Third party payer taxations where client bankrupt: WASCA

In Iron Mountain Mining Ltd v K & L Gates [2016] WASCA 166, the appellant, a listed company, had indemnified one of its directors against the legal costs of lawyers defending the director in criminal charges.  Companies can do this on the basis that the director must repay the costs if he pleads or is found guilty, since it is illegal to indemnify a costs liability incurred as an officer of the company if the costs are incurred in defending or resisting criminal proceedings in which the person is found guilty: ss. 199A-C Corporations Act 2001Note Printing Australia Ltd v Leckenby [2015] VSCA 105; (2015) 106 ACSR 147 [65]. The company paid more than $500,000 in respect of the fees prior to the guilty plea.

The director went bankrupt.  The company applied for taxation of the director’s solicitors’ fees.  By that time, the director had pleaded guilty to some of the charges.  The company was a non-associated third party payer; it promised to pay the lawyers’ fees, but its promise was made to the director and not to the lawyers. The Court found that the right given to third party payers to seek taxation did not adjust the interests of the client and the lawyers; it only adjusted the interests between the third party payer and the client:

’26 In this manner the provisions of the Legal Profession Act [(WA)] address the situation which may commonly arise where, for example, a lessee or mortgagor agrees to pay the legal costs incurred by the lessor or mortgagee in securing the preparation of legal documentation. The fact that the client of the law practice may be prepared to pay a law practice more than would be assessed by a taxing officer does not prevent the third party from applying for an assessment to limit the costs they have to pay pursuant to the obligation owed to the client or other person to whom the obligation may be owed.’

For that reason, the Court held at [29] that a third party payer must have an obligation to pay the client’s legal costs at the time of the application for taxation, otherwise, the ascertainment of the amount owed under what had become a non-existent liability would be useless.

Here, it was argued, the company no longer had an obligation to pay the fees by virtue of the director’s guilty pleas.  But even if that was so, there remained a question as to the proper amount of fees payable in defending charges which were ultimately dropped.  So the Court said that the director should be joined as a party to the appeal.  As the client, he was taken to be a party to the taxation proceedings, by operation of the Legal Profession Act 2008  (WA) but that was not the case on appeal.  There was a question to be determined as between the company and the director: what fees was the director required by his promise to repay the indemnity in the event he was found guilty?  The whole of the fees associated with the prosecution, or only the fees associated with the defence of those charges in the form they ultimately took after amendment?  The appeal would have to determine that question as between the director and the company.

Then the Court found that the company had commenced the proceedings against the bankrupt director contrary to the obligation to obtain leave from a court with bankruptcy jurisdiction to bring proceedings against a bankrupt.  Accordingly, they stayed the appeal until such time as the company had obtained leave from a court with bankruptcy jurisdiction to proceed against the director.  Since the company’s reason for bringing the application for taxation was to compel the lawyers to repay the difference between the costs as paid and those which the taxing officer would declare were payable at law, a purpose which the Court declared misconceived, it seems most unlikely that any such leave will be sought.

Big firms rarely have their fees taxed.  When third party payers come along and seek taxation, the potential for embarrassment vis-a-vis the client is great notwithstanding that there is no implied statutory obligation on the big firm to refund to the client the difference between their fees in fact charged and the amount the Supreme Court declares on taxation they were entitled to under the law.  Especially is that so where, by virtue of the obligation on a third party to pay the fees, the usual commercial imperatives on clients to supervise their lawyers’ fees is not so keenly present.  Hence the rationale for allowing these kinds of taxations which seem much-under utilised to me.

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