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The Wisdom of Salomon

The Wisdom of Salomon

Chorley, the Incorporated Legal Practice and the meta-physical bifurcation.

The seemingly unending saga of Coshott and Spencer provides another benefit to the profession with the handing down, on 8 October 2021 of the Court of Appeal judgment of Spencer v Coshott [2021] NSWCA 235.

Mr Spencer was at the time the principal and the sole director and shareholder of an incorporated legal practice, Kejus Pty Ltd which carries on practice as a solicitor under the name “Spencer & Co Legal”

This matter had a storied history dating back to 2013 when Spencer & Co Legal was retained to represent members of the Coshott family (not including the respondent, Ronald Coshott) in Federal Court litigation. Mr Coshott undertook some or all of the responsibility for payment of the fees and costs involved in the litigation.

In 2014 Coshott applied for an assessment of the Spencer costs on the basis of his assertion that he was a third-party payer. The costs assessor rejected the application, finding that Mr Coshott was not a “third-party payer” and had no standing to apply for assessment. Mr Coshott appealed to the District Court against that decision. The appeal was dismissed with costs: Coshott v Spencer [2016] NSWDC 43 [2016] NSWDC 43. By summons filed in the Court of Appeal, Mr Coshott sought judicial review of that decision, but again the summons was dismissed: Coshott v Spencer [2017] NSWCA 118.

It is important to note that the above occurred prior to the determination of Bell Lawyers Pty Ltd v Pentelow [2019] HCA 29 which I have written about here.

Undeterred, Mr Coshott sought and was granted special leave to appeal to the High Court. On 10 May 2018, after the appeal had proceeded for some time, the grant of special leave was revoked with costs: Coshott v Spencer [2018] HCATrans 81 with the Court coming to the view that the case was not a suitable vehicle to consider whether the Chorley exception should be maintained.

Spencer & Co prepared and filed their High Court bill which was assessed pursuant to Pt57 HCR and included an allowance for professional costs.  Coshott then sought a further order of review of the taxation which came before Keane J.

The reasoning of Keane J, Coshott v Spencer (High Court, Keane J, 11 September 2019, unrep) although having no direct bearing on this matter was highly material. Keane J accepted, as a fact, that Mr Spencer had retained Kejus to represent him in the High Court proceedings and had agreed to pay Kejus’ costs of doing so, and that he had performed the work he did in his capacity as a principal of Kejus.

His Honour added:

“15.   It may be said that it is quite artificial that an individual may render services for a corporation of which he or she is a sole shareholder and director at the same time as the corporation provides those services for the same individual as a client of the corporation. It may fairly be said that this ‘meta-physical bifurcation’, as it was described by Bray CJ in R v Goodall [(1975) 11 SASR 94 at 99-100] is as unattractive as it is unnatural. But as Bray CJ also recognised, it is ‘the logical consequence of Salomon’s Case’ [Salomon v Salomon & Co Ltd [1897] AC 22], in which the House of Lords affirmed that the legal personality of a corporation is separate from that of the individual who controls the corporation. And so an individual who is the sole director and shareholder of a corporation may contract with that corporation for the provision of services by it so as to give rise to an obligation to pay for those services”.

The present matter relates to the costs incurred by Mr Spencer in the District Court and Court of Appeal.

The costs of the District Court and Court of Appeal proceedings were determined by the cost assessor on 10 April 2020 (notably post-Bell Lawyers) in the sum of $91,374.02 including professional fees of $45,312.96.

Coshott applied for a review of the determination and the same was handed down on 17 July 2020 in the sum of $35,604.73 with no allowance for professional costs with the review panel determining that the cost assessor erred in allowing Mr Spencer to recover from Mr Coshott professional costs charged to him by Kejus for legal services provided to him by Kejus.

Mr Spencer appealed to the District Court from the determination by amended summons on 10 December 2020 seeking an order that the determination of the review panel be set aside on the ground that they erred in law in misconstruing and misapplying the decision of Bell Lawyers in finding that Mr Spencer was not entitled to recover from Mr Coshott the costs for legal services provided by himself or his firm of solicitors.

The primary judge found that:

  • Mr Spencer is a solicitor who provides legal services through his incorporated legal practice, Kejus, of which Mr Spencer is the sole director and shareholder;
  • that Mr Spencer entered into a binding costs agreement with Kejus and
  • that, as a natural person, Mr Spencer remains liable to pay the legal fees of Kejus in the event, for example, that Kejus were to be sold, wound up or put into administration.

However, his Honour was persuaded “by principle and the balance of authority” that, in the circumstances of the case, the decision of the review panel was correct. In reaching that conclusion, the primary judge, in effect, ignored the distinction between Mr Spencer, as an individual and a litigant, on the one hand, and his corporation, Kejus, on the other, effectively ignoring Salomon.

The primary judge, therefore, dismissed the appeal and ordered Mr Spencer to pay Mr Coshott’s costs.

On Appeal, Bell, Emmett and Simpson found that the primary judge had fallen into error in 4 ways.

Firstly, they found that it was an error to disregard the corporate status of Kejus in departing from the approach taken by Keane J and disregarding the effect of the distinct legal personalities of Mr Spencer and Kejus founded on the “conventional application of the principle established by Salomon”.

Secondly, the primary judge misquoted from the Victorian Court of Appeal matter of United Petroleum.

Thirdly, the primary judge erred in finding that the review panel’s decision was correct, based on their incorrect reading of Bell Lawyers.

Fourthly, the primary judge erred in his reliance on “the balance of authority” as supporting the concept of “the agency principle” in relation to the costs of an incorporated legal practice and the decision of the review panel.  None of the authorities, being United Petroleum, McIlraith v Ilkin and McMahon v John Fairfax Publications supported the application of “the agency principle”, the conclusion of the review panel, or the conclusion of the primary judge.

Emmett JA went on to consider the findings in Burrows v Macpherson & Kelley Lawyers (Sydney) Pty Ltd [2021] NSWCA 148 in which support and guidance were found for the ultimate determination.

But ultimately, reference was made back to [53] of Bell Lawyers where the plurality considered that:

“… whether or not an incorporated legal practice that is a vehicle for a sole practitioner should be able to obtain an order for costs for work performed by its sole director and shareholder is ultimately a matter for the legislature.”

This was interpreted to mean that the existing law that recognises the separate legal personality of a corporation, including an incorporated legal practice, is to be applied unless and until the legislature intervenes (or consideration of the already existing legislation dictates a different result).

Simpson AJA concluded at 102:

The findings by the primary judge that Mr Spencer, as a solicitor, provides legal services through Kejus, and that Mr Spencer had entered a binding costs agreement with Kejus, conclude the issues. The professional costs rendered to Mr Spencer by Spencer and Co Legal (or Kejus) are, within the meaning of s 3(1) of the Civil Procedure Act, “costs payable” by Mr Spencer to Spencer and Co Legal. They are therefore within the costs order made by this Court. Recovery of those costs is not precluded by anything in Bell Lawyers.

So, in summary:

  • Sole trader – No professional fees (Bell)
  • Unincorporated partnership –No professional fees (United Petroleum)
  • Incorporated Legal Practice – Provided there is a binding cost agreement entered into between the individual and the law practice – Fees are recoverable.

For how long this position continues is however uncertain, and in the writers view it would be a bold ILP that would enter into significant litigation on its own behalf on the assumption that the current status quo will be maintained for the foreseeable future.

At Pattison Hardman, we are not only experts in the field of legal costing but also have a dedicated team and accredited partners available to assist law practices in the recovery of their legal costs, thereby a) allowing you to avoid the arguments Spencer was forced to address in the subject matter; b) allowing you to focus on your clients and c) providing costs certainty moving forward.  For more information on this offering refer to Cost Recovery for Solicitors on our website.