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The Client and the Obligation to Pay Legal Fees & Costs

The Client and the Obligation to Pay Legal Fees & Costs

A retainer with a law firm is a contract.  Like most contracts, the parties’ rights are also impacted by the overlay of statue law which may imply contractual terms. An example is a prohibition on misleading a person as required under the Australian Consumer Law

A costs agreement with a law practice may also have to comply with additional obligations under the Legal Profession Uniform Law (the “Uniform Law“).   As with most agreements, it is important to identify who has the obligations under the cost agreement for paying fees for services provided and thus the identity of the client and other parties to the agreement is all-important. 

The Uniform Law defines a client as including “a person to whom or from whom legal services are provided.”  There is also a term in the Uniform Law for a person who is a “third-party payer”.  These persons are not the client but have an obligation to pay all or part of the legal costs for the legal services provided to the client.  In respect of client identification and payment of fees, an “associated third party payer” is a person who is under a liability to pay the law practice the fees on behalf of the client.  An example is a guarantor.  Such a person must have their legal rights and obligations disclosed to them as if they were the client because they need to understand what they are guaranteeing if the client does not pay and how much they will be liable for.  

In many instances, the identity of the client and the obligation to pay will be straight forward. For example, in a Family Law dispute, the client will be the one and the same person on the cost agreement and the relevant party to the proceedings.  However, situations can arise which create complexities and can impact the law practices right to enforce the terms of their agreement and also affect the client’s rights under the agreement.  Consider for example the following:

  • company client that becomes insolvent;
  • multiple clients with the same causes of actions in proceedings;
  • a corporate entity, when that company may be a trustee of a trust;
  • individual acting in a capacity, for example, as a legal representative of an estate, trustee or administrator;
  • parties to a joint venture;
  • partnerships;
  • a person who does not understand the terms of the contract through age or impairment; or
  • a person who cannot pay legal fees.

Corporations

Corporate clients are often involved in litigation.  However, they can also become insolvent during or after the litigation has concluded (especially if unsuccessful in the proceedings).  In those circumstances, it is advisable to consider if the agreement can be with the directors as well as the client.  Security, such as personal guarantees from a third party (an “associated third party”), can provide security if the client cannot pay.  

It is advisable to undertake an ASIC search on corporate clients, to ascertain the financial status of the company, whether the company is under external administration and to affirm that those giving you instructions, i.e. the directors, are who they say they are and have authority to bind the company to any agreement. 

Joint Liability 

if you are acting for more than one person, such as a partnership, joint venture or multiple plaintiffs, then they all need to be parties to the cost agreement. 

In the situation of several clients, it then raises the question are these persons jointly liable, separately liable or joint and severally liable to pay the legal fees?  If this is not covered off with the appropriate clause in the retainer/cost agreement this has the potential to cause issues. For example, if limited to being jointly liable and one of the clients becomes insolvent and the affairs of the client come under the management of a liquidator or trustee it may prove difficult for the legal practice to enforce against only one client (though not impossible).  This may also provide difficulties for the clients.  If jointly liable then it may impact one party’s right to challenge terms of the costs agreement without the assistance of the other, as collectively they are the “clients”.  Joint and several liability avoids this situation.   

The other issue when acting for two or more clients is the potential for a conflict of interest to arise and the obtaining of instructions.  For example, if one client gives instructions do the instructions bind the other clients?  The answer is most likely no depending on the wording of the agreement.   It is advisable to obtain an authority to take instructions from one client that binds all clients.  Even so,  it warrants special care to ensure all clients understand important events such as the settlement of proceedings and the impact on them. 

As to the conflict of interest, consideration can be given to the clients entering into an agreement in which they waive any rights in respect of a conflict.  Care needs to be given to obtaining such a waiver, as it may require inviting the parties to obtain independent legal advice and raises issues as to the changing nature of the conflicts that may arise throughout the course of the retainer. 

Trustees and Legal Representatives

A trustee of a trust, trustee in bankruptcy or a legal representative, such as an executor are all likely to desire not to be personally liable for lawyers’ fees.  Such persons may enter into an agreement in their limited capacity to avoid personal liability.  The liability may be limited to what trust assets that they are entitled to be indemnified from the trust.  

In these circumstances, a law practice may have terms,  in its general terms of business, that if the client is a trustee of a trust, it enters the agreement in both its own capacity and as trustee of the trust and/or warrants that it has authority to enter into the costs agreement on behalf of the trust. 

Costs Agreements with persons who do not understand the obligations

Entering into an agreement with someone who does not have the ability to understand the terms of the contract can result in the agreement being, varied and/or voided.  Costs agreements between law practice and a client are no exception to this.   Section 174(3) of the Uniform Law prescribes that a law practice must be satisfied that the client consents to and understands the proposed course of action for the matter and the proposed costs to be charged. Practically a solicitor cannot take instructions if the client is not competent to give instructions.  

If in fact it is discovered the person is suffering from mental impairment it may require a substitute decision-maker being appointed.  Consideration could be given to making an application for a financial manager to make substitute decisions for the client.  Such applications need to be considered carefully as they themselves can raise several legal and ethical issues for practitioners.  

If the person is underage, under guardianship or a protected person within the meaning of the NSW Trustee and Guardian Act 2008, then a “tutor”  may need to be appointed in accordance with requirements of the Civil Procedure Act.  In Family Law proceedings there are similar considerations for a child and the proceedings may require the appointment by the Court of a “case guardian” to look after and manage the interest of a child. In these circumstances, it will require the identification and retaining of a person who will be liable to meet the legal practitioners’ fees.

Summary

The above are some issues that impact on client identification and ensuring a costs agreement identifies who is going to be liable to pay legal fees. It is important to take the time to not only properly identify the client, but to ensure that any agreement makes it clear where the liability exists in respect of payment of legal fees. 

At Pattison Hardman we often come across issues about who is the client.  It has resulted in persons being found not liable to pay when the law firm thought they had been properly engaged and results in the legal practices costs agreement being worthless.  

To recap we suggest considering the following, depending on the matter, client and other factors:

  • Identify the client.  Obtain certified copies of driver’s licences or passports.  Better still view the identification document. 
  • Undertake searches.   If the person is a discharged bankrupt ascertain whether any standing to take part in proceedings vested in the trustee.
  • Meet the client and make sure they understand the terms of the agreement to ensure compliance with section 174(3) of the Uniform Law.
  • In respect of a trust, if appropriate, ask for the trust documents, obtain the ABN of the trust.  Consider searches to see what assets are available in the trust.
  • Consider obtaining security.  Section 206 of the Uniform Law says the law practice can obtain reasonable security to secure its fees.  This could be in the form of a separate agreement, such as a security agreement granting the right to register a security interest under the Personal Property Securities Act, a personal guarantee or/and an agreement charging property as security for fees. 
  • If acting for two or more persons, ensure the understanding of obligations by all parties to the costs agreement and consider documenting waivers or authorities.
  • Update costs agreements to reflect the actual matter being entered into. Each matter is unique and not all generic cost agreements will be appropriate for every type of engagement.
  • If the individual cannot give instructions, consider whether to act at all or in the alternative, the appointment of a guardian/tutor and identify and enter into an agreement with an associated third party payer to meet the fees of the firm.

Whilst none of the above is intended to be legal advice and each retainer and circumstances need to be considered on a case by case basis, the failure to properly identify the client and to sure up who is paying can present problems from the outset of the engagement.

At Pattison Hardman, we assist legal practitioners by reviewing, advising and suggesting appropriate terms for cost agreements and collateral documents that may be required to be entered by the client.