WARNING: costs agreements and bills require amendment

Since 6 December 2007, the maximum interest chargeable on bills has dropped from 12% (the penalty interest rate) to the Reserve Bank Target Rate +2% (at the time of writing 8.75%), and the period of non-payment after which you can begin charging has changed too. You need to amend your bills because if you don’t put the right statement on them, you won’t be able to recover interest unless you dream up some sophisticated arguments. In the case of ongoing retainers, you probably need to send the first new bill of the new regime under cover of a letter advising a change in the rate applicable to unpaid bills. Otherwise, you might fall foul of the ongoing obligation to disclose any substantial changes to anything previously disclosed.

You do not have to express the interest chargeable as a percentage rate per annum. In my experience, the only time anyone ever charges interest is when suing for fees, after the relationship has broken down, or demanding payment of fees as a condition of staying on the record or giving up a file subject to a lien. Perhaps that was because the rate was so punitively high, and perhaps because too few people knew about the penalty interest rate calculator on the internet. Why not set a lower rate which is dead easy to calculate and actually make a habit of collecting interest? So long as the rate you are effectively charging works out lower than what you would charge if you charged the maximum annual percentage rate over the same period, you’ll be sweet. Read on to find out the answer to the questions someone in your firm is sure to ponder at some stage in the future: does it apply to bills given before 8 November 2007? Does it apply in retainers in which instructions were first taken before that date?

Overview

The Legal Profession Act, 2004‘s provision about charging interest on unpaid bills has been amended, and a provision added to the Legal Profession Regulations, 2005:

  • to substitute as the maximum rate (whether the interest is levied under s. 3.4.21 or in accordance with a costs agreement) the Reserve Bank Cash Target Rate +2% in place of the penalty interest rate we all knew and loved;
  • to substitute for the old rate, which varied, in relation to any one particular bill, over the time the bill remained unpaid, a default rate which varies over time, but is fixed in respect of any one bill for the duration of its non-payment by reference to the applicable rate on the date of the issuing of the bill (see the definition of ‘relevant date’ in the regulation referred to below), so that interest calculations will be easier in the future;
  • to change the default date from which interest may be charged to 30 days after the law practice has ‘given’ a bill for the costs in accordance with Part 3.4 of the Legal Profession Act, 2004;
  • to allow for interest to be charged in the manner agreed in a costs agreement, so long as the amount charged is not more than what would be payable under the default provision;
  • to stipulate that you can’t charge interest unless the relevant bill ‘contains a statement that interest is payable if the costs are not paid and of the rate of interest’.

The penalty interest rate is presently 12%. Here’s an online penalty interest rate calculator which makes things easy. If you’re not entirely sure what the Reserve Bank Cash Rate is, you’re not alone. It is the benchmark lending rate for all Australian lending institutions, what the politicians hang off, and what residents in the mortgage belt fear quarter percent rises in. Presently, it’s 6.75%, as it has been since the amended section and the new regulation came into force on 8 November 2007.

I’m not sure about this, but it is conceivable that the new entitlement to agree on how interest will be charged might be interpreted to mean that you can agree that interest will be charged from:

  • say, 7 days after the date of the bill, rather than 30 days after bill is ‘given’ (the default period), or even
  • from the day after the bill is given, but only if the bill remains unpaid for 30 days, so that if the bill is paid 29 days after it is given the client pays no interest, but if paid 31 days after the bill is given, the client pays 30 days’ interest).

The legislative provisions themselves are reproduced and linked to at the end of this post. A separate post contains an Idiot’s Guide to calculating interest under the new regime.

Transitional provisions

There are no transitional provisions which save from the operation of the new regime bills rendered after 8 November 2007 in matters in which instructions were first taken before a certain date, or anything of the kind, though the general transitional provisions associated with the Legal Profession Act, 2004 continue to apply. So, by virtue of s. 8.2.1 and cl. 3.1 of Schedule 2 to the Legal Profession Act, 2004, it is the Legal Practice Act, 1996 (and hence the penalty interest rate ‘from the period beginning 30 days after payment is demanded’: see s. 95 of the Legal Practice Act, 1996) rather than the Legal Profession Act, 2004 which applies to bills given in:

  • solicitors’ retainers in which instructions were first received prior to 12 December 2005; and
  • barristers’ retainers, even after 12 December 2005, in which the instructing solicitors first received instructions prior to 12 December 2005 (see sub-clause (2)).

I tentatively suggest that s. 14(2) of the Interpretation of Legislation Act, 1984 will have the result that in matters caught by the Legal Profession Act, 2004:

  • the old s. 3.4.21 will apply to bills given before 8 November 2007;
  • the new s. 3.4.21 will apply to bills given after 7 November 2007; and
  • on bills given after 7 November 2007, the maximum rate which may be charged in the period after 7 November and up to 6 December 2007 under the new s. 3.4.21 is the penalty interest rate, and thereafter in relation to the same bills, the new 8.75% rate (though this third bullet point is the result of the operation of the amended regulation rather than s. 14(2) of the Interpretation of Legislation Act, 1984).

That’s what I make of Justice Brooking’s judgment in J & P Lemming Holdings Pty Ltd v O’Keefe [1984] VR 1005 (link available only to certain LexisNexis subscribers). His Honour had to decide whether a change in the rate of interest which accrued on judgments operated on judgments which were given before the change. His Honour said no, by reference to s. 14(2).

Section 14(2) only states a presumption against retrospective operation. The presumption yields to parliament’s express intention: there is no doubt that, in general, parliament has full power to make retrospective legislation if it so desires. I am not sure about this today, but back in 1984, Justice Brooking pointed out that it was unclear whether an intention which was clear but implied could be ‘express’. The existence of r. 3.4.3(2), which deals with the rate chargeable in the period between 8 November and 6 December 2007 might be thought to suggest that the law makers intended the new s. 3.4.21 to apply to bills given before the 8 November 2007 commencement of the amended s. 3.4.21. That is because if the new section applies only to bills given on or after that date, and interest is only chargeable 30 days after the bill is given, reg. 3.4.3(2) could never have any operation. There are two problems with this argument:

  • regulations are not made by parliament so presumably cannot be relied on to ascertain parliament’s intention; and
  • reg. 3.4.3(2) can have work to do — if the interpretation of the right to agree how interest may be charged I said was conceivable above is correct — in those cases where a costs agreement states a period of non-payment of a bill shorter than 30 days from which interest may be charged.

Need to amend bill and costs disclosure precedents

Whatever the costs agreements you are presently operating under say, new bills should state that interest will be charged at 8.75% (or whatever lower rate you decide to set). The bills should not state that the rate is the cash rate from time to time plus 2% because the rate of interest chargeable on any particular bill is the cash rate as at the date of the bill, regardless of how long into the future the amount is outstanding. The Act says you must state the rate, not where to go to find out what the rate is. In respect of bills given after 5 December 2007, the operative provision, read together with its definitions, provides:

The maximum rate is the rate that is equal to the percentage (or maximum percentage) specified by the Reserve Bank of Australia as the Cash Rate Target as at the date the bill was issued by the law practice concerned, increased by 2 percentage points.

Section 3.4.9(1)(f) of the Legal Profession Act, 2004 requires pre-costs agreement disclosure of the rate of interest that the law practice charges on overdue legal costs, and s. 3.4.16 requires written disclosure of ‘any substantial change to anything included in a disclosure already made … as soon as is reasonably practicable after the law practice becomes aware of that change’.

Sections 3.4.17 and 3.4.45 say that the client need not pay legal fees until they have been taxed by the Supreme Court, prima facie at the lawyer’s cost, ‘if a law practice does not disclose to a client … anything required … to be disclosed’.

Whatever might be the situation if disclosure is given late, where there is no disclosure at all of the change in interest rates, it is conceivable that failure to give a written disclosure of the change in interest rates to be charged might trigger s. 3.4.17. After all, disclosure is required of substantial changes to anything already disclosed, not changes to substantial matters already disclosed. The change in interest rates you are entitled to charge is probably ‘substantial’: the new maximum rate has been reduced by a quarter, it is calculated differently, and it is a fixed rate for each bill rather than being a variable rate. Why risk it? Especially when you have the opportunity to give your clients some good news at the same time.

Need to revisit post-8 November 2007 bills and costs disclosures

If in ignorance of the changes, you have given the same old costs disclosures since 8 November 2007 in matters caught by the Legal Profession Act, 2004 which were not finalised by 6 December 2007, or sent bills since 6 December 2007, it might be a wise idea to amend the disclosures on the basis that an error was made (as opposed to giving disclosure of a substantial change to something previously disclosed), and to re-issue amended bills (if that is permissible).

In any event, in the future, your bills should say something (consistent with your costs agreement) like

We reserve the right to charge simple interest on the outstanding balance of this bill at 5% per year starting on the 31st day after we give you the bill, or it is taken to have been given to you, if the bill remains unpaid, or partly unpaid.

though it is arguable that this would satisfy new s. 3.4.21(3):

Interest at the rate of 8.75% per year is payable if this bill is unpaid.

Legislative provisions

Until 8 November 2007, the Legal Profession Act, 2004‘s interest provision said:

‘3.4.21 Interest on unpaid legal costs

A law practice may charge interest on legal costs, at a rate not exceeding the rate fixed for the time being under section 2 of the Penalty Interest Rates Act 1983, from the period beginning 30 days after payment is demanded until the legal costs are paid.’

From then on, as a result of s. 49 of the Legal Profession Amendment Act, 2007, it has read:

‘3.4.21 Interest on unpaid legal costs

(1) A law practice may charge interest on unpaid legal costs if the costs are unpaid 30 days or more after the practice has given a bill for the costs in accordance with this Part.

(2) A law practice may also charge interest on unpaid legal costs in accordance with a costs agreement.

(3) A law practice must not charge interest under subsection (1) or (2) on unpaid legal costs unless the bill for those costs contains a statement that interest is payable if the costs are not paid and of the rate of interest.

(4) A law practice may not charge interest under this section or under a costs agreement at a rate that exceeds the rate prescribed by the regulations.’

Regulation 3.4.3 was inserted by r. 15 of the Legal Profession (Amendment) Regulations, 2007. Most of those regulations commenced on 8 May 2007, but s. 15 commenced 6 months later, on 8 November 2007. (Section 49 of the amending Act had the same delayed operation compared with the rest of that Act.) The regulation is over-complicated, and reproduced separately here. In substance, it says that the maximum rate for the period between 8 November and 6 December 2007 was the penalty interest rate (not the penalty interest rate +2% as the Law Institute’s website claimed until this blog put them right), and thereafter, it is the cash rate +2%.

See also:

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One Reply to “WARNING: costs agreements and bills require amendment”

  1. Unfortunately some of the larger litigation firms have not read your post or taken heed of the warning so that, at least by mid-2009, they were sending out bills of costs which did not included a statement that interest is payable if the costs are not paid and the rate of interest. It is a real trap for law firms as it means that a client sued for legal costs is not faced with a mounting interest bill if they delay settling the litigation.

    The other surprise is how many law firms do not comply with the disclosure requirements under Division 3 of Part 3.4 of the Act and therefore are vulnerable when they sue for legal costs to the defence that they cannot recover the legal costs or maintain the proceeding unless they have first applied under Division 7 of Part 3.4 of the Act for review of those costs.

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