Fleming, John --- "Estoppel, limitation & other hurdles on the way to pay day" [2016] PrecedentAULA 80; (2016) 137 Precedent 42

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ESTOPPEL, LIMITATION & OTHER HURDLES ON THE WAY TO PAY DAY

By John Fleming

Calvo v Ellimark Pty Ltd [2016] NSWCA 136 was an appeal from a decision of her Honour Bergin CJ of the Supreme Court of New South Wales. The primary case concerned the enforcement of rights under a deed entered into between the parties. In addition, pursuant to a cross-claim lodged in the primary proceedings, a lawyer for one of the parties sought orders enforcing a claim for legal costs. This article focuses on the lawyer’s claim for legal costs.

THE FACTS OF THE CASE

Mr and Mrs Calvo ran the Australian Institute of Music (AIM), a public company limited by shares out of premises they leased from Ellimark Pty Ltd (Ellimark). AIM ran into some financial difficulty. The Calvos brokered an arrangement to sell part of their shares in AIM to their accountant, Mr Sweeney, at an agreed price and to Ellimark in return for significant rental arrears being forgiven. After the agreement, AIM was owned 37.5 per cent by Ellimark, 37.5 per cent by Mr Sweeney and 25 per cent by the Calvos. However, a dispute subsequently arose after Mr Sweeney failed to pay for his stake in AIM.

The Calvos commenced proceedings against Mr Sweeney to recover their shares in AIM and engaged a lawyer to represent them. They entered into identical cost agreements with the lawyer as well as a deed (the Costs Deed). The Costs Deed required 32.5 per cent of the shares in AIM to be transferred to the lawyer should the proceedings be successful. In order to fund the proceedings, the Calvos entered into a further deed with Ellimark (Ellimark Deed). The Ellimark Deed provided that in return for funding the litigation, the Calvos would sell 12.5per cent of their shares in AIM to Ellimark for a designated price, thereby making Ellimark an equal owner of AIM.

The Calvos were successful in their proceedings against Mr Sweeney. Mr Sweeney was ordered to return the shares in AIM to the Calvos. Around this time, Mr Calvo suffered a stroke and was hospitalised. The lawyer attended the hospital and obtained a signed transfer of 32.5 per cent of the shares in AIM in accordance with the terms of the Costs Deed. The signed transfer was never registered by the lawyer. In addition to the transfer of shares in AIM, the Calvos had already paid $55,000 to the lawyer on account of professional costs, and significant sums for senior counsel.

THE PARTY/PARTY COSTS ASSESSMENT

In 2010, the lawyers then acting for the Calvos wrote to the lawyer alleging that the Costs Deed was void. They denied the lawyer’s right to be paid legal costs in addition to the transfer of shares. They sought an itemised bill from the lawyer concerning the $55,000 already paid and confirmation of any outstanding amounts. The letter concluded with the statement ‘our clients are more than happy to pay your client a reasonable sum for any further fees claimed on receipt of an itemised bill of costs’. The lawyer failed to provide itemised invoices and claimed an entitlement to both fees and the shares.

In 2011, an application for assessment of party/party costs was made by the Calvos. The application sought assessment of the fair and reasonable costs payable arising from the costs order made in their favour in the Sweeney proceedings. The cost assessor issued a notice to the lawyer requiring production of itemised invoices. When no response was received, the costs assessor referred the lawyer to the Office of Legal Services Commissioner (NSW). Ultimately, with no itemised invoice forthcoming, the assessor finalised the assessment without the inclusion of the lawyer’s fees and delivered a certificate of determination. The party/party costs issue was subsequently settled with a substantial amount recovered.

THE PROCEEDINGS AT FIRST INSTANCE

Proceedings were commenced by Ellimark for specific performance of the Ellimark Deed. In the same proceedings, the lawyer sought to enforce specific performance of the transfer of shares under the Costs Deed. The Calvos sought orders setting aside the Ellimark Deed, the Costs Deed and the share transfer. Shortly before the final hearing, the lawyer delivered an itemised bill of costs seeking $2,289,248.54, which prompted the Calvos to file a further cross-claim seeking declarations setting aside the cost agreements and estopping the lawyer from recovering any further fees.

For the purpose of this article, we will concentrate on the decision as it relates to the proceedings between the Calvos and the lawyer.

At first instance the court made;

a. a declaration that the Costs Deed and subsequent share transfer was void;

b. a finding that the cost agreements remained in force; and

c. a finding the lawyer was not estopped from recovering legal costs.

THE APPEAL

The Calvos appealed the first instance decision. The questions raised by the grounds of appeal were:

a. whether the lawyer was estopped from claiming legal fees for work done in the Sweeney proceedings; and

b. whether the cost agreements read together with the Costs Deed constituted a contingency agreement in breach of s325 of the Legal Profession Act 2004 (NSW) (LPA).

The declaration that the Costs Deed and subsequent share transfer was void was not the subject of appeal.

The Calvos argued that the lawyer was estopped from recovering any costs over and above the $55,000 already paid. Leeming JA stated:

‘The facts are extremely unusual, but I think that by what occurred throughout the assessment process, [the lawyer] must be taken to have represented that she would not seek to recover any additional legal costs.’^[1]

What conduct by the lawyer amounted to representations that no further fees would be sought? The court took into consideration the following conduct:

• The lawyer’s response to the letter sent by the Calvos’ solicitors just prior to the cost assessment advising that the Calvos would be happy to pay reasonable legal costs on receipt of an itemised bill of costs but denying the lawyer’s right to the shares. The lawyer’s response that the legal costs and entitlement to the shares were separate issues was considered by the court to have ‘contributed to the assumption or expectation that no additional fees would be sought’. In particular, the court noted that there was no separate claim for legal costs made in the letter.

• The lawyer’s response to the Office of the Legal Services Commissioner, stating ‘I was paid the extremely modest sum of $50,000 plus $5,000 GST for approximately three years of solidly working on their “unwinnable” case’ but expressed no entitlement to further fees. The letter was served two months after the lawyer had assured the cost assessor that she ‘could have the invoices to [Ms Dulhunty] in a couple of weeks’ but failed to provide them.

The court considered that the Calvos relied on this expectation to their detriment. They accepted Mr Sweeney’s cheque in full and final satisfaction of his obligations under the costs order made, were unable to incorporate the lawyer’s fees in the cost assessment and were at risk that no further fees claimed by the lawyer could be recovered from Mr Sweeney.

The court considered there needed to be a ‘clean break’ between the lawyer and the Calvos. Having found estoppel, they granted the Calvos permanent injunctive relief against the lawyer from taking any further steps to recover costs.

WIDER IMPORT OF THE DECISION

The decision touched on a number of issues faced by practitioners concerning the recovery of fees.

When should a lawyer issue a bill?

There are two interests, at times competing, entangled in the answer to this question: the client’s right to receive a bill from the lawyer and the lawyer’s right to recover a debt for legal services provided to the client.

In dealing with the client’s right, the court in unambiguous fashion in Calvo v Ellimark stated:

‘The time to serve a bill of costs is when the client is seeking to enforce a favourable costs order against a solvent defendant.’^[2]

The paramount duty of a lawyer is to their client and in serving their client’s interests. The court was critical of the lawyer’s failure to provide an itemised bill after repeated requests, especially in circumstances where the client was taking steps to enforce their costs order against Mr Sweeney.

A lawyer’s right to recover legal fees is contractual. A cost agreement may be enforced in the same way as any other contract.^[3] The right was considered in Coshott v Lenin [2007] NSWCA 153, where the Court acknowledged that the contractual right of a lawyer to recover fees is subject to restrictions. In particular, the prerequisite that a bill must comply with legislative requirements and have been served on the client prior to the institution of recovery proceedings.^[4]

The court considered but expressed no conclusion on whether the Calvos had a complete limitation defence to the lawyer’s claim, given that legal services were provided more than six years ago. The court noted the six-year limitation period to collect debts could not be ‘side-stepped’ by failing to render a bill.^[5] The lawyer’s right and cause of action in respect of outstanding legal fees arises on completion of the last legal service: Coburn v Colledge [1897] UKLawRpKQB 62; [1897] 1 QB 702 and Cockburn v Shehadie [2013] NSWSC 758. The court made no final decision on the limitation argument made in Calvo v Ellimark, given its decision on estoppel.

In NSW, as in Queensland, a lawyer can choose between commencing proceedings to recover an outstanding debt or engaging the non-curial process of costs assessment. Does filing an application for assessment amount to ‘bringing an action on the cause of action’, thereby avoiding the extinguishment of the right and title to the debt by limitation?

The issue was considered in Coshott v Barry & Anor [2012] NSWSC 850. In that case, the lawyers had sought assessment of their legal costs in six separate matters conducted for the Coshotts. The legal costs pertaining to each matter had been through assessment, with certificates of determination issued by the costs assessor in all matters. The lawyers had taken steps to register two certificates as judgments, but not the remaining four. Mrs Coshott commenced proceedings seeking declarations that the certificates of determination and judgments be set aside on limitation grounds. The Court found that the two certificates filed as judgments had been properly obtained, should not be set aside and their filing as a judgment paved the way for a further 12 years to enforce the debt as a judgment.

In relation to the four unregistered certificates, the Court stated:

‘Mr Turner acknowledged that a costs assessment is a non-curial proceeding. I am not satisfied that the lodging of an application for a costs assessment amounts to bringing an action on a cause of action within the meaning of the Limitation Act.’^[6]

In short, the firm lost its entitlement to recover legal costs that were the subject of the four unregistered certificates. Practitioners would do well to keep in mind, when recovering debts through costs assessment, that they must not only complete the process but register any subsequent certificates of determination prior to the expiration of any limitation period.

When will a cost agreement be void?

At first instance the primary judge in Calvo v Ellimark found that the Costs Deed dealt with payment for the legal services provided and accordingly was a ‘cost agreement’ as defined in s302 of the former NSW LPA. Section 302 defined a cost agreement expansively as ‘an agreement about the payment of legal costs’. This decision was in accord with prior NSW decisions like Amirbeaggi and 2 Ors v Business in Focus (Australia) Pty Ltd and 5 Ors [2008] NSWSC 421 (Amirbeaggi).

The primary judge considered the Costs Deed to be a conditional cost agreement, given that the obligation to transfer the shares in AIM to the lawyer was conditional upon a successful outcome in the litigation against Mr Sweeney. As the Costs Deed failed to contain the necessary cooling-off period or inform the client of their right to seek independent legal advice, it was void. Given the decision on estoppel, the Court of Appeal made no findings on these grounds.

With the introduction of the Legal Profession Uniform Law 2015 (LPUL) in Victoria and NSW, future cases regarding void costs agreements will need to consider the application of r72A of the Legal Profession Uniform General Rules 2015 (recently inserted into the LPUL on 22 April 2016). Ordinarily, failure to comply with the disclosure obligations in the LPUL will result in a law practice’s costs agreement being void.^[7] Where non-compliance with a disclosure obligation has been remedied in a timely fashion, r72A provides a mechanism for the salvation of an otherwise void agreement. There are a number of hurdles for a law practice to overcome before obtaining the benefit of the section. No doubt case law will provide further guidance on where and in what circumstances the remedy may be relied upon.

Rule 72A provides that where a lawyer has taken reasonable steps to disclose but fails in some sense to fully comply – for example, the lawyer fails to update their estimate of costs arising from a significant change in the matter – they will have 14 days from the date they became aware of the oversight to rectify the situation and avoid the cost agreement being made void by virtue of s178.

A DIFFERENT INTERPRETATION OF ‘COST AGREEMENT’

The Supreme Court of Victoria in GLS v Goodman Group Pty Ltd [2015] VSC 627 took a different approach to Amirbeaggi in its interpretation of what constituted a costs agreement. In that case, the Court was dealing with a law practice that had been retained to represent a client regarding proceedings in the Victorian Civil & Administrative Tribunal (VCAT). The client had entered into a costs agreement and paid the majority of the invoices prior to the matter’s finalisation. On completion, the client disputed the legal costs and, after some negotiations, agreed to a discounted amount and paid the remaining fees. The client then sought a costs review at which time the law practice raised an ‘accord and satisfaction’ defence to the application. The Court distinguished Amirbeaggi, holding that the negotiated settlement agreement was not a costs agreement. It stated:

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 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).

57. This analysis and conclusion disposes of all three of the grounds subsumed by this issue: all three incorrectly assume that an agreement made after the making of the costs agreement by which the client relinquishes a right of review in exchange for a reduction in the final amount of costs billed under the costs agreement, is itself a “costs agreement” to which the Act applies.’^[8]

There are two important aspects to this decision:

1. The Court found the later agreement to settle costs between the law practice and the client was not a costs agreement due to timing. The Court construed the notion of a ‘costs agreement’ as defined in the Act to be temporally different from an agreement settling a dispute regarding costs already incurred and billed.

2. The Court considered ss3.4.48A and 3.4.26(5) of the former Legal Profession Act (Vic) 2004 to be ‘in step’ with that view. This decision essentially provided prohibitions on unsophisticated clients and associated third-party payers from waiving their rights to assessment at the time of entry into the cost agreement.

Though the decision relates entirely to the provisions contained in the former LPA (Vic), the guiding principles can be applied to the LPUL. Namely, it was not parliament’s intention to restrict clients and third-party payers from reaching commercially binding settlements with a law practice concerning amounts for legal costs which have already been incurred and billed. With that said, caution needs to be exercised when a client is agreeing to waive entitlements in return for a discount. In particular, independent legal advice should be sought to ensure that the client is made fully aware of the ramifications of the settlement in order to avoid later arguments of undue influence.

CONCLUSION

Billing, cash flow and debt recovery are essential ingredients of a healthy practice. Practitioners must keep abreast of billing obligations and ensure that they comply with requests for itemised bills. Failure to bill in a timely fashion or to respond to requests for itemised bills may have ramifications beyond irritated clients and can gravely impact on the practitioner’s right to recover fees.

John Fleming is a costs solicitor with the Law Society of New South Wales.

PHONE: [phone] EMAIL: [e-mail].

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^[1] Calvo v Ellimark Pty Ltd [2016] NSWCA 136, [139].

^[2] Ibid, [40].

^[3] Legal Profession Uniform Law (NSW), s184; former s326 of the Legal Profession Act (NSW) 2004.

^[4] Ibid s194; ibid s331.

^[5] Calvo v Ellimark, see above note 1, [65].

^[6] Coshott v Barry & Anor [2012] NSWSC 850, [53].

^[7] LPUL, see above note 3, s178.

^[8] GLS v Goodman Group Pty Ltd [2015] VSC 627, [56]-[7].