When can lawyers contract out of taxation (part 3)

This is part 3 of a post about the circumstances in which lawyers can avoid having their fees taxed.  Parts 1 and 2 are here and here.  In GLS v Goodman Group Pty Ltd [2015] VSC 627, Macaulay J held that an accord and satisfaction which was found to have been made in relation to fees previously rendered for work already done was not a ‘costs agreement’ in the sense of that expression in the now-repealed but still operative Legal Profession Act 2004, so that the prohibitions on contracting out of taxation in costs agreements, and the writing requirements for costs agreements were not applicable.  His Honour distinguished Amirbeaggi and Jaha, discussed in the two previous posts, explaining that he was following Beba.

Justice Macaulay ruled:

’43 GLS [argued] that the agreement to pay the discounted sum for the withdrawal of caveat and legal files in October 2013 constituted a ‘costs agreement’, and was thereby void due s 3.4.31 of the Act. Relevantly, s 3.4.31 provides that a costs agreement that contravenes, or was entered in contravention of, any provision of Division 5 of Part 3.4 the Act is void.

44 Division 5 contained s 3.4.26 which concerned the making of costs agreements. Section 3.4.26(5) provided —

(5) Except as provided by s 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.

45 Section 3.4.48A provided —

3.4.48A Contracting out of Division by sophisticated clients

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.

46 Definitions of ‘sophisticated clients’, ‘third party payer’ and ‘associated third party payer’ were set out in ss 3.4.2 and 3.4.2A of the Act. GLS was none of those. Essentially, GLS argued that, because she did not fall within the category of a client who could contract out of Division 7, neither did she fall within the exception in s 3.4.26(5). Consequently, no costs agreement between her and Goodman could provide that the legal costs to which that agreement related were not subject to costs review. Implicit in her arguments was the proposition that the alleged accord and satisfaction amounted to a ‘costs agreement’ or some variation of the costs agreement she had entered with Goodman. If that were the case, she argued, the accord and satisfaction must be void because its term precluding any costs review contravened s 3.4.26(5).

47 Put succinctly, the associate judge was correct to hold as he did … The making of the accord and satisfaction was not the making of a costs agreement as defined by the Act. This simple proposition is the complete answer to GLS’s arguments.

48 The most relevant decisions on this principle are [the Court of Appeal’s decision in ‘Beba’] and [Justice Emerton’s decision at first instance in that case in ‘Gadens’] (which was affirmed in Beba). [At first instance in this case, the Costs Judge] referred to both decisions. Beba was a non-associated third party payer which had a right under s 3.4.38(2) to apply for a costs review of legal costs payable. After reaching a compromise of the sum payable for legal costs, paying the compromised sum and receiving certain benefits from doing so, Beba later sought to review the costs in the Costs Court. In Gadens, the trial judge allowed an appeal from the Costs Court, denying Beba the right to review. The Court of Appeal in Beba upheld her Honour’s decision finding:

the judge was correct to conclude that section 3.4.48A did not preclude Beba entering into an agreement which finally compromised legal costs as between itself and the lender, such as to shut out its right to request information under section 3.4.38(7) and to apply for a costs review under section 3.4.38(2).[49]

49 As the understanding of the decision in Beba is vital to the outcome of this appeal, I set out the most relevant paragraphs. Ashley JA (with whom Redlich and Priest JJA agreed) said:

73 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).

50 In paragraph 74 of that passage Ashley JA was addressing a distinction between categories of third party payers that does not arise in this case. But the conclusion in paragraph 75 was determinative in that case as it is here. It is important to understand the temporal distinction Ashley JA was making. His Honour’s statement that the provisions of ss 3.4.26(5) and 3.4.48A must be read in step in paragraph 73 is to be taken as meaning that they must be read as being concerned with the same point in time: that is, they are both concerned with the time of the making of the costs agreement. His Honour rejected an extended ambit of operation of s 3.4.48A which would also apply to an agreement made after the making of the relevant costs agreement.

51 Ashley JA reinforced his construction of the provisions by considering the practical consequences of the alternative view. After referring to them, he continued:

t[79] … the consequences which I have outlined make it extremely improbable that Parliament could have intended them. Whilst it must be recognised that Pt 3.4, and specifically Div 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.

52 Counsel for GLS attempted to confine Beba’s ambit, arguing that paragraph 75 was merely dicta, with the case being concerned only with the rights of non-associated third party payers. I reject that argument.

53 Counsel also stressed that a costs agreement may be created at the start of a retainer, in the middle or at or near the end of the retainer after all or most of the costs were incurred. Having done so, counsel argued that the most relevant decision was the ex tempore judgment of Brereton J in the Supreme Court of New South Wales in Amirbeaggi v Business In Focus (Australia) Pty Ltd, which is summarised in Beba at [83]. He argued that Amirbeaggi established that a costs agreement created at the middle or the end of the retainer that may be an accord and satisfaction is still a ‘costs agreement’ within the meaning of the Act. Misunderstanding the effect of the Court of Appeal’s remarks about Amirbeaggi, counsel argued that the Court in Beba had expressly endorsed that proposition. However, what the court actually said [at [85], emphasis added] was:

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.

54 Properly understood, this passage does not adopt the broader principle in Amirbeaggi. Rather, it merely makes it clear that if an agreement is found to be a ‘costs agreement’ according to the Act but does not comply with ss 3.4.26(5) and 3.4.31(1), a court will likely find that agreement is void. In any event, Amirbeaggi can be distinguished on the basis that there, during the course of the retainer, the parties signed a deed relating to how the solicitors could secure payment of previous fees. The signed deed did not compromise a dispute about legal costs.

55 GLS’s counsel also referred to the decision of Pagone J in Jaha v Defteros [2012] VSC 512, where his Honour found [at [14]] that an oral agreement reached in August 2011 for the payment of costs for outstanding fees and an upcoming trial was a ‘costs agreement’ within the meaning of s 3.4.31 of the Act. However, that case was decided before Beba and there, Pagone J was primarily considering whether the oral agreement satisfied the writing requirements of s 3.4.26(2) of the Act rather than whether there had been an accord and satisfaction.

56 Here, as set out above, the parties made a costs agreement between them at one point in time and, later, following a dispute about the costs, they entered an accord and satisfaction compromising the costs to be paid and displacing any existing right of action for or entitlement to review the costs incurred under the costs agreement. Notwithstanding the breadth of the definition of ‘costs agreement’ in the Act [fn: ‘Legal Professional Act 2004 (Vic) s 3.4.2: ‘an agreement about the payment of legal costs’.’], applying Beba, the accord and satisfaction was not such an agreement and the parties here are not prevented from settling their dispute (including shutting off the possibility of a review of costs).’

It may be seen that even a very modest discount is sufficient to satisfy the test for an accord and satisfaction which brings disputation to an end: in Beba, the lender’s legal costs, billed and yet to be billed, totalled $41,472 and consultants’ costs, for which the borrower was also liable, totalled about $19,000 plus GST (i.e. probably $20,900).  The total was about $63,398, and the compromise was to pay $60,000 as one undifferentiated sum for legal costs and consultants’ fees alike.

In GLS, the client, who represented herself at first instance, advanced the position that she had made no accord and satisfaction and waived no rights, so the question whether the accord was voidable because of duress or undue influence or mistake was not fully prosecuted.  In fact, according to her, an employee of her conveyancer told the lawyers that she was reserving her rights to tax the costs notwithstanding that she was paying the sum required by the lawyers to remove the caveat from her home so she could sell it to pay their fees, and it was her case that that reservation of rights was promptly confirmed in writing.  (The lawyers had acted in a sexual harassment claim against her employer in which she had won $100,000 and a limited costs order from VCAT.  But the legal costs charged by the lawyers gobbled up her compensation entirely.) And it was on what happened next on which the case turned, and was resolved by reference to the doctrine of ostensible authority of the conveyancer.

The question of how equity would deal with a client who was not very fully independently advised and who had been induced to give up their right to taxation, in circumstances where equity would say that that provided a substantial benefit to the lawyers, did not really arise.  But when I am asked to advise clients, it is to equity and the presumed relationship of undue influence to which I would be turning my focus, since if a compromise of fees for work already done and already billed is not a ‘costs agreement’, then VCAT would not have jurisdiction to hear an application under s. 3.3.32 of the Legal Profession Act 2004 to set it aside.  I would expect the Courts to be highly suspicious of any agreement by which a client waived a right to taxation without being fully informed of their options.

GLS did allege that the lawyers had failed in their disclosure obligations, but since the lawyers had taken their fees directly from the compensation payment, the question of how s. 3.4.17(1) interacts with the provisions considered in this three part post did not arise.

Section 3.4.17(1) provides that:

‘If a law practice does not disclose to a client or an associated third party payer anything required by this Division to be disclosed, the client or associated third party payer (as the case may be) need not pay the legal costs unless they have been [taxed].’

So the question of whether a client need honour their promise to pay a sum for legal fees already rendered for work already done pursuant to a compromise of a dispute about them in circumstances where there has been a disclosure default must also await answer in another case.   I suspect not, on the basis of authorities about the construction of s. 3.4.17(2). Where there have been costs disclosure defaults, that provision prohibits the maintenance of proceedings for the recovery of legal costs, until they have been taxed. Consider, for example Koutsourias v Metledge & Associates [2004] NSWCA 313 at [11], which was touched upon in Beba.



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