These are proceedings between a solicitor and former client about the proceeds of a judgment obtained by the client in other court proceedings. Consent orders were made in October last year which resolved the proceedings apart from costs. Each party now seeks an order that the other party pay the costs of the proceedings.
[2]
Background and procedural history
In these proceedings the former client, Marcha Makari, is the defendant. The earlier proceedings arose out of the breakdown of her marriage. She brought proceedings against her ex-husband for division of the property of their marriage under s 79 of the Family Law Act 1975. Those proceedings appear to have been commenced in the Family Court in about 2014. They were transferred to this Court in 2018. That was to allow them to be heard together with proceedings between Ms Makari and the trustee of a family trust controlled by her ex-husband. Those proceedings were commenced in this Division of the Court in 2015. Presumably their subject matter overlapped with that of the family law proceedings.
The plaintiff, Eden King Pty Limited ("EK") is a solicitor corporation. It has one solicitor-director, Ms Claudette Gazi. Through EK, Ms Gazi acted for Ms Makari in the earlier proceedings in this Court. EK was the fifth firm to act for Ms Makari in the proceedings.
EK began acting for Ms Makari in March 2019. Ms Gazi retained counsel, Mr J Lo Schiavo, to appear on Ms Makari's behalf. Mr Lo Schiavo was retained in October 2019.
The proceedings came on for hearing before Kunc J in December 2019. They were eventually settled. Consent orders were made on 17 December. Those orders provided for Ms Makari to receive a sum of about $630,000. Of this, about $480,000 was to come from a controlled monies account held by Mills Oakley, the solicitors acting for her ex-husband.
On 18 December 2019 Ms Makari's lawyers prepared their bills. Mr Lo Schiavo was the first to do so. He issued a memorandum of fees (incorrectly dated 4 November) for $52,470 and sent it to Ms Gazi. Ms Gazi forwarded it to Ms Makari asking whether Ms Makari wished for her (Ms Gazi) to negotiate with Mr Lo Schiavo about the amount.
Later that evening, Ms Gazi followed with EK's bill. This was for $288,306.24 (not including Mr Lo Schiavo's fees). The bill was accompanied by an email to Ms Makari offering to reduce the fees to $180,000 on the basis that all fees were paid within seven days of the settlement monies being received.
All parties appear to have proceeded on the basis that Ms Gazi's fees would be paid out of the settlement funds to be received from Mills Oakley's controlled monies account. For reasons which do not appear in the evidence, the release of the funds was delayed. In the meantime, there was some discussion between Ms Gazi and Ms Makari about EK's and Mr Lo Schiavo's bills. Ms Makari asked Ms Gazi to negotiate with Mr Lo Schiavo about his fees. She also sought some explanation of the level of fees in EK's bill.
On the afternoon of 5 February 2020, Mills Oakley intimated that the settlement funds would be available for release the following day. At 11:37 am Ms Gazi emailed Ms Makari. There appear to have been some loose ends with the settlement, in particular concerning the proceedings between Ms Makari and the trustee for her ex-husband's family trust (the trustee was separately represented). After referring to these, Ms Gazi stated:
John [Mr Lo Schiavo] has advised that he does not agree to discount his fees as his invoice already includes discounts.
We cannot negotiate any further on our previous invoice. We will be issuing a further invoice with disbursements as the court has emailed us with invoices. My office will send this shortly.
Ms Makari does not appear to have replied. Instead, that evening, she wrote directly to Mills Oakley. In her email she stated that EK was no longer acting for her and she was representing herself. She asked Mills Oakley to pay the monies from the controlled monies account directly to her, nominating an account in her name with the Arab Bank. She noted that under the terms of the settlement orders the payment was due to her personally.
Ms Makari did not send Ms Gazi a copy of this email or tell her about it. On the following day, Friday 7 February, Mills Oakley paid the settlement funds from the controlled monies account to the account which Ms Makari had nominated.
Ms Gazi remained unaware of Ms Makari's email to Mills Oakley until the following Wednesday, 12 February, when Blackstone Waterhouse, the firm acting for the trustee, which had obtained a copy of the email, wrote to ask her whether she was still acting. Having become aware of the email, Ms Gazi swung into action. At 10:09 am she emailed Ms Makari providing a copy of her communications with Blackstone Waterhouse and asking whether EK was still retained. At 11:33 am she sent an email enclosing a final bill, dated the same date. It was for $4,236.50. She also sent copies of EK's earlier bill and Mr Lo Schiavo's bill from 18 December. The total amount claimed was therefore $345,012.74.
Ms Gazi also called Ms Makari but received no reply. That afternoon, Ms Gazi wrote to Mills Oakley putting that firm on notice that EK claimed a solicitors' lien over the settlement funds in the controlled monies account. But at about 6:00 pm she learned that the funds had already been paid out.
Later that evening, three further emails passed between Ms Gazi and Ms Makari:
Email from Ms Gazi to Ms Makari at 7:50pm (emphasis original)
We refer to all previous emails and note I called you earlier today without any reply.
We would appreciate urgent clarification as to whether you are terminating the retainer and if you have taken the settlement funds.
We hold a fruits of litigation lien over any settlement funds irrespective of whether they are held by Mills Oakley, BSM Group [the trustee] or you.
We encourage you to provide a response at the earliest time, and make payment of our fees.
As you know we have worked the last 12 months without pay, including paying disbursements out of our pocket.
Email from Ms Makari to Ms Gazi at 8:22pm
Please do not act on my behalf in any form and do not add any further charges to your already unreasonable bills.
I'm representing myself to save myself further excessive costs from you.
Please note that your bills have been excessive and unreasonable and as such I would like to get them assessed and determined by appropriate people.
Please send me a confirmation of cease to act form.
Email from Ms Gazi to Ms Makari at 8:35 pm
Thank you for your email. If you feel that the costs are unreasonable, then you may have the invoices assessed at your cost.
However a cost assessment does not prevent the fees being paid to us, pending any application for assessment.
Therefore in the circumstances please notify all relevant parties who hold funds to pay the sum of $345,012.74, to our trust account immediately.
In the event that our fees are reduced by any cost assessment application you make, the fees will be refunded promptly to you.
Two days later, the present proceedings were commenced on an urgent basis in the Duty List. EK obtained an ex parte order freezing the Arab Bank account into which the settlement funds had been deposited by Mills Oakley a week before. Apart from the freezing orders, the only other prayer for relief in the summons was paragraph 4:
Payment of $345,012.74 into trust account of [EK], to be held there pending agreement or costs assessment determination.
The proceedings returned to Court on 21 February. Ms Makari was represented by her current solicitor, Ms Antoinette Khalil. Consent orders were made for the $345,012.74 claimed by EK to be paid into Court whereupon the freezing order was to be discharged. An undertaking was given on Ms Makari's behalf to make an application to have the fees claimed by EK assessed.
In accordance with Ms Makari's undertaking, she filed an application for assessment in April 2020. The application was referred to Mr JC Dobson as Assessor. He completed his assessment on 14 October.
When EK had been retained by Ms Makari in March 2019, a written costs agreement had been entered into. That agreement contained a fee estimate of $154,000 but did not contain any description of the work to be done. Moreover, the estimate was far less than the amount ultimately billed. Ms Gazi had advised Ms Makari in October 2019 that the fees would be up to $100,000 more than the estimate, but this too proved to be an underestimate.
The Assessor found that EK, through Ms Gazi, had failed to comply with its disclosure obligations. Ms Gazi could, and should, have caused EK to comply with its obligations. Accordingly, the agreement was set aside. The Assessor proceeded to determine the costs on a fair and reasonable basis. He reduced the amount of the fees claimed by EK by about $80,000. The disbursements and counsel's fees were allowed in full. The result was a costs determination in the sum of $261,943.45. EK was obliged to pay the costs of the assessment as well as Ms Makari's costs, which were fixed in the amount of $3,450.13.
The Assessor released his determination on 29 October 2020. The Assessor's certificate fixed the amount owing from Ms Makari to EK at $258,493.32 (the figure determined by the Assessor less the costs owing to Ms Makari).
On the same day, Ms Gazi sent a Calderbank letter to Ms Khalil proposing the resolution of these proceedings. The letter asserted that, following the costs determination, EK had succeeded in these proceedings, and would receive an order for costs in its favour. The proposed order was for the sum of $261,683.32 to be paid to EK out of the monies in Court with the balance to be paid out to Ms Makari. The figure to be paid to EK was calculated as the amount under the Assessor's certificate plus $3,190 for the filing fee in these proceedings. Otherwise, there was to be no order as to costs.
This offer was not accepted. EK then sought review of the Assessor's decision and the proceedings were stood over to allow that to happen.
In its application for review, EK challenged the Assessor's decision to set aside the costs agreement, and also challenged some of the reductions made by him in fixing the fair and reasonable costs. But this was rejected by the Review Panel, which affirmed the Assessor's decision and determined that the costs of the review application be paid by EK. The Review Panel handed down its decision in September last year.
The proceedings had first come before me on 7 May last year as a result of a referral from the Applications List. EK had filed a notice of motion seeking payment of a sum of money out of Court. The motion proceedings were settled with a payment by Ms Makari of $120,000 and the rest of the monies remaining in Court.
The proceedings came back before me on 28 October. Consent orders were agreed between the parties which provided for judgment to be entered in favour of EK against Ms Makari in the sum of $141,683.32 (calculated as $261,683.32 for "as due for legal fees and disbursements" [sic; this was actually the same figure as proposed in the offer of 29 October 2020, which included the filing fee in these proceedings] less the $120,000 already paid.
The consent orders went on to provide that that sum be paid out to EK, the balance of $83,329.42 to be paid to Ms Makari, and interest accrued be divided equally between the parties. The orders also contained directions for the exchange of submissions on costs.
[3]
Plaintiff's application for costs
Counsel for EK put the application for costs on two bases. First, counsel contended that, in substance, EK had succeeded in the proceedings. The consent orders represented an effective capitulation by Ms Makari. Further, and alternatively, counsel relied on various settlement offers which had been made on behalf of EK but not taken up by Ms Makari. Counsel submitted that the failure to do so was unreasonable. Counsel went so far as to submit that the whole of the costs of the proceedings should be paid by Ms Makari on an indemnity basis.
[4]
December 2019 offer
It is convenient to deal first with the earliest offer upon which counsel for EK relied. This was the offer in the email which Ms Gazi sent to Ms Makari accompanying EK's December 2019 bill (see [7] above). The email relevantly stated:
We enclose our invoice for your consideration. We have also allowed 2 days of work to finalize the matter (settlement deed, amendments, organising payment, liaising with the parties). The fee does not include counsel's fees and as already discussed I am prepared to request counsel reduce his fees if you are agreeable.
The firm is prepared to offer you a reduction of fees from $288,306.24 to $180,000.00 incl GST on the basis that all fees are paid within 7 days of receiving the initial money per court orders.
In passing, I wish to comment on what Ms Gazi said about Mr Lo Schiavo's fees. The impression given was that she was not going to negotiate with counsel unless Ms Makari asked her to. Other correspondence in evidence gives the same impression, perhaps because Ms Gazi thought that, as Ms Makari would ultimately bear counsel's fees, it was up to her to take the lead.
If this was Ms Gazi's attitude, then that was problematical. As counsel, Mr Lo Schiavo was retained by EK. Any obligation which Ms Makari had to pay his fees was limited to indemnifying EK against liabilities properly incurred by EK to him. Ensuring that Ms Makari paid no more than she was obliged to pay for counsel's services was part of EK's responsibility to her as the client. Ms Makari should not have been expected to pay anything more for Mr Lo Schiavo's services than EK would have paid if obliged to do so out of its own pocket.
There is nothing to suggest that in the present case Mr Lo Schiavo charged more than he was entitled to under the terms of his retainer, or that there was anything unreasonable about his refusal to negotiate. His fees were allowed in full on assessment. But it should be clearly understood that if there had been any issue about whether his charges were justified under the terms of his retainer (including any question about his compliance with his disclosure obligations) it would have been EK's responsibility to identify that issue and take it up with him. Similarly, if Mr Lo Schiavo had been amenable, even if not legally obliged, to negotiate his fees downwards, then it would have been EK's responsibility to pursue that opportunity to the full.
Returning to Ms Gazi's email of 18 December 2019, the immediate problem is that it did not contain a warning that if not accepted it would be the basis for an application for a special costs order. Indeed it did not even contain a specified date for acceptance, or deal with the loose ends about counsel's fees and the further work to be undertaken before the settlement would be complete. Nor did it contain the usual Calderbank notation of "without prejudice except as to costs".
Even if the email had been sent to an experienced lawyer in the course of proceedings which were actually underway, it might have been difficult to overlook these omissions. But there is no justification for doing so when the "offer" was sent to a layperson.
The problem does not end there. EK was, at the time the "offer" was made, acting for Ms Makari. Had Ms Gazi contemplated using the "offer" against Ms Makari in a later dispute with her, she would have been hopelessly conflicted. Probably, she would have had to terminate EK's retainer. At the very least she would have had to advise Ms Makari to obtain independent legal advice with respect to her rights against, and obligations to, EK. Of course, any competent independent solicitor would have been obliged to advise Ms Makari that there were grounds for having EK's costs agreement set aside and, if that happened, an assessment would have had to take place at EK's expense before Ms Makari was obliged to pay anything.
None of this necessarily means that a solicitor cannot discuss or negotiate fees with a client while the retainer continues, although great care must be taken to ensure that what the client is told is completely dispassionate. In truth it seems unlikely that Ms Gazi had in mind at all when she wrote the email that it might later be relied upon for costs purposes. But to rely on it now for those purposes would put EK in an untenable position. In my view the Court should not even entertain such an argument.
[5]
Success in proceedings?
Counsel submitted that EK had been vindicated by the ultimate payment out of $262,000 as a result of the proceedings. Counsel also submitted that the proceedings had been instituted as a reaction to Ms Makari's own wrongful conduct. Ms Makari had been seeking to nullify EK's lien over the settlement proceeds This had made the freezing order, followed by the order for payment of money into Court, necessary.
Counsel's first submission in effect treats the ultimate payment of a substantial sum of money out of Court as success in the proceedings. But I think this is an oversimplification.
Where a party to proceedings obtains an order for payment out of monies held in court, it is tempting to see the order as a form of substantive relief. But in most cases that is not strictly correct. The order for payment is auxiliary. It merely reflects the substantive rights declared (even if tacitly) by the judgment.
In the present case the payment out reflects the outcome, not of a claim made in these proceedings, but of a claim made in the costs assessment proceedings. But the principle is the same. The present proceedings were, in effect, auxiliary to those proceedings. This is clearly seen in the terms of order 4 sought in EK's summons, quoted at [15] above. The order was equivalent to an interlocutory injunction freezing the sum claimed by EK pending the outcome of the costs assessment proceedings.
It is true that the costs assessment proceedings resulted in a determination in the plaintiff's favour in a substantial sum. But it would be quite wrong to see EK as having succeeded in those proceedings. EK's costs agreement was set aside and the costs claimed by it were very significantly reduced. The fact that Ms Makari was the winner is clearly shown by the fact that ultimately it was EK which had to pay the costs of the assessment.
There could have been no dispute that EK was entitled to a solicitor's lien over the settlement funds. That lien gave it a proprietary interest in the funds to the extent of the fees it was entitled to recover from Ms Makari. Upon notice being given, that interest attached to the funds in the hands of the payer. See Firth v Centrelink (2002) 55 NSWLR 451 at [35], [38].
But at the time the proceedings were commenced, the interest was, it can now be seen, inchoate. EK did not have an entitlement to be paid the $345,000 claimed, or indeed any other sum. Its entitlement only arose when the Assessor issued his determination more than six months later.
The upshot is that EK managed to lock up more than $80,000 of Ms Makari's money for more than eighteen months, to satisfy a claim which ultimately failed. As I have said, EK was effectively in the position of a plaintiff obtaining an interlocutory injunction in support of an asserted proprietary claim. Such a plaintiff should as a matter of principle be obliged to ensure that to the extent that money locked up is ultimately refunded to the defendant, the defendant receives proper recompense.
It seems to me that in the present case proper recompense would have required the payment of interest on any monies refunded to Ms Makari at the rate applicable to judgments of the court. The funds to which Ms Makari was entitled were, after all, due pursuant to a consent judgment. Certainly, the minuscule rate of interest actually earned on monies in Court seems far too low.
The Court may, in some circumstances, have power to order this under the Civil Procedure Act 2005, s 100 (St George Bank v Meredith [2017] NSWSC 961 at [65]). But I think that in the usual course it would be preferable to put the matter beyond doubt by requiring an undertaking when monies are paid into court. The same logic of course will usually apply to the defendant, who should be under a like obligation for a sum to which the plaintiff is ultimately found to have been entitled. But in the present case, when the proceedings were instituted there was nothing owing.
I turn now to the circumstances in which the proceedings were commenced. In support of EK's summons, which included the application for ex parte relief, Ms Gazi made an affidavit on 14 February 2020. In the affidavit, she asserted a concern that Ms Makari might make off with the settlement funds. She stated:
33. There is no challenge to the fee agreement and as such the plaintiff has reasonable prospects of being paid should the funds still be within the jurisdiction.
34. The monies were initially paid to the Arab Bank and Ms Makari holds a Lebanese passport. Her entire extended family reside in Lebanon and with the end of the family law proceeding she has limited ties to Australia. The Plaintiff during the course of the family law proceeding became aware that Ms Makari has no other significant assets other than the funds that she has now received.
35. The Plaintiff fears that the funds will be sent to Lebanon and that Ms Makari herself may depart the Jurisdiction. It is also possible that the funds may be dissipated by the Defendant, making enforcement of the costs agreement difficult.
In an affidavit in response made for the purpose of the hearing on 21 February, Ms Makari denied she had any intention of leaving Australia or dissipating the settlement funds within Australia. The Court has made no finding in EK's favour on this issue (if indeed it remained an issue once Ms Makari's affidavit had been filed). Thus the justification (or at least part of the justification) for the urgent relief obtained by EK has never been established.
In these circumstances, I do not accept that the settlement of the proceedings involved a capitulation by Ms Makari. And, although not raised in submissions, there are two other points which have troubled me about Ms Gazi's evidence.
First, while it may have literally been true that no challenge had been made to the costs agreement, this was arguably not the whole story. Ms Makari had queried the level of costs, and had done so well before 6 February, when she asked Mills Oakley to pay the money out to her.
It could hardly have been assumed that a layperson (and Ms Makari was unrepresented when Ms Gazi made her affidavit) would have known about challenging costs agreements. But had Ms Gazi thought about the question from Ms Makari's point of view she could and should have appreciated that such a challenge was, at the very least, open. And that was the point of view from which EK's ex parte application should have been prepared and presented: see Natural & Great Pty Ltd v Lane Cove Business Park Pty Ltd [2022] NSWSC 274 at [93]-[96].
The second concern is what Ms Gazi said in [34] about Ms Makari's lack of assets in Australia. On the face of it, that was information which Ms Gazi had obtained from Ms Makari in the course of acting for her in the family law proceedings. If that was so, it was quite wrong of Ms Gazi to use Ms Makari's confidential (and privileged) information to advance EK's interests against its own former client. No question of consent on Ms Makari's part, express or implied, could possibly have arisen, given that the application was made ex parte.
It is understandable that Ms Gazi would have seen Ms Makari's actions as a furtive attempt to deprive EK of its entitlement to exercise a lien over the settlement funds. In requesting a direct release of the funds, Ms Makari was acting wrongfully (although on the evidence I cannot say that she was aware of the wrongfulness of what she was doing: EK only mentioned the lien to her in the email at 7:50 pm on 12 February 2020, which was five days after she had received the money).
Even so, I think that EK's response involved a significant overreach. In the light of the outcome of the assessment, the assertions made on EK's behalf that it was clearly entitled to the $345,000 claimed, and if Ms Makari wanted an assessment it would have to be at her own expense (see the email at 8:35pm on 12 February 2020 quoted at [14] above), wear an unfortunate appearance. EK was in the end fortunate that an interest undertaking of the type that I have mentioned was not sought on Ms Makari's behalf and that questions of non-disclosure and possible breach of confidence were not raised.
[6]
Further offers
The next offer upon which counsel relied was the one made on 29 October 2020 (see [25] above). The offer letter asserted that, now that EK's fees had been quantified at $262,000 (at least: as events showed, there was a possibility of a review), EK had succeeded in the proceedings. But I have already explained why I do not agree with that characterisation.
It is true that in the end the consent orders in October last year provided for judgment in the same amount which was the subject of the offer on 29 October 2020. In effect that meant that EK recovered the filing fee in these proceedings. But for the reasons I have given, I do not think that EK had any entitlement to recover any of its costs of these proceedings. Why the figure was consented to is not clear. It may have been an oversight. Be that as it may, it does not make it unreasonable for Ms Makari to have refused the offer at the time, and that is the relevant test.
Counsel also referred to further offers made on 7 May last year and 19 October last year. The May offer seems to have been made in the context of a notice of motion which would not fully have resolved the proceedings. The October offer was to accept the sum of $12,500 for EK's costs of the proceedings. It was premised on EK obtaining an order for indemnity costs in its favour, which is a premise I have rejected.
[7]
Defendant's application for costs
Most of the submissions on behalf of Ms Makari were directed towards resisting the plaintiff's application for costs. But the submissions did contend that the commencement of proceedings by EK had been premature (because it took place before the amount actually owing to EK had been determined by assessment).
I have already dealt with the substance of this argument. EK may have been guilty of overreach but Ms Makari was also in the wrong. I therefore do not think she should receive an order for costs in her favour.
[8]
Orders
Before dealing with the orders to be made on the application, I return to [34] of Ms Gazi's affidavit of 14 February 2020. I have elsewhere referred to problems which may arise if solicitors obtain financial information about the circumstances of their clients in the course of acting for the client, and then seeks to use that information for the solicitors' own commercial purposes (Malouf v Constantinou [2017] NSWSC 923 at [99]-[100]; see also Sithakoul v Su [2022] NSWSC 132 at [63]). The problem is particularly acute in family law matters where the conduct of the matter requires disclosure to the solicitor of the client's financial circumstances. In the present case there appears on the face of it to have been an unauthorised disclosure of information imparted in confidence, for the solicitor's own purposes. I propose to invite Ms Gazi to show cause as to why I should not refer the papers to the Law Society in case they should see fit to take any action about Ms Gazi's conduct.
The orders of the Court are:
1. Order that the parties bear their own costs of the proceedings.
2. Order that the proceedings be listed before me at 9:30 am on 29 March 2022, or such other date as may be arranged with my Associate, for the solicitor-director of the plaintiff, Ms Claudette Gazi, to show cause why the Court should not refer the papers in these proceedings to the Law Society for it to take such action as it may consider fit about the apparent unauthorised disclosure by her of the defendant's confidential information.
[9]
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Decision last updated: 18 March 2022