Gilles v La Rosa

Background to the present proceedings

1. By amended initiating application dated 27 November 2012, Ms Garcia commenced the Family Law Proceedings seeking, inter alia, parenting orders and orders in relation to property. For reasons that will become apparent, an issue in the proceedings was a loan made to Salvatore and Francesco in 2003. The repayment of the loan was guaranteed by the Clients, who mortgaged the Gladesville Property to the lender as security for their liability under the guarantee. The loan was subsequently repaid by Salvatore and Francesco in part and it appears that Ms Garcia sought to assert that the loan was not repayable.

The First Agreement

1. By letter to the Clients dated 25 February 2014, the Firm confirmed that it had been instructed to consider the Clients' position in relation to the Family Law Proceedings, advise on how to move forward in the matter so that the Clients would not be required to become parties to the Family Law Proceedings, and ensure that the Clients would be able to recover Salvatore's share of the loan secured over the Gladesville Property. The letter concluded as follows: "In the meantime, we are required to disclose to you an estimate of our costs and the basis of our charging. We do this in the form of a Costs Agreement. The present agreement is on the basis that you will not have to intervene in Salvatore's family law proceedings and it will therefore not be necessary for [the Firm] to act on your behalf in those proceedings. If this agreement is in order, we ask that you sign one copy and return it to our office… When you return this document, please provide us with a cheque or money in the sum of $5,000 to be held in trust on account for our costs and disbursements."
2. The letter annexed the First Agreement, which was entitled "Basic Costs Disclosure and Costs Agreement". The First Agreement estimated the total costs of the Firm's work including professional fees, internal expenses and disbursements) to be $6,160.
3. Annexed to the First Agreement was a document entitled "General Terms of Business". Relevantly, cl 2 provided that the Clients may accept the terms and conditions of the agreement by signing and returning the agreement, or continuing to instruct the Firm. By cl 3, the Clients agreed to be charged interest at the maximum rate prescribed in r 110A of the Legal Profession Regulation 2005 (NSW) on any amounts unpaid after the expiry of 30 days after a tax invoice was issued. Clause 6 provided that if the Clients had a dispute in relation to any aspects of the Firm's legal costs, they should discuss their concerns with the Firm and failing that, apply to the Manager, Costs Assessment at the Supreme Court of New South Wales for an assessment of costs. The key clause for the purposes of these proceedings is cl 20, which provided as follows: "We shall have the right of security for our costs and disbursements for work performed pursuant to this Agreement including the right to lodge a caveat over your real and personal property to secure such payment." It is significant that no mention of the effect of cl 20 was made in the letter of 25 February 2014.
4. By letter dated 20 May 2014, the Firm advised the Clients that the Firm had received correspondence that Ms Garcia was seeking to join them to the Family Law Proceedings but that, given the proximity to the hearing date, it was unlikely that formal steps would be taken by the Court. Accordingly, the letter advised that "on [the Firm's] part the matter had been completed". The letter enclosed a Statement of Account dated 2 May 2014 for $5,438.93. After deducting $5,000 that was already held on trust by the Firm, the amount outstanding was $438.93.

The Second Agreement

1. On 26 June 2014, the Clients learned that Ms Garcia had filed an application to join them to the Family Law Proceedings, and instructed the Firm to oppose the joinder. On 4 July 2014, a lawyer employed by the Firm appeared before Federal Circuit Court Judge Scarlett. His Honour allowed the parties time to discuss the matter. By letter from the Firm to the Clients dated 18 July 2014, the Firm advised as follows: "The discussion with [Ms Garcia's solicitor] was to the effect that: a. His client believes that the loan made over your property should not have been included in the pool of assets held by Salvatore and [Ms Garcia] during their marriage because it was a 'gift' from you to your sons; b. His client believes that in paying out his share of the mortgage, Salvatore has, in effect, given away money that could have been used to settle the property matter with Ms Garcia; c. His client acknowledges that a loan exists but say [sic] that because the original loan was made before the marriage it should not be considered as part of the debts of the marriage…; and d. His client believes that the properties purchased using those funds… should be included as part of the property of the marriage."
2. The letter further advised that, as a result of those positions, Judge Scarlett decided it was best to have the matter listed for hearing and ordered the parties to put on evidence. This would require the Clients to prepare affidavits outlining the history of the loans to Salvatore and Francesco. The letter indicated that, following confirmation from Salvatore, who the firm understood was assisting with the Client's legal costs, the Firm had instructed counsel to assist and appear at the hearing.
3. The letter then concluded, in a manner identical to the first letter, that the Firm was required to disclose an estimate of their costs, and that they did so in the form of a Costs Agreement. It annexed the Second Agreement, which was also entitled a "Basic Costs Disclosure and Costs Agreement". The Second Agreement estimated the total amount of fees as $14,740, being $6,800 of solicitor's fees and $6,000 in counsel's fees, plus GST and disbursements. The Second Agreement also annexed, in identical terms, the "General Terms of Business" document containing cl 20. On 25 July 2014, Ms Becker, a solicitor employed by the Firm, attended the Gladesville Property to take statements in relation to the Family Law Proceedings. The Clients executed the Second Agreement in Ms Becker's presence. Nothing was said at that time about the effect of cl 20.
4. In July and August 2014, the Firm issued two Statements of Account under the Second Agreement, which were not in evidence before me. However, no sums were received by the Firm in payment and on 10 June 2015, the Firm lodged the caveat.
5. By letter to the Clients dated 8 September 2015, the Firm indicated that the Statement of Account remained unpaid, and that there did not appear to be any intention to finalise the account. As a result, the Firm said, it had determined to withdraw the Statement of Account, and a bill of costs in assessable form would be provided.
6. On 2 November 2015, Judge Scarlett dismissed the application to join the Clients to the Family Law Proceedings and the Firm filed a Notice of Ceasing to Act in those proceedings. By letter to the Clients dated 9 November 2015, the Firm confirmed that they had attended the Federal Circuit Court to receive a copy of the judgment. The letter asserted that "[the Firm] and [counsel] have achieved the result that we said would be the best possible outcome for you in this matter". As foreshadowed by the letter on 8 September 2015, the Firm enclosed a solicitor/client bill of costs in itemised form pursuant to the Legal Profession Act 2004 (NSW) dated 9 November 2015, in the amount of $22,011.34. This figure did not include $6,363.64 paid to counsel for work performed and anticipated.
7. On 2 December 2015, the Clients caused a lapsing notice to be served on the Firm in respect of the caveat. As indicated above, pursuant to a summons filed by the Firm on 14 December 2015, Darke J ordered the extension of the operation of the caveat on 17 December 2015.

Costs assessment process

1. The bill of costs remained unpaid and, on 11 January 2016, the Firm lodged an Application by Legal Practice for Assessment of Costs. The application recorded that the amount of costs in dispute was $23,399.34, being: 1. the outstanding sum of $438 from the Statement of Account dated 2 May 2014; 2. the outstanding sum of $950 for counsel's fees; and 3. $22,011.34 from the bill of costs dated 9 November 2015.
2. On 30 May 2016, a costs assessor issued a certificate of determination declining to set aside the costs agreements and assessing the fair and reasonable amount of costs to be paid as $25,704.57. Giving credit for $6,000 already paid on the account, the amount outstanding was assessed as $19,704.57.
3. On 15 July 2016, the Clients filed an Application for Review of Determination of a Costs Assessor pursuant to s 373(1) of the Legal Profession Act 2004 (NSW) (the Legal Profession Act). Although Giovanni La Rosa had died by this time, he was listed as a party to the application as probate of his will had not yet been granted. By s 375(1) of the Legal Profession Act, a costs review panel (Panel) may review the determination of an assessor and either affirm the determination or set aside the determination and substitute another determination, such as in the Panel's opinion should have been made by the assessor. Section 328(1) of the Legal Profession Act provides that, on application by a client, a costs assessor may order that a costs agreement or a provision of a costs agreement be set aside if satisfied that the agreement is not fair or reasonable.
4. In determining whether or not a costs agreement is fair or reasonable, and without limiting the matters to which the costs assessor can have regard, the costs assessor may, under s 328(2) of the Legal Profession Act, have regard to the following matters: "(a) whether the client was induced to enter into the agreement by the fraud or misrepresentation of the law practice or of any representative of the law practice; (b) whether any Australian legal practitioner or Australian-registered foreign lawyer acting on behalf of the law practice has been found guilty of unsatisfactory professional conduct or professional misconduct in relation to the provision of legal services to which the agreement relates; (c) whether the law practice failed to make any of the disclosures required under Division 3; (d) the circumstances and the conduct of the parties before and when the agreement was made; (e) the circumstances and the conduct of the parties in the matters after the agreement was made; (f) whether and how the agreement addresses the effect on costs of matters and changed circumstances that might foreseeably arise and affect the extent and nature of legal services provided under the agreement; and (g) whether and how billing under the agreement addresses changed circumstances affecting the extent and nature of legal services provided under the agreement."
5. On 14 October 2016, the Panel set aside the certificate of determination of costs dated 30 May 2016. The Panel found that it did not appear that the assessor was ignorant of the relevant principles. Further, the assessor had not failed to take into account the particular circumstances of the review applicant, and the assessor's reasons were sufficiently comprehensive.
6. The Panel did not consider that the circumstances and conduct of the parties justified setting aside the First Agreement. In particular, the Panel indicated that the Clients had had an opportunity to read the First Agreement, have it translated or obtain independent advice. However, the Panel did not accept that the taking of security for costs estimated to be in the vicinity of $6,000 was fair and reasonable. The Panel considered that taking such security created a conflict of interest between the Firm and the Clients and, at the very least, required the informed consent of the client to the charging clause. Accordingly, the Panel set aside cl 20 of the First Agreement.
7. The Panel also did not consider that the circumstances and conduct of the parties justified setting aside the Second Agreement. However, the Panel considered that the Second Agreement was deficient in failing to disclose, contrary to s 309(1)(f) of the Legal Profession Act, an estimate of the range of costs that may be recovered if the Clients were successful in the litigation, and the range of costs that the Clients may be ordered to pay if the client was unsuccessful. Section 309 falls within Div 3, Part 3.2 of the Legal Profession Act, such that it is a matter to which the costs assessor can have regard under s 382(2)(c) in determining whether to set aside the costs agreement. The Panel considered that such non-disclosure was significant because the Clients were under the impression that their costs would be paid by way of a costs order against Ms Garcia. Accordingly, the Panel set the Second Agreement aside in its entirety.
8. Having set aside cl 20 of the First Agreement and the entirety of the Second Agreement, the Panel indicated that it had conducted its own determination of the fair and reasonable costs of the work. The Panel was permitted to take this course by virtue of s 319 of the Legal Profession Act, which provides a form of statutory quantum meruit. Section 319(1) provides: "(1) Subject to the provisions of this Part, legal costs are recoverable: (a) in accordance with an applicable fixed costs provision, or (b) if paragraph (a) does not apply, under a costs agreement made in accordance with Division 5 or the corresponding provisions of a corresponding law, or (c) if neither paragraph (a) or (b) applies, according to the fair and reasonable value of the legal services provided." (Emphasis added)
9. The Panel accepted that the amount claimed in the Statement of Account dated 2 May 2014 was fair and reasonable. However, the Panel did not consider that the amount claimed in the bill of costs dated 9 November 2015 was fair and reasonable. Conducting its own assessment of what would be a fair and reasonable cost, the Panel reduced the hourly rates claimed by the Firm by 20%, and disallowed eight items on the itemised bill of costs. The Panel concluded that a fair and reasonable amount of costs to be paid to the Firm was $23,762.85 under the Second Agreement and $5,438.93 under the First Agreement. Giving credit for $12,000 which had by that time been paid on the account, the balance owed to the Firm was $17,201.78.
10. On 2 June 2017, the Firm filed a summons in the District Court commencing an appeal against the decision of the Panel pursuant to s 384 of the Legal Profession Act. Section 384(1) provides that a party to an application for a costs assessment who is dissatisfied with a decision of a costs assessor as to a matter of law arising in the proceedings to determine the application may, in accordance with the rules of the District Court, appeal to the Court against the decision. The Firm alleged that a relevant error of law was procedural unfairness on the part of the Panel in failing to invite the Firm to make further submissions after determining to set aside the entirety of the Second Agreement.
11. On 20 October 2017, a judge of the District Court made orders dismissing the appeal. His Honour found that no error of law was disclosed in the Panel's reasons. The Firm had not sought to place material before the costs assessor or the Panel to oppose the Clients' application to set aside the Second Agreement. His Honour concluded that the Panel's decision was reached after consideration of the appropriate law, which was correctly stated, and that the Panel had made sufficient factual findings to justify the conclusion reached. Importantly for the purpose of the proceedings in this Court, his Honour ordered that the Firm pay the Clients' costs of the appeal.

Conduct of the present proceedings

1. The summons and cross-claim were listed for hearing before me on 17 and 18 May 2018. In her opening statement, counsel for the Clients indicated that the Clients' principal contention remained that pleaded in the Statement of Claim, namely, that each of the First Agreement and the Second Agreement was void ab initio, and thus no money was payable to the Firm under either of them. However, as a fall-back position, counsel submitted that, even if money was owing, the Clients' costs of the appeal to the District Court, which the Firm was ordered to pay to them, were likely to exceed $17,201.78, being the amount determined by the Panel to be owed by the Clients.
2. I adjourned the hearing for some hours to permit counsel and solicitors for the Clients to gather evidence as to their costs in the District Court proceedings. When the hearing resumed, counsel for the Firm indicated that he had reviewed the documents provided by the Clients' legal representatives and that it appeared, on the basis of assessment on a party/party basis, that the Clients' costs in the District Court would exceed $17,201.78. He indicated that two matters followed from that conclusion. First, given that those must be mutual debts because they arise between the same parties, the Firm would have no security in the Gladesville Property. Section 21 of the Civil Procedure Act 2005 (NSW) provides that if there are any mutual debts between a plaintiff and a defendant in any proceedings, the defendant may, by way of defence, set-off against the plaintiff's claim any debt that is owed by the plaintiff to the defendant. Secondly, he conceded that the application of the set-off meant that the present proceedings had no utility, such that the only matter to be determined was the costs of the proceedings in this Court. Counsel for the Clients agreed with that conclusion.

Costs

1. In light of those concessions, the only question to be determined by me was the costs of the present proceedings. I indicated that I was minded to order that the Firm pay a fixed sum to the Clients, so as to ensure that no further costs were incurred through disputed assessments in a matter where only a small sum had ever been at stake. I considered that it was appropriate to make such order for a number of reasons.
2. First, the proceedings were misconceived. As the Clients correctly pleaded in in their second amended defence, the Firm's claim was defective because it only sought interlocutory relief. Parties must endeavour to have all issues between them brought before the Court, so that the dispute may be finally resolved. If money was found to be owing under the First Agreement or the Second Agreement, it would have been open to the Firm to enforce the judgment by executing it against the Gladesville Property. [2] However, rather than adopt that course, the Firm sought a declaration that the Clients had charged the Gladesville Property in favour of the Firm to secure the Clients' obligations under the First Agreement and the Second Agreement. Even if I had been willing to make the declarations sought by the Firm, the Firm would then have been required to apply to the Court for the appointment of a receiver pursuant to the charge or judicial sale for the property.
3. The Firm also sought an extension of the caveat on the Gladesville Property. However, as I indicated to the parties during the hearing, a caveat is an interlocutory mechanism intended to freeze the register and thus preserve the status quo until the real issues in the proceedings are resolved. [3]
4. In any case, I indicated my doubts as to whether I would have been willing to make the declaration sought by the Firm had the matter proceeded to hearing. In particular, there is a question as to whether cl 20 of the First and Second Agreement gave rise to a security interest at all, or merely amount to an agreement to permit a caveat to be lodged. [4]
5. Counsel for the Clients also pointed me to a number of authorities that were said to support their case in relation to undue influence. A solicitor is presumptively in a relationship of undue influence with his or her client, which the solicitor may rebut with evidence that the client provided fully informed consent. [5] When considering the scope of the solicitor's fiduciary duty to the client, it is relevant to consider how the solicitor came to be in possession of information that the client had property that could be the subject of a charge. If the solicitor came into possession of that information though acting for the client, using that information to take security and lodge a caveat may be in breach of the solicitor's fiduciary duty. [6]
6. In relation to the First Agreement, it is unlikely that sending the costs agreement by post would be sufficient to rebut the presumption of undue influence that arises when a solicitor advances his position beyond merely making an agreement to be paid reasonable fees and takes security from his client for fees. [7] In relation to the Second Agreement, Ms Becker conceded that she never explained the document to the Clients, did not inform them that they might like to seek independent legal advice, did not disclose that in taking a charge the Firm was in a position of conflict, and did not ask for their informed consent to give permission for that position of conflict. While I accept that the Clients had previously executed two documents granting security over the Gladesville Property in respect of loans to their children, that is an entirely different matter from the execution of a somewhat obscure clause in a costs agreement with solicitors.

Amount of the order

1. When it came to the provisional fixing of a fixed sum for costs, counsel for the Clients disclosed that their costs in this Court were around $56,000, being about $16,000 in counsel's fees and $40,000 in solicitor's fees. Counsel for the parties suggested that, in assessing costs, the Court's practice in recent times has been to permit counsel's fees as claimed (as that tends to be the case on assessment), but to reduce professional costs to an amount of around 75%. Accordingly, I reduced the total figure to $46,000, which constituted $16,000 for counsel's fees and $30,000 for solicitor's fees.
2. However, I considered that it was not appropriate to give the Clients the full amount of their costs. First, although the Clients had pleaded in their defence that the proceedings were defective as they were not conducive to final relief, they did not take the point any further and allowed the matter to proceed to hearing. In particular, the Clients did not file an application seeking to strike out the proceedings, or raise the issue at a pre-trial directions hearing before me on 9 May 2018. On that day, I specifically asked the parties whether the proceedings were ready to proceed to hearing. If the Clients had indicated that the proceedings would not be conducive to final relief, it is likely that I would have required the parties to re-plead the issues in the proceedings before allowing it to proceed to hearing.
3. Secondly, the Clients did not plead the possibility of a set-off by way of a further amended defence or otherwise raise the possibility of a set-off until the morning of the hearing. Counsel for the Clients also conceded that they did not put the possibility of a set-off to the Firm after the District Court judgment was delivered in October 2017 as a reason why the proceedings should not be maintained.
4. Given the Firm's willingness to accept that a set-off should occur, there is a strong possibility that, had the possibility been raised after October 2017, the Firm would have agreed to that course. Even if counsel for the Clients had raised the possibility before me on 9 May 2018, costs may have been saved. While the Clients submitted that they did not take that course because the costs of the District Court proceedings were unquantified, qualified lawyers should be in a position to estimate or quantify their costs, especially where that process may assist to reduce further costs.
5. Counsel for the Firm submitted that the Firm should only be liable for 50% of the $46,000 figure. However, I determined that the Firm should be liable for two thirds of the $46,000 figure, being $30,000. That proportion more appropriately reflects the parties' contributions to the costs incurred, in circumstances where the proceedings, which were instigated by the Firm, were totally misconceived. While it is true that the Clients filed a cross-claim in the proceedings, it was defensive in the sense that it sought to set aside the Second Agreement and remove the caveat. Further, it is significant that the Firm also failed to raise the possibility of a set-off with the Clients, and counsel for the Firm failed to raise that possibility before me on 9 May 2018.

Endnotes

1. Unlike the summons, the statement of claim does not refer to the First Agreement.
2. Civil Procedure Act 2005 (NSW) s 106(1)(a).
3. Miller v Minister for Mines [1963] AC 484.
4. See Taleb v National Australia Bank Limited (2011) 82 NSWLR 489.
5. Malouf v Constantinou [2017] NSWSC 923 at [122]; MJ Leonard Pty Ltd v Bristrol Custodians Ltd [2013] NSWSC 1734 at [51].
6. Malouf v Constantinou [2017] NSWSC 923 at [99]-[100].
7. MJ Leonard Pty Ltd v Bristrol Custodians Ltd [2013] NSWSC 1734 at [54]. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 June 2018