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Solicitor’s equitable charge to secure fees declared void

October 19th, 2009 · No Comments

The plaintiff in Brott v Shtrambrandt [2009] VSC 467 is not having much luck.  First of all, he cut what he thought was a plea bargain in a professional misconduct prosecution only to have VCAT’s Legal Practice List increase by 50% the penalty he and the Law Insitute had agreed jointly to contend was appropriate, so that his practising certificate was cancelled and he was prohibited from applying for a new one for 9 months: Law Institute of Victoria v Brott [2008] VCAT 1998.  But the extra penalty all became a bit academic when he was prohibited from applying for a new practising certificate until 2014 in a professional misconduct prosecution he contested and lost disastrously (Legal Services Commissioner v Brott [2008] VCAT 2399, and then lost on appeal ([2009] VSCA 55), paying the Commissioner’s costs all the way and suffering withering criticism.  Then, in a suit by the solicitor for fees charged back in the day when he was allowed to charge them, Justice Beach has inconveniently declared that what sounded like a pretty kick-arse charge fell foul of the Consumer Credit Code and was void.  Section 40 of the Code voids any mortgages (including equitable charges) governed by the Code which do not describe or identify the charged property.  ‘[A]ll estates or interests in real estate which I now have or may hereafter acquire’ did not cut the mustard as a description.

Not all costs agreements will be credit contracts governed by the Code.  I bet there are a lot of solicitors out there with void equitable charges, however.  They will need to proceed with great care in fixing the problem.  Unless they procure the amelioration of the position with retrospective effect with the utmost probity, the ‘fix’ may in fact be challenged in the various jurisdictions which give expression to the law’s tenderness towards clients in their dealings with solicitors.  It would be sensible to obtain advice if the amount secured by the questionable charge is of sufficient significance to them.

The solicitor’s original costs agreement purported, by way of security for the solicitor’s fees to be charged in the future, to charge

‘all my estate, rights, title and interest in and to and entitlement to any real or personal property from a property lase settlement with my husband and to: (a) all of my estate, right title and interest in any other real or personal property, save and except for heirlooms, now or hereafter acquired by me; in favour of Issac Brott & Co for the due and punctual payment of all moneys that may now or hereafter become due to Issac Brott & Co by reason of and pursuant to the terms of this agreement.’

This solicitor purported to take a charge over his client’s toothbrush, but Justice Beach found the costs agreement containing that charge to have been superseded by the one which turned out to be controversial.  By way of dicta, his Honour suggested that the mystery word ‘lase’ probably rendered the charge void for uncertainty anyway.  Alternatively, his Honour said, it may have fallen foul of the requirement that the property charged be able to be pointed to at the time it is sought to be enforced.  Justice Beach explained at [49]:

‘From time to time it is suggested that a charge over all of the real and personal property over which the chargor owns or may hereafter acquire may be too wide. [fn 21: See for example Fisher & Lightwood’s Law of Mortgage (Australian edition) at paragraph 2.3.]  However, the better view appears to be that a charge over a chargor’s “real and personal property whatsoever and wheresoever” is not void for uncertainty, nor as being against public policy if it is possible at the time when the charge is sought to be enforced to point to the property comprised in it. [fn 22: See generally Bridge Wholesale Acceptance Corporation (Australia) Limited v Burnard (1992) 27 NSWLR 415 at 421. See further, National Trustees Executors and Agency Co of Australia Limited v Lesser [1944] VLR 210; Tyson v Kelcey [1899] 2 Ch 530 at 532-3; Clark v Raymor (Brisbane) Pty Ltd (No. 2) [1982] QdR 790 at 795 and ALH Australia Limited v McGlinn (1996) 7 BPR 15179.]

(For some reason, perhaps that there was no incurring of a deferred debt under the first costs agreement, s. 40 of the Consumer Credit Code, which was determinative of the dispute in relation to the second costs agrement discussed below, was not discussed in relation to this first costs agreement).

Clauses 9 and 10 of the second costs agreement purported to charge irrevocably to secure ‘payment of all moneys that may be or become due to you [Brott] under this Costs Agreement’:

‘all estates or interests in real estate which I, or any company in relation to which I have authority to exercise the power to charge real estate, now have or may hereafter acquire’ and

all money and property whatsoever (sic) nature to which I may become entitled pursuant to any judgment or order obtained in, or by reason of any settlement of, any proceeding pursued by you’.

Justice Beach found that the second costs agreement achieved retrospective operation (at [40]).  Bills were to be rendered periodically, but the fees were not payable until ‘completion of these proceedings (being a minimum of 180 days after settlement of the proceeding) or, alternatively, the termination of your services, whichever is the earlier.’  If they were not paid at that time, however, interest ran at 12.3 per cent from the date of the rendering of each unpaid bill (as opposed to from the date for payment of the monies due upon the bills from the due date).  Accordingly, Justice Beach found that the costs agreement’s equitable charge was a ‘mortgage’ as defined by the Consumer Credit (Victoria) Code, to which the mortgagor was a natural person (s. 8) which secured obligations under a ‘credit contract’ as defined. That latter finding entailed findings that the credit was provided for personal, domestic or household purposes (matrimonial property proceedings), and that (about which there was ‘no doubt’) by the second costs agreement, the solicitor deferred a debt owed by the client or the client incurred a deferred debt, although the reasoning in that regard was not set out in any detail because the solicitor apparently admitted as much.

Significantly, Justice Beach found that the following clause, a member of a class of such clauses commonly found in costs agreements at the less exemplary end of the scale, amounted to a charge which was or might have been made for providing the credit:

‘I acknowledge that those rules [Family Law Rules] admit (sic) you to add up to 10% loading to the costs set out in the Schedule hereto having regard to the complexity of the proceedings, the difficulty or novelty of the matters raised in the proceedings and/or the special skill, knowledge or responsibility of and the demands placed on you by the proceedings.’

The odd interest provision referred to above also amounted to a charge which was or might have been made for providing the credit.  By s. 11(1) of the Code, the solicitor had the onus of rebutting the presumption that the Code applied to the provision of credit, which would have required him to establish on the balance of probabilities that no charge was or might be made for the provision of the credit.

The judgment notes that the Consumer Credit (Victoria) Act, 1995 applies the Consumer Credit (Victoria) Code (commonly referred to simply as ‘the Consumer Credit Code’) to credit contracts entered into from 1996.

Section 40 of the Consumer Credit Code provides that:

‘(1) A mortgage that does not describe or identify the property which is subject to the mortgage is void.

(2) Without limiting subsection (1), a provision in a mortgage that charges all the property of the mortgagor is void.’

Justice Beach continued:

’78  It follows from what I have said that the second costs agreement is a mortgage within the meaning of s 40 of the Consumer Credit Code.  The question that now arises is whether it is void because it “does not describe or identify the property” which is subject to it.

79  If one looks at clauses 9 and 10 of the second costs agreement, it is apparent that they purport to charge:

(a) all Mrs Shtrambrandt’s interests in any real estate which she now has or may acquire;

(b) all interests in real estate which any company in relation to which Mrs Shtrambrandt has authority to exercise the power to charge real estate now has or may acquire; and

(c) all money and property of whatsoever nature to which Mrs Shtrambrandt might become entitled by reason of any judgment or settlement in the family law proceeding or any other proceeding pursued by Mr Brott on her behalf.

80 Clause 13(4) of Schedule 2 of the Code provides that in the Code “words in the singular include the plural”.  Applying that clause and clause 7 of Schedule 2, if two or more provisions in a mortgage charge all the property of the mortgagor, then they are void.   On one view, it could be said that clauses 9 and 10 of the second costs agreement charge all the property of Mrs Shtrambrandt because anything Mrs Shtrambrandt becomes entitled to retain after the completion of the family law proceeding could be said to be an entitlement pursuant to a judgment or settlement of that proceeding.

81  However, I prefer to base my decision on grounds which are not so narrow.  In my view, clause 9 of the second costs agreement is caught by s 40(1) of the Consumer Credit Code.  Property is neither described nor identified within the meaning of that section by the use of general words encompassing all estates or interests in real estate which the mortgagor now has or may acquire.[42] Further, a mortgagee’s position is not enhanced by the breadth of the charge being widened to include all estates or interests in real estate which any company in relation to which the mortgagor has authority to exercise the power to charge real estate now has or may acquire.

82 Neither the Consumer Credit Code nor the extrinsic material in relation to it[43] disclose the purpose or object[44] of s 40.  However, one likely purpose would appear to be to ensure that a mortgagor’s obligations are not open-ended and to ensure that a mortgagee cannot claim, or place restrictions on, property of greater value than the mortgagee might otherwise have a right to under the credit contract.[45] This purpose (or object) would obviously not be achieved (or not be best achieved, to use the language of clause 7 of Schedule 2) by the construction posited on behalf of Mr Brott.’

[42] Cf Considine v Citicorp Australia Limited [1981] 1 NSWLR 657.

[43] Cf clause 8 of Schedule 2 of the Code.

[44] Cf clause 7 of the Code.

[45] Cf paragraph 8.109 of the explanatory memorandum of the National Consumer Credit Protection Bill currently before the Commonwealth Parliament (and in which it is proposed to enact a national credit code in which s 44 is in identical terms to s 40 of the Consumer Credit Code).’

See also:

Tags: Costs agreements · No win no fee · Professional fees and disbursements · Retainers · setting aside costs agreements