Mark Brabazon discusses some of the changes the Legal Profession Act 2004 will make to costs disclosure in New South Wales.
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2 Costs Disclosure New regime more extensive and onerous than its predecessor ILLUSTRATION: NIGEL BUCHANAN Mark Brabazon is a tax and commercial/equity barrister at Fifth Floor Selborne Chambers. His practice includes advice and advocacy in relation to legal costs. Mark Brabazon discusses some of the changes the Legal Profession Act 2004 will make to costs disclosure in New South Wales. Although its most obvious purpose is to resolve interstate conflicts of law by operating in tandem with legislation in other states and territories, replacing the Legal Profession Act 1987, the Legal Profession Act 2004 also rewrites the law relating to legal costs. It changes the law relating to costs disclosure, the subject of this paper, as well as costs agreements, billing and recovery. The latter topics are not dealt with here, except as they relate to costs disclosure. The 2004 Act received assent on 21 December last year, and it is expected that a commencement date, possibly 1 July 2005, will soon be proclaimed. Practitioners need to be aware of the changes made by the new Act, and to be prepared for them before they commence. The text of the Act as passed may not be the final word. The Government has received a number of submissions and is considering possible pre-commencement amendments. At the time of writing, 1 no draft bill for that purpose has been made public. Overview of disclosure Part 3.2 of the 2004 Act deals with costs disclosure and assessment, and Division 3 of that Part deals with costs disclosure. While many of its provisions and concepts will be familiar to practitioners, there are also some significant changes and a few surprises (see the Costs disclosure changes table). Disclosure obligations under the 2004 Act are generally more extensive than under the 1987 Act, and arise on additional occasions. Broadly speaking, the 2004 Act provides for three classes of disclosure by a directly retained law practice to a client: Initial disclosure: Disclosure under s.309 before accepting a retainer and under s.310(1) in relation to costs of an indirectly retained law practice (for example town agent or counsel) before effecting the indirect retainer. Additional disclosure: Special disclosure before entering into an uplift cost agreement (s.314), progress reports upon request (s.318) and disclosure before settlement of litigation (s.313). Continuing disclosure: Disclosure of any substantial change to anything included in Division 3 disclosure (s.316). An indirectly retained law practice only has initial disclosure obligations under s.310(2), which requires disclosure to the retaining law practice of information necessary to enable it to comply with LAW SOCIETY JOURNAL 3
3 Costs disclosure changes 1987 ACT (Part 11 Div 2) 2004 ACT (Part 3.2 Div 3) INITIAL DISCLOSURE Content Relatively modest Significantly extended (175/176, 177) (309, 310(1)/310(2)) Time Before retainer if practicable; 309 disclosure: before retainer if practicable; (i) (to client) otherwise asap (178(1),(2)) otherwise asap (311(1)) Time Before retainer if practicable; 310(2) disclosure: must enable (ii) (between practitioners) otherwise asap (178(1),(2)) 310(1) disclosure to client Time asap after becoming aware 310(1) disclosure: before indirect retainer (iii) (to client, re other practitioner) (178(3)) (311(2)) ADDITIONAL DISCLOSURE n/a Before uplift fees agreement (314) Progress reports upon request (318) Pre-settlement disclosure (313) CONTINUING DISCLOSURE Content Significant increase in estimate Substantial change to anything included (177(3)) in Div. 3 disclosure (316) Time Asap after aware of likely increase Asap after aware of change (178(4)) (316) GENERAL Form In writing 309 and 310 disclosures must be in writing (179) but 310(1) disclosure may initially be oral if urgent (311) 314 and 318 require writing Language Clarity Clarity plus for written disclosures (179) (315) Consequences 175/176 non-disclosure only: Any non-disclosure to a client: of non-disclosure No obligation to pay and no action for costs No obligation to pay and no action for unless assessed (182(1), (2)); costs unless assessed (317(1),(3)); Costs of assessment payable by defaulting Costs of assessment payable by defaulting practitioner (182(3)) practitioner (369 but note restricted scope of such costs); 175/176/177: Capable of being professional misconduct No breach of Act but capable of being or u.p.c. (317(4)); professional misconduct or u.p.c. Explicit right for client to apply to set (182(4), 183) aside cost agreement (317(2)) s.310(1). Its additional and continuing disclosure obligations are similar to those of a directly retained practice (modified in one respect by s.313(2)). Seemingly by oversight, the Act requires these disclosures to be made to the client instead of the retaining law practice. The only significant exception to the new disclosure obligations is provided by the exemptions in s.312. These relate to initial disclosure; they do not relieve from additional disclosure. Continuing disclosure obligations are derivative, and therefore still apply to changes in anything otherwise required to be disclosed. Most section 312 exemptions are based on the nature or circumstances of the particular client. Initial disclosure Section 309 requires disclosure of The 2004 Act wisely does not repeat the invitation to bad drafting in s.179(2) of the 1987 Act, which permitted disclosure to be included in a costs agreement. about 24 separately identifiable pieces of information. Some of them relate to the legal rights of clients generally. Others are specific to the particular proposed retainer of the law practice by the client. This suggests a natural division of disclosure into two sections: one giving notice of rights, the content of which will only change if the law changes, and the other providing information about costs and other matters particular to the proposed retainer, the content of which may differ from case to case. The Costs disclosure to clients box shows the text of s.309 differentiated by colour between these two classes of disclosure. Disclosure of rights is required by s.309(1)(b), (g), (i), (j) and (l). Section 309 speaks of rights in a loose, colloquial sense. The right to a bill is really no more than an immunity from action until the law practice has complied with s.331; there is no freestanding right to require delivery of a bill. The right to negotiate is 4 LAW SOCIETY JOURNAL June 2005
4 LEGAL PROFESSION ACT 2004 (NSW) SECTION 309 Disclosure of costs to clients (1) A law practice must disclose to a client or prospective client in accordance with this Division: (a) the basis on which legal costs will be calculated, including whether a fixed costs provision applies to any of the legal costs, and (b) the client s or prospective client s right to: (i) negotiate a costs agreement with the law practice, and (ii) receive a bill from the law practice, and (iii) request an itemised bill within 30 days after receipt of a lump sum bill, and (iv) be notified under section 316 of any substantial change to the matters disclosed under this section, and (c) an estimate of the total legal costs if reasonably practicable or, if it is not reasonably practicable to estimate the total legal costs, a range of estimates of the total legal costs and an explanation of the major variables that will affect the calculation of those costs, and (d) details of the intervals (if any) at which the client or prospective client will be billed, and (e) the rate of interest (if any) that the law practice charges on overdue legal costs, and (f) if the matter is a litigious matter, an estimate of: (i) the range of costs that may be recovered if the client or prospective client is successful in the litigation, and (ii) the range ange of costs the client or prospective client may be ordered to pay if the client or prospective client is unsuccessful, and (g) the client s or prospective client s right to progress reports in accordance with section 318, and (h) details of the person whom the client or prospective client may contact to discuss the legal costs, and (i) the following avenues that are open to the client or prospective client in the event of a dispute in relation to legal costs: (i) costs assessment under Division 11, (ii) the setting aside of a costs agreement under section 328 (Setting aside costs agreements), (iii) mediation under Division 8, and (j) any time limits that apply to the taking of any action referred to in paragraph (i), and (k) that the law of this jurisdiction applies to legal costs in relation to the matter, and (l) Disclosure information relating to background rights: will only change if the law changes. Disclosure information relating to the proposed retainer: may different from case to case. information about the client s or prospective client s right: (i) to sign under a corresponding law a written agreement with the law practice that the corresponding provisions of the corresponding law apply to the matter, or (ii) to notify under a corresponding law (and within the time allowed by the corresponding law) the law practice in writing that the client or prospective client requires the corresponding provisions of the corresponding law to apply to the matter. Note: The client s or prospective client s right to sign an agreement or give a notification as mentioned in paragraph (l) will be under provisions of the law of the other jurisdiction that correspond to section 304 (Part also applies by agreement or at client s election). (2) For the purposes of subsection (1) (l), the disclosure must include: (a) a statement that an order by a court for the payment of costs in favour of the client or prospective client will not necessarily cover the whole of the client s or prospective client s legal costs, and (b) if applicable, a statement that disbursements may be payable by the client or prospective client even if the client or prospective client enters a conditional costs agreement. more precisely a liberty, since nobody has a correlative duty to negotiate back. The right to request an itemised bill is ephemeral, because no other provision of the Act attaches any legal consequences to the request. A law practice should also, as a matter of good practice, give notice of the client s right to seek independent legal advice before entering into any costs agreement. This is not mentioned in s.309, but s.323(3)(d) requires a conditional costs agreement to include an acknowledgement that the client has received such notice before entering into the agreement. Disclosure of information particular to the retainer is required by s.309(1)(a), (c), (d), (e), (f), (h), (k) and (2). 2 These obligations raise a number of problematic issues, some of which are discussed further below. If there is to be an uplift costs agreement, the additional information required by s.314 can be disclosed here as well. Section 310(1) requires disclosure of information particular to a proposed indirect retainer corresponding to information under s.309(1)(a), (c), (d) and (e). It is not entirely clear whether original s.309 estimates of total costs under s.309(1)(c) and party/party recovery under s.309(1)(f)(i) are required to include counsel s fees, although it seems clear that adverse party/party estimates under s.309(1)(f)(ii) must allow for costs of opposing counsel. 3 In any event, there could hardly be objection to s.309(1)(c) and (f)(i) estimates expressly including items for counsel s fees, and this may be the more prudent course because it avoids the risk of inadequate disclosure. From a practical viewpoint, a solicitor would either have to consult with counsel before accepting the client s retainer or make a pre-estimate of counsel s fees based on the solicitor s own knowledge and experience. Before actual retainer of counsel, however, a solicitor must still make disclosure of each of the items required by s.310(1). Initial disclosure and costs agreements The 2004 Act wisely does not repeat the invitation to bad drafting in s.179(2) of the 1987 Act, which permitted disclosure to be included in a costs agreement. A costs agreement is a contract. The function of a contract is to set rules for a relationship of private law between the contracting parties. Its function is not to give information. A contract that tries to fulfil both functions at once is bound to fail in at least one of them. The 2004 Act contemplates that disclosure will precede any costs agreement. The point of disclosure, so far as it relates to the terms of a costs agreement, is to ensure that the client is properly informed and has a fair opportunity to negotiate (s.309(1)(b)(i)) and to seek whatever June 2005 LAW SOCIETY JOURNAL 5
5 COSTS DISCLOSURE independent advice the client thinks appropriate (cf. s.323(3)(d)) before committing to a proposed agreement. On the other hand, the Act requires disclosure by the law practice of its proposed basis of charging, billing and interest. In practical terms, this requires the lawyer to give the client a copy of a proposed costs agreement, along with all the other required disclosures. If they then negotiate some different agreement, so be it; the Act contemplates such a process. The practical requirements to sever disclosure from agreement and to provide a draft agreement as part of disclosure can be reconciled by providing a single bound set of documents comprising two sections: first, a notice addressed from the law practice to the prospective client giving notice of rights and information about costs and other matters particular to the proposed retainer as required by the Act, and secondly, a form of costs agreement as proposed by the law practice, drafted as a conventional contract. In this way, the disclosure can easily cross-refer to the proposed agreement, and the agreement can conveniently be executed if the parties so desire in a form that evidences antecedent disclosure. Importance of the scope of the retainer The terms in which the disclosure obligations are expressed require clear identification of the scope of the proposed retainer to which they relate. This is particularly evident in relation to total cost estimates and party/party estimates. It is also important for cost basis disclosure where a law practice proposes to apply fixed price costing or other more exotic options, such as value billing arrangements. The obligation to make initial disclosure of estimates of total costs, including party/party estimates pro and con for litigation, normally requires a directly retained law practice to give a numerical range of estimates before the client commits to litigation. The not reasonably practicable proviso to s.311(1) cannot be used to delay an estimate under s.309(1)(c) where all that is impracticable is the estimate of total costs as distinct from the expression of a range of estimates with an explanation of major variables, since this contingency is already provided for in the terms of the primary obligation. The better course is to express a range of estimates before commencing proceedings for a plaintiff or filing a defence for a defendant, together with party/party range estimates under s.309(1)(f), albeit that these estimates may have to be heavily qualified. The proviso to s.311(1) may justify a delayed estimate where the law practice must act swiftly to protect a client s position (for example in the face of an impending limitation period, or where the client as plaintiff or defendant is in imminent danger of damage to rights or property), but the practitioner must assay the required estimates once the nature of the required work is clear and the client s immediate practical interests have been secured. It is possible to enter into a series of retainers, each with its own disclosure. This may be appropriate, for example, where a law practice accepts a retainer to investigate a claim before the law practice and the client commit to litigation. Such a limited retainer does not require estimates relating to the cost of litigation before the initial retainer; those estimates can be given before taking instructions to prosecute or defend. It would not, however, be appropriate to try to evade the obligation to estimate total costs by taking separate retainers for successive stages of litigation. Once a solicitor is asked to go on the record in proceedings, the retainer and corresponding estimates should relate to the whole proceeding. Appeals are a different matter. An appeal should be regarded as separate proceedings requiring separate disclosure. To institute an appeal requires separate instructions and a fresh or explicitly extended retainer. The same is usually true of instructions and retainer from the respondent to an appeal. An obvious corollary to the need to identify the scope of an initial retainer is the need to identify any fresh retainer or material extension of the scope of an existing retainer, and to give a fresh round of disclosure before the client is committed to it. In the past, many practitioners have adopted lax cost disclosure practices when the scope of work for an existing client has expanded in new directions. While it may not strictly be necessary to repeat notification of background rights which have not changed since an earlier disclosure, 4 information particular to the new retainer must be disclosed afresh. Section 312(1)(b) provides limited relief from repetitive disclosure. It exempts from initial disclosure where (i) the law practice has made s.309 or 310 disclosure in the preceding 12 months, (ii) the client gives a written waiver, and (iii) a principal of the law practice decides on reasonable grounds that further disclosure is not warranted. As a matter of obvious, practical self-protection, the principal concerned should contemporaneously document the making and grounds of each decision. Notably, s.312(1)(b) does not exempt from disclosure of a significant change under s.316 in relation to something that has already been the subject of initial disclosure. Overall, the compliance burden and risk of contestation probably outweigh the benefits of this exemption for most practitioners in most areas. Its utility is probably limited to solicitors who have a standing arrangement with a commercial client that generates numerous fresh retainers each year, although even in these situations it can produce queer results. 5 Additional disclosure The categories of additional disclosure are new to the 2004 Act. Section 314 requires written disclosure before any conditional costs agreement that provides for uplift fees. This is likely to be irrelevant in practice because s.324(1) precludes such agreements in the only field where they are commonly used, viz. in relation to claims for damages. Section 313 provides for pre-settlement disclosure of solicitor/client and party/party costs estimates that are given as a matter of good practice in any event. In contrast to other disclosures, these are not required to be in writing. Section 318 entitles a client on reasonable request to written progress reports (for which the law practice may charge) and written reports of unbilled costs. The language chosen suggests that s.318 reports may not attract provisions which apply generally to Division 3 disclosures, such as sections 315, 316 and 317. Continuing disclosure Section 316 requires a law practice to notify the client in writing of any substantial change to anything included in a disclosure under Division 3 as soon as reasonably practicable after becoming aware of it. This applies to changes in background rights as well as changes specific to the retainer, including solicitor/client and party/party cost estimates. 6 LAW SOCIETY JOURNAL June 2005
6 The expanded scope of primary disclosure obligations makes the continuing disclosure obligation considerably more onerous than under the 1987 Act, and requires the development of office procedures to bring notifiable changes to the attention of a practitioner responsible for client notification. The textual simplicity of the section also hides a number of interpretive issues, the most important of which is the meaning of substantial change. It is also not clear why or how continuing disclosure would be appropriate in respect of additional disclosure under sections 313 and 314, having regard to their respective subject matters, nor why an indirectly retained law practice is required to make continuing disclosure to the client rather than the retaining law practice. Non-disciplinary consequences of deficient disclosure Section 317 of the 2004 Act imposes more extensive adverse consequences on a defaulting practitioner than its predecessor. Failure in any of the disclosure obligations disables cost recovery without assessment, with costs of assessment payable by the law practice. Under the 1987 Act, failure to estimate or to update estimates only attracts disciplinary consequences; only failures of s.175/176 disclosure preclude recovery without assessment. The 2004 Act applies this consequence to all classes of non-disclosure, including failures to provide estimates, updated estimates, disclosure of other changes and pre-settlement disclosure. On the other hand, the adverse costs consequences for a defaulting practitioner are less onerous under the 2004 Act. Section 329 only requires payment of the fees of the costs assessor where the 1987 Act also requires payment of the client s costs of the assessment. The extension of these consequences to any failure of disclosure raises difficult questions concerning the relevant concept of default. The statutory criterion in each limb of s.317 is whether the law practice in question does not disclose to a client anything required by this Division to be disclosed. Seriousness of breach is not mentioned. So, for example: Does an omission to include in written disclosure of any one of the 24-odd separate sub-items implicit in s.309 automatically attract s.317 as non-disclosure of a thing required to be disclosed? Can a law practice ever validly comply with s.309(1)(c) by saying that it is unable to make the required estimate or range of estimates and, if so, in what circumstances? What detail, accuracy and precision are required to comply with the provisions of s.309 requiring notice of various rights or unspecified information about them? How is a substantial change to be judged for the purposes of the s.316 disclosure obligation? Does s.316 oblige a law practice which charges interest at the maximum permitted rate under s.321(4) to notify all its clients whenever the rate changes? Can late disclosure evade the application of s and, if so, how late? These questions may arise in a range of contexts, including the defence of civil cost recovery actions and the determinations of costs assessors relating to the costs of solicitor/client assessments. Section 317(2) explicitly empowers a client to apply for an order that a costs Failure in any of the disclosure obligations disables cost recovery without assessment, with costs of assessment payable by the law practice. ENDNOTES May The reference in s.309(2) to s.309(1)(l) is a drafting mistake. Presumably it was intended to link s.309(2)(a) to s.309(1)(f)(i) and s.309(2)(b) to section309(1)(a). 3. There is no doubt that counsel s fees are costs; the question is, whether they are part of the total costs referred to in s.309(1)(c), of which one may ask rhetorically, the total costs of what? The separate presence and content of s.310(1) may be read as indicating an intention that s.309 disclosure should relate to legal services provided by the disclosing law practice, rather than services to be provided by another law practice. On the other hand, apart from the anomoly that would arise if solicitor/client s counsel s fees are ignored while adverse party/party counsel s fees must be estimated, a litigation client is presumably interested in knowing the likely cost of conducting litigation before committing to it. Similar considerations arise in the interpretation of s.309(1)(f). 4. See Hogarth v Gye [2002] NSWSC 32 in which Bryson J said at [25]: An obligation to make a agreement with a defaulting practitioner be set aside under s.328, but it does not say whether default of disclosure is to be treated as a separate ground for setting aside. Section 328 provides that a costs assessor may make a set-aside order on application by a client if the assessor is satisfied that the agreement is not fair, just or reasonable, 7 and may for that purpose have regard to any default of disclosure. 8 This suggests that s.317(2) is just a cross-reference with no real, operative effect. A separate question arises whether the not fair, just or reasonable test applies by reference to the circumstances when the costs agreement was made or the circumstances at the time of the order. Section 328 is not explicit, in contrast to other contract review provisions based on notions of fairness, such as s.208d of the 1987 Act, s.7 of the Contracts Review Act 1980, and s.106 of the Industrial Relations Act If the test applies as at the time of contract, post-contract defaults (such as under sections 316 or 313) are irrelevant to the threshold question, although they may have relevance to an assessor s exercise of discretion if that discretion is enlivened. Section 317(3) of the 2004 Act precludes recovery proceedings against the client but, in contrast to s.182(2) of the 1987 Act, not between law practices for costs under an indirect retainer. This change may have been inadvertent, or it may reflect a legislative view that a directly retained law practice can judge whether an indirectly retained law practice has provided the information necessary in terms of s.310(2) or 318(3). Conclusions The disclosure obligations of the 2004 Act are more extensive and more onerous than their predecessors under the 1987 Act. Apart from being commands of positive law the infringement of which may amount to professional misconduct or unsatisfactory professional conduct, all failures of disclosure can now attract adverse consequences in the cost recovery process. Legal practitioners will therefore be well advised carefully to review their cost disclosure and agreement procedures and their procedures for identifying notifiable matters under the 2004 Act before it commences. disclosure does not require the communication of any information to a person who is aware of the matter supposedly to be disclosed. Taken literally, this appears to be an overstatement; it was said in the course of rejecting an argument which would have required repeated disclosure of matters which the solicitor had previously disclosed in writing to the same client, and should be read in that context. 5. The procedure for annual disclosure does not appear to have been well thought out. The interaction of ss.309,312(1)(b) and 316 produces the odd result that the first retainer of each 12 month period attracts obligations of initial disclosure and derivative continuing disclosure, but subsequent retainers in the same 12 month period to not. 6. Contrast the words does not disclose in s.317 with s.182 of the 1987 Act, which refers to failure to disclose in accordance with this Division. The 1987 wording is apt to penalise failure to disclose at the required time, but the 2004 wording is ambiguous. 7. Section 328(1). 8. Section 328(2)(c). June 2005 LAW SOCIETY JOURNAL 7
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