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Solicitors’ exposure to falling between two stools in solicitor-client taxations revealed

October 18th, 2011 · No Comments

Update, 16.2.12: See now Ipex ITG Pty Ltd v McGarvie [2011] VSC 675.

Original post: A recent decision of the Supreme Court’s Costs Court means that solicitors have only a non-extendable 60 days in which to seek taxation of counsel’s fees, even though clients and third party payers have an extendable 12 months in which to seek taxation of the solicitors’ fees, including disbursements such as counsel’s fees: Kong v Henty Jepson & Kelly Pty Ltd, unreported, Associate Justice Wood, 4 April 2011.  The same result was reached in I.J.R. Homes v MDM Legal Services SCI, unreported, Associate Justice Wood, 12 September 2011, and the Costs Judge’s comments in that order are reproduced at the end of this post too.  Unless the barrister may be joined to and bound as against the solicitor to the outcome of the taxation of the solicitors’ fees initiated after the expiry of the time allowed to the solicitor for seeking taxation of the counsel’s fees, the solicitors run the risk of the client being liable to them only for the taxed down amount of counsel’s fees while the solicitors remain liable to the barrister for the full whack.

And the solicitor cannot get around the problem by seeking to procure their client to seek taxation of the counsel’s fees directly against counsel, because, the Supreme Court says, clients have no standing to do so.  Though the Court has a discretion under s. 3.4.42 to join ‘concerned law practices’ and order that they be bound by the outcome, it did not make such orders in the Kong Case joining the barrister, though for reasons peculiar to that case, the Court’s reluctance to do so may not be as great in future. All of that applies where the traditional relations between client, solicitor and counsel are entered into; where the client has a costs agreement with the barrister, things are different, and less problematic for solicitors.

But for the fact that solicitors tend to disregard the law of costs and carry on as they always have, no matter what the law is and how it is changed, four reactions might be expected in Victoria and the many other states with analogous statutory provisions:

1.   Solicitors will commence prophylactic applications for taxation of counsel’s fees within 60 days after service on them of the fee slip, in case the client later seeks to tax the solicitors’ bills (but they may well have to pay the costs of doing so out of their own pockets);

2.  Solicitors will require counsel to contract directly with clients in relation to fees, which many counsel will not be prepared to do;

3.  Solicitors might seek to contract out of clients’ rights to review counsel’s fees as disbursements on their bills, or to contract out of their rights to review counsel’s fees as disbursements on their bills, once their right to seek review of counsel’s fees has expired, but that is likely to be effective only where the clients and third party payers are ‘sophisticated’ within the s. 3.4.2 meaning of that term, since agreements about costs which purport to contract out of normal (as opposed to ‘sophisticated’) clients’ and/or third party payers’ rights to taxation are void: see ss. 3.4.26(5) and 3.4.31; or

4.  Solicitors might make it a term of their costs agreement with counsel that counsel indemnify the solicitors against any difference between the amount paid by the solicitors to the barrister and the amount payable by the client to the solicitors in respect of those same fees, but any such agreement would have to have a degree of sophistication, to avoid counsel taking the rap for a solicitor’s default (such as where counsel provide adequate information for the solicitor to provide disclosure of counsel’s fees to the client, but the solicitor fails to do so, with the result that the solicitor’s taxed costs, including disbursements such as counsel’s fees, are reduced under s. 3.4.17(4).

How are similar problems treated in other states’ and territories’ taxing and review jurisdictions?

The traditional relationship between client, solicitor and barrister is a contract (the retainer) between client and solicitor which permits the solicitor to retain counsel on the client’s behalf, and a contract between the solicitor and the barrister traditionally made by the delivery of the brief enclosed by a backsheet marked with a fee, fleshed out by centuries of understood norms as to the charging of counsel’s fees.  Nowadays, counsel may contract directly with the client or with the solicitor and client by a ‘costs agreement’.  Traditionally, counsel could not sue for their fees, but now they can.

The Supreme Court of Victoria recently decided that unless the client has a costs agreement with counsel, the client may only seek taxation (now called ‘review’) of counsel’s fees in proceedings naming the solicitors as respondent.  That is, the client can seek taxation of the solicitor’s bill, or part of it (e.g. only the disbursements, or only those disbursements which are counsel’s fees, or only some of counsel’s fees), in which case the client’s liability to the solicitor may be diminished on taxation.  The solicitor will be at least the primary respondent to the review application.  What the client may not do is seek to tax counsel’s fees directly by naming the barrister as a respondent and seeking to bind him or her to the outcome so that the amount counsel is entitled to be paid by the solicitor is the same as the amount the solicitor is entitled to be paid by the client.

The decision has set that part of the costs lawyers world which knows about it abuzz.  But Costs Judge Wood did not publish reasons for decision, preferring instead to make some notes in the ‘Other Matters’ part of the order, so knowledge of the decision is likely limited.  The notes are reproduced at the end of the post.  Since neither party to the case sought to review or appeal the decision, fuller reasons will not be provided.  The problem is that solicitors have only a non-extendable 60 days from the date of counsel’s fee slip’s service in which to seek review of counsel’s fees in such a way as to bind counsel: s. 3.4.39, Legal Profession Act, 2004 (Vic.), while clients have an extendable 12 months from the date of the solicitor’s bill’s service: s. 3.4.38(5) and (6). Counsel’s fee slips are often not given to clients immediately, but are charged as a disbursement to the solicitor’s bill at the end of the month (or — so it seems to me — the next, or the one after that…), so that the 60 day period will expire substantially sooner then 60 days after the client learns of the amount charged by counsel.  Often enough, then, the client will seek review of the solicitor’s bill, and if the fees charged by counsel are not allowed in full, the client may have to pay the reduced amount, while the solicitor will have to pay counsel full whack, personally wearing the difference.

The Act is not especially clear when it comes to the taxation of counsel’s fees.  The first question is as to the ambit of the principal provision, s. 3.4.38(1), which says ‘A client may apply to the Costs Court for a review of the whole or any part of legal costs.’  Who may the client join as counterparty?  What ‘legal costs’ are referred to? Presumably not the 14th Dalai Lama’s, but only legal costs for which the client is ultimately liable, but ought a limitation be read into the provision that the client be directly liable to the person joined as counterparty to the application for taxation?  The second question is — if not, so that the client can only seek taxation against the lawyer he is directly liable to (usually the solicitor), can the client or the Court then join the barrister pursuant to s. 3.4.42 so that the solicitor may obtain, against the barrister, the benefit of any amounts taxed off the barrister’s fees? Indeed, can the solicitor seek taxation of his own fees and give notice of the taxation pursuant to the barrister pursuant to s. 3.4.42, so as to achieve the barrister’s involvement in the taxation? Can the client or the solicitor do so after the 60 day period in which the solicitor had to tax the barrister’s fees have elapsed? If so, will the Court make the all-important determination that the barrister will be bound by the review?

Five classes of person may seek review of legal costs:

  1. Clients — that is persons to whom or for whom legal services are provided: s. 3.4.38(1);
  2. Third party payers — that is, non-clients who are under an obligation to pay the lawyers’ fees, or an amount equal to the lawyers’ fees, to the lawyers or the lawyers’ clients (e.g. defendants’ liability insurers who have taken over the conduct of an insured’s defence, directors who guarantee their companies’ legal fees, mortgagors who are obliged to pay the mortgagee’s legal costs of variations to the mortgage pursuant to the terms of the mortgage): s. 3.4.38(2)
  3. Executors and administrators of deceased former clients / third party payers and trustees of the estate of clients and third party payers (by virtue of s. 3.4.38(10)’s extended definition of ‘client’ and ‘third party payer’);
  4. Lawyers, in respect of the fees and disbursements of other lawyers retained by them (e.g. barristers, town agents and costs lawyers): s. 3.4.39; and
  5. Lawyers, in respect of their own fees and disbursements: s. 3.4.40.

The situation is complicated because costs disclosure defaults by solicitor or barrister may result in amounts being taxed off counsel’s fees.  There are three classes of disclosure obligations under the Act:

  1. Those owed by solicitors to clients and associated third party payers (e.g. s. 3.4.9, 3.4.10(1), 3.4.13, 3.4.14, 3.4.16, s. 3.4.18A);
  2. Those owed by barristers to clients and associated third party payers (e.g. s. 3.4.13, 3.4.14 and 3.4.16); and
  3. Those owed by barristers to solicitors (s. 3.4.10(2)).

Any costs disclosure default by a solicitor, including in relation to counsel’s fees, may result in amounts being taxed off the solicitor’s ‘legal costs’, which include disbursements, and so, presumably, counsel’s fees: s. 3.4.17(4).  By sub-section (5), however, sub-section (4) does not apply to the solicitor’s own fees where the solicitor’s costs disclosure default was solely attributable to counsel’s failure to provide to the solicitor the information necessary to allow the solicitor to make disclosure about counsel’s fees, but sub-section (4) does ‘apply to the legal costs owing to the [barrister]’.  The operation of s. 3.4.17(5) in a taxation of solicitors’ legal costs including counsel’s fees as disbursements is intriguing, assuming it is intended to have operation in a taxation to which counsel is not a party.  Can it have been intended that the barrister’s entitlement to a fee will be interfered with in a hearing to which he or she is not a party?  Probably not, so that in these circumstances, it seems likely that the Court would give notice to the barrister under s. 3.4.42, and determine that the barrister is bound by the review.  But then what would ‘bound by the review’ mean?  Would it mean that the barrister’s fees would be diminished only to the extent of the reduction under s. 3.4.17(4), or would it mean that the barrister is bound by the taxing off, as between solicitor and client, of the barrister’s fees, in the form of a disbursement on the solicitor’s bill on the basis that the fees were for work which it was not reasonable to do?

Now, as promised, the Costs Judge’s notes by way of brief reasons:

Kong v Henty Jepson & Kelly Pty Ltd

‘It is common ground that the Second Respondent in each matter was a barrister who was engaged by the First Respondent (who is a solicitor).  The arrangement was for the [barrister] to provide legal services for the Applicants who were the clients of the [solicitor]. The [solicitor] had a right to be indemnified by the [clients] for the fees of the [barrister] and, in line with normal practice, there was no contractual arrangement between the [clients and the barrister].  The contractual arrangement was between the [solicitor and the barrister].

The Applicants seek a review of a number of bills of costs issued by the [solicitor] in which charges of the [solicitors] appear and fees of the [barrister] appear as disbursements.  However, the [clients’] summons for taxation only seeks to review the fees of the [barrister].

A reading of the plain words in s. 3.4.38(1) and the definition of “legal costs” in s. 1.2.1 of the Legal Profession Act 2004 to give them their natural meaning, leads to the conclusion that the only proper Respondent to an application by the clients to review disbursements of the [solicitor] is the [solicitor].  The [clients’] liability to pay is to the [solicitor] and it is the [solicitor’s] responsibility to justify the disbursement in their bill on review. The [clients’] right is to review a bill of “a law practice for the provision of legal services including disbursements” (s. l.2.1). The law practice here is the [solicitor], and the fees of the [barrister] are the disbursements in the [solicitor’s] bill.

The Act provides an option for the [solicitor] to review the [barrister’s] fees pursuant to s. 3.4.39 of the Act. No such application was brought. The current review proceedings can only determine the liability of the [clients] to the [solicitor]. The quantum of liability of the [solicitor] to the [barrister] is a separate exercise potentially on a different basis in a recovery action in a Court of competent jurisdiction initiated by the [barrister].’

I.J.R. Homes Pty Ltd v MDM Legal Services Pty Ltd

‘[The Court found that there was an orthodox contractual relationship between client, solicitor, and barrister, i.e. a contract between client and solicitor and a separate contract between solicitor and barrister.]

The [client] also argued that in effect the [client] should be re-characterised as a “non associated third party payer” and therefore had standing to review the [barrister’s] fees on the basis that the “client” was the [solicitor] and the [barrister]  was the ” law practice”.

It is clear from the language of s. 3.4.10 that the [client] is to be characterized as the “client” in circumstances where a solicitor engages a barrister on their behalf in the conventional way.

The Court did not favour the [client’s] interpretation of the legislation. A reading of the plain words in s. 3.4.38(1) — (where it is the “client” who has standing) — and the definition of “legal costs” in s. 1.2.1 of the Legal Profession Act 2004to give them their natural meaning, leads to the conclusion that the only proper Respondent to an application by the client to review disbursements of the [solicitor] is the [solicitor]. The [client]’s liability to pay is to the [solicitor] and it is the [solicitor]’s responsibility to pay the [barrister] and to justify the quantum of their disbursement in their bill on review. The [client’s] right is to review a bill of “a law practice for the provision of legal services including disbursements (s. 1.2.1 [definition of ‘legal costs’]). The law practice here is the [solicitor], and the fees of the [barrister]s are the disbursements in the [solicitor]’s bill.

The current review proceedings can only determine the liability of the [client] to the [solicitor]. The quantum of liability of the [solicitor] to the [barrister] is a separate exercise potentially on a different basis.

Even if the [client] paid the [barrister]’s fees direct the [client] would be treated as having done so on behalf of the [solicitor] and the fees would still be included in the bill as a disbursement of the [solicitor] (see Oliver “Law of Costs” at pages 25 and 179).’

See also:

Tags: Costs agreements · costs disclosure defaults · Professional fees and disbursements · Retainers · Solicitor client bills of costs · Taxations