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Costs Disclosure in Personal Injury Claims – The Danger of the “Welcome Pack”

The danger of the “Welcome Pack”

Todorovska v Brydens Lawyers Pty Ltd

A vitally important judgement for legal practitioners in the personal injury field but also law practices in generally in relation to disclosure.

It is common practice among many personal injury practices, and law firms in general, to issue clients with “Welcome Packs” which include cost agreements and disclosure documentation with a view to satisfying their requirements under the legislation.

The below is a stark reminder as to why this “box ticking” process may not satisfy the requirements under the Uniform Law and may result in adverse findings for the practice.

Background

The matter relates to a slip and fall accident in 2015 where the plaintiff (the “client”) subsequently took a claim for damages against the occupier in the District Court and retained the defendant (the “law practice”) as their legal representative.

In August 2017 the proceedings settled for the sum of $100,000 inclusive of costs. From this, the law practice deducted the sum of $67,963.08 for is professional costs and disbursements primarily consisting of an amount of $29,700 for professional fees and $16,500 for counsel’s fees.

The client had instructed the law practice  in March 2013, thereby the Legal Profession Act (theLPA”) applied to the terms of the retainer. However, this matter remains as relevant as to the question of disclosure under the Legal Profession Uniform Law as it was under the previous act.

By way of section 338 of the LPA (and now s61 Legal Profession Uniform Law Application Act 2014 – Schedule 1) the maximum costs for legal services (including counsel’s fees) provided for a party in a proceeding for personal injury damages of the kind that Ms Todorovska commenced was, in the case of the client, fixed at 20% of the amount recovered (here $20,000) or $10,000, whichever was the greater sum. Note that personal injuries referred to here are ones governed exclusively by the Civil Liability Act 2002.

The first instance proceedings in respect of this matter concerning the solicitor and client commenced in January 2021 with the client complaining that she overpaid the law practice the difference between what was charged, and what the law practice  was entitled to under the act being $20,000.

The law practice  contended that the client had contracted out of the statutory cap.  The client counter argued that there was no contracting out of the LPA since the law practice  did not comply with its disclosure requirements under section 339 of the Act and regulation 116 Legal Profession Regulations (the “LPR”).

A further issue for determination before the court was whether the cost agreement was breached in relation to charges levied for photocopying which I will not examine in any detail here.

The primary issues therefore for determination by the court in the first instance were

  1. what constituted the costs agreement entered into by the parties and what were its terms?
  2. whether the Firm complied with its disclosure requirements under Regulation 116, and was therefore effectively contracted out of the statutory cap?

Ultimately, in the first instance proceedings, (Todorovska v Brydens Lawyers Pty Ltd [2021] NSWDC 382) Abadee DCJ found at [108] that:

[…] I am not persuaded that there was anything more that the Firm was required to disclose to Ms Todorovska, prior to the entry into the costs agreement on 4 May 2015, which had not already been disclosed, in conformity with the Firm’s obligation under Regulation 116(2). In other words, a valid costs agreement was entered into for the purposes of s 339(1) of the Act. In the result, the cap under s 338 did not apply.

The Appeal

The appeal Todorovska v Brydens Lawyers Pty Ltd [2022] NSWCA 47 focused on the disclosures provided to the client and the adequacy of same.

Following the taking of initial instructions, the client was provided, via post a covering letter, the first page of which contained four paragraphs, followed by a second page identifying attachments as follows:

“(a)   Client Information Factsheet setting out relevant matters pertaining to the prosecution of a public liability claim.

(b)   Medical Authorities which we would ask that you sign and return to enable us to obtain reports from your treating doctors in due course.

(c)   Conditional Costs Agreement in duplicate. Would you please sign a copy of the Costs Agreement and return same to us.

(d)   Notice Pursuant to the Legal Profession Act.

(e)   Firm Profile.

You will also find attached* a standard cost agreement between solicitor and client in personal injury matters which will apply in the event that you do not execute and return the conditional cost agreement.

It appears that the two costs agreements were provided to the client (standard and conditional) on the basis that the law practice could continue representing the client should she not sign and return the conditional costs agreement as required under s323 LPA and s181 LPUL. Whilst this process may have been thought by the law practice to be the easiest methodology to overcome the hurdle of the requirement of receiving a signed conditional costs agreement, the effect proved the opposite.

This was not only because of confusing statements within the standard cost agreement which made it unclear whether it was in fact a contract on a standard or conditional basis, but also because as found at paragraph [19]  of Todorovska:

[…]the combination of alternative costs agreements and the variety of the disclosures made it important that the applicant understood what was being put before her and how it might affect her position. It was also important that she understood that she had a right to obtain independent legal advice. A clear statement as to the need for such advice may have mitigated the effects of the complicated and confusing material provided to her. There was no evidence that the applicant had been advised as to the need for advice in terms which might allow a lay person to comprehend its significance for her.

The matter also turned on the disclosure required under section 116 LPR (see section 28 Legal Profession Uniform Law Application Regulation 2015 in virtually identical terms)

It is worth setting out in detail the findings of the court in relation to this particular aspect as it affects the disclosure that law practices are providing in order to properly contract out of capped fees.

At [48-55] Basten stated:

[48] Critical to the respondent’s success in this matter was cl (18), the first three subparagraphs of which were relied on as compliance with the requirements of s 339. (The last two paragraphs dealt with offers of compromise and the cooling-off period.) The relevant parts thus read:

“(18)   Costs Disclosures – Maximum costs recoverable and offers of compromise.

In accordance with relevant provisions of the Act and the Legal Profession Regulation 2005 (NSW) (‘the Regulation’) we are required to inform you of the following before you decide to enter into a costs agreement with us:

  1. Where the amount recovered in your claim does not exceed $100,000, the maximum amount of professional costs which you are required to pay us is 20% of the amount recovered or $10,000, whichever is the greater. This would include barrister’s fees if a barrister is retained for your claim. The same restrictions also apply to any costs which can be recovered from the other party if your claim is successful;
  2. The amounts set out above do not include disbursements, ie payments made to others which are incurred by your lawyer or yourself in the preparation and running of your case. For example, the costs of medical reports, experts’ reports, filing fees, external photocopying charges, etc.
  3. The restrictions on the professional costs you have to pay your lawyers, as explained above, do not apply if you enter into a costs agreement with us which complies with Part 3.2 of the Legal Profession Act 2004 and you will pay us in accordance with the costs agreement, if you enter into such an agreement with us. However, if you are successful, the amount of costs, which becomes recoverable from the other party, will still be limited to the maximum amounts set out in subparagraph (a) above, which will be less than our costs payable by you if you enter into the costs agreement. We can only act for you in accordance with this costs agreement and your acceptance of it.”

[49] There are five difficulties with the manner of this disclosure. First, cl 116(3) of the Regulation required a statement as to the operation of s 339, “but for the costs agreement”. The disclosure set out in two paragraphs how s 339 operates, but without reference to the costs agreement. The effect of the costs agreement was then referred to in par (c). The first sentence in par (c) was ambivalent as to its effect. While it stated that the restrictions would not apply, it did so in terms which did not obviously engage the agreement in which the clause appeared. Thus, while par (a) explained the constraint on the costs you are required “to pay us”, par (c) in part adopted the language of the third person, namely costs “you have to pay your lawyers”. Secondly, it spoke of entering into “a” costs agreement with “us” which complied with Pt 3.2 of the Act, but did not say (i) that it was referring to this costs agreement, nor (ii) that this costs agreement complied with Pt 3.2, nor (iii) that it was this costs agreement which would have that effect. Rather, it stated that “you”, the client, will pay us “in accordance with the costs agreement, if you enter into such an agreement with us.”

[50] This lack of clarity and level of imprecision was potentially fatal. Regulation cl 116(3)(a), in referring to the effect of s 339 “but for the costs agreement” required that the proposed costs agreement be identified as an agreement having the exclusionary effect. That was not identified in cl (18) in express terms, but only by way of an indirect inference, which a lay person may not have drawn, depending on the contextual material.

[51] Thirdly, the second sentence in par (c) was confusing. Although it began “[h]owever”, it did not qualify what had just been said; rather, it identified the practical significance of what had been said, namely that not only would the client have to pay at a higher rate, but would not be able to recover that extra amount. Stated as a qualification to the preceding sentence, it was apt to mislead. It could have been much clearer.

[52] The primary judge, reflecting the respondent’s submissions below, noted that disentitling a law firm to agreed costs where it had failed to make adequate disclosures was “very onerous for legal practices”. [6] The judge continued:

“But a virtue of Regulation 116(3) is that, however awkward it may be for a legal practice to express the concepts (in (a)-(e)) in practice, they at least provide some measure of certainty to the legal practice that it will obtain the capacity to contract out of the cap if the requirements are complied with.”

[53] As White JA put to the respondent in the course of argument, referring to cl 116(3)(a): [7]

“It could be explained pretty simply: but for this costs agreement, Div 9 of Pt 3.2 of the Legal Profession Act would limit the maximum costs you could be charged for legal services provided to you to the amounts referred to in para a; if you enter into this costs agreement, the agreement will have the effect of excluding the operation of that division.”

Importantly, nothing in the text of the agreement directly alerted the reader to the fact that entering into “this” costs agreement would have that effect.

[54]Fourthly, there was nothing in the agreement which suggested that this was, realistically, a significant issue for the client. The ordinary reading of the chapeau to cl (18) was that the solicitors were obliged by law to “inform you of the following”. A lawyer, familiar with cl 116 of the Regulation might have inferred that this was a significant issue, as cl 116(5) stated that “[t]his clause does not require disclosure if the costs agreement in relation to the matter was entered into before the law practice could reasonably expect that the matter would involve a claim to which this clause applies.”

[55] Fifthly, the last sentence of par (c) which stated, “[w]e can only act for you in accordance with this costs agreement and your acceptance of it”, suggested that the client had no choice but to accept the terms of the costs agreement, not that the firm would only act for the client if the client agreed to waive the protection provided by the statutory cap. That may have been accurate, because both forms of the agreement had that effect, and one applied in default, but it distracted attention from the cap, and denied the right to negotiate.

Further to the above, the court highlighted the risks of including such statutory disclosure requirements within the terms of an agreement and noted

For example, an agreement may contain a separate page with a heading, “Important Information: Read This Before You Sign This Agreement”, appropriately displayed. When dealing with the statutory cap, it might state: “It is possible that this may apply to you because your claim may not be worth more than $100,000: Ask our solicitor if you are in doubt about this.”

The court found at [63] that

the primary judge approached the adequacy of the disclosures made on a textual basis, seeking the identification of information in cl (18) of the costs agreement. On the assumption that each of the matters identified in cl 116(3) was to be found in cl (18), the case was dismissed. With respect, that approach failed to test the contractual language, (i) for clarity in its own terms, and (ii) read in the context of other provisions of the contract, the covering letter and the other documents supplied by the respondent, against the apparent purpose of s 339 of the Legal Profession Act and cl 116 of the Regulation.

In conclusion the Court found

[66] Clause (18), which appeared in identical terms in all three copies of the costs agreements provided to the client (one purporting to be other than a conditional costs agreement, the others being duplicate copies of a conditional costs agreement) failed to satisfy the disclosure requirements in cl 116(2) of the Regulation. Read in context, the statements in cl (18) were apt to confuse or, as expressed by counsel in the course of argument, baffle the prospective client. They did not serve the statutory purpose.

[67] That is not to suggest that there was any specific language or written document which must have been provided to satisfy the terms of the provisions, when in force. However, a formulaic disclosure in a context which tended to deny the practical effectiveness of a right to negotiate, and the opportunity for obtaining independent legal advice, in circumstances where the language used was conducive to misunderstanding, will not be sufficient.(my emphasis)

In Summary,

This judgement from the Court of Appeal should cause all personal injury practitioners in particular, but law practices in general, to carefully review and consider not only the terms of the cost agreement and disclosure documentation, but also the methodology in which they are presented to the client.

One would also expect that keen attention is paid to the words of White JA as detailed at paragraph 53 above.

Further, not only should the entirety of the judgement be carefully reviewed by interested practitioners, but also that the further overlay of “informed consent” as required under the uniform Law and considered in Malvina Park Pty Ltd v Johnson [2019] NSWSC 1490, of which I have written about here be revisited in this context.

Charles Ackroyd

For clarity s116 of the LPR states:

116 Disclosure requirements regarding costs agreements—section 339 of the Act

(1)  This clause has effect for the purposes of section 339 of the Act, and applies to a costs agreement proposed to be entered into between a client or prospective client of a law practice in connection with a claim for personal injury damages referred to in Division 9 of Part 3.2 of the Act by the client or prospective client.

(2) The law practice must disclose to the client or prospective client information in relation to the effect of the costs agreement in connection with the operation of Division 9 of Part 3.2 of the Act.

(3) The information must include:

(a) a statement that Division 9 of Part 3.2 of the Act would (but for the costs agreement) limit the maximum costs for legal services provided to the client or prospective client in connection with the claim, and

(b) particulars as to how those maximum costs are calculated, and

(c) a statement that the costs agreement would have the effect of excluding the operation of that Division, and

(d) particulars as to how the costs would be calculated under the costs agreement, and

(e) a statement that the costs agreement relates only to the costs payable as between the law practice and the client or prospective client, so that, in the event that costs are recoverable against the other party, the maximum costs so recoverable will be as provided by Division 9 of Part 3.2 of the Act.

(4) Disclosure under this clause must be made in writing before, or as soon as practicable after, the law practice is retained in the matter, but before the costs agreement is entered into.

(5) This clause does not require disclosure if the costs agreement in relation to the matter was entered into before the law practice could reasonably expect that the matter would involve a claim to which this clause applies.

(6) A failure by a law practice to comply with the requirements of this clause disentitles the law practice to the benefit of section 339 of the Act.