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When can lawyers contract out of taxation? (part 1)

December 6th, 2015 · No Comments

Often enough, lawyers would love to avoid having their costs taxed.  Under the repealed but still operative Legal Profession Act 2004, lawyers could contract out in advance of the obligation to have their fees reviewed by taxation with ‘sophisticated clients’, but I do not recall ever having seen anyone attempt to do so.

When lawyers have not complied perfectly, vis-a-vis unsophisticated clients, with the costs disclosure regime under the repealed but still relevant Legal Profession Act 2004, they could not recover their fees unless there had been a taxation: s. 3.4.17.

It was clear that unsophisticated clients could not validly agree to waive in advance of the fees being incurred their right to tax their lawyers’ charges. But what about if the solicitors entered into a compromise of a dispute about their already rendered fees with their client?

How did the law of accord and satisfaction apply? (Accord and satisfaction is the litigation estoppel equivalent to res judicata when a dispute is compromised or ‘settled’ rather than adjudicated upon.)

Can lawyers get certainty and avoid further disputation (including taxation) in return for a discount on their fees?  Can they get around the s. 3.4.17 prohibition on recovering fees in cases of disclosure defaults unless they have been taxed?  If a taxation is commenced and then compromised, I would think there was no doubt that the fees have been ‘taxed’ for the purposes of this rule, especially if the compromise were embodied in orders finalising the taxation.  But what if the compromise occurs without any summons for taxation having been issued? Need the compromise comply with the formal requirements for costs agreements on the basis that they are agreements about the payment of legal costs which have been which have been charged for the provision of legal services?  Does the accord have to state expressly that the client waives the right to taxation?

It seemed until recently, that lawyers could not preclude taxation by compromising a dispute with a client or associated third party payer about fees, because such agreements would amount to a ‘costs agreement’ under the Legal Profession Act 2004.  Costs agreements were defined, after all, to mean ‘an agreement about the payment of legal costs’: s. 3.4.2, where ‘legal costs’ were defined by s. 1.2.1 to mean, amongst other things, ‘amounts that a person has been … charged by … a law practice for the provision of legal services…’).  And the Act prohibited unsophisticated clients from contracting out of their right to taxation.  Attempts to do so were void: ss. 3.4.26(5), 3.4.31.

The cases in this blog post (Amirbeaggi (NSWSC, 2008) and Jaha (SCV, 2012) explain why unsophisticated clients were apparently equally unable validly to waive their right to taxation after the fees had been incurred as they were unable to do so in advance, by virtue of the breadth of the definition of ‘costs agreement’.

Subsequent blog posts will consider what the Court of Appeal has had to say in a case indirectly on point, and explain the true state of the law in Victoria, as declared by the Supreme Court. It seems now that Victorian lawyers in dispute with their clients can buy their way out of taxation by giving clients a bit of a discount, and that this can occur without any writing or other formalities associated with ‘costs agreements’, and without any express reference to the future unavailability of taxation.  The client need not even be aware that they are giving up their right to taxation.  And that is so because agreements about how much a lawyer will accept in full and final satisfaction of their claim for fees already rendered for work already done are not ‘costs agreements’ governed by the Act after all.Now this is fairly technical folks.  So, to understand what follows in this and subsequent posts, you are going to have to keep the following provisions in mind:

‘3.4.26(5)  Except as provided by section 3.4.48A, a costs agreement cannot provide that the legal costs to which it relates are not subject to costs review under Division 7

Note: If it attempts to do so, the costs agreement will be void—see section 3.4.31(1).’

and

‘3.4.48A A sophisticated client of a law practice, or an associated third party payer who would be a sophisticated client if the third party payer were a client of the law practice concerned, may contract out of this Division.’

And you are going to have to understand that in the Court of Appeal case, only s. 3.4.48A was in issue, the unsuccessful argument being that even where s. 3.4.26(5) had no application, s. 3.4.48A separately and implicitly prohibited anyone other than sophisticated clients (including non-associated third party payers such as the borrower in that case) from contracting out of the right to taxation.

Amirbeaggi v Business in Focus (Australia) Pty Ltd [2008] NSWSC 421 was an ex tempore decision of Justice Brereton.

Amirbeaggi was the first-named partner in a firm of lawyers named individually as defendants, as per NSW practice. Business in Focus was one of its clients. There was a retainer by five clients in relation to five matters. Which clients were involved in which matters is unclear. There appears to have been a dispute about fees, because Brereton J described a subsequent agreement documented in a deed as ‘this apparent resolution’ at [3]. That was nine months or so into the retainer, when the clients entered into a deed acknowledging their indebtedness for work already done as to $200,000 or so, and provided an irrevocable authority to pay so much of that debt as remained unpaid out of monies which were coming in from another case.

Though it is not stated in the judgment, it seems most likely that the solicitors were not prepared to continue to act given the arrears of about $200,000 in fees owing, unless the clients acknowledged that they owed that sum and waived their right to dispute the arrears of fees.  The clients were prepared to do so, and it seems that in return, they got not a discount on the fees, but extra time to pay them, and a willingness in the solicitors to continue to do work ‘on credit’.  By virtue of the ex tempore nature of the judgment, however, it must be admitted that the extent to which a dispute was mutually compromised by the clients and lawyers is a little unclear.

There was no express giving up of any right to seek costs review, but there was a promise that the deed could be produced as a defence to any proceedings brought by any party in connection with the matters referred to in the deed, and that the solicitors could rely on the provisions of the deed to evidence the indebtedness of the clients to the lawyers.  As a matter of substance, therefore, there was a contracting out of the right to tax the fees.

Oddly, the lawyers then sought taxation of their own fees, but then thought better of it and sued for specific performance of the deed, monies by then having come in from the other case, but having been paid to a new firm of solicitors.  The new firm was joined as defendants to the old solicitors’ suit. The old solicitors sought summary judgment of their suit for specific performance. Of four arguments they made, only the third is relevant. It is treated at [19] – [33]. ‘Costs agreement’ and ‘legal costs’ were defined as in the Victorian statute: see [20].

The conclusion was:

‘27 The recitals to the deed make clear that the debt the subject of the deed is a debt for legal costs within that term as defined in the Act – namely, costs which a party has been charged in connection with proceedings or in connection with the rendering of legal services. The deed then makes provision for how that debt will be paid. It seems to me quite clear that the deed is, within the terms of s 302, an agreement about the payment of legal costs. Essentially, it provides that the legal costs rendered to that point will be paid upon payment of the Begun Value to the client. In my opinion, the deed is a costs agreement as defined.

28 Clause 6.1 of the agreement purports to provide that the deed may be pleaded as a full and complete defence to any costs assessment application. In that respect it purports to bar proceedings for costs assessment in respect of the costs which are the subject of the deed. It therefore has the effect of providing that the legal costs to which it relates are not subject to costs assessment under Division 11, in contravention of s 322(5). It follows that the deed, being a costs agreement, is void pursuant to s 327(1), it not being suggested that the clients or any of them fall within the definition of sophisticated client in the Act.’

Brereton J then went on to make some further comments by way of obiter dicta, expressly noting that he had not heard argument on the question.  The subject of the obiter was the possibility of contracting out of or waiving the right to taxation more generally. Importantly for what follows, his Honour found at [32] that s. 3.4.48A’s NSW equivalent provided ‘in effect, that only a sophisticated client can contract out of the right to costs assessment’.  (Though in my blog I talk of ‘taxation’, that which is commenced by a summons for taxation is described in the old Victorian and NSW statutes as ‘costs review’ and ‘costs assessment’ respectively.)

The Victorian Court of Appeal considered Amirbeaggi in Beba Enterprises Pty Ltd v Gadens Lawyers [2013] VSCA 136, discussed in a subsequent post. Justice Ashley, with whom Priest and Redlich JJA agreed said, of Amirbeaggi:

’85 What was necessary for his Honour’s decision ended when he held that the deed, being a costs agreement, was void. There would be just the same result in this State, for exactly the same reason. See ss 3.4.26(5) and 3.4.31(1) of the Act. The observations thereafter made by his Honour were made without the benefit of argument. The situation falling for determination in this case did not arise.’

The situation which fell for determination in Beba was axiomatically not a costs agreement, for it was a compromise of a commercial dispute between a borrower (who was a ‘non-associated third party payer’) and a lender, to which no solicitor was a party.  Justice Ashley may have been  distinguishing Justice Brereton’s broad proposition that NSW’s equivalent of s. 3.4.48A effectively provided that only a sophisticated client could contract out of the right to taxation, so that it did not preclude the Court of Appeal from finding that borrowers and lenders were perfectly entitled to contract out of whatever they liked in relation to any rights of taxation either may have, so long as they did not do so in a ‘costs agreement’. The Court of Appeal well understood that the obiter was directed to the NSW equivalent of s. 3.4.48A (see Beba at [48]).  Section 3.4.26(5) was not relied upon by the lawyers in that case.

The Supreme Court of Victoria applied Amirbeaggi in Jaha v Defteros [2012] VSC 512 (Pagone J).  That was before the Court of Appeal’s decision in Beba.  Justice Pagone confirmed on appeal a finding that the solicitor had accepted an offer by the client to waive fees for work to date and complete the retainer for a fixed fee of $30,000. His Honour found that the parties’ oral statements in a conference gave rise to an oral costs agreement evidenced in writing. The final offer was put by the client. Its acceptance by the solicitor was evidenced by a letter from the solicitor of which Pagone J said at [14]:

‘The terms of the agreement evidenced in the letter are consistent with the agreement as I have found the parties to have reached orally.’

So both the terms of the agreement and the acceptance by the offeree were evidenced in writing (though the parties do not appear to have drawn the Court’s attention to Legal Profession Act 2004 sub-ss. 3.4.26(3) or (4)). His Honour dismissed a challenge to the agreement on the basis of alleged non-compliance with the writing requirements, but acknowledged that the agreement was a ‘costs agreement’ to which the formal requirements set out in the Legal Profession Act 2004 applied, citing Armibeaggi.

Of course it was in part a common garden variety costs agreement in that it provided for the cost of future legal work in part, as well as dealing with work already done, and so different from a compromise exclusively about already billed costs for work already done.  Nevertheless it may be said to have been made at a moment ‘temporally distant from the time when a costs agreement may be entered into’, a concept which we will come to when we examine Beba in more detail in a subsequent post.

See also:

Tags: Costs agreements · costs disclosure defaults · costs disputes · Legal Profession Act · Professional fees and disbursements · setting aside costs agreements · Taxations · The suit for fees