I was asked to talk to my colleagues at the Victorian Bar recently in relation to costs recovery in pro bono cases. It is now more certain that costs may be recovered from the other side by victorious litigants who engage their lawyers on the basis of a greater variety of pro bono arrangements. That is as a result of both recent developments in the judge-made law and changes to the Supreme and County Courts’ rules. Over the last few days, I published parts one and two of the paper I distributed. What follows is the third and final part, which considers different kinds of client-favourable costs agreements (some quite esoteric) and analyses their indemnity principle implications. It also provides some thoughts on how to draft costs agreements for work done otherwise than on a purely commercial basis, and how to ensure counsel get paid. Part one is here and part two here
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Species of client-favourable costs agreements
Options available to lawyers who wish to do work at less than their usual rates for non-commercial reasons include:
(a) not making any arrangements as to fees at all;
(b) charging your usual rates and leaving it to your discretion whether you send out a bill, or whether you forgive some or all bills given in the event that certain outcomes obtain;promising to do the work for free;
(c) agreeing to do the work at a reduced rate;
(d) doing the work on a no win = reduced fee basis;
(e) doing the work no win = no fee;
(f) doing the work no costs order = no fee;
(g) doing the work on no actual recovery of costs / compensation / costs or compensation = no fee basis.
(a) No arrangements as to fees: no indemnity principle problem
Under the Legal Profession Act 2004 costs were recoverable under a costs agreement or, in the absence of a costs agreement, on the applicable court scale for litigation and under the Practitioners Remuneration Order (or PRO) for transactional work: s. 3.4.19. A promise to pay would be implied by law in the absence of a promise to do the work for free: Shaw v Yarranova Pty Ltd [2011] VSCA 55 at [17] et seq. The burden of proof of establishing such a promise made by the successful party’s lawyers to the successful party expressly to do the work for free, so as to rebut the presumption of an intention to pay, fell on the unsuccessful party.
Option (a) therefore effectively involved a costs agreement coming into existence by operation of law for the client litigant to pay her lawyers’ fees calculated in accordance with the scale of the relevant court.
Under the Legal Profession Uniform Law, there is no equivalent of s. 3.4.19. How lawyers may be remunerated in the absence of any express agreement is, for the moment, a legal mystery. Since the LPUL specifically limits the rights to remuneration by lawyers whose express costs agreements are void (see s. 185(2) et seq), however, it may be assumed that the drafters contemplated recovery of legal costs in the absence of a costs agreement, and it seems reasonably likely that the Costs Court will, if it is legally possible, continue to do what it has traditionally done, and allow scale rates in this situation.
Where counsel is concerned, there is an added complication about the identity of the person who would be found impliedly to have promised to pay their fees according to the applicable court scale: instructing solicitor or client. In the ordinary circumstance, one might expect the person taken to have made the implied promise to be the instructing solicitor: Dimos v Hanos [2001] VSC 173.
This option (a) scenario is most likely to arise as a result of slackness, since in a scenario like this involving someone other than a ‘commercial or government client’, the lawyer would be required to meet disclosure obligations under the LPUL and it is unlikely that, except in the case of slackness, disclosure as to how costs would be calculated and as to estimated total legal costs would be given without actually entering into a costs agreement.
(b) Leaving it to the lawyer’s discretion
If the client and lawyer trust each other implicitly, this ensures that there is no indemnity principle problem, unless the written agreement were shown by evidence to be a sham, and that the true agreement was, for example, that the lawyer would recover fees from the client only in the case of, only to the extent of, and only subsequent to the recovery of costs from the unsuccessful party. Senior counsel’s costs arrangements in the Federal Court case (Royal v El Ali) is an example of the adoption of this option, by which an orthodox fee agreement to charge an hourly rate regardless of the outcome is entered into, but the client is content to leave to counsel’s discretion if, when, and to what extent, the fees will actually be chased.
(c) Promising to do the work for free
Lawyers may of course promise to do the work for free. There is a certain exhilaration in the representation of a client without the constraints of justifying each piece of work against a fee of hundreds of dollars an hour, and, for some, an ascetic satisfaction in doing good work with purity of thought. Rarely, the elation and satisfaction endures throughout a long case, month after month.
It is a good way of being rid of most of the disclosure obligations and formalities in both the 2004 Act and the LPUL: e.g. LPUL s. 174(4). But other obligations do still need to be complied with, e.g., for solicitors, s. 175 (estimate of counsel’s fees).
What is new on this scenario is that the Supreme Court may make an order for costs in Supreme Court proceedings in favour of the lawyers as if they had not been acting pro bono, and the costs may be ordered to be paid directly by the unsuccessful party to the successful party’s lawyers. (Of course the unsuccessful party often pays the money to the successful party’s lawyers in their capacity as agent for the successful party and the lawyers then go through the procedures for withdrawing monies from trust in satisfaction of fees. But the nature of the payment contemplated by this special order is different. The successful party’s lawyers would receive the money personally and so would not bank the money into trust, and it would be theirs, legally and beneficially, from the moment it was received.) This opportunity which might be considered to be of great benefit in some scenarios but not very important in others, is only available in the case of options (c), and some versions of (g) and (h). Those options are the ones which provide for fees on the basis described by the new rules as the ‘pro bono basis’ which is summarised in the first post in this series.
But in any court other than the Supreme and County Courts, a promise to do the work for free is probably fatal to the client’s entitlement to recover costs. As noted above, anything short of an actual promise to do the work for free is usually treated as within option (a). The courts are very keen to find implied costs agreements so as to allow successful parties to obtain a costs order, even in situations where the reality is that the lawyer would never recover fees out of his client’s own pocket, e.g. where the lawyer is appointed by a union.
(d) Reduced rates
Agreeing to do work for less than your usual rate never gave rise to an indemnity problem. Of course the party-party claim could not exceed the successful party’s liability on the reduced rates. A better variation of this option, however, might be the one next considered, except that option (e) is replete with legal complexity.
(e) No win = reduced fee
Agreements to do work on a no win = reduced fee basis have been rare, but may be attractive to pro bono practitioners. My own experience suggests that, not unnaturally, clients to whom one’s firm has promised open endedly to work for free for do not act in the same way litigants with skin in the game do. Even quite a modest pay-as-you-go obligation ($50 per hour, say) might cure this characteristic of such engagements which might be regarded from the lawyer’s (or the courts’) perspective as a problem.
The client and the lawyers might be happy in the event of a win for the lawyers to recover $500 per hour to the extent that a partial indemnity of that liability was recovered on a party-party basis from the unsuccessful party.[1]
Tantalisingly, after the late 2005 repeal of the Legal Practice Act 1996, the Court of Appeal explained in Equuscorp Pty Ltd v Wilmoth Field Warne (2007) 18 VR 250 that the 1996 Act’s prohibition on charging an uplift of more than 25% ‘of the costs otherwise payable’ was not offended by a costs agreement by which the firm promised to charge $66 per hour to be billed and paid as the work was done, with an extra $334 per hour payable in the event of a successful outcome as defined.[2]
If that logic holds good under the LPUL, this kind of costs agreement might become widespread. Equuscorp was a statutory interpretation case, however, and the cognate provisions in the 2004 Act and the LPUL are slightly different. Having considered the question, I have doubts about whether the same result would obtain under these more recent Acts, but it might be interesting to run a test case.
(f) No win = no fee
The no win = no fee agreements which I tend to see are not attractive documents. True, they are the ones which generate disputes so as to require my involvement, but client-friendly conditional costs agreements seem to me to be very rare. They effectively give the lawyers the right to force clients to settle cases and then charge 25% more than they otherwise would.
The other pernicious characteristic of this kind of no win = no fee agreement is that they contain definitions of ‘successful outcome’ which mean that if the client gets a single dollar in the litigation whether for costs or for compensation, the lawyer is entitled to charge all their fees plus an uplift of 25%, even if the client ends up owing money as a result of the litigation when all the costs orders and compensation orders are netted off.
Nevertheless, there is no reason why a ‘conditional costs agreement’ (as the legislation refers to no win = no fee agreements) with a definition of ‘successful outcome’ which is favourable to the client ought not be considered.
Indeed, the remaining options (g) and (h) are usually sub-categories of this option. We now know that the first sub-category (g) (no costs order = no fee) presents no indemnity principle problem and is within the scope of the new Supreme Court rules. The second sub-category (h) (no actual recovery under a costs order) is the most problematical (even though, as already noted) what appear in substance to have been manifestations of this option were waived through the indemnity principle gate by the Court of Appeal in Mainieri, by the Supreme Court of Queensland in LM Investment Management and by the Federal Court in Royal v El Ali.
Both sub-options (g) and (h) mean that, in a case where the client might obtain compensation or another benefit, that outcome is irrelevant to the lawyer’s entitlement to fees, which might not be thought to be a good thing. Of course where the pro bono client is a defendant, or the suit is for judicial review or some other non-pecuniary remedy, this consideration does not arise or at least not so obviously or so acutely.
There have been specific requirements for conditional costs agreements some of which have usually, in my experience, been breached, rendering the costs agreements void. Requirements that clients sign them, that they be in clear plain language and that an estimate of the uplift be provided in writing as a stand-alone dollar figure have often rendered such costs agreements void, making much work for costs lawyers.
It should also be remembered that conditional costs agreements are prohibited in ‘criminal proceedings’ (not defined) and ‘proceedings under the Family Law Act 1975’: LPUL s. 181(7).
(g) No costs order = no fee
Usually this sub-option and sub-option (h) have been deployed by practitioners who are essentially acting pro bono but want the other side to pay them if they win, and want for their client the forensic advantage of the other side understanding that it has the usual costs risk.
This sub-option presents no indemnity principle problem to any lawyer armed with Mainieri’s Case, and, for cases in the Supreme and County Courts, may be crafted so as to come within the scope of the new Supreme Court rules, in which case the practitioner would be entitled to seek a ‘pro bono costs order’ by which the unsuccessful party is ordered to pay the lawyer directly. As noted above, the liability in the successful party to pay his lawyers’ fees must be limited to a liability to pay fees for the work covered by the costs order to come within the Supreme Court rules.
Usually the condition for liability in the successful party to pay her lawyers’ fees in an option (g) scenario would be that she have a win overall, and obtain a costs order. Tough luck in that case if the claim is settled on the basis that the client obtain compensation with no order as to costs.
There is no requirement in the judge made law or in the Supreme Court rules to condition a liability to pay fees on a win in the case overall. A costs agreement might provide that if a court makes a costs order, the lawyers will be entitled to fees for work covered by that costs order forthwith, regardless of whether a ‘successful outcome’ has yet been achieved or is ever achieved. Such an agreement would appear to be within the scope of the new rules.
(h) No actual recovery under a costs order = no fee
It is this kind of costs agreement which the Costs Judge found in Mourik v Von Marburg could not generate a costs order.
Paradoxically, the conditional costs agreement most beneficial to the client is the one most difficult for the client to obtain a costs order by reference to and the one most likely unexpectedly to disappoint pro bono counsel.
Paradoxically again, practitioners who receive pro bono referrals under the Federal Court’s scheme are obliged, if they want to recover fees, to have a costs agreement entitling them to fees only ‘if an order for costs is made in favour of the assisted party’ and only ‘to the extent that the party against whom the order for costs is made in fact pays the costs’.[3] If they have such a costs agreement, then the Federal Court can make orders similar to those provided for by the new Supreme and County Court rules.
And as already noted several times, the costs agreements in Mainieri and LM Investment Management appeared effectively to be this kind of costs agreement, so with the right drafting, this option might be effective in any State court or tribunal in Victoria. What is new is that this kind of agreement is sanctioned by the amendments to the Supreme Court rules, giving rise to the possibility of an order that the unsuccessful party pay costs directly to the lawyer and obviating the need to refer to the somewhat perplexing authorities on this kind of costs agreement.
Getting paid
What to do if your costs agreement has the characteristics of the one in Mourik v Von Marburg and you are not saved by the new rules? The answer is probably: amend to cure the problem and provide for the amendments to have retrospective effect. In Mourik, the Costs Judge recognised the efficacy of that cure effected by junior counsel, and generally speaking retrospective costs agreements are permissible. There are of course limits to this proposition,[4] and it should never be forgotten that judges enjoy what is sometimes described as an unfettered discretion in relation to costs.
Counsel whose costs agreements are with their instructing solicitor have an interest in their solicitor’s costs agreements with the client. If counsel’s fees are, as between the solicitor and the client, a disbursement, and the solicitor’s costs agreement says fees and disbursements are not recoverable unless the unsuccessful party actually pays the costs, the client may have a Mourik v Von Marburg problem such that she cannot recover any costs at all.
Counsel should consider who will control and pay for taxation of a party-party costs order obtained by the client. What if the client suffers an adverse costs order in the taxation? How will the solicitors, junior counsel, senior counsel and the expert witness share in the indivisible sum which is offered in settlement of the taxation by the unsuccessful party and accepted by the successful party? Tedious as it seems these issues should be addressed by the costs agreement.
The costs agreement should probably deal in advance with the apparent conflict between interest and duty which would arise if counsel were to apply for, or embrace a judicial suggestion of, an order requiring the unsuccessful party to pay the fees directly to the lawyer rather than to the client.
Whether or not the court is to make a costs order payable directly to the lawyer or in the traditional way payable to the successful party, application by counsel for a lump sum costs order in respect of their fees might be highly desirable. Rather than go through taxation, counsel might offer on their own behalf (or on instructions) to accept a lump sum costs order in a sum which the Court could be satisfied in a summary hearing was clearly not more than would be quantified on taxation.
Otherwise, since the fruits of litigation are future property which may be assigned (see this blogpost) a sophisticated costs agreement might provide for the assignment to counsel of the fruits of a costs order and promise to let counsel control the prosecution of the taxation and enforcement procedures in return for an indemnity against adverse costs orders.
Lawyers have a fruits of litigation ‘lien’ (which is in fact an equitable right) over compensation and costs orders generated by their exertions. It is not well understood that in an appropriate case, where the client is not minded to prosecute the taxation so as to generate a return to their lawyer without any return to them, or is colluding with the unsuccessful party to keep the lawyer out of their fees, the courts will enforce this entitlement by allowing the lawyer to prosecute the taxation in her own name.[5] Presumably that would be all the more likely where the applicant for such an order was an assignee of the fruits of a costs order, and with some persuasion the law might develop so as to allow this course as a matter of routine in cases where pro bono lawyers wish effectively to pursue their own costs against the unsuccessful party.
Once counsel is acting for themselves, rather than for the client, however, care would need to be taken in relation to the costs of the taxation since the Chorley exception to the indemnity principle referred to above may not have application to counsel.
[1] What the successful party and his lawyers agree upon as the lawyers’ remuneration is principally relevant only as a cap on what may be recovered from the unsuccessful party. If costs are ordered on the usual basis (formerly called the party-party basis) then they will be calculated on scale. So too will they usually be calculated on scale, albeit with a less parsimonious proclivity, if indemnity costs are ordered: ACN 074 971 109 as trustee for the Argo Unit Trust v National Mutual Life Association of Australia Limited [2013] VSC 137 (in the Federal Court, c.f. Bob Jane Corporation Pty Ltd v ACN 149 801 141 Pty Ltd [2014] FCA 1066). Only rarely will courts specifically order that the unsuccessful party pay indemnity costs calculated in accordance with the successful party’s costs agreements: e.g. Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3) [2012] VSC 399.
[2] In fact, unbeknown to most people, a then unpublished decision of the Legal Profession Tribunal constituted by Registrar Malcolm Howell was to similar effect. In Lustig v Buksh [2001] VLPT 8, the practitioner said he would do work for $120 per hour, $150 per hour (125% of $120) or $200 per hour (>25% of $150 per hour and >25% than $120 per hour) depending on the outcome. The Tribunal found that the costs agreement was not void: ‘A premium of the kind envisaged by section 98 is payable over and above “the legal costs otherwise payable”. The legal costs otherwise payable under the costs agreement entered into between Mr. Buksh and Mr. Lustig were $120, $150 or $200 per hour depending upon which of the three possible outcomes turned into reality. The agreement did not provide for a premium over and above those hourly rates.’
[3] See r. 4.19, Federal Court Rules 2011.
[4] King v King [2012] QCA 81.
[5] Oakley Thompson & Co Pty Ltd v Maisano (No 2) [2015] VSC 210, affirmed on appeal: Bodycorp Repairers Pty Ltd v Oakley Thompson & Co Pty Ltd [2017] VSCA 23.
