Shillington v Harries [2013] NSWSC 1202 | Case summary

Judgment 1The plaintiffs in this matter, Michael Shillington (the first plaintiff) and Michael Crowley (the second plaintiff), are trustees pursuant to a Family Court appointment in respect of the sale of two rural properties in NSW. Mr Shillington is a solicitor and Mr Crowley is an accountant. 2The defendant, Richard John Harries, is the respondent husband to Family Court proceedings commenced by his former wife. The defendant was the owner, together with his two sisters, of the two subject properties. The defendant instructed the firm Lee Dalton and Associates to act for him in relation to the family law proceedings. 3The first plaintiff's firm, Whiteley, Ironside and Shillington, carried out the legal work associated with the performance of the plaintiffs' obligations under the terms of the trust. 4Following the sale of the properties, the plaintiffs informed the defendant's solicitors on 1 November 2011 that the proceeds of sale would not be distributed pending a resolution of a dispute concerning the trustees' costs and clarification of the correct interpretation of the Court's orders. The defendant had previously entered into a contract to purchase a farming property in Queensland and was pressing the plaintiffs to distribute the proceeds of sale so that he could complete the settlement. The defendant instructed his solicitor to advise the plaintiffs that they would be held personally liable for any damages arising out of a delay in settlement. 5On 22 November 2011, the plaintiffs instructed a firm of solicitors, Hicksons Lawyers, to act for them in Family Court proceedings brought by the defendant to enforce distribution of the funds and to have the plaintiffs removed as trustees, among other proposed remedies. 6On 23 November 2011 orders were made in the Family Court clarifying the extent of the respective interests in the properties and directing the distribution of the proceeds of sale, but for $150,000.00 which was to be retained by the plaintiffs pending further orders. Any further application by a party to these proceedings was to be brought by 29 November 2011. 7When the matter was returned to the Family Court on 30 November, these orders were continued, subject to any further application by 17 January 2012. No further applications were made. 8On 9 February 2012, the defendant filed an application for an assessment of costs against the plaintiffs, ostensibly on the basis that the defendant was a "client". The plaintiffs objected to the application on the basis that the defendant lacked standing, in that he was neither a "client" nor a "third party". A costs assessor appointed to deal with the application sought further submissions from the defendant. The defendant's submissions of 2 May 2012 claimed that he was a "third party payer". 9In June 2012 the costs assessor determined that the defendant was a third party payer and that an assessment of the costs of the legal services provided by Mr Shillington's firm and by Hicksons Lawyers could be made. The costs assessor accepted that there was no jurisdiction to assess costs incurred as a result of the provision of services by the second plaintiff, which were accountancy services. The assessment was withheld pending proceedings in this Court. 10The summons filed on 18 September 2012 by the plaintiffs sought a declaration that the defendant is not a "client" or a "third party payer" pursuant to the Legal Profession Act 2004 (the Act) with respect to legal services carried out by the first plaintiff's firm and Hicksons Lawyers. That summons was amended at the hearing to add proposed declarations (3, 4 and 5) to the effect that the costs of the services provided by the second plaintiff are not legal costs and that the defendant is not a client or a third party payer in respect of them. The defendant maintains that these additional declarations are unnecessary. In any event, they are not in dispute. 11In order to appreciate whether the defendant may be characterised as a client or a third party payer, it is necessary to have regard to the history of the legislation and to the fact that the Act was the response to a proposal for a national scheme.

Is the Defendant a Third Party Payer ? 32As I have already noted, the touchstone of the definition of "third party payer" is a legal obligation to pay all or part of the legal costs incurred by the client. The plaintiffs maintain that the legal obligation to pay the costs of Whiteley, Ironside and Shillington and of Hicksons Lawyers fell on the trustees and remains there. In the absence of any legal obligation on the defendant to pay any of those costs, it is submitted that he cannot come within the definition of "third party payer" or "associated third party payer" or "non associated third party payer." 33The defendant submits that the beneficiaries of the trust are, at the very least, "non associated third party payers" because they owe a legal obligation to the trustees (the clients) to pay the legal costs. This argument is premised on the fact that the legal costs are payable from the proceeds of sale held on trust for the beneficiaries. 34The argument goes further, by way of reliance upon the fact that the relevant "legal obligation" may be created by the operation of contract, legislation or otherwise (s 302A(2)). The defendant ultimately submits that, because he, as a beneficiary, effectively indemnifies the plaintiffs against any loss arising out of the expenditure of costs legitimately incurred in the administration of the trust, his legal obligation to pay those costs is recognised by the words "or otherwise" : see Claudio Grizonic v Suzanne Ranken Suttor & Ors. ; Dawn Wade v Suzanne Ranken Suttor [2001] NSWSC 471 at [56] to [58]. 35There is, in my view, a relevant distinction between a legal obligation, as that term is used in the Act, and an equitable obligation arising out of the indemnification by the beneficiaries of a trust with respect to the reasonably incurred expenses of the trustees. In Hardoon v Belilios [1901] AC 118, Lord Linley explored the basis of such an indemnity in the following terms :- ... the plainest principles of justice require that the cestui que trust who gets all the benefit of the property should bear its burden unless he can show some good reason why his trustee should bear them himself. The obligation is equitable and not legal, and the legal decisions negativing it, unless there is some contract or custom imposing the obligation, are wholly irrelevant and beside the mark. (italics not in original) See also Balkin v Peck (1998) 43 NSWLR 706 at 711 - 712. 36I am not persuaded by the defendant's submission that "otherwise" is capable of comprehending other than legal obligations. To adopt such a construction would seem to me to ignore the context within which the term appears, in particular, the deliberate omission from the Act in 2006 of an express provision recognising the right of a beneficiary to apply for an assessment of legal costs paid out of the assets of a trust. 37Furthermore, the beneficiaries have not indemnified the trustees in respect of legal costs incurred by the trust, in circumstances where the Family Court orders provided that the costs of the trustees were to be met from the proceeds of sale and an amount of $150,000.00 was quarantined from the proceeds of sale for that purpose. Any right to an indemnity that may have existed is not enforceable unless the trust funds are insufficient to indemnify the trustees : Hardoon v Belilios ; Balkin v Peck 38To the extent that the defendant relies upon Ipp JA (MacFarlan JA and Hoeben J agreeing) in Boyce v McIntyre [2009] NSWCA 185 at [22], his Honour was merely observing (correctly) that :- .......... the introduction in 2006 of the non-associated third party payer provisions in the Legal Profession Act in 2006 can be seen as being for the purpose of consumer protection. In particular, the introduced provisions afford protection to persons who agree, in effect, to indemnify other parties (such as lessors and mortgagees) in respect of legal costs for services rendered to those other parties. 39This passage ought be understood against the background of that case. It was not in issue that the respondent was a non-associated third party payer. At [19], Ipp JA commented that :- The point to be noticed about a "non-associated third party payer" is that such a person, while being under legal obligation to pay "legal costs" for legal services provided to the client, owes no legal obligation to the law practice that provided the legal services. (italics not in original) 40In Boyce v McIntyre, the respondent had contracted under a sublease to pay the legal costs of the lessor. The lessor had entered into a costs agreement with the applicants' firm. The respondent was therefore under a legal obligation to pay the legal costs of the client. It is in that context that Ipp JA referred to an "effective indemnity". 41Here, there is no legal obligation on the part of the defendant to pay the trustees' legal costs. The Family Court orders did not impose an obligation on the defendant or the other beneficiaries to pay the legal costs of the trustees. The fact that the legal costs are payable out of the monies held in trust does not create a legal obligation in the beneficiaries to pay those costs. 42A consideration of decisions in other jurisdictions where the model legislation applies reinforces the conclusion that the defendant is not a third party payer or any subsidiary of that category. The following cases discuss the meaning of "third party payer" for the purposes of an application for assessment of legal costs. 43In Amos v Ian K Fry & Co. [2010] QCA 131, Edward and Leonard Amos had been appointed executors and trustees of their late father's estate. They were, together with their sister, residual beneficiaries of that estate. The brothers fell into dispute, which ultimately resulted in the removal of Edward as executor and trustee of the estate, together with an undertaking that he would not commence any further proceedings without leave of the court. Edward broke that undertaking by commencing proceedings in relation to the costs associated with the property. 44Leonard brought proceedings to restrain his brother from commencing or continuing proceedings with respect to the property. Douglas J made orders in favour of Leonard, together with three orders as to costs, namely that Edward was to pay to Leonard the costs of the administration of the estate arising out of vexatious correspondence, that Edward was to pay Leonard's costs incidental to the court proceedings and Leonard's solicitor was authorised to deduct those costs from Edward's share of the estate, and a further order allowing the deduction of costs relating to the sale of the property by Leonard's solicitor, Ian K Fry and Company, from Edward's share of the estate. 45Edward commenced fresh proceedings against the solicitor for the assessment of all the invoices issued by that solicitor in the administration of the estate. Lyons J dismissed those proceedings. Edward Amos appealed. Edward Amos contended that he had a legal obligation to pay the costs as a result of the orders of Douglas J and by those orders, he became a third-party payer. This was said to be because his share of his father's estate was not distributed to him but went to pay the trustees' solicitor's costs. 46Leonard Amos sought to permanently stay the appeal. That application was heard by White JA who held that Lyons J was correct to dismiss the proceedings on the basis that Edward Amos was not a third party payer because he had no obligation to pay the costs relating to the administration of the estate (as distinct from the obligation he had to pay the costs the subject of the court orders). It was noted that the solicitor could not recover those costs from Edward Amos as a beneficiary. 47White JA had regard to the terms of the statute, in particular the definition of "third party payer" in s 301 of the Legal Profession Act 2007 (Qld) (in the same terms as s 302A of the New South Wales Act) and determined that Edward Amos was not legally liable to pay the respondent solicitor's costs. In particular, his status as a beneficiary was not altered by the orders of the court previously made. White JA found that Edward Amos had no standing to bring the proceedings. 48Edward Amos sought leave to appeal to the High Court. On 22 September 2010 Hayden and Bell JJ refused leave in the following terms :- White JA dismissed the appeal on the ground that the order sought by the applicant was sought against the solicitor who had charged the legal expenses ; the correct defendant was the executor, not the solicitor. Hence the applicant had no standing to bring the proceedings. There were no prospects of success in the application. 49In Legal Services Commissioner v Wright [2010] QCA 321, the Legal Services Commissioner appealed a refusal to declare that a person referred to in the proceedings as Ms A was a client or a third-party payer under the Legal Profession Act 2007 (Qld). 50As a result of proceedings taken in the District Court with respect to the sale of property, jointly owned by Mr A and Ms A, orders were made, including that Ms Wright, solicitor, would act for Mr A in the sale of the property. Further, it was ordered that Mr A and Ms A would ensure that all costs, commissions and expenses of the sale, the amount required to discharge the mortgage, and all outstanding rates and charges be paid from the proceeds of sale. Relevantly for present purposes, there was an order that Mr A and Ms A cause the balance of the proceeds of sale to be divided 75% to Ms A and 25% to Mr A by way of payment into the trust account of a firm of solicitors and into the trust account of D M Wright and Associates Solicitors. 51Ms A sought an itemised bill of the costs from D M Wright and Associates on the basis that she was a third-party payer. The solicitor declined on the basis that she was not a third-party payer. 52In the Court of Appeal, Holmes, White and McMurdo JJA found that Ms A was a third-party payer on the basis that the court order imposed upon Mr A and Ms A jointly an obligation to pay the costs. McMurdo JA (Holmes J and White JA agreeing on this aspect) held at [31] :- The obligation of Ms A to cause the proceeds of sale to be paid in various ways according to the order, was enforceable against her. .... the legal obligation to cause the proceeds of sale to be applied in accordance with the order had its basis and thereby its enforceability primarily from the force of the order itself, as well as its contractual force. It was thereby an obligation enforceable not only by a money claim, but also by proceedings to compel compliance with the Court's order. 53In the course of McMurdo JA's judgment (White JA agreeing), the distinction between a "legal obligation" to pay costs and a "liability to pay" costs was reinforced. McMurdo JA said at [27] and [28] :- Unambiguously, s 301 requires the existence of a legal obligation to pay the costs. As the judgments in [earlier cases] specifically recognised, a person might have been "liable to pay" the costs in the relevant sense whilst not being under a legal obligation to pay them. .... what must be considered now are the terms of the present statute which in my view cannot be construed, in its requirement for a legal obligation to pay the costs, as including a case where there is no such obligation. .... there are likely to be many cases where the burden of a lawyer's bill will fall to a substantial extent upon someone other than the client and who therefore has more than an academic interest in having the costs assessed. But where the line is to be drawn, in defining who apart from the client should be entitled to an assessment, has been decided by the Parliament in unambiguous terms : it is according to the existence or otherwise of a legal obligation to pay the costs. 54McMurdo JA went on to note that the decision of Amos was correctly decided. White JA also confirmed that the analysis in Amos was premised upon the fact that the applicant was seeking to have the whole of the trustees' costs assessed, not that part of the costs which he was legally obliged to pay by virtue of the court orders. 55Huntingdale Village Pty Ltd v Mallesons Stephen Jacques [2013] WASC 48 concerned an application for summary dismissal of proceedings brought by the plaintiff companies seeking to have themselves declared third-party payers. The application was refused, simply on the basis that the defendant had not established that there was no real question to be tried with the requisite degree of certainty. In dismissing the application, Le Miere J referred to the West Australian case of Andrew Koh Nominees v Receivers & Managers of the Baleum Joint Venture [2007] WASCA 152, a decision which turned upon differently worded legislation which required a finding of "liability to pay". His Honour declined to consider whether the existence of an indemnity arising out of the loan documents was equivalent to a legal obligation to pay costs. In those circumstances, this decision is of little assistance. 56In summary, the defendant was not under any legal obligation to pay the costs relating to the administration of the trust. The defendant does not contend that any part of the orders made by the Family Court imposed upon him an obligation to pay the legal costs of the trustees. The defendant is not a third-party payer or non associated third-party payer. 57I make the following declarations :- (1)That for the purposes of the Legal Profession Act 2004 Richard Harries is not a client in respect of the work referred to in the Application by Client for Assessment of Costs filed 9 February 2012 Assessment Number 2012/42817 performed by Michael Shillington, Whitely Ironside and Shillington, or Hicksons. (2)That for the purposes of the Legal Profession Act 2004 Richard Harries is not a third-party payer in respect of the work referred to in the Application by Client for Assessment of Costs filed 9 February 2012 Assessment Number 2012/42817 performed by Michael Shillington, Whitely Ironside and Shillington, or Hicksons. 58I make the following orders :- (1) That the costs of the first plaintiff and the second plaintiff in these proceedings be paid from the fund held by them on trust pursuant to the orders made by the Family Court of Australia in matter number (P)SYC C5110/2008 on 11 March 2011, 23 November 2011 and 30 November 2011 ("the trust fund"). (2) That Richard Harries reimburse to the trust fund the amount paid under order (3) above. (3) That the determination of the costs assessor of 12 June and 25 August 2012 be quashed. 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: 05 September 2013

Shillington v Harries

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