When can lawyers contract out of taxation? (part 2)

This is part 2 of a post about in what circumstances lawyers can avoid having their fees scrutinised by the Supreme Court by the process traditionally known as ‘taxation’, but more recently also described in statutes as ‘costs review’ and ‘costs assessment’.  Part 1 is here. First, a disclosure: I argued Beba at first instance, for the lawyers, and advised in the appeals.

In Beba Enterprises Limited v Gadens Lawyers [2013] VSCA 136, a borrower promised the lender to pay the lender’s legal costs if they defaulted.  Of course, they did default, and the lender demanded a sum which included an allowance for the lender’s legal fees occasioned by the default. The borrower and lender compromised their dispute, including in relation to the legal fees payable.  Nevertheless, the borrower sought taxation of the lender’s legal fees by issuing a summons for taxation addressed to Gadens Lawyers, the lender’s solicitors.

You might not be aware that this is something that ‘third party payers’ like the borrower could do under the Legal Profession Act 2004, but they could: s. 3.4.38(2).

The lender’s lawyers argued in response to the application for taxation that the borrower’s and the lender’s written compromise was an accord and satisfaction which was a defence to the borrower’s suit for taxation against the lawyers.  The borrower recognised that the compromise was not a ‘costs agreement’ so that s. 3.4.26(5) had no application, but argued that s. 3.4.48A implicitly provided that non-associated third party payers, like the borrower, could not waive their right to taxation.  The argument was that since s. 3.4.48A expressly stated a class of persons who could contract out of the right to taxation (sophisticated clients and sophisticated associated third party payers), implicitly, the rest of the world could not.

(To understand what follows, you will need to have read part 1, which sets out ss. 3.4.26(5) and 3.4.48A.  Know also that associated third party payers are non-clients who make a promise to another’s solicitor to pay the other’s fees (e.g. an insurer who promises to pay the fees of their insured’s defence) and non-associated third party payers are non-clients who make a promise to another to pay to that other the other’s legal fees (like the borrower who made a promise to the lender to pay to the lender their legal fees in case of default under the loan agreement). In other words, each promises to pay someone else’s fees, and the distinction between the two lies in to whom the promise is made.)

The Supreme Court overturned the Costs Court’s decision which had rejected the lawyers’ accord and satisfaction defence.  Emerton J and, on appeal, the Court of Appeal, found that the borrower and the lender had entered into an accord and satisfaction which was not a ‘costs agreement’, and found that that provided a defence to the lawyers, so that the application for taxation should be dismissed summarily.

It is worth noting what the decision was not about.  It was not about a ‘costs agreement’, under the Legal Profession Act 2004, because ‘costs agreements’ have to have a lawyer as a party, and the accord was between two non-lawyers (as the Court of Appeal noted at [74]).

It was also not a case about the writing requirements for costs agreements.  First, the accord was in writing.  Secondly, it was not a costs agreement at all.

Finally, as noted above, it was not a case about the prohibition on contracting out of costs agreements in Legal Profession Act 2004 s. 3.4.26(5).  Firstly because the borrower relied instead exclusively on s. 3.4.48A which said that some classes of sophisticates ‘can contract out of’ the provisions relating to taxation.  By implication, the borrower argued, even though the s. 3.4.26(5) prohibition on doing so in costs agreements did not apply, persons other than the sophisticates referred to in s. 3.4.48A (including non-associated third party payers) could not, by implication, contract out of the taxation provisions.  Secondly, the accord was not, and could not be, as already noted, a costs agreement.

The Court of Appeal nevertheless made some comments about the application of s. 3.4.26(5) to costs agreements in the course of deciding the dispute about the application of s. 3.4.48A to an accord which was not a costs agreement.  As noted in part 1, the Court considered and expressly approved a decision of the NSW Supreme Court in Amirbeaggi v Business in Focus (Australia) Pty Ltd [2008] NSWSC 421. But Ashley JA, with whom Redlich and Priest JJA agreed, set out Justice Emerton’s reasoning, and then made some comments which suggest that they would take a different approach to the question of whether a compromise in relation to fees already billed is a ‘costs agreement for the purposes of the Act if such a case were to come before them:

’59 … This is what the judge said about the matter:

“Section 3.4.48A makes no mention of non-associated third party payers. Beba submits that, by implication, non-associated third party payers may not contract out of their rights under Division 7, whether they qualify as sophisticated or not.

I reject the submission that s 3.4.48A gives rise to the implication that a non-associated third party payer cannot waive its right to costs review by agreement with the client. Section 3.4.48A deals only with the rights of ‘clients’ and ‘associated third party payers’, and it treats them as clients of law practices. It allows those clients and associated third party payers who can be described as ‘sophisticated’ to waive their rights under Division 7, including their right to costs review. By implication, ‘unsophisticated’ clients and ‘unsophisticated’ associated third party payers cannot waive their right to costs review even if they enter into an agreement that purports to have this effect. The fact that s 3.4.48A only refers to ‘clients’ and ‘associated third party payers’ shows the provision to be directed to regulating the contracting out of rights in costs agreements rather than in agreements at large. If s 3.4.48A was intended to have the effect that non-associated third party payers in need of statutory protection could not contract out of their rights under Division 7, it would have enabled ‘sophisticated’ non-associated third party payers to contract out, just as it does for sophisticated clients and sophisticated associated third party payers.

In my view, s 3.4.48A has nothing to say, either expressly or by implication, about the position of non-associated third party payers, who by definition are not parties to the costs agreement.”

71 The judge below concluded, in substance, that there was a relationship between ss 3.4.26(5) and 3.4.48A. That is, the latter provision was in step with the right conferred by the former. I agree.

72 At first, in the Act, there was a blanket ban on a costs agreement providing that there should be no costs review; and there was no need for, or equivalent of, s 3.4.48A. Then an exception was created by s 3.4.48A in its initial form. That exception was not accompanied by amendment of s 3.4.26(5). That was remedied by the amending Act of 2007, which made the two provisions compatible.

73 Next, the language of s 3.4.48A, with its reference to contracting out, has an evident relationship with the conception of a costs agreement. A client and an associated third party payer may enter into such a contract. In doing so, they are permitted by s 3.4.26(5) to contract out of Division 7 — by reference to s 3.4.48A – but only if the client is, or the associated third party payer is akin to, a sophisticated client. A reading that the provisions are in step makes more sense, in my opinion, than a construction that s 3.4.26(5) addresses the time of making a costs agreement, whilst s 3.4.48A addresses contracting out either at that time or when a contract to contract out of Division 7 is made at some later time. I reject such a construction.

74 If s 3.4.48A has the field of operation which I have described, it makes perfectly good sense why the section does not refer to non-associated third party payers. Such persons cannot enter into a costs agreement. Except for the definitional section, they are not referred to in any of Divisions 1-6 of Part 3.4.

75 It is a corollary of the conclusions which I have already expressed that neither ss 3.4.26(5) nor 3.4.48A says anything about the ability of a client or associated third party payer to reach a binding settlement with a law practice respecting the quantum of legal costs charged, or of a non-associated third party payer to reach a binding settlement respecting the quantum of costs charged with the person who is under a legal obligation to pay those costs. Each of these situations — costs having been incurred and charged out – is temporally distant from the time when a costs agreement may be entered into (and then only between clients or associated third party payers with a law practice).

76 In that event, subject to considering Beba’s submission that Division 7 is legislation of a kind that cannot be displaced by private agreement, it appears to me that non-associated third party payers, a fortiori clients and associated third party payers, are not prevented by Division 7 from entering into binding agreements to pay a quantified amount in costs, such agreements precluding a party from later seeking information or applying for a costs review.

77 I pause for a moment to consider the consequences of Beba’s argument that the provisions of Division 7 cannot be displaced by private agreement. The argument advanced for Beba that non-associated third party payers are the most vulnerable group, for which reason it is understandable that they are precluded from contracting out, has little attraction when the consequences of Beba’s construction are understood. It would mean that sophisticated clients and associated third party payers who would be sophisticated clients if they were clients could contract out of Division 7; and that not only non-associated third party payers, but also unsophisticated clients and associated third party payers could not do so. That is because none of those classes of persons fall within s 3.4.48A, and the inference that contracting out is prohibited would apply equally to all of them.

78 I should say a little more about the consequences flowing from acceptance of Beba’s construction. It would mean that unsophisticated clients could not enter binding agreements with law practices about costs charged out, likewise unsophisticated associated third party payers. So also, non-associated third party payers (whether sophisticated or not). Any agreement, whether or not entered into by a party with full information about the costs charged, would be at risk of a costs review at the instance of the payer. Moreover, application for review could be made, in some cases, as long as 12 months after payment of costs, and even later in some circumstances: see s 3.4.38(5) and (6). It is also the fact, contrary to Beba’s submission, that the payment might have been made in a litigious proceeding. If a proceeding was settled, and terms of settlement were signed requiring the defendant to pay the plaintiff an amount plus a further amount as the plaintiff’s quantified costs, the defendant would appear to fit the description of a non-associated third party payer.

79 In my opinion, the consequences which I have outlined make it extremely improbable that Parliament could have intended them. Whilst it must be recognised that Part 3.4, and specifically Division 7, is designed to protect persons obliged to pay legal costs, it does not follow that the desirability of parties bringing an end to a legal dispute, including its costs ramifications, and whether or not involving litigation, should be ignored. Nor would it do much for the administration of justice if agreements settling costs issues (whether solely relating to costs, or part of a wider resolution), entered into in apparent good faith, could be at risk of being partly set aside at the instance of the payer, the other party then being at risk, in some cases, of having to repay some part of moneys already received and paid to the party’s legal practitioner.

80 The structure of Part 3.4 as I have described it, together with the improbability that Parliament intended consequences such as I have outlined, makes it improbable that Division 7 should be understood to be legislation of a kind that cannot be displaced by private agreement. …’

Paras 73 and 75 strongly suggest that Ashley JA construed ‘costs agreement’ as meaning an agreement about the payment of legal costs for work to be done in the future.

The definitions of ‘costs agreement’ and ‘legal costs’ are not considered in the Court of Appeal’s reasons.  As noted in Part 1, costs agreements were defined 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…’).

Ashley JA went on to distinguish Amirbeaggi on the basis that, unlike in Beba, there was a costs agreement, but did not consider Jaha (probably because Austlii does not recognise that Jaha considered Amirbeaggi so that the decision was not brought to the Court of Appeal’s attention).

The ratio of Amirbeaggi and Jaha certainly seem inconsistent with the Court of Appeal’s comments about the non-application of s. 3.4.26(5) to agreements between solicitor and client about the payment of amounts already charged for the provision of legal services.  In both the earlier cases, there were agreements between solicitor and client about the payment of legal costs already charged, which were found to be costs agreements.

As we will see in part 3 of this post, the Supreme Court has now resolved the matter as between solicitors and clients consistently with the Court of Appeal’s comments: solicitors and unsophisticated clients are free to contract out of the possibility of taxation, so long as they do so in an agreement about the payment of legal costs already incurred.  Further, it seems there are no writing requirements, and a client may be found objectively to have contracted out of taxation despite having a subjective intention specifically to reserve the right to seek taxation.

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