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Lancken, Steven --- "Mediation and ADR: meeting the costing challenges of early resolution" [2016] PrecedentAULA 74; (2016) 137 Precedent 16


MEDIATION AND ADR: MEETING THE COSTING CHALLENGES OF EARLY RESOLUTION

By Steve Lancken

Acting for a claimant involves complex management of risk and reward for both the client and their legal representatives. When someone else is funding the costs of the action, whether that be the lawyers themselves or a litigation funder, the complexity and risks multiply in magnitude and number.

It is hard to imagine a more complicated scheme to manage the ‘consumer protection’ dynamic of legal costs than has been designed by our legislators. In NSW and Victoria, the Legal Profession Uniform Law is the starting point with 39 sections devoted to costs. In NSW, the Legal Profession Uniform Law Application Act 2014 (NSW) has another 41 provisions, there are Regulations and soon there will be ‘Rules’ governing the costs assessment process itself.

No other trade or profession is as heavily regulated when it comes to how they charge. It is sad for the legal profession that neither consumers nor governments trust the profession when it comes to costs. And yet only a tiny percentage of bills to clients are subject to assessment.[1]

The complexity and risk associated with legal costing are a mystery to most clients (and some lawyers). It is most mysterious and risk-filled at crucial times for the client; that is, when they are asked to make a settlement decision, whether that be at mediation or otherwise. This article refers to mediation as the time of focus on settlement, although settlement decisions get made at many other times. Mediation and the mediation room are used as a convenient ‘name’ for the time and place that a settlement decision is being made.

ENGAGEMENT

There is a particular dynamic that occurs when a client instructs a lawyer to pursue a claim. The client is usually relieved to have support and a trusted adviser to share the worry of what to do and how to manage the risks and uncertainties of the legal system. For the lawyer, that trust forms a deep responsibility and a heightened awareness of the risks and opportunities that might be ahead. Practitioners realise they know less than the full ‘story’ that will play out should a case go to trial. And then there are the complexities of legal costs and paying the overheads and making a profit.

Initially, a lawyer will need to decide the way that they will charge for their services, which could include any of the following arrangements:

• a lump sum bill;

• hourly rate – billed regularly;

• hourly rate – billed at the end of the case;

• hourly rate – ‘no win - no fee’;

• contingency fee (if that is allowed); or

• funded externally.

Then the lawyer needs to manage compliance requirements of the complex law identified above. Only then can the lawyer take the time to assist clients, many of whom are the least able to navigate such complexity, understand legal costs and how they might impact on likely recovery, let alone the risk of an adverse costs order. For all of this (at least in NSW), the lawyer is not allowed to charge their client.

The lawyer and the client then embark on the shared journey of the rocky road of claims and litigation. During that journey, lawyer and client sometimes have shared interests. At the time of settlement, however, those interests may diverge, especially if an offer is in the interests of one party and not another. For example, this can occur if the client, facing enormous risk, is offered an ‘out’ from that risk without having to pay an adverse costs order, but their lawyer will not get paid, or if a funder wants to settle and the client does not.

Like many things in life, however, the beginning (engagement) has a profound impact on the end (the settlement). This article does not seek to cover all of the compliance obligations at the time of engagement, only in so far as they affect settlement. Rather, from the perspective of the costs assessor, some of the matters that should be considered at the time of settlement are:

• What is the real basis of fees for the matter?

• How much risk is the lawyer accepting when it comes to costs?

• How to make the impact of costs on the client easy to understand, including risk, the impact on the quantum recovered, etc?

• How to assist the client to understand the way that they will be charged?

• How to protect the lawyer from the risk that the clients’ understanding changes over the length of a long case?

• The particular legislative regime in which costing decisions are made; for instance, in most ‘statutory lines’ of insurance there are caps and limits on costs recovery and consumer legislation that affects the way lawyers can charge for their services.

• How will the lawyer and client approach the various issues of minimising the risks and maximising the recovery of legal costs using offers of compromise and Calderbank offers?[2]

• What is to happen if the lawyer and their clients’ interests diverge?

• The proportionality of the costs to the importance of the claim.[3]

Given the risks of adverse costs orders; the provisions of the various ‘proportionate liability’ regimes (which are not uniform across Australia); the impact of specific legislation such as workers’ compensation or motor accidents laws and the requirement to comply with a diverse range of pre-action requirements;[4] the sort of considerations referred to above have to be addressed every time a decision is made to join – or not join – a prospective defendant or third party. These principles also apply at many other times in the proceedings, such as when a settlement decision is to be made.[5]

Lawyers have a burdensome task that can be managed effectively only with a thorough knowledge of the law and practice, and absolute clarity in lawyer/client communication. From my experience, lawyers need to ensure:

• clear communication with the client. A lengthy costs disclosure document is a risk management tool and not a substitute for client understanding;[6]

• that clients will remember the risk explanation (or can be reminded of what was discussed) when making settlement decisions;

• that clients understand what they stand to win (or lose) at the time of engagement and at settlement;

• that clients have the opportunity to consider and even get independent advice when their interests may diverge from the lawyer’s or when they might be considering taking a course of action that the lawyer does not recommend; and

• that they are aware of their own commercial interests and those of others affected (counsel, experts, etc).

Decisions made at the time of engagement have a profound impact on the dynamics of settlements made in the mediation room.

IN THE MEDIATION ROOM

From my experience inside the mediation room, the very worst time to begin the discussion of legal costs with the client is when the first offer is made. Far too often that first offer is very low (or high) and does not take into account, or sometimes does not even cover, the costs that the client has incurred.

The Legal Profession Uniform Law (NSW), s177 states:

‘Disclosure obligations regarding settlement of litigious matters

(1) If a law practice negotiates the settlement of a litigious matter on behalf of a client, the law practice must disclose to the client, before the settlement is executed –

(a) a reasonable estimate of the amount of legal costs payable by the client if the matter is settled (including any legal costs of another party that the client is to pay); and

(b) a reasonable estimate of any contributions towards those costs likely to be received from another party.

(2) A law practice retained on behalf of a client by another law practice is not required to make a disclosure to the client under subsection (1), if the other law practice makes the disclosure to the client before the settlement is executed.’

If a client has an understanding, before the mediation, of the matters referred to in s177, then they are better equipped to respond to any offer. It is not good enough (to comply with s177 or to address the ethical responsibility of a plaintiff’s lawyer) to let the client know what they will get ‘in hand’ after deducting their legal costs. More importantly, a client who is not made aware at the time of settlement of the legal fees they will be charged is, in my experience of assessing solicitor/client legal costs, much more likely to challenge the legal fees later on. It is better to have the shock of knowing the expense before making important decisions.

Disclosure at this early time is also vital in dealing with the real conflict of interest between the lawyer and client that can occur in the settlement process. This particularly occurs when fees are charged on a no-win, no-fee or contingency basis, while the same issues pertain to funders’ costs.

A great deal of the work of a good mediator is assisting clients (and their lawyers) to manage expectations and risk. A good mediator will work with the lawyers and advisers to carefully and logically explain risk and reward; this includes the impact of costs recovery and the risk of adverse costs orders that impact on decision-making. A good mediator does not want to place pressure on the client to accept or reject an offer. Clients have enough pressure at that time and my experience is that clients are much more likely to make wise decisions if they fully understand the consequences of their choices, particularly in relation to costs. Given the complexity referred to above, the sometimes real conflicts of interest and the pressure of the mediation room, a mediator who has a good understanding of legal costs, and the risks and rewards of litigation, can be invaluable. That value comes not from convincing a client, but assisting them to understand, and then make good decisions.

It is my experience that defendants who are being asked to pay damages and costs seek to understand what part of their settlement offer is going to the plaintiffs’ lawyers. If liable, they might even make a plus costs offer or break up their offers, demonstrating the component that they allow for costs. Discussions about a party’s solicitor/client costs are sometimes tricky and can create tension in negotiations in the mediation room if not handled well. That tension can impact on the offers made. Surprisingly, it is my experience that defendants are likely to make higher offers if they think that the plaintiff’s legal costs are reasonable and are more reluctant to pay if (for whatever reasons) they think that a party is being ‘overcharged’ by their own lawyers. Defendants’ lawyers, who usually charge on an hourly rate basis and take no risk in regard to their own fees acting for a client, sometimes do not understand how the undertaking of risk by a lawyer impacts on the costs of a plaintiff.

One well-known mediator used to insist that lawyers give their clients, in writing, a letter setting out their costs to the date of the mediation and the likely costs (and the amount that they may recover if successful) of pursuing the claim to judgment. While a mediator does not have the power to insist on this procedure in all matters, it seems to me that what was asked is good practice. Settlement is all about placing a value on risk, and then managing that risk in a way that is acceptable to the client (and the lawyers if they have assumed risk as to costs or adverse costs orders). As a mediator, one of the most difficult situations is where a client does not understand risk or how to value it. In some circumstances, I have seen clients reject reasonable offers that far exceed the value of the risk that they are assuming. On the other hand, I have seen defendants make offers that are not even in the risk zone (for instance, do not cover legal costs of the plaintiff) simply because they do not understand how those costs are charged.

In preparation for mediation, there are other costs issues to be considered. Previous offers, particularly offers of compromise and Calderbank offers, take on a significance much greater than their quantum, especially when there are multiple issues, parties or complex risk issues. They can also have an anchoring effect if not framed properly. It is unusual for a defendant to offer more (for instance) than the plaintiff’s lowest offer, unless there is a special reason. Early and low offers are less likely to create that anchor if accompanied by an explanation that:

• costs will increase after the offer is made;

• a plaintiff’s condition or the value of the loss claimed may change after more preparation of the case; and/or

• the offer is, in fact, a compromise made in an effort to reach an early resolution, and the trial value of the claim is higher (the best offers even articulate how a compromise is offered from ‘full value’).

Of course, a client does not have to compromise and settlement is about more than just compromise. But my experience is that if a lawyer can honestly explain why the client thinks an offer is less than full value, defendants are more likely to be influenced.

THE MEDIATOR’S FEES

The legal costs of seeking resolution are generally recoverable in a successful prosecution of a claim (so long as they are reasonable), but the mediator’s fees (and room hire, etc) may not be, especially if the mediator’s costs agreement does not specifically provide that those fees are costs of the proceedings.[7] If there is only one good reason to read a mediation agreement this is it (though I also recommend consideration of the confidentiality and privilege provisions). Mediators’ fees can be a significant issue, especially in small claims, so lawyers should be mindful of choosing mediators whose fees are proportionate to the amount or seriousness of the issues at stake. In small claims, it is my experience that many mediators are willing to negotiate their fees or recommend a colleague.

AFTER THE BATTLE IS WON (OR THE SETTLEMENT IS REACHED)

If recovery of costs ‘as agreed or assessed’ is a term of a judgment of settlement, then the work is not over and the next negotiation for you and your client is about to begin. Regulation 32 of The Legal Profession Uniform Law Application Regulation 2015 (NSW) provides as follows:

‘Applications for costs assessment – section 68 of the application Act

(1) For the purposes of section 68 (1) of the application Act, an application for costs assessment:

(a) is to be made in the approved form, and

(b) is to be accompanied by the fee calculated in accordance with clause 33.

(2) The application must authorise a costs assessor to have access to, and to inspect, all documents of the applicant that are held by the applicant, or by any law practice, Australian legal practitioner or Australian-registered foreign lawyer concerned, in respect of the matter to which the application relates.

(3) The application must contain a statement by the applicant that there is no reasonable prospect of settlement of the matter by mediation.’

I have been involved in many mediations and negotiations of legal costs, especially in complex costs matters with multiple parties, or complex costs orders. It is most difficult if a judge has made an ‘issue-specific’ costs order – for instance, that the costs of a particular claim only are to be paid by the loser. I recommend that judges be dissuaded from making such orders due to their complexity of assessment. What is needed in those mediations is not necessarily an item-by-item explication of all the work done; rather, a careful explanation of how costs are charged (that is, the hourly or other rates), and why that is reasonable; the work that was done (in particular, any work necessary that the other party is not aware of); and any unusual aspects of the claim. Defendants and payers of costs, in my experience, tend to attribute to the quantum of claims for costs a ‘normality’ that may not be real (for instance, in a case of this type costs are usually...’). Of course, timesheets (if not privileged in a case that is continuing) and other standards of legitimacy are the most powerful persuaders when it comes to recovery of legal costs. When seeking to recover from a defendant, honesty in relation to what the client has actually been charged is helpful, even sometimes essential, if lawyers are not going to be accused of breaching the so-called ‘indemnity principle’ that ensures that a client cannot recover more for costs than they have expended.

Legal costing is complex but becomes even more complex when settlement is being considered or reached. Lawyers advising clients can manage risk, influence the other party and maximise their own return for the effort and risk they take if – when discussing settlement with their client and with the other parties – they have been clear with the client, at the time of engagement, about the basis on which fees are to be charged. They must also ensure that they have placed maximum pressure on the other party through strategic, clear and legally effective offers of compromise. Finally, lawyers should provide clients with clear and open information about legal costs before and during settlement discussions so clients can make informed decisions about how to value risk.

Steve Lancken is a professional mediator and Costs Assessor appointed by the Chief Justice of NSW to assess costs under s93C of the Legal Profession Uniform Law Application Act 2014. Steve regularly mediates complex insurance, commercial and costs claimed disputes. He is an accredited specialist in mediation and commercial litigation and left law in 1999 to practise full time as a mediator and arbitrator, acting for plaintiffs, insurers, and financial institutions. PHONE: 0418 272 449 EMAIL: steve@negocio.com.au.


[1] In 2015, fewer than 200 client/practitioner applications were made. According to 2014 Law Council of Australia data, there are more than 27,000 practising solicitors in NSW.

[2] For an excellent article on the latest cases on indemnity costs, see: Phillipa Alexander, ‘Costs update: Indemnity costs update’ (2015) 130 Precedent, 47-9.

[3] In NSW and Victoria, s172 of the Legal Profession Uniform Law requires that legal costs be ‘proportionately and reasonably incurred’ and ‘proportionate and reasonable in amount’.

[4] For instance, the Civil Dispute Resolution Act 2011 (Cth) or the Retail Leases Act 1994 (NSW) and others too numerous to articulate.

[5] For more information about the complexity of making effective offers that transfer the risk of legal costs to the defendant, see: Phillipa Alexander, ‘Costs update: Indemnity costs update’ (2015) 130 Precedent, 47-9.

[6] The Legal Profession Uniform Law in fact requires that ‘the law practice must take all reasonable steps to satisfy itself that the client has understood and given consent to the proposed course of action for the conduct of the matter and the proposed costs’.

[7] Newcastle City Council v Paul Wieland (2009) NSWCA 113.


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