Breach of Div 3.2.3
128 The Court has a discretion to make a reduction of the allowable professional fees to reflect its view of the seriousness of Adero Law's failure to comply with disclosure requirements under Div 3.2.3 of the LP Act. As I have mentioned, Adero Law did not seek to argue that the power could not be exercised in a case such as the present. It matters not whether the power to make the deduction is to be sourced directly in s 277 of the LP Act or under Pt IVA of the FCA Act.
129 Contrary to s 269 and s 271 of the LP Act, Adero Law did not disclose to Mr Schoneweiss, before or as soon as practicable after it was retained (at s 269(1)(d)):
an estimate of the total legal costs, if reasonably practicable or, if it is not reasonably practicable to estimate the total legal costs, a range of estimates of the total legal costs and an explanation of the major variables that will affect the working out of the costs; …
130 Adero Law was retained on 15 May 2020. The proceedings were commenced on 26 October 2020. Adero Law did not give the required estimate until 10 June 2021, that is, after the proceedings had commenced and after the matter had been referred to mediation.
131 It is to be borne in mind that Adero Law's breach of s 269(1)(d) and s 271 of the LP Act is in addition to the breaches of s 283 and s 284 (contained in Div 3.2.5), those being the contraventions that rendered the Costs Agreement void.
132 In addition, I am satisfied on the material before me that Adero Law failed to comply with the requirement in s 273 of the LP Act in circumstances described below.
133 In her First Report, Ms Dealehr did not consider whether any reduction in the allowable costs in accordance with s 277 of the LP Act by reference to Adero Law's contraventions of Div 3.2.3.
134 In her Second Report, Ms Dealehr said that a deduction on account of the non compliance would typically occur in the event of a costs "dispute". Earlier in these reasons I have explained why it was not appropriate to identify a "dispute" before considering a reduction in Adero Law's fees referable to its breach. The Court can and will consider the issue in the exercise of its discretion, particularly having regard to the interests of group members.
135 In addition, Ms Dealehr had regard to clause 7 of the Costs Agreement. Clause 7.1 is expressed as follows:
It is estimated that it will cost $400,000.00 in legal fees, costs and disbursements for Adero to perform the following Work in relation to the Claim:
(a) initial bookbuild;
(b) drafting and briefing counsel to prepare pleadings;
(c) first case management conference; and
(d) correspondence with the Respondent.
136 Ms Dealehr considered that estimate to constitute partial compliance by Adero Law, as explained at [8] of her Second Report:
The costs disclosure of $400,000 provided for in the Costs Agreement, albeit inadequate and limited to the preliminary stage, had not been exceeded at the time of the update disclosure on 10 June 2021. I have since examined the professional fees found in Adero's time recording records as at 10 June 2021 and the professional fees were approximately $250,000. Disbursements incurred at that time were also not substantial. Accordingly, I do not believe that Adero failed to comply with its ongoing disclosure obligations pursuant to Section 276 of the LPA. However, I still consider Adero's initial disclosure to be inadequate but this was updated and included total legal costs in its update disclosure letter.
137 Ms Dealehr proceeded on the basis that Adero Law had not failed to comply with s 273 of the LP Act. It requires a lawyer to disclose to his or her client, before settlement is executed, a reasonable estimate of the total legal costs payable including a reasonable estimate of any contributions towards those costs likely to be received from another party. Ms Dealehr stated that "at the conclusion of this matter, once approval is obtained, Adero would be placed to disclose to the Applicant the total legal costs payable in compliance with this Section".
138 Ms Dealehr affirmed her opinions in her Third Report. She explained that Adero Law's non compliance had already had the consequence that she had calculated costs in accordance with the Scale and that the non-compliance had also resulted in Adero Law being unable "to seek an uplift fee which would have been $107,107.13" (in her calculations). Ms Dealehr stated that a "further reduction" in accordance with s 277 of the LP Act "is a discretion that vests with the Court on a costs assessment when there is a dispute between the law practice and client as to the quantum of legal fees payable". She said that she was aware that Mr Schoneweiss had been provided with a copy of the First Report and "now advises" that he is not disputing Adero Law's claim for costs except in a limited aspect. Ms Dealehr continued:
34. The Applicant had the benefit of Adero acting on a no win no fee basis, including carrying disbursements under the agreement that is not relied on. I have not been provided any information that the Applicant would have acted differently if Adero had provided proper disclosures, in particular in relation to the estimates of total legal costs at the commencement of the proceeding.
35. Furthermore, I am not aware of a reduction being applied by the Courts in class action approval applications where the Legal Profession Act is the applicable legislation on the basis of an exercise of discretion pursuant to the equivalent Section 277 provision.
36. Accordingly, for all the reasons stated above, I do not wish to change my position in regards to the non-disclosure breaches by Adero.
139 I have concluded that Ms Dealehr was misinformed in her instructions with respect to clause 7 of the Costs Agreement. She relied on that clause as constituting a genuine estimate of the costs of the stage of the proceeding to which the clause expressly refers. Mr Markham then invited the Court to accept Ms Dealehr's opinion, including her conclusions as to partial compliance. On its face, clause 7 appears to provide an estimate of fees to a particular stage of the proceedings. However, on the evidence and submissions subsequently provided, I am satisfied that the estimate is not a genuine estimate with respect to that tranche of work at all. Contrary to Ms Dealehr's finding, it does not constitute partial compliance so as to ameliorate the breach of s 269(1)(d) of the LP Act.
140 Mr Markham's written and oral submissions on this issue related, in large part, to the reasons the Court has published in Thomas and subsequently in Thomas v Romeo Lockleys Asset Partnership (No 2) [2022] FCA 1276 (Thomas No 2), particularly with a view to distinguishing the circumstances of that case. It will be recalled that the reasons in Thomas relate to two concurrent representative proceedings heard in proximity to this case and raising some similar issues. In those proceedings there existed a Costs Agreement in substantially the same terms as the Costs Agreement executed by Mr Schoneweiss in this case. Clause 7.1 in each instance is identical.
141 The judgment in Thomas was delivered on 19 September 2022. It contains the following observations relating to the equivalent clause 7 in the costs agreements there in issue:
33 When the hearing commenced, I ventured the preliminary opinion that I did not have sufficient evidence to consider the appropriateness of the Costs Amount. My initial concerns about the quantum of costs were caused in part by cost estimates contained on the face of the Retainer. Those estimates suggested that the lead applicants may incur legal fees in the amount of $400,000.00 (excluding GST) in each matter, only to the point of the first case management hearing. On the material then in evidence, the total estimate of $800,000.00 (excluding GST) for the two proceedings up to the first case management hearing was (and remains) surprising. The pleadings in each matter were substantively identical and the work encompassed in the estimate did not include the preparation of evidence, any interlocutory process or attendance at any other hearing. …
…
75 As mentioned earlier, the Cost Agreement contained within it an estimate of costs through to the first case management hearing in amounts that attracted the Court's attention, given the very early stage of the proceedings to which they related. It did not contain an estimate of total costs, whether expressed within a range or otherwise.
142 In effect, the Court expressed its dismay that in the concurrent proceedings in Thomas estimates there totalling $800,000.00 had been given to progress the matters to such an early stage of the proceedings referred to in clause 7.
143 There was a further hearing on 29 September 2022 in Thomas and this matter jointly. At that hearing, Mr Markham sought to ameliorate the Court's concerns about the quantum of the estimate.
144 On the basis of submissions and evidence then provided to the Court, I made further orders and published reasons in Thomas No 2. The reasons in Thomas No 2 reiterate that Ms Dealehr had acted on the estimate of costs given by clause 7 of the Costs Agreement in that case. The reasons continue:
38 Ms Dealehr had regard to that estimate in concluding that there had been at least 'partial' compliance by Adero Law with its cost estimate obligations under the LP Act.
39 The Court itself referred to that estimate and expressed the view that it was surprisingly high, given the early stage of each proceeding to which clause 7 expressly related (Reasons, [33]). The estimate was one of multiple factors affecting the Court's confidence in the time keeping and billing records of Adero Law.
40 In the course of the most recent hearing the Court received evidence and submissions casting a new light on the estimate given in clause 7 of the retainer.
41 Mr Markham submitted that what is described on the face of the retainer as an estimate was in fact not a genuine estimate at all. He relied upon the statement of Mr Thomas in which it is said:
In connection with Adero Law's non-compliance with the Legal Professions Act, I wish to make clear that at all times I understood that the initial $400,000.00 estimate was in connection with Adero Law seeking to undertake the matter on a no win, no fee basis. I was also aware that this estimate was made whilst also trying to secure … the necessary funding in order to ensure that the matter could be taken to hearing and run efficiently. I did not understand that the estimate was intended for the full matter. I also recall having facilitated through Adero Law various applications for litigation funding which were not ultimately pursued.
42 In oral submissions, Mr Markham asserted further facts concerning the 'estimate'. He emphasised that Adero Law was acting on a "no win no fee" basis and so was shouldering the risk of an unsuccessful outcome in the litigation and emphasised the public interest in the due prosecution of actions for remedies under the FW Act. He said that the lead applicants were both aware that $400,000.00 was not intended to be an estimate of the total costs. That it was not an estimate of total costs is plain on the terms of the retainer itself. The Reasons do not treat it as such.
145 In that case, Mr Markham adduced evidence concerning the existence of what he termed a "collateral agreement". He submitted that the "costs estimate" contained in clause 7 of the Deed was not in fact a genuine estimate of the costs that would be incurred in the performance of the work described in that clause (namely initial bookbuild, drafting and briefing Counsel to prepare pleadings, first case management hearing and correspondence with the respondent). Instead, he said, the amount of $400,000 represented the amount of work in progress Adero Law would be prepared to accrue before it exercised an entitlement to cease to act for Mr Schoneweiss in the proceeding if litigation funding could not be secured. In other words, the $400,000.00 figure in clause 7.1 did not represent Adero Law's estimate of the cost of the particular work referred to in clause 7.1. That matter was not disclosed to the Court at the time of the Approval Application. It should have been.
146 As I have mentioned, on the Approval Application (and until at least 29 September 2022) Adero Law relied upon the Second Report of Ms Dealehr in which she referred to the estimate in clause 7.1 as a matter counting in Adero Law's favour when considering the fact and seriousness of its breach.
147 In his affidavit evidence, Mr Markham stated: "I understand that at the time that the Applicant signed the Cost Agreement, Adero Law staff informed the Applicant that Adero Law would need to secure litigation funding to continue the proceedings beyond the limit of $400,000.00 otherwise provided for in the Cost Agreement".
148 In his submissions, Mr Markham confirmed that the "limit" related to Adero Law's willingness to sustain the matter on a no win no fee basis. The evidence does not state the basis of Mr Markham's understanding. The "staff" who "informed" Mr Schoneweiss of the matters referred to are not identified.
149 Mr Markham also stated: "I understand that Adero Law also informed the Applicant that Adero Law was actively preparing applications for litigation funding for the matter" based on certain assumptions, including an assumption that "the amount of legal costs to be funded may be up to $1,700,000.00 for the entire matter". Again, Mr Markham does not disclose the source of his understanding, and there is no evidence that Mr Schoneweiss was "informed" of such matters in writing.
150 Mr Markham has annexed to his affidavits some brief correspondence from Mr Schoneweiss. In one letter, Mr Schoneweiss states:
1. Adero Law has informed me that they have been asked to give an affidavit about the existence of any litigation funding proposals.
2. I remember a proposal was made early in the matter. At this time, we believed that the class action may have been up to $20 million. I understand that the amount of costs we were looking to fund were around $1.7 million for the entire matter.
151 Whilst it is unsworn, that evidence goes some way to confirm that there was some understanding on Mr Schoneweiss' part about the likely legal costs for the entirety of the matter, albeit not provided in writing and not provided at the earliest practicable time as required by s 271 of the LP Act. Considered in context, I am prepared to assume that the information was provided orally to Mr Schoneweiss before this proceeding was commenced as that is when litigation funding was sought (although not at the earliest practicable time after Adero Law was retained). A written total estimate meeting the requirement of s 269(1)(d) of the LP Act was not provided until some eight months after the commencement of the action.
152 Section 273 of the LP Act is also contained in Div 3.2.3. Ms Dealehr has expressed the opinion that the obligation under s 273 is one that arises after approval of the settlement is granted, and not at the time that the Deed was executed. That is not correct. Upon executing the Deed, Mr Schoneweiss became contractually bound to take the steps recorded in it, including the steps necessary to obtain the Court's approval of the settlement recorded in it. He could not unilaterally depart from its terms. On the proper construction of s 273 of the LP Act, Adero Law was required to disclose to Mr Schoneweiss a reasonable estimate of the amount of legal costs payable by him "if the matter is settled". In the context of a class action, that included an obligation to inform Mr Schoneweiss before the Deed was executed of what his cost liability would be if the matter were to settle in accordance with the terms of the Deed he was then being advised to execute. The circumstance that the matter could not settle without the approval of the Court did not absolve Adero Law of that responsibility. The obligation to provide a reasonable estimate of the actual costs payable is particularly heightened in a case where Mr Schoneweiss had commenced an action on behalf of group members, where the costs were to be deducted from the Settlement Sum and where it was known that the Court would be approached for an order binding the group members to the Deed.
153 In submissions, Mr Markham said that there was no need for the cost estimate to be given because the Deed made provision for there to be a "formal assessment" of the costs in any event. I do not accept that submission. A reasonable estimate of the costs that would be payable (as asserted by Adero Law) is critical information necessary to assist Mr Schoneweiss to make his own assessment about the commercial value of Settlement Sum, not only for his own benefit but for the benefit of other group members. The estimate is of no utility if it is provided at a time after Mr Schoneweiss becomes bound to observe the terms of the Deed (including those terms affecting rights between him and Adero Law).
154 In my evaluation, the seriousness of the breach of s 269(1)(d) is ameliorated to a significant degree by the circumstance that there is some evidence (albeit unsworn) from Mr Schoneweiss to the effect that he had some appreciation of the likely total costs of the litigation before the action was commenced, by virtue of his knowledge that litigation funding was being sought in an amount equivalent to that stated in the written estimate provided to him in June 2021. I nonetheless consider the breach of s 269(1)(d) to warrant a reduction in the claimed costs. In so concluding, I have proceeded on the basis that there was no initial genuine estimate for any early stage of the proceeding at all, notwithstanding clause 7.1 of the Costs Agreement. I remain of the view that an estimate of $400,000.00 for the work referred to in that clause should be cause for real concern as to Adero Law's methods of charging in any event. If I act upon Mr Markham's submission that that figure should not be understood to be a genuine estimate at all, it follows that there was no "partial" compliance of the kind identified by Ms Dealehr and that she was misinformed in that respect.
155 I do not accept that a deduction should only be applied if it can be established that Mr Schoneweiss could or would have arranged his affairs differently had there been strict compliance with the LP Act. Nor do I accept that a deduction for the breach of s 269(1)(d) should not be made in the absence of a complaint from Mr Schoneweiss about it. It is in the interests of all group members that Adero Law strictly comply with its obligations under the general law to the consumers of its services. Having asked the Court to order that group members be bound by the Deed, it would be a strange result if no deduction could be made referrable to Adero Law's breach simply because Mr Schoneweiss as the lead applicant did not advance a counter factual as to what he personally could or would have done had there been compliance.
156 In all of the circumstances, the appropriate reduction for the breach of s 269(1)(d) and s 271 is 5 %. I emphasise that this figure is reached in light of an additional deduction to be made below, and in light of Mr Schoneweiss' confirmation that he gained some knowledge of the likely legal costs in the context of seeking litigation funding. It is at the very lowest end of the range this Court would ordinarily consider to be appropriate.
157 Whilst I consider the breach of s 273 of the LP Act to be particularly serious, the deduction with respect to that breach will be assessed having regard to the cumulative effect of the Court's response to the whole of Adero Law's conduct. The deduction for that breach should be 5%.
158 I do not accept Ms Dealehr's response that no deduction for any breach should be made because there have already been consequences for non compliance with the LP Act, particularly the requirement that costs be assessed in accordance with the Scale, and Adero Law's inability to charge the 25% contingency uplift provided for in the Cost Agreement. The application of the Scale is the legal consequence of different and further departures with other requirements of the LP Act. They do not provide a proper basis for the breaches of Div 3.2.3 of the LP Act to be ignored.
159 There will accordingly be a 10% deduction applied to the professional fees in respect of the Part A period and the Part B period (Deduction 8).
I certify that the preceding one hundred and fifty-nine (159) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Charlesworth.