Plaintiffs v Defendants

The Costs Court may refer to a judge of the Court for directions any question arising on a taxation.

2 During the course of a taxation of costs in this matter, a Judicial Registrar referred two questions under that rule for determination. In broad terms, the questions concern whether on a taxation the Costs Court is required to consider the fairness and reasonableness of the amount of legal costs when a costs agreement is in place which sets the rates or other method for calculation of the costs. The questions posed for consideration are:

(1) On the proper construction of s 3.4.44 and s 3.4.44A of the Legal Profession Act 2004 (Vic), do the criteria in s 3.4.44(1)(c) and s 3.4.44(2) apply to a costs review where there is an applicable costs agreement and s 3.4.44A applies?

(2) Is a Judicial Registrar entitled to adjust costs on the basis of the criteria set out in s 3.4.44(2) where s 3.4.44A applies?

3 The questions arise because the Judicial Registrar followed Law Institute of Victoria v Keen,[1] and ruled that the Costs Court is required to consider what is the fair and reasonable amount of legal costs under ss 3.4.44(1)(c) and 3.4.44(2) in conducting a review of costs in a solicitorown client case to which a costs agreement applies. The taxation is not yet concluded.

The statutory provisions and earlier consideration of them

4 Part 3.4 of the Legal Profession Act is concerned with disclosure and review of costs. One of its purposes is to provide a mechanism for the review of legal costs and the setting aside of certain costs agreements.[2] The current matter concerns the review of costs where a costs agreement is in place and has not been set aside.

5 Section 3.4.44 sets out the criteria for review of legal costs. So far as is relevant in this case, it reads as follows:

(1) In conducting a review of legal costs, the Costs Court must consider -

(a) whether or not it was reasonable to carry out the work to which the legal costs relate; and

(b) whether or not the work was carried out in a reasonable manner; and

(c) the fairness and reasonableness of the amount of legal costs in relation to the work, except to the extent that section 3.4.44A... applies to any disputed costs.

(2) In considering what is a fair and reasonable amount of legal costs, the Costs Court may have regard to any or all of the following matters -

(a) whether the law practice and any Australian legal practitioner or Australian-registered foreign lawyer acting on its behalf complied with this Act, the regulations or the legal profession rules;

(b) any disclosures made by the law practice under Division 3;

(c) any relevant advertisement as to -

(i) the law practice's costs; or

(ii) the skills of the law practice or of any Australian legal practitioner or Australian-registered foreign lawyer acting on its behalf;

(e) the skill, labour and responsibility displayed on the part of the Australian legal practitioner or Australian-registered foreign lawyer responsible for the matter;

(f) the retainer and whether the work done was within the scope of the retainer;

(g) the complexity, novelty or difficulty of the matter;

(h) the quality of the work done;

(i) the place where, and circumstances in which, the legal services were provided;

(j) the time within which the work was required to be done;

(k) any other relevant matter.

6 Section 3.4.44A deals with review of costs by reference to a costs agreement and so far as relevant provides:

(1) The Costs Court must review the amount of any disputed costs that are subject to a costs agreement by reference to the provisions of the costs agreement if -

(a) a relevant provision of the costs agreement specifies the amount, or a rate or other means for calculating the amount, of the costs; and

(b) the agreement has not been set aside under section 3.4.32 -

(c) that the agreement does not comply in a material respect with any applicable disclosure requirements of Division 3; or

(d) that Division 5 precludes the law practice concerned from recovering the amount of the costs; or

(e) that the parties otherwise agree.

7 Section 3.4.44A(1) was inserted into the Legal Profession Act by the Legal Profession Amendment Act 2007 (Vic) with effect on 9 May 2007. Under the old legislation, a costs agreement was a relevant but not determinative consideration - the Taxing Master was required to consider, among other things, the fairness and reasonableness of the amount of legal costs in relation to the work. Subsection (2) provided that in considering what is a fair and reasonable amount of legal costs, the Taxing Master may have regard to any or all of a number of matters, including any relevant costs agreement.[3] The reference to any relevant costs agreement in subs (2) was repealed when the new s 3.4.44A was introduced. Additionally, the exception that appears in s 3.4.44(1)(c) was added at that time.

8 The explanatory memorandum stated that the amendments to s 3.4.44 were to change the criteria the Taxing Master should apply in conducting a costs review to refer to the new ss 3.4.44A and 3.4.44B. The memorandum went on to state that those provisions set out how the Taxing Master should use a costs agreement, practitioner remuneration order and a scale of costs, as well as compliance with the costs agreement and disclosure provisions, in undertaking a costs review.

9 As I have mentioned, the amended provisions were considered in Law Institute of Victoria v Keen.[4] In that case, the applicant argued that the Taxing Master was able to look at the fairness and reasonableness of the amount of legal costs because the Legal Profession Act required that all three elements contained in s 3.4.44(1) were mandatory, including the fairness and reasonableness of the amount of legal costs in relation to the work specified in s 3.4.44(1)(c). The applicant submitted that where there was a costs agreement so that s 3.4.44A applied, that simply meant that the review occurred by reference to the hourly rate specified in the costs agreement and did not prevent an evaluation of the fairness and reasonableness of the amount of the work. The Associate Judge held:

In my view, the applicant's assessment of the effect of these provisions is the correct one and, the Taxing Master is able to assess the fairness and reasonableness of the amount by reference to the provisions in subparagraph (2) of section 3.4.44. In my view, the words "except to the extent that section 3.4.44A or 3.4.44B applies to any disputed costs" in 3.4.44(1)(c) should be construed narrowly and the review occurs by reference to the hourly rate as opposed to scale or Practitioner Remuneration Order. The additional words inserted in 3.4.44(1)(c) however do not mean that the Taxing Master cannot consider for example "the quality of the work done" or the "complexity, novelty or difficulty" or the "scope of the retainer" or the "skill labour and responsibility displayed" as outlined in 3.4.44(2).

If the respondent's submission is accepted in relation to the interpretation of these provisions it would mean that the parliament intended that all the discretionary criteria in 3.4.44(2) only apply to reviews in very limited circumstances, for example, criminal matters in which there was no costs agreement. Further it would mean that subparagraph 3.4.44(2)(k) which allows consideration of "any other relevant matter" would not be available to reviews under the scale Practitioner Remuneration Order or a costs agreement, and would only be available under the very limited circumstances just described. This cannot have been the intention of parliament.

Section 3.4.19 merely describes in broad terms the three bases for costs "recover". Subparagraph (c) of that section uses the words "fair and reasonable value" where no costs agreement, Practitioner Remuneration Order or scale applies. The section just describes the quantum meruit concept.

Section 3.4.44 applies to all reviews. Section 3.4.44B covers review where scale or the Practitioner Remuneration Order applies. Section 3.4.44A covers a review in circumstances in which there is a costs agreement. The amendment to 3.4.44 by repealing (2)(d), that is, by deleting the reference to any existing costs agreement as one of the discretionary considerations and enacting section 3.4.44A just means that the hourly rate in the agreement is the primary basis of the review.

In my view there is nothing in the amendments to the Act that prevents the concept of fairness and reasonableness and the provisions in 3.4.44(2) from being considered in the reviews of both matters.[5]

10 A different approach has been taken in courts in other states in relation to the equivalent provisions.[6] In interpreting the Queensland legislation, judges in that state have treated the equivalent of s 3.4.44(1)(c) as being excluded where a costs agreement is in place unless one of the provisos in the equivalent of s 3.4.44A(1)(c), (d) or (e) applies,[7] or unless the costs agreement has been set aside. A similar position has been adopted in New South Wales.[8] This also accords with the interpretation put on the legislation by commentators.[9]

11 It became clear on the hearing before me that both the applicant and the respondent contended for the interpretation of the legislation that is consistent with the interpretation in Queensland and New South Wales and inconsistent with the interpretation of the legislation in Law Institute of Victoria v Keen.[10]

Are the factors in s 3.4.44(2) relevant to determining the amount of costs when a costs agreement is in place?

12 The task of statutory construction 'begins with the ordinary and grammatical sense of the words having regard to their context and legislative purpose'[11] and the task must end with a consideration of the statutory text.[12]

13 With respect to the learned Associate Judge, I prefer the approach to interpretation which has been adopted in Queensland and New South Wales. In my opinion, it is clear from the text of the legislation that where there is a costs agreement that has not been set aside, then the Costs Court must review the amount of any disputed costs in accordance with that agreement unless the Costs Court is satisfied that the agreement does not comply in a material respect with the disclosure requirements, or div 5 precludes the lawyer from recovering the amount of the costs, or the parties have otherwise agreed. Where there is a costs agreement, ss 3.4.44(1)(c) and (2) have no work to do in respect of the amount of the costs charged.

14 Further support for this construction comes from consideration of the amendments that were made to the legislation to remove from s 3.4.44(2) the reference to any relevant costs agreement which might be taken into account in considering what is a fair and reasonable amount of legal costs. The legislation in its amended form permits the parties to strike their own bargain and they are then bound by it. The current legislation promotes the pre-eminence of the contract above other considerations. Nevertheless, there are some protections for clients who enter into a costs agreement. So it is that s 3.4.32(1) enables a client to apply to have a costs agreement set aside where the agreement is not fair or reasonable. If the agreement is set aside, then s 3.4.44A will not apply and the client, on a review of legal costs, will have the benefit of s 3.4.44(1)(c) such that the fairness and reasonableness of the amount of legal costs in relation to the work must be considered by the Costs Court. In those circumstances, the Costs Court may take into account any of the matters set out in s 3.4.44(2). Additionally, the client will have the benefit of those provisions if the Costs Court is satisfied that the agreement does not comply in a material respect with the disclosure requirements under the legislation or that div 5 precludes the law practice concerned from recovering the amount of the costs.[13]

15 Moreover, before one reaches the question of the amount of the legal costs, the Costs Court has to determine two matters: first, that it was reasonable to carry out the work[14] and secondly, that the manner in which the work was carried out was reasonable.[15] The legislation does not set out the factors that the Court may take into account in determining those issues. However, particularly in relation to the second issue, it may be that the Costs Court would have regard to matters which appear in s 3.4.44(2) such as the quality of the work done or the skill, labour and responsibility displayed amongst other things. Those matters would not be taken into account as a result of their inclusion in s 3.4.44(2). Rather, they would be considered because in the particular circumstances of the case they were matters that were independently relevant to the issues to be determined under s 3.4.44(1)(a) and (b) albeit that coincidentally they appear in s 3.4.44(2).

16 In conclusion, it seems to me that where there is a costs agreement that is in place that satisfies the disclosure and other requirements of the Act, the criteria in s 3.4.44(1)(c) and (2) do not apply in considering the amount of the costs because the work that would be done by those provisions is dealt with by s 3.4.44A. Consequently, the answer to each of the questions posed is no.

Legal Profession Act 2004 (before 2007 amendments)

(1) In conducting a review of legal costs, the Taxing Master must consider -

(a) whether or not it was reasonable to carry out the work to which the legal costs relate; and

(b) whether or not the work was carried out in a reasonable manner; and

(c) the fairness and reasonableness of the amount of legal costs in relation to the work.

(2) In considering what is a fair and reasonable amount of legal costs, the Taxing Master may have regard to any or all of the following matters -

(a) whether the law practice and any Australian legal practitioner or Australianregistered foreign lawyer acting on its behalf complied with this Act, the regulations or the legal profession rules;

(b) any disclosures made by the law practice under Division 3, or the failure to make any disclosures required under that Division;

(ii) the skills of the law practice or of any Australian legal practitioner or Australianregistered foreign lawyer acting on its behalf;

(e) the skill, labour and responsibility displayed on the part of the Australian legal practitioner or Australianregistered foreign lawyer responsible for the matter;

(f) the retainer and whether the work done was within the scope of the retainer;

(g) the complexity, novelty or difficulty of the matter;

(i) the place where, and circumstances in which, the legal services were provided;

(j) the time within which the work was required to be done;

[1] (Unreported, Supreme Court of Victoria, Wood AsJ, 25 July 2008).

[2] Section 3.4.1(d) Legal Profession Act.

[3] The full text of s 3.4.44 as it appeared prior to the amendment in 2007 is set out in the Annexure to these Reasons.

[4] (Unreported, Supreme Court of Victoria, Wood AsJ, 25 July 2008).

[6] The equivalent provision of s 3.4.44 in Queensland is s 341 of the Legal Profession Act 2007 (Qld). The equivalent of s 3.4.44A is s 340 of the Queensland legislation.

[7] See Paroz v Clifford Gouldson Lawyers [2012] QDC 151 (26 June 2012) [27]; Southwell v Jackson [2012] QDC 65 (23 April 2012) [22]-[24].

[8] Mohareb v Horawitz & Bilinsky Solicitors [2011] NSWDC 170 (4 October 2011) [10]. The equivalent New South Wales provisions are ss 361 and 363 of the Legal Profession Act 2004 (NSW).

[9] Professor G E Dal Pont, 'Costs Agreement and VCAT - The Challenge of St Yves' [2008] MonashULawRw 11; (2008) 34(2) Monash University Law Review 262, 266, 268 where the author said:

... The traditional control on the legitimacy of lawyers' fees - the process of taxation (now termed 'review' in Victoria) - is restricted in scope when a costs agreement is in place. The Legal Profession Act 2004 (Vic) provides that, in conducting the review, the Taxing Master must, inter alia, consider the 'fairness and reasonableness of the amount of legal costs in relation to the work' and may, for this purpose, have regard to any or all of the matters prescribed. However, it is now clear that where a costs agreement is in place, the Taxing Master must review the amount of disputed costs by 'reference to the provisions of the costs agreement', where a relevant provision of that agreement 'specifies the amount, or a rate or other means of calculating the amount, of the costs'. The latter applies unless the parties otherwise agree, there has been material nondisclosure, an illegitimate percentage or uplift fee agreement, or the agreement has been set aside by the Victorian Civil and Administrative Tribunal ('VCAT').

As noted earlier, where a valid costs agreement is in place, on a review 'the fairness and reasonableness of the amount of legal costs' is determined not by the statutorily listed factors but by giving effect to the terms of the agreement. The statute does not purport to modify or oust contractual entitlements, to this end, unless there are grounds for the agreement itself to be set aside. The latter is prescribed by s 3.4.32(1) of the Legal Profession Act 2004 (Vic), which states that, on application by a client, VCAT 'may order that a costs agreement be set aside if satisfied that the agreement is not fair or reasonable' ...

See also Halsbury's Laws of Australia, (at 19 June 2013), 250 Legal Practitioners, 'Approach to Assessment' [250-4310] which states:

'in the absence of valid costs agreement or applicable scale ... an assessor must consider whether it was reasonable to carry out the work to which the costs relate, whether the work was carried out in a reasonable manner, and the fairness and reasonableness of the amount of the costs in relation to that work ... a valid costs agreement restricts the scope of assessment, as statute ... requires an assessor to assess the disputed costs by reference to the provisions of the costs agreement if it specifies the amount, or a rate or other means for calculating the amount, of the costs.'

[10] (Unreported, Supreme Court of Victoria, Wood AsJ, 25 July 2008).

[11] Minister for Immigration and Citizenship v SZJGV [2009] HCA 40; (2009) 238 CLR 642, 649 [5] (French CJ and Bell J); Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27, 46 [47] (Hayne, Heydon, Crennan and Keiffel JJ). Section 35(a) of the Interpretation of Legislation Act 1984 (Vic) provides that a construction that would promote the purpose or object underlying an act must be preferred to a construction that would not promote that purpose or object. In performing its task of interpretation, the Court may have regard to any relevant matter or document including explanatory memoranda: Interpretation of Legislation Act s 35(b)(iii).

[12] Commissioner of Taxation v Consolidated Media Holdings Limited [2012] HCA 55; (2012) 293 ALR 257, 268 [39] (French CJ, Hayne, Crennan, Bell and Gaegler JJ).

[13] The Costs Court is not required to initiate an examination of those matters: Legal Profession Act 2004 s 3.4.44A(2).

[14] Legal Profession Act 2004 s 3.4.44(1)(a).

[15] Legal Profession Act 2004 s 3.4.44(1)(b).