSC 720 (28 June 2011). The author discloses that she provided expert evidence in this matter on behalf of the Costs Respondent. Herein the decision is referred to as “Ventouris”.[/note] Slattery J made a finding that counsel was prevented from recovering $131,341 in fees for breaches of s 324 of the Legal Profession Act notwithstanding that Slattery J found the way the legislation works ‘somewhat surprising'[note]Above n2, paragraph 17[/note] and considered that counsel ‘did much of the heavy lifting on the plaintiff’s side’ including carriage of the matter at the final hearing and conducted himself with ‘professionalism’.[note]Above n2, paragraphs 10 and 29.[/note]
The disclosure provisions considered by Slattery J in Ventouris do often surprise practitioners in New South Wales. As a costs consultant, the author has had cause to advise practitioners of the provisions on numerous occasions since their inception in 2006. Section 324 of the Legal Profession Act[note]New South Wales. All references to the Legal Profession Act in this article are to the Legal Profession Act 2004 (NSW)[/note] read together with s 327 have the significant result, as in this instance, of preventing any recovery of fees even where that might lead to the recovery of ‘zero’ costs for reasonable work performed on the part of a successful plaintiff or defendant.
The legislative provisions are clear and express. Section 324(1) of the Legal Profession Act 2004 provides that: “A law practice must not enter into a conditional costs agreement in relation to a claim for damages that provides for the payment of an uplift fee on the successful outcome of the claim to which the fee relates.”[note]Emphasis added. Exceptions to s 324(1) Legal Profession Act 2004 are noted at s 324(2)-(5).[/note] Section 327(4) of the Legal Profession Act then adds force to this provision by providing that: “A law practice that has entered into a costs agreement in contravention of section 324 (1) (Conditional costs agreements involving uplift fees) or 325 (Contingency fees are prohibited) is not entitled to recover any amount in respect of the provision of legal services in the matter to which the costs agreement related and must repay any amount received in respect of those services to the person from whom it was received.”[note]Emphasis added.[/note]
In Ventouris, counsel conceded contravention of the relevant provisions above[note]Above n2, paragraph 18.[/note] but submitted that his fee agreement otherwise represented a ‘fair and reasonable’ amount for the services performed and should be recovered pursuant to s 319(1)(c)[note]Legal Profession Act 2004 (New South Wales).[/note] that allows recovery of fees on a ‘fair and reasonable’ basis where there is no relevant cost agreement.[note]Above n2, see paragraphs 19.[/note]
Slattery J did not disagree and opined that “…having seen the proceedings conducted, [and] having seen the work that [w]as done in them on the part of counsel on both sides…’ he regarded the fee agreements provided as “..prima facie evidence of what was fair and reasonable value for the legal service [counsel] provided without an uplift fee.”[note]Above n2, paragraph 21.[/note] However, this did not mean counsel could recover any fees. Slattery J opined that the language of ss 324 and 327 of the Legal Profession Act is ‘quite intractable'[note]Above n2, paragraph 24.[/note] and excludes the possibility of recovering fees either on a quantum meruit or alternative restitutionary basis.
Slattery J reached this conclusion for two primary reasons. First, he found that the “… Legal Profession Act, s 327(2) expressly contemplated that fees may be recoverable under a void costs agreement under Legal Profession Act, s 319(1)(c). Thus to a limited extent the legislation expressly preserves restitutionary remedies. But then in the same section, s 327, in the limited case of contravention of s 324, the legislation uses language that on any view covers and removes such restitutionary remedies.”[note]Above n2, paragraph 25.[/note]He also opined that “… the words ‘any amount’ and ‘in respect of’ in s 327(4) are apt to cover any kind of restitutionary claim” and “the words ‘…the provision of legal services in the matter to which the costs agreement related…’ clearly encompass any kind of work associated with the subject matter of these proceedings to which [counsel’s] costs agreement relates, whether or not under the costs agreement itself.”[note]Above n2, see paragraphs 26.[/note]
The second reason Slattery J concluded that the legislature intended that there be no basis for recovery of any fees for contravention of s 324(1) is that the words ” ‘…and must repay any amount received in respect of those services to the person from whom it was received’ in s 327(4) leave no room to doubt that the legislation intends that restitutionary claims be wholly excluded.î[note]Above n2, paragraph 27.[/note] Indeed, Slattery J found that “the maintenance of a restitutionary claim for services is inconsistent with requiring the repayment of moneys already paid for those services.”[note]Above.[/note]
Ultimately, Slattery J concluded that the ‘statutory language’ utilised in provisions s 324 and 327 of the Legal Profession Act indicated that “…the Legislature wished in the strongest possible terms to deter the making of costs agreements, which included uplift fees, for the conduct of damages claims.”[note]Above.[/note] As a consequence, Slattery J, concluded that such a result had been produced in this case notwithstanding that it was unfortunate for counsel and that the benefit of that mistake will “…redound to a limited extent to the benefit of the plaintiff and to a major extent to the benefit of the defendants in these proceedings.”[note]Above n2, see paragraph 29.[/note]
The consequences of these findings are significant for two reasons. First, both the specific provisions of the LPA at issue and the confirmation of the consequences of breaches of the provisions provided by Slattery J in this decision affirm that great caution and care must be taken by practitioners when entering into cost agreements. Inadvertent errors and mistakes, such as that made by counsel in the fee disclosure in this case, may result in recovery of nil fees even where the practitioner acts reasonably, professionally, and brings about a successful outcome for their client. Such a mistake also cannot be undone by agreeing to waive the uplift fee on completion of the proceedings or agreeing to compromise such fees.
Second, however, by operation of the indemnity principle the mistake will almost certainly prevent or reduce recovery of such fees on a party party basis. This consequence is linked to the ‘indemnity principle’.[note] The relevance of the indemnity principle is also noted by Slattery J at paragraph 39, above n2. The indemnity principle is comprehensively considered in Dyktinski v BHP Titanium Minerals Pty Ltd  NSWCA 154.[/note] The indemnity principle is central to any costs assessment and provides that party party costs (even where they are awarded on an indemnity basis) are considered to be only a partial and not perfect indemnity of costs and disbursements paid on a solicitor client basis. The operation of the indemnity principle therefore means that the starting point in determining the fair and reasonable party party costs that a costs applicant is likely to recover requires an examination of the reasonable solicitor client costs incurred by the costs applicant. From this starting point various deductions are then made in accordance with sections 364(1) & (2) of the Legal Profession Act 2004 (NSW)[note] Sections 364 (1) & (2) Legal Profession Act 2004 set out the assessment criteria applied by a Costs Assessor on a party party assessment.[/note] and the principles applied on a costs assessment to arrive at a fair and reasonable party party total. Put simply, it then follows on from the indemnity principle that if there is ‘no’ solicitor client costs liability or a ‘reduced’ solicitor client liability there is – as a result – ‘no’ party party liability or a ‘reduced’ party party liability prior to the application of other assessment criteria.
This is precisely what occurred in Ventouris. By way of an example, Slattery J noted that of the $356,675.70 billed to the plaintiff, $131,341 was charged by counsel.[note]Above n2, paragraph 10.[/note] However, as a result of the findings made by Slattery J that counsel’s breach of s 324(1) of the Legal Profession Act resulted in a complete disentitlement to any of the fees billed, Slattery J excluded counsel’s $131,341 from the starting point of the party party assessment. That is, the starting point for the party party assessment then became $225,334 instead of the $356,675.70 billed to the plaintiff.[note]Above n2, paragraph 30.[/note]†As a result, after other deductions, Slattery J made a gross lump sum assessment of the plaintiff’s fair and reasonable party party fees at $150,000.00.[note]Above n2, paragraph 44.[/note] However, Slattery J helpfully went on to note that had counsel’s fees not been excluded from the starting point for the assessment, he would have made a gross lump sum assessment of $240,000.00 in favour of the plaintiff.[note]Above n2, paragraph 49.[/note]
The alternative assessments conducted by Slattery J set out the substantially different outcomes resulting from either the inclusion or exclusion of counsel fees in the starting point for the party party assessment. These assessments clearly show that the disclosure ‘mistake'[note]Above n2, see paragraph 29 where Slattery J opines that “… a mistake appears to have been made here by the inclusion of the uplift fee in the costs agreement”.[/note] by counsel resulted in a costs recovery for the costs applicant (or liability for the costs respondent) that was reduced by $90,000.00 and cost counsel all of his fees.
This is a timely reminder to all practitioners of the importance of attention to detail not only in the conduct of a file but also in the client engagement procedure. Otherwise, even where you act in your client’s best interests and bring about success for your client if your disclosure is found to be non-compliant – as it was for counsel in Ventouris – your costs might not be recoverable.