Appellant v Respondent

Supreme Court of Victoria|2012-11-01|Before: EMERTON J

COSTS - Appeal from the Costs Court - Jurisdiction of the Costs Court - Non-associated third party payer - Whether Costs Court can make an order for the provision of information to a non-associated third party payer under the Legal Profession Act 2004 (Vic) where no application for review is on foot - Loan agreement provided for borrower to pay lender's legal and other costs in event of default - Borrower defaulted and lender incurred legal and other costs - Further agreement reached for the repayment of the loan and the payment of the lender's costs - Whether by the further agreement the borrower gave up its right to seek review of legal costs under the Legal Profession Act 2004 (Vic) - Whether there was an accord and satisfaction in respect of existing rights and obligations under the loan agreement in respect of legal costs - Legal Profession Act 2004 (Vic) , - (Vic) , - r 77.06.

1 This is an appeal against orders made by the Costs Judge in the Costs Court. The orders were made in answer to three preliminary questions identified by Wood AsJ on 26 March 2012. Those questions concerned, in substance, whether the Costs Court could conduct a review of certain costs at the behest of a putative non-associated third party payer under the Legal Profession Act 2004 (Vic).

2 The appellant ('Gadens') is a firm of solicitors which acted for a mortgagee (the 'Client') in respect of a loan agreement entered into on about 29 January 2009 with the respondent ('Beba') as mortgagor, pursuant to which the Client lent $3 million to Beba.[1] Under the loan agreement and a fixed and floating charge of the same date, Beba was obliged, among other things, to:

(a) repay the principle sum of $3 million on or before 31 January 2009;

(b) pay interest on any sum in respect of which there was a default in payment, which sums could be capitalised at the option of the Client;

(c) to pay to the Client on demand 'all costs, charges and expenses (including legal costs as between solicitor and client) reasonably incurred by [the Client] because of any default of [Beba]'; and

(d) under the charge, 'to indemnify [the Client] ... from and against any ... costs, and expenses of any nature which [the Client] ... sustain[s] or incur[s] ... in respect of or arising from any neglect or default of [Beba] to observe and perform any of the terms, covenants and conditions' and any 'liability incurred by [the Client] in the exercise, non-exercise or purported exercise of its powers, rights and privileges'.

3 On 31 December 2010, by reason of Beba's default, the Client called up the sums due under the loan agreement and threatened to exercise her rights under the loan agreement and pursuant to the charge without further notice. During the first week of January 2011, there were negotiations for an overall resolution of the rights and obligations arising under the loan agreement and the charge. These culminated in an offer being made by Beba to the Client on 7 January 2011, which was accepted by the Client the same day (the 'settlement agreement').

4 Pursuant to the settlement agreement, Beba was to make a payment described as 'a contribution in the sum of $60,000 towards fees owed to [the Client's] advisors, Gadens Lawyers and PPB Advisory'. PPB Advisory was a firm of insolvency accountants retained by the Client to advise her on her options to recover the amount outstanding under the loan agreement.

5 It is common ground that $60,000 was paid by Beba to the Client pursuant to the settlement agreement. However, insofar as it was required by the loan agreement and/or the charge to pay legal costs incurred by the Client in respect of its default, Beba was a 'non-associated third party payer' for the purposes of Division 7 of Part 3.4 of the Legal Profession Act. A non-associated third party payer has the right to seek a review under that Division of the legal costs that it is or has been required to pay, even though it was not the client.

6 On 13 February 2012, by amended third party summons for costs review in the Costs Court, Beba sought the following orders:

(a) an order that Gadens provide Beba with sufficient information to allow it to consider making, and if thought fit to make, an application for costs review under s 3.4.38 of the Legal Profession Act including provision of any agreement under which the said costs were said to be payable and delivery of bills of costs in taxable or itemised form;

(b) alternatively, that Gadens' costs described in the bills of costs appearing in the schedule be taxed insofar as the items therein were claimed against Beba as a third party payer pursuant to s 3.4.38 of the Legal Profession Act, under the terms of:

(i) the loan agreement dated 29 January 2009; and/or

(ii) the fixed and floating charge dated on or about 29 January 2009

as described in the affidavit filed with the summons.

7 When the summons came on for hearing before Wood AsJ, Gadens challenged the jurisdiction of the Costs Court to make an order requiring Gadens to provide the information sought in paragraph (a) of the summons, and contended further that the settlement agreement prevented Beba from exercising the statutory right under the Legal Profession Act to review the four bills of costs referred to in the summons.

8 As a result, his Honour identified the following three questions for preliminary determination:

(1) Does the Costs Court have the power to grant the relief sought in paragraph (a) of the summons for costs review?

(2) Is there an agreement between Beba and the Client that precludes Beba from exercising the statutory right under the Legal Profession Act to review, in the Costs Court, and in this proceeding, the four bills included in the summons?

(3) If the answer to question (1) is 'yes', should the Costs Court grant the relief sought in paragraph (a) of the summons in respect to the four bills in the summons?

9 His Honour determined that the Costs Court did have the power to grant the relief sought in paragraph (a) of the summons, that there was no agreement between Beba and the Client that prevented Beba from exercising its statutory right under the Legal Profession Act to have the bills of legal costs attached to the summons reviewed by the Costs Court, and that the Costs Court should grant the relief sought in paragraph (a) of the summons in respect of the four bills, but only to the extent of requiring itemised bills at that stage.[2]

10 Those determinations are now challenged in this appeal.

11 There was some discussion as to the form of an appeal from the Costs Court to a judge of the Trial Division. The right to appeal from the decision of the Costs Judge in the present proceedings is conferred by s 3.4.47 of the Legal Profession Act, which provides:

A person may appeal from a decision of the Costs Court in accordance with the Supreme Court Act 1986 and the Rules of the Supreme Court.

12 More generally, s 17I of the Supreme Court Act 1986 (Vic) provides:

Unless otherwise expressly provided for by this Act or any other Act or the Rules, an appeal lies to the Trial Division constituted by a Judge of the Court from a determination of the Costs Court constituted by a Costs Judge.

13 These provisions do not describe the nature of the appeal in question. However, r 77.06 of the Supreme Court (General Civil Procedure) Rules 2005 (the 'Rules') provides for appeals to a judge of the Court from orders made by an associate judge under any Chapter of the Rules. Rule 77.06(7) provides that '[t]he appeal shall be by re-hearing de novo of the application to the Associate Judge'.

14 In this case, the orders made by the Costs Judge were made under Chapter 1 of the Rules. Rule 77.06 is therefore applicable the appeal. The appeal is to be heard and determined by way of a re-hearing de novo of the application to the Costs Court.

15 Although Gadens did not contend that the jurisdictional issue operated as a bar to the Court as presently constituted determining the remaining issue (whether the right to have the costs reviewed has been compromised), it submitted that there was a bar to the Costs Court determining the issue and that the Court as presently constituted should decide this jurisdictional issue for the benefit of the Costs Court in the future.

16 By paragraph (a) of the summons, Beba sought an order that Gadens provide it with sufficient information to allow it to consider making, and if thought fit to make, an application for costs review under s 3.4.38 of the Legal Profession Act. Gadens submits that the Costs Court has limited powers and that the grant of the relief sought in paragraph (a) of the summons does not fall not within any of those powers.

17 The Costs Court's powers are conferred by s 17D of the Supreme Court Act. Section 17D provides, relevantly, that the Costs Court -

(a) must hear and determine costs reviews under the Legal Profession Act: s 17D(1)(f);

(b) has any other jurisdiction in relation to costs given to it under the Supreme Court Act or any other Act, by the Rules or by the Rules of another court or of a tribunal: s 17D(1)(h); and

1"> 18 Paragraph (a) of the summons is based on the entitlement conferred by s 3.4.38(7) of the Legal Profession Act, which provides:

If the third party payer is a non-associated third party payer, the law practice must provide the third party payer, on the written request of the third party payer, with sufficient information to allow the third party payer to consider making, and if thought fit to make, an application for a costs review under this section.

19 Section 3.4.38 provides generally for applications by clients or third party payers (both 'associated' and 'non-associated') for costs review.

20 Gadens submits that as the provision of information pursuant to a request made under s 3.4.38(7) is to enable a party in the position of Beba to request 'sufficient information' to enable that party 'to consider making, and if thought fit to make, an application for costs review', it involves a step that is anterior to the commencement of a costs review. That is not part of the process of hearing and determining a costs review and hence does not fall within s 17D(1)(f) of the Supreme Court Act. Gadens further submits that the provision of information prior to the commencement of a costs review is not 'necessary' to enable the Costs Court to exercise its jurisdiction to 'hear and determine costs reviews'. In short, Gadens submits that the Costs Court has no jurisdiction to make orders for the provision of information where no application for costs review is on foot. For this reason, the relief sought by paragraph (a) does not fall within the ancillary jurisdiction provided for in s 17D(2) of the Supreme Court Act.

21 There is a fundamental difficulty with Gadens' position in this instance. By its application to the Costs Court, Beba also expressly initiated a costs review. An application for costs review was therefore on foot at the time the application was made for the production of the bills of costs under s 3.4.38(7) of the Legal Profession Act.

22 However, even if Beba had not made an application for costs review as an alternative to seeking an order for the provision of information by the Client, the Costs Court would have had the power to make an order requiring compliance with the obligation in s 3.4.38(7) of the Legal Profession Act. The Costs Court has both ancillary powers and any other jurisdiction 'in relation to costs' given to it by statute or under the Rules.[3] While s 3.4.38(7) of the Legal Profession Act does not expressly confer a power on the Costs Court, the power to enforce the right of the non-associated third party payer to obtain information about bills of costs to allow it to consider making an application for a costs review must lie with the Costs Court. The review provisions in Division 7 of Part 3.4 of the Legal Profession Act anticipate that the Costs Court will administer the review process generally. In my view, the legislature could not have intended that responsibility for one small part of the review process, albeit one that may be anterior to any application for costs review, be taken out of the hands of the Costs Court and vested in the judges of the Trial Division.

23 Accordingly, the Costs Court has power to order the provision of itemised bills and the like for the purpose of facilitating a costs review, whether or not the costs review has been commenced at the time the order is sought or made.

24 Gadens submits that Beba has compromised its statutory right to a costs review by entering into the settlement agreement, which required it to make a contribution to legal and other costs as a fixed sum and, so it is submitted, in final satisfaction of its obligation to pay legal and other costs under the loan agreement. Beba contends, in substance, that when it entered into the settlement agreement it did not agree to waive its statutory right as a non-associated third party payer to have legal costs reviewed by the Costs Court under the Legal Profession Act.

25 In order to analyse the competing submissions, it is necessary to describe the manner in which the settlement agreement was arrived at and its final terms:

(a) On 31 December 2010, Gadens wrote to Beba on behalf of the Client attaching Notices of Demand under the loan agreement in respect of the outstanding amount of $3 million. The Notices required the payment of the outstanding amount by close of business on 11 January 2011, and advised that failure to comply with the demand would enable the Client, without further notice, to exercise her rights for recovery under the loan agreement, as well as under the relevant securities, and that, in accordance with the terms and conditions of the loan agreement, interest, fees and charges would continue to accrue on the the outstanding amount until paid in full.

(b) On 5 January 2011, Beba's advisors sent to Gadens a letter setting out proposed terms of agreement that would result in the withdrawal of the Notices of Demand. The proposal was expressed to be conditional on the Notices of Demand issued on 31 December 2010 being withdrawn and the Client's acceptance of a proposed repayment plan involving the repayment of the loan by instalments and payment of interest at an agreed interest rate of 12% per annum paid weekly on the outstanding balances. The payments of principal and interest were expressed to be in full and final settlement of all obligations owed to the Client under the loan agreement and related documents. Beba's proposal contains the following sentence: 'We would be happy to further discuss your costs once you can provide us a full estimate including by grade and by hour and the tasks you have performed on behalf of your client'.

(c) The following day, Thursday 6 January 2011, Gadens responded attaching an amended version of Beba's proposal with tracked changes. The tracking shows Gadens to have made a number of amendments to Beba's proposal, including:

(i) after the reference to repayment of the $3 million owing, the words 'together with a contribution in the sum of $60,000 towards fees owed to your client's advisors, Gadens Lawyers and PPB Advisory' have been inserted.

(ii) An amount of $60,000 has been added to the final item of the weekly repayment schedule with the explanation, 'made up of $200,000 repayment and $60,000 contribution to both Gadens Lawyers and PPB Advisory'.

(iii) The words in the previous draft relating to further discussions of costs and the provision of a full estimate of costs have been deleted.

(iv) A paragraph has been added setting out what will happen in the event of default under the settlement agreement.

(d) On the afternoon of the same day (3.05 pm on 6 January 2011), Beba's advisors responded with an 'amended written proposal' comprising amendments to the draft forwarded by Gadens. The amended written proposal contained the following amendments:

(i) The paragraph dealing with default was removed;

(ii) In relation to costs, the words, 'subject to Kookai Group being provided with evidence of such costs having been incurred by your client since 5 October 2010' were inserted. The words 'up to' were inserted directly before '$60,000' in both the passage referring to a contribution towards fees and in the repayment Schedule in respect of the final instalment.

In other words, Beba sought to maintain its right to scrutinise and challenge the Client's legal (and other) costs that it was required to pay.

(e) In its response later in the day (5.15 pm on 6 January 2011), Gadens removed the words 'up to' before the figure of $60,000 and the words 'subject to Kookai Group being provided with evidence of such costs having been incurred by our client since 5 October 2010'. It also re-inserted the paragraph that it had previously proposed relating to default.

(f) By email sent five minutes later (5.19 pm on 6 January 2011), Mr Chait of Gadens provided the following information to Beba's advisors about the fees owed to Gadens and PPB Advisory:

In reference to fees owed to Gadens and PPB Advisory, I note as follows -

Since taking instructions in October last year to seek to enforce our client's loan agreement and her securities she holds from Beba's and Epona, our client has been billed for three months to December 2010 of $25,655.30.
We have WIP on our system to the end of yesterday of $15,816.35 (I have not included WIP for today).
PPB Advisory have notified us their fees are approximately $19,000 plus GST.

The total amount exceeds $60,000 however our client has agreed to accept $60,000 in respect of her fees from your client.

(f) Approximately one hour later (6.21pm on 6 January 2011), Mr Chait of Gadens sent to Beba's advisors the amended proposal to be signed by Beba. The proposal:

(a) refers to 'a contribution in the sum of $60,000 towards fees owed to your client's advisers, Gadens Lawyers and PPB Advisory';

(b) includes the sum of $60,000 in the final payment on the repayment schedule with the notation '(made up of $200,000 repayment and $60,000 in aggregate as a contribution to both Gadens Lawyers and PPB Advisory)';

The above payments of principal and interest will be in full and final settlement of all obligations owed to your client under the Loan Agreement and related documents and, upon the payments being set out above being made the securities held by your client will be released.

The cut-off time for signature was 11.00am the following day.

(g) On 7 January 2011, Mr Cromb returned the signed letter of offer to Mr Chait of Gadens.

(h) On the same day, 7 January 2011, Gadens wrote to Mr Cromb recording that as terms for the repayment of the indebtedness to the client by Beba had been agreed, the Notice of Demand served on each of Beba and Epona was deemed to be withdrawn.

26 Gadens submits that the Client and Beba thereby achieved by accord and satisfaction a substantial and wide-ranging resolution of a commercial transaction between them. It was a term of that agreement that the Notices of Demand be withdrawn and the loan agreement varied so as to provide for payment terms over three months. The Client gave up her entitlement to the immediate exercise of her rights and remedies under the loan agreement and accompanying security documents upon default. In return, the payments to be made by Beba included 'a contribution in the sum of $60,000 towards fees owed to your client's advisors, Gadens Lawyers and PPB Advisory'. This was 'in full and final settlement of all obligations owed [to the Client] under the loan agreement and related documents'. According to Gadens, therefore, by entering into the settlement agreement the parties were putting an end to disputes about how much of the Client's legal costs were recoverable and how much of the PPB Advisory costs were recoverable. This took place in the context of resolving some of their other disagreements as to whether there had been a default under the loan agreement, whether the whole sum due under the charge was repayable immediately and so on. Thus, as part of the package establishing a new regime for the repayment of the loan, the parties put aside their existing rights in relation to legal and other costs, and entered into a new agreement for the payment of $60,000.

27 Gadens submits that in the circumstances, the settlement agreement was a final, conclusive and mutually binding agreement to settle Beba's obligations to the Client. It would be inconsistent with the terms and tenor of the settlement agreement if Beba alone could now re-open one aspect of the settlement agreement, namely the quantum of the Client's legal costs payable by Beba. Once the accord and satisfaction had been reached by the parties signing the letter of offer, the rights and obligations newly entered into replaced those that existed before. Any previous cause of action disappeared.[4]

28 According to Gadens, the intention to compromise Beba's obligations in respect of legal and other costs is evidenced by the way in which the settlement agreement was structured, as no specific amount or amounts could be identified as having been paid for legal costs alone. Even though it was known what PPB Advisory charged for non-legal services, 16 bills of legal costs were annexed to Beba's original summons.[5] It is impossible to know whether the $60,000 that was paid involved the payment of any particular one or more of those bills. Beba therefore entered into the settlement agreement knowing that it was blind to what costs were legal costs and what costs were for forensic accounting, and it compromised those costs at a specific figure because it wanted the other features of the transaction, namely a renegotiation of its loan and an extension of time to pay. Beba also obtained a preferential interest rate compared to what had been provided under the loan agreement, and a release from any claim for legal or accountancy costs. The settlement agreement was therefore a classic example of accord and satisfaction, that is, the resolution of a whole set of existing rights and their replacement by an agreement extinguishing all the pre-existing rights. A new agreement came into existence amending the previous agreement and setting out a new bargain between the parties.

29 For its part, Beba submits that the question before the Court is whether the parties intended the settlement agreement to be in satisfaction of all causes of action. In order to establish what was contemplated by the parties, it is necessary to consider their conduct as well as the actual terms of settlement agreement.

30 As to the purported settlement agreement, Beba submits that it is not a binding agreement that could be taken to compromise its rights in respect of its obligation to pay the Client's legal costs. It says that it entered into an arrangement with the Client for the purpose of trying to save its business. Under that arrangement, Beba was not required to do anything more or less than it was required to do under the loan agreement. No consideration flowed from Beba; it did not promise to do or give up anything that it was not already required to do or to give up and did not release the Client from any of its obligations under the loan agreement.

31 Thus, Beba submitted that while there might be said to have been an accord in the sense that there was a unilateral surrender of rights by the Client, the settlement agreement required Beba to do no more than it was already required to do under the loan agreement. In fact, the settlement agreement required Beba to do less, in that it could make payments over time and was not subject to a penalty interest rate. The release was therefore a 'one way release'. In effect, Beba offered to pay what it was required to pay under the loan agreement and it made no promise to abandon any claim that it was entitled to make. This left its statutory right to seek a costs review intact.

32 In this context, Beba referred to the High Court's statements in Grant v John Grant & Sons[6] about the construction of contractual releases: general words in a release are limited to that thing or those things that are specifically in the contemplation of the parties at the time the release is given; a claim by one person against another cannot have been the subject of a release if it was not the subject of a dispute at or before the time of the transaction which the deed embodies.[7] According to Beba, there is no evidence that Beba's rights of review under the Legal Profession Act were in contemplation by the parties at the time they entered into the settlement agreement. Any release given by Beba would have to be 'read down' to exclude its right as a third-party payer to apply to the Costs Court for a review of the bills of costs that it is required to pay.

33 Of course, the negotiations between the parties leading to the settlement agreement included communications about whether the agreement should require the Client to substantiate the legal and other costs payable as a result of Beba's default. However, Beba contends that there was no dispute between the parties at the time of the settlement agreement which related to its right to have legal costs reviewed under the Legal Profession Act. Beba did not assert such a right and cannot be said to have compromised it. Rather, Beba requested the insertion of a contractual term requiring Gadens to substantiate its bills. When that request was refused and Beba agreed to the terms of the settlement agreement minus the substantiation requirement, all that Beba gave up was the insertion of a contractual term. That did not involve giving up a cause of action, because Beba had no legal right to insist upon the insertion of that term. It continues to enjoy its legal rights under the Legal Profession Act, which have never been referred to, called upon or been the subject of dispute.

34 Beba submits that with the payment of the $60,000 contribution to Gadens' costs, there has been a payment of legal costs by Beba and s 3.4.3(2) of the Legal Profession Act is activated. It is now a matter for the review process to determine the amount of those costs.

35 The nature of accord and satisfaction was considered by the New South Wales Court of Appeal in El-Mir v Risk,[8] a case involving the settlement of a dispute under a building contract, in which McColl J summarised the law by way of the following propositions:

(a) The essence of accord and satisfaction is the acceptance of something in place of a cause of action; the accord is the agreement or consent to accept the satisfaction; upon provision of the satisfaction, there is a discharge which extinguishes the cause of action;[9]

(b) Where there is an agreement to accept a promise in satisfaction of a cause of action, the original cause of action is discharged from the date on which the promise is made;[10]

(c) Where there is an accord and satisfaction, only the agreement for compromise may be enforced because the previous cause of action has gone; it has been 'satisfied' by the making of the new agreement constituted by abandonment of the earlier cause of action in return for the promise or other benefit;[11]

(d) In other words, the role of an accord is to replace the former contract with a new one;[12]

(e) The question of whether there has been an accord and satisfaction is one of fact. It turns upon determining the parties' intentions, which may be discerned from the terms of the document said to constitute all or part of the agreement or from the surrounding circumstances.[13]

36 The settlement agreement is in the form of a brief letter dealing with limited but important matters arising under the loan agreement. As Gadens submitted, it purports to amend the loan agreement, principally in respect of the amount and timing of repayments and the interest rate on the outstanding amount. Importantly, it also provides for the payment of a contribution towards fees paid or payable by the Client to its advisers, Gadens and PPB Advisory as a result of Beba's default. Insofar as the settlement agreement effected a compromise of rights and obligations under the loan agreement, it was in respect of those discrete matters. The loan agreement continued to apply in respect of a range of matters after the settlement agreement was entered into.

37 It is common ground that Beba defaulted on the loan. The Client incurred costs and expenses as a result of Beba's default. At the time of the settlement agreement, Beba was under an obligation under the loan agreement to pay the reasonable costs and expenses incurred by the Client as a result of its default. By the settlement agreement, Beba and the Client agreed that the Client would withdraw the Notices of Demand that had been issued on default and that Beba would repay the loan in accordance with the terms in the settlement agreement and pay the sum of $60,000 as a contribution to the legal and advisory costs incurred by the Client.

38 Beba's submission that the settlement agreement was not a binding agreement, but merely an arrangement by which it was allowed more generous and flexible repayment terms by the Client, has little merit. By the settlement agreement, the parties renegotiated some of the terms of the loan agreement. The settlement agreement operated to bind the parties as a variation to the loan agreement. Each of Beba and the Client gave something and got something in return. Beba avoided what the Costs Judge described as the 'catastrophic implications' of defaulting on the

$3 million loan on the basis that it would repay the loan in accordance with the new terms of repayment. The new terms of the loan were agreed to by the Client on the basis that she would not have to rely on the default provisions of the loan agreement and the charge to recover the amounts to which she was entitled. In addition, Beba would make a payment of $60,000 to compensate the Client for the costs and expenses she had incurred without the need for the Client to substantiate those costs and expenses.

39 In my view, both the structure of the settlement agreement and the evidence about its negotiation make it clear that the parties to the agreement had in mind that the payment of $60,000 would conclusively resolve the issue of what costs the Client was entitled to recover as a result of the default and that it would not be open to one or other of them to re-open or revisit this question. The parties settled the question of costs in a way that made it very difficult to disentangle the legal costs from the other elements of the compromise package so as to enable the Costs Court to review the legal costs. The parties did not specify, and the Court cannot now know, whether the $60,000 that was paid was to be applied rateably across the fees of PPB Advisory and Gadens, or according to some other arrangement. Although Beba now seeks review of only four bills of costs, its original summons appended 16 bills of costs from Gadens to the Client. In the circumstances, no particular item of legal costs could be identified as having been claimed and paid. If the parties intended that Beba retain its entitlement to have the Client's legal costs reviewed by the Costs Court, the settlement agreement would have addressed how that could occur, given the difficulty arising from grouping together the legal and advisory costs and the fact that what was paid was described as 'a contribution', rather than a payment of the full amount of the legal costs or the full amount of the advisory costs.

40 Moreover, although Beba received an estimate of both the legal and advisory costs from Mr Chait prior to entering into the settlement agreement, when it agreed to pay $60,000 to the Client, Beba had not seen any of the bills for these costs. Nonetheless, it agreed to pay the amount of $60,000 to discharge its liability for the Client's costs and expenses generally.

41 In the circumstances described, it is difficult to imagine that the parties had in mind that it would be open to one party to re-open the question of legal costs only. I am satisfied that the parties intended that the payment of the $60,000 constitute a compromise of their respective rights in relation to the legal and advisory costs incurred by the Client by reason of Beba's default. By agreeing to the payment of $60,000, the parties put an end to any question about how much of the legal costs were recoverable and how much of the PPB Advisory costs were recoverable by the Client under the loan agreement. They did so in the context of putting to an end a larger dispute as to whether there had been a default, whether the whole sum due under the mortgage was repayable immediately and so on.

42 The Costs Judge reached a different conclusion on the parties' intention. His Honour gave weight to the respective negotiating positions of the parties in construing the settlement agreement. He found that Beba was in a weaker negotiating position and was attempting to obtain clarity in relation to the $60,000 demand as part of the settlement of the more important implications of default under the loan.[14] His Honour concluded that Gadens' two rejections of Beba's requests for this information and Beba's 'eventual capitulation' could not be taken as evidencing an intention to settle on the basis of waiver of any review rights under the Legal Profession Act; after all, paying legal costs and reviewing them is contemplated and authorised by the Act.

43 Although the last proposition is unexceptional, I do not agree that Beba's 'eventual capitulation' does not evince an intention to settle on the basis that it waive its rights to review. To the contrary, Beba's capitulation evinces an intention not to insist on substantiation of the legal and advisory costs. For the reasons I have given, the terms of the settlement agreement and the course of its negotiation tell against an intention that Beba maintain its review rights, that is, its right to re-open the question of how much it was obliged to pay for the Client's legal costs. In my view, by acknowledging in the settlement agreement that the amount of $60,000 was 'a contribution to' the Client's legal and advisory costs, Beba cannot now be heard to say that it paid the legal costs and reserved its right to have those costs reviewed by the Costs Court. As Gadens submitted, this was not a case where the mortgagee said to the mortgagor, 'My legal costs are X' and the mortgagor responded, 'I will pay X and I will have it taxed later'. The parties agreed, in essence, that the Client would 'take Y and call it quits', that is, it would accept a particular amount in full satisfaction of whatever it was owed to reimburse it for its legal and advisory costs and that would be the end of the matter.

44 I have therefore concluded that there was an accord and satisfaction in respect of Beba's obligation to pay the legal and other costs that had been incurred by the Client as a result of Beba's default under the loan agreement. The provision for the payment of $60,000 in the settlement agreement replaced the Client's right under the loan agreement to its legal and other costs arising from Beba's default. As a corollary, Beba lost its entitlement to re-open the amount of costs payable, either by having Gaden's bills of costs reviewed by the Costs Court or otherwise. Beba waived its right to a review by reason of the compromise that it entered into. Although the settlement agreement did not refer to any compromise or waiver of Beba's rights under the Legal Profession Act, it is implicit that Beba gave up those rights when it agreed to pay the amount of $60,000 in satisfaction of its obligation to pay the Client's costs arising from its default.

45 As a final matter, Beba relied on s 3.4.48A of the Legal Profession Act to submit that as a non-associated third party payer, it could not contract out of its rights under Division 7 of Part 3.4 of the Legal Profession Act, including the right to apply to the Costs Court for review. Section 3.4.48A provides:

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 Section 3.4.48A makes no mention of non-associated third party payers. Beba submits that, by implication, non-associated third party payers may not contract out of their rights under Division 7, whether they qualify as sophisticated or not.

47 I reject the submission that s 3.4.48A gives rise to the implication that a non-associated third party payer cannot waive its right to costs review by agreement with the client. Section 3.4.48A deals only with the rights of 'clients' and 'associated third party payers', and it treats them as clients of law practices. It allows those clients and associated third party payers who can be described as 'sophisticated' to waive their rights under Division 7, including their right to costs review. By implication, 'unsophisticated' clients and 'unsophisticated' associated third party payers cannot waive their right to costs review even if they enter into an agreement that purports to have this effect. The fact that s 3.4.48A only refers to 'clients' and 'associated third party payers' shows the provision to be directed to regulating the contracting out of rights in costs agreements rather than in agreements at large. If s 3.4.48A was intended to have the effect that non-associated third party payers in need of statutory protection could not contract out of their rights under Division 7, it would have enabled 'sophisticated' non-associated third party payers to contract out, just as it does for sophisticated clients and sophisticated associated third party payers.

48 In my view, s 3.4.48A has nothing to say, either expressly or by implication, about the position of non-associated third party payers, who by definition are not parties to the costs agreement.

49 Accordingly, Beba, as a non-associated third party payer, was not precluded from entering into an agreement with the Client by which it waived its right to have the Client's legal costs reviewed.

50 By the settlement agreement, Beba compromised its right to require the Client to substantiate its legal costs. It effectively waived its right to statutory review under the Legal Profession Act.

[1] Beba and Epona Pty Ltd conducted a retail women's fashion business under the 'Kookai' brand.

[2] Beba Enterprises Pty Ltd v Gadens Lawyers (Unreported, Supreme Court of Victoria, Wood AsJ, 13 April 2012).

[4] Osborne v McDermott [1998] 3 VR 1; Baxter v Obacelo Pty Ltd [2001] HCA 66; (2001) 205 CLR 635; El Mir v Risk [2005] NSWCA 215.

[5] Summons for Costs Review dated 14 October 2011.

[9] Ibid [48], referring to Federal Commissioner of Taxation v Orica Ltd [1998] HCA 33; (1998) 194 CLR 500, [116] (Gummow J).

[10] Ibid [49], referring to McDermott v Black [1940] HCA 4; (1940) 63 CLR 161, 176 (Starke J).

[11] Ibid [50], referring to Osborn v McDermott [1998] 3 VR 1, 8 (Phillips JA).

[13] Ibid [54], referring to Ballantyne v Phillott [1961] HCA 17; (1961) 105 CLR 379, 398 (Menzies J).

[14] As his Honour pointed out, the Client was obliged to provide Beba with sufficient information in relation to its legal costs and Beba's attempts to obtain that information were reasonable and consistent with its rights under the Legal Profession Act.

Court (General Civil Procedure) Rules 2005

At a glance

Court

Decision date

Before

Source

Judgment (112 paragraphs)

Parties

Legislation Cited (3)

Cases Cited (5)