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New disclosure requirements and the indemnity principle

New disclosure requirements and the indemnity principle

It’s seriously time to get your costs agreements in order

Also published in adapted format in Law Society Journal, December 2006, Volume 44, page 46

In the context of the Wentworth decision, of stricter disclosure requirements under the Legal Profession Act 2004 and of the recommendations of the Legal Fees Review Panel regarding defective disclosure (and defective ongoing disclosure), defective disclosure practices may no longer result only in an increased party/party solicitor/client gap on assessment but, quite possibly, result in referral of the legal practitioner to the Legal Services Commissioner, together with a reduction in the amount recovered.


New disclosure requirements and the indemnity principle – it’s seriously time to get your cost agreements in order

By Suzanne Ward and Lana Gough[note]Suzanne Ward is a Director of Pattison Hardman ñ The Legal Costing Company. Lana Gough is a costs consultant at Pattison Hardman.[/note]

The Court of Appeal, in Wentworth v Rogers[note][2006] NSWCA 145.[/note] (“Wentworth“) handed down a decision on 7 June this year determining – inter alia – whether an Appellant, having been unsuccessful in civil proceedings, could be liable for a costs order in favour of the successful party where the successful party had incurred no liability to pay legal costs to his solicitor and barristers. This paper considers some of the general (rather than specific) issues considered by Wentworth in the context of other recent significant costing developments.

The indemnity principle has long applied to the recipient of a favorable costs order in civil proceedings stating that “if that party is under no legal obligation to pay lawyers’ fees, then no amount can be recovered from the unsuccessful party.” [note]Basten J, paragraph 5, above footnote 2.[/note] Importantly, the principle does not require costs to have been paid but rather that there be a “legal liability to pay costs”.[note]Above n2, at paragraph 6. Also, see Oshlack v Richmond River Council (1998) 193 CLR 72.[/note]

In determining the specific issues in Wentworth, the Court of Appeal found that the “ultimate application of the indemnity principle will depend on the content and proper constructions of the costs agreement.”[note]Above n2, at paragraph 6. Also, see Oshlack v Richmond River Council (1998) 193 CLR 72.[/note] The court also found that the principle is “capable of accommodating conditional cost agreements permitted by statute.”[note]Santow JA, above n2, paras 51 & 53.[/note]

It follows then that in the absence of disclosure or defective disclosure that the indemnity principle may prevent or reduce the amount recoverable to the recipient of a successful costs order where cost agreements are not in order or nonexistent. Although, it is acknowledged by the court in Wentworth that a quantum meruit entitlement would arise.

The Wentworth decision in the context of the stricter disclosure obligations under the Legal Profession Act 2004 highlights the importance of legal practitioners getting their cost agreements in order. For example, it is no longer sufficient under the new Act to provide an estimate without disclosing an estimate, range of estimates, or the range of variables upon which the estimate is based. It is also no longer excusable for a legal practitioner not to monitor or update the costs estimate. In fact, in the context of the Legal Profession Act 2004, the Legal Fees Review Panel recommends that revised estimates to a client be provided or reviewed quarterly.[note]Legal Fees Review Panel Report, Legal Costs in NSW, December 2005. Refer to p50 regarding discussion of budgets complying with s309 disclosure requirements.[/note] Not updating estimates under the new Act may result in the Assessor considering the disclosure or cost Agreement defective and non-compliant.

The court, in Wentworth, went further. It stated that if there is to be “reliance on the terms of a contract as to quantum or manner of computation of…a lawyer’s costs, that contract as to quantum or manner of computation must either be a written contract or a contract evidenced in writing.”[note]Santow JA, Above n2, paragraph 33. This determination is made in relation s184(4) Legal Profession Act 1987 and in agreement with HH Barret J.[/note] The rationale underlying this finding is that if there is ‘room for speculation’ as to what was agreed to about legal costs because of a lack of writing “the legislative policy is that any agreement should be treated as non-existent and rights and obligations on the subject of the lawyer’s remuneration should be determined without regard to the supposed agreement”.[note]Santow JA, above n2, paras 32-33.[/note] The Court found in the present case that whether an agreement is defective or absent, however, should be determined upon oral evidence and tested in cross-examination by a court.[note]Santow JA, above n2, para 36.[/note]

The consequences of not getting your cost agreements in order are therefore increasingly serious. If there is a dispute as to the terms of the cost agreement, you may be required to provide evidence and be cross-examined regarding the terms of same. It is also likely to significantly reduce the amount your client will recover on a party party basis.

The Legal Fees Review Panel goes further. The Panel recommends that where a Costs Assessor finds that a solicitor has failed to comply with their disclosure obligations under s309 of the Legal Profession Act 2004 that the costs assessor should be required to refer the matter to the Legal Services Commissioner for consideration.[note]Above n7, at pages 44-45 and Recommendation 14 at page 64. 12 Above n7, Recommendation 12, at page 64. Emphasis added.[/note] The panel additionally recommends that where an updated estimate is not provided by a legal practitioner to a client that “the practitioner should not be permitted to recover fees billed in excess of that [original] estimate except as assessed… on the basis of the fair and reasonable value of the work, less 20%.”[note]Above n7, Recommendation 12, at page 64. Emphasis added.[/note]

The risk of referral to the Legal Services Commissioner does not therefore only apply under the Legal Profession Act 2004 in circumstances where a disgruntled client applies for a solicitor client costs assessment and the disgruntled client complains to the Commissioner. The risk also readily arises in circumstances where the client is happy and has been successful in litigation that gives rise to a party party assessment and the assessor discovers that there is defective disclosure.

On a practical level, the solicitor client Tax Invoices must also be consistent with the Cost Agreement or an assessor may consider the indemnity principle or disclosure requirements breached. For example, as Legal Costs Consultants, we see files where the time recording or amount charged on a solicitor client basis is inconsistent with the Cost Agreement. Further, hourly charge out rates may be increased in time recording ledgers as a matter progresses but not always confirmed by revised disclosure to the client. All such matters are likely to be discovered in the course of the assessor considering the file for a party or solicitor client assessment and contribute to any findings of defective disclosure.

In the context of the Wentworth decision, stricter disclosure requirements under the Legal Profession Act 2004 and the recommendations of the Legal Fees Review Panel regarding defective disclosure (and defective ongoing disclosure), defective disclosure practices may no longer only result in an increased party/solicitor client gap on assessment but, quite possibly, result in referral of the legal practitioner to the Legal Services Commissioner, together with a reduction in the amount recovered and possibly attendance in court for cross examination to test the ‘content and construction’ of the cost arrangements.

ends