Todorovska v Brydens Lawyers Pty Ltd

HEADNOTE [This headnote is not to be read as part of the judgment] On 13 March 2015, the applicant, Ms Mirjana Todorovska, instructed the respondent, Brydens Lawyers Pty Ltd (the law firm), to act for her in a personal injury matter. Under the Legal Profession Act 2004 (NSW) (the Act), if the amount recovered for personal injury damages did not exceed $100,000, the maximum legal costs for a plaintiff was the greater of 20% of the amount recovered or $10,000. The Act and the Legal Profession Regulation 2005 (NSW) (the Regulation) permitted solicitors and clients to exclude the statutory cap by entering into a costs agreement that satisfied specified requirements. One requirement was that the solicitor must make certain disclosures to the client before entering into the costs agreement. The applicant received a package of documents containing, among other things, a covering letter, duplicate copies of a conditional costs agreement, a "notice pursuant to the Legal Profession Act", and a standard costs agreement. The applicant signed a copy of the conditional costs agreement on 4 May 2015. A subsequent consent judgment was entered in the District Court, awarding the applicant $100,000 damages, with the parties to pay their own costs. The law firm received payment of the award and deducted from it $67,963 on account of professional costs and disbursements. The applicant brought proceedings in the District Court against the law firm for money had and received. She submitted that the statutory cap limited the costs she was required to pay to the law firm to $20,000. The trial judge dismissed the claim, finding that the statutory cap had been excluded by the conditional costs agreement. The law firm had satisfied the disclosure requirements because (i) the proposed costs agreement itself disclosed that it would exclude the statutory cap, and (ii) the disclosure was made before the applicant signed the agreement. On appeal, the applicant challenged the finding that the law firm's disclosures were effective to exclude the statutory cap. The Court held, granting leave to appeal and upholding the appeal: (1) The adequacy of the law firm's disclosures was to be judged by the statutory purpose of the disclosure provisions. Ordinarily, a law practice owes a fiduciary duty to its client which requires it to obtain the client's consent to receive a financial benefit. Sections 338 and 339 of the Act and cl 116 of the Regulation sought to ensure that clients could make an informed choice between their rights under the statutory cap and under the proposed costs agreement. The client should be made aware of (i) the protection afforded by s 338 in the event that she recovered less than the prescribed amount; (ii) the fact that the proposed costs agreement which allowed the lawyers to charge more; and (iii) the fact that the defendant would not have to pay the usual proportion of the costs incurred by the successful plaintiff. One purpose was to ensure that the cost to the parties was proportionate to the importance and complexity of the dispute: [15], [58], [70], [72], [74], [76]. Civil Procedure Act 2005 (NSW), s 60 referred to. (2) Where there is a constructional choice, the reading that best promotes the statutory purpose must be preferred. Attention must be given to the correct level of generality or abstraction at which purpose is identified: [15]-[16], [70], [73]. Interpretation Act 1987 (NSW), s 33 applied. Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41 referred to. (3) The effectiveness of the disclosures was to be assessed in the context in which they occurred. The large bundle of documents containing the disclosures was apt to confuse a lay client. The "notice pursuant to the Legal Profession Act" gave a misleading impression that a client had no choice but to enter into a costs agreement. The standard costs agreement purported to have effect if the conditional costs agreement were not signed. Absent a meaningful explanation of her right to negotiate a costs agreement and seek independent legal advice, the disclosures were inadequate: [16], [18]-[19], [29]-[31], [40]. (4) The identical disclosures contained in the standard and conditional costs agreements set out how s 339 operated, but without reference to the proposed costs agreements. They failed clearly to inform the client that entering into either of the proposed costs agreements would have the effect of excluding the statutory cap. It was not explained that removal of the statutory cap would be a significant issue for her. The information did not indicate she had a meaningful right to negotiate the costs agreement: [49], [51], [54]-[56], [59], [66]-[67].

Judgment

1. BASTEN JA: The applicant, Mirjana Todorovska, sought leave to appeal from a District Court judgment dismissing a claim for money had and received brought by her against Brydens Lawyers Pty Ltd. [1] Leave is required for two reasons: it is an appeal from a judgment as to costs only, [2] and it involves an amount of less than $100,000. [3] The matter was listed for a concurrent hearing of the leave application and the appeal; the submissions addressed the question of leave and the grounds of the proposed appeal.
2. In March 2015, the respondent solicitors acted for the applicant in District Court proceedings which resulted in a consent judgment with an award of $100,000 damages, with the parties to pay their own costs. The respondent received payment of the award and deducted from it an amount of $67,963.08 on account of professional costs and disbursements. This amount included $29,700 in solicitors' professional costs and $16,500 in counsel's fees; a total of $46,200. The applicant contended that a statutory cap applied which limited the recoverable amount of professional costs and counsel's fees to $20,000 and, repayment of the difference being refused, she commenced proceedings in the District Court claiming the balance of $26,200 plus interest.
3. As the respondent opposed the grant of leave to appeal, it is appropriate to consider that question first.

Leave to appeal

1. The respondent contended that leave should not be granted on the grounds that (i) the amount in question was small and related only to costs; (ii) the applicable legislation, the Legal Profession Act 2004 (NSW) and the Legal Profession Regulation 2005 (NSW) (the Regulation), was repealed some five years ago and replaced with provisions which differed from the repealed legislation, and (iii) there was no issue of principle involved.
2. Of these matters, (i) may be accepted. However, although the amount in issue was not large in absolute terms, the amount was significant for her, it being accepted that she was impecunious. As to (ii), the new legislation does not differ materially from that applicable to the applicant's claim. Sections 338 and 339 of the Legal Profession Act are mirrored by Sch 1, cll 2 and 4 of the Legal Profession Uniform Law Application Act 2014 (NSW). Similarly, cl 28 of the Legal Profession Uniform Law Application Regulation 2015 (NSW) follows closely the language of cl 116 of the Regulation. As to (iii), as the applicant contended, the case raised issues of public importance in relation to the regulation of legal practitioners in their dealings with clients.
3. Further, the fact that an amount constituting more than two-thirds of the judgment was paid to the respondent gives cause for concern. There is an unsatisfactory disproportion between the benefit obtained by the injured party (some $23,000) and the proportion received by the lawyers (being almost three times that amount). Such a result suggests that the attempt to limit litigation involving small claims, where the bulk of any recovery goes to lawyers, may be subverted if lawyers are able to obtain full recovery of their costs with disclosures to the injured party of the kind considered below.
4. Finally, the applicant's arguments had, on their face, merit and were certainly more than reasonably arguable. Indeed, for the reasons set out below, they should be accepted. There should be a grant of leave to appeal.

Applicable legislation

1. Part 3.2, Div 9 of the Legal Profession Act bore the heading, "Maximum costs in personal injury damages matters". Section 338 relevantly provided: 338 Maximum costs fixed for claims up to $100,000 (1) If the amount recovered on a claim for personal injury damages does not exceed $100,000, the maximum costs for legal services provided to a party in connection with the claim are fixed as follows: (a) in the case of legal services provided to a plaintiff - maximum costs are fixed at 20% of the amount recovered or $10,000, whichever is greater, (b) in the case of legal services provided to a defendant - maximum costs are fixed at 20% of the amount sought to be recovered by the plaintiff or $10,000, whichever is greater. … (4) When the maximum costs for legal services provided to a party are fixed by this Division the following provisions apply (subject to sections 339-341): (a) a law practice is not entitled to be paid or recover for those legal services an amount that exceeds those maximum costs, (b) a court or tribunal cannot order the payment by another party to the claim of costs in respect of those legal services in an amount that exceeds that maximum, (c) in assessing the amount of those costs that is a fair and reasonable amount, a costs assessor cannot determine an amount that exceeds the maximum set by this section. …
2. It should be noted that s 338 was engaged when "the amount recovered" did not exceed the prescribed amount. That could not be known until after a judgment was obtained or the claim was settled without a judgment.
3. Although s 338 was expressed to apply to costs generally, s 339 provided an opportunity for solicitor and client to agree to a different regime: 339 Maximum costs do not affect solicitor-client costs under costs agreements (1) This Division does not apply to the recovery of costs payable as between a law practice and the practice's client to the extent that recovery of those costs is provided for by a costs agreement that complies with Division 5 (Costs agreements). (2) The regulations may make provision for or with respect to requiring disclosure by a law practice to the practice's client of information in relation to the effect of a costs agreement in connection with the operation of this Division. (3) The regulations may provide that a failure by a law practice to comply with the requirements of the regulations under this section disentitles the law practice to the benefit of this section, and in such a case this Division applies in respect of the claim concerned despite the terms of any costs agreement.
4. The focus of the argument in the present matter was on the operation of s 339 and the relevant provision of the Regulations with respect to the required disclosure by the respondent in order to engage the exclusion from the cap. The Regulation relevantly provided: 116 Disclosure requirements regarding costs agreements - section 339 of the Act (1) This clause has effect for the purposes of section 339 of the Act, and applies to a costs agreement proposed to be entered into between a client or prospective client of a law practice in connection with a claim for personal injury damages referred to in Division 9 of Part 3.2 of the Act by the client or prospective client. (2) The law practice must disclose to the client or prospective client information in relation to the effect of the costs agreement in connection with the operation of Division 9 of Part 3.2 of the Act. (3) The information must include: (a) a statement that Division 9 of Part 3.2 of the Act would (but for the costs agreement) limit the maximum costs for legal services provided to the client or prospective client in connection with the claim, and (b) particulars as to how those maximum costs are calculated, and (c) a statement that the costs agreement would have the effect of excluding the operation of that Division, and (d) particulars as to how the costs would be calculated under the costs agreement, and (e) a statement that the costs agreement relates only to the costs payable as between the law practice and the client or prospective client, so that, in the event that costs are recoverable against the other party, the maximum costs so recoverable will be as provided by Division 9 of Part 3.2 of the Act. (4) Disclosure under this clause must be made in writing before, or as soon as practicable after, the law practice is retained in the matter, but before the costs agreement is entered into. (5) This clause does not require disclosure if the costs agreement in relation to the matter was entered into before the law practice could reasonably expect that the matter would involve a claim to which this clause applies. (6) A failure by a law practice to comply with the requirements of this clause disentitles the law practice to the benefit of section 339 of the Act.
5. Costs agreements were covered by Pt 3.2, Div 5 of the Legal Profession Act. All were required to be in writing, or evidenced in writing, and could consist of a written offer accepted in writing or by other conduct: s 322(2), (3). The offer had to state what type of conduct would constitute acceptance: s 322(4)(c). Tighter constraints applied to conditional costs agreements, which were required to be in writing and could not be accepted by conduct s 323(3)(c). A conditional costs agreement, being one which was "conditional on the successful outcome of the matter", was required to specify the circumstances that constituted the successful outcome: s 323(1), (3)(a).
6. A conditional costs agreement had to contain "a statement that the client has been informed of the client's right to seek independent legal advice before entering into the agreement": s 323(3)(d). It should be inferred that the statement had to be a true statement, which meant that the client must have been informed of that right before entering into the agreement. Section 327(1) provided that, "[a] costs agreement that contravenes, or is entered into in contravention of, any provision of this Division is void."
7. Section 328(1) allowed a client to apply to a costs assessor to have the agreement or a provision of it set aside as "not fair or reasonable". One of the matters which might have been taken into account by the costs assessor on such an application was whether the firm had failed to make any required disclosure: s 328(2)(c).
8. The evident purpose of the disclosures required by s 339 and cl 116 was to ensure that the client was aware of (i) the protection afforded by s 338 in the event that she recovered less than the prescribed amount; (ii) the effect of a costs agreement which allowed the lawyers to charge more, and (iii) the fact that the defendant would not have to pay the usual proportion of the costs in fact incurred by the successful plaintiff. In determining the operation of those provisions, where there is a constructional choice, that reading which promotes this purpose must be preferred to one that does not, or does so to a lesser extent. [4]
9. As the applicant submitted in this Court, the adequacy of the disclosures was to be judged against the statutory purpose of the provisions requiring the disclosure of particular information. Whether that purpose was served will need to be determined in the context in which the disclosures occurred. It is not sufficient, as the respondent submitted, that one or more documents supplied to the applicant contained statements following the language of the Legal Profession Act and the Regulation.

Context of disclosures

1. A solicitor employed by the respondent first took instructions from the applicant on 13 March 2015, with respect to an accident which occurred two days earlier. There was no evidence that costs were discussed with her on that day, but a letter was sent to her bearing the date 13 March 2015 attaching a number of documents.
2. The letter was unsigned; the evidence indicated it was sent by post. Not all the enclosures were included in the exhibit, but an internal accounting document which was in evidence listed 70 pages of billable printing on that date. (It may be noted that while various disclosures were required under Pt 3.2, Div 3 of the Legal Profession Act, the costs of making those disclosures and the costs associated with the making of a costs agreement were not recoverable: s 319(2).) Accordingly, it is clear that a sizeable bundle of documents was provided to the applicant. That is a material consideration in determining whether an effective disclosure was made for the purpose of excluding the cap on recoverable fees.
3. As will be seen, the combination of alternative costs agreements and the variety of the disclosures made it important that the applicant understood what was being put before her and how it might affect her position. It was also important that she understood that she had a right to obtain independent legal advice. A clear statement as to the need for such advice may have mitigated the effects of the complicated and confusing material provided to her. There was no evidence that the applicant had been advised as to the need for advice in terms which might allow a lay person to comprehend its significance for her.
4. The written material supplied by post on 13 March 2015 consisted of a covering letter, the first page of which contained four paragraphs, followed by a second page identifying attachments as follows: "(a) Client Information Factsheet setting out relevant matters pertaining to the prosecution of a public liability claim. (b) Medical Authorities which we would ask that you sign and return to enable us to obtain reports from your treating doctors in due course. (c) Conditional Costs Agreement in duplicate. Would you please sign a copy of the Costs Agreement and return same to us. (d) Notice Pursuant to the Legal Profession Act. (e) Firm Profile. You will also find attached* a standard cost agreement between solicitor and client in personal injury matters which will apply in the event that you do not execute and return the conditional cost agreement. We will keep you informed as to developments." (An asterisk appeared against the word "attached" in two places, but its significance was not explained in the letter.)

Covering letter

1. Before turning to the attached documents, it is convenient to consider the text of the letter. The first paragraph referred to the recent conference and thanked the applicant for her instructions to act. The second paragraph confirmed information apparently given in the conference, "that a claim is available for the injuries which you have sustained in your accident." The third paragraph commenced with the sentence: "It is confirmed that on the successful prosecution of a claim such as yours you are entitled to recover damages … [categories being identified] as well as a contribution towards your costs." The rest of the paragraph dealt with steps to be taken for the purpose of assessing damages (such as obtaining medical reports).
2. The fourth paragraph discussed limitation issues. As the letter noted in the heading that the accident occurred on 11 March 2015, that is two days before the date of the letter, this paragraph may have been puzzling to the applicant. It was an example of a standard form letter being sent with little or no attempt to focus the reader's attention on what was relevant to her.

Client Information Factsheet

1. Turning to the attachments, the first, described as "Client Information Factsheet", might have been thought to contain relevant disclosure information. The document attached did not have that heading, but was entitled "Important Information for People Injured on Public or Private Property". The document covered three pages. It had the headings, "Introduction", "What Injuries?", "Making a Claim", "Types of Compensation" and "Going to Court". It ended with an exhortation in bold print: "Be calm and trust your legal representatives. Brydens Compensation Lawyers have many years of specialist personal injury law experience."
2. There was one reference to costs in the document, under the subheading "Costs", under the general heading "Types of Compensation". It read: "If you win your case, an Order for payment of party/party costs will be made against the owner/occupier. This will cover part of your legal fees and disbursements. The balance of your legal fees and disbursements not payable by the Defendant will be deducted from the verdict monies." No information material for present purposes was disclosed by that statement.

Medical authorities

1. The medical authorities were not included in the evidence, but were presumably signed and returned to the lawyers as requested by a subsequent letter.

Conditional costs agreement

1. The third attachment was a conditional costs agreement in duplicate. There was a signed copy of such a document contained in the evidence, which may be assumed to have been identical with that attached to the letter (in duplicate). The document in evidence was signed by the applicant and dated 4 May 2015. It will be convenient to return to that document, and the "standard cost [sic] agreement" referred to in the letter, after considering the other two documents listed as attachments.

Notice Pursuant to the Legal Profession Act

1. The fourth document, entitled "Notice Pursuant to the Legal Profession Act", [5] was a curious document. It covered one and a half pages, over the name of the principal of the law firm. Under the title was a heading "Civil Liability Act 2002" and a subheading "Division 5B". The second page had a subheading "Division 5C". These subheadings may have confused a lawyer more than a lay person reading the document. They were not properly subheadings referring to the Civil Liability Act, nor to the Legal Profession Act 2004, but to its predecessor, the Legal Profession Act 1987 (NSW).
2. The first four paragraphs of the notice were not ultimately relied upon by the respondent in the District Court, but it may be inferred that the intention of the drafter was to explain the effect of s 338 and the effect of entering into a costs agreement as provided for in s 339. They should be set out in full: "You would no doubt be aware from our initial discussions that a Plaintiff, such as yourself, who is successful in an action for personal injury damages is entitled to recover from the insurer an allowance for their costs. These are costs as between party and party and traditionally amounted to about two thirds of the actual costs incurred by the Plaintiff in the prosecution of the claim. However, things now are very different. Amendments have been made to the Legal Profession Act 2004 to restrict the amount of costs that are recoverable in a personal injury action upon its successful conclusion in the event that the amount of damages recovered is $100,000 or less. It does not apply where the amount is more than $100,000. That is, if the amount awarded by way of damages by the Court is $100,000 or less then the Plaintiff can only recover a reduced amount for party/party costs as prescribed by the Legislation. The amount of costs recoverable by a Plaintiff in proceedings where the amount of damages is $100,000 or less is set at $10,000 or 20% of the judgment sum, whichever is the greater. Furthermore, the sum of $10,000 is inclusive of all professional costs incurred by the Plaintiff for their solicitor and includes the fees payable to barristers engaged in the proceedings. The restrictions on costs do not apply as between solicitor and client where a costs agreement exists and we will continue to act on the basis of our costs agreement as forwarded to you, which estimates the likely costs that you will incur. However, the restrictions to which we have referred to above applies as to the recovery of party/party costs despite the existence of a costs agreement as between you and this firm."
3. The first three paragraphs dealt with costs recoverable by a plaintiff from an unsuccessful defendant. The purport of the first paragraph was that, whatever advice had been given in "initial discussions" as to the traditional approach was wrong because "things are now very different." The only qualification was that relating to claims where the damages recovered were not more than $100,000. The first sentence of the fourth paragraph was potentially misleading. It should have stated that "the restrictions on costs in small cases apply to the fees which we are allowed to charge you, unless you enter into a costs agreement with us which permits us to charge on a different basis." It did not suggest that the client had any choice in the matter. It was properly conceded that this was an inadequate, if not misleading, statement. However, the effect of the notice cannot be put aside so easily. To the extent that it was at least confusing and possibly misleading, it infected the disclosure which might be found elsewhere. In fact, as will be seen, the disclosure relied upon by the respondent was to be found in the costs agreement itself, as a relevant "condition".

Firm Profile

1. Before turning to the costs agreements, it is convenient to deal with the final notice, described as "Firm Profile". It was a single page document which is best described as promotional. It did not say that the firm will not do work subject to a statutory cap (as may well have been the case). It stated that "we restrict our legal practice to helping people receive optimum compensation". It may have impressed a lay client that the firm would act in her interests at all times. It contained no suggestion that there could be a conflict of interest as to which the client might be advised to get independent legal advice. It in fact implied the contrary, advising that, "You can rely on us to look after your best interests…."

Proposed costs agreements

1. Turning to the costs agreements, it will be recalled that the final paragraph of the letter of 13 March 2015 stated that "a standard cost agreement … will apply in the event that you do not execute and return the conditional cost agreement." The statement did not identify the difference between the Standard Cost Agreement and the document entitled "Standard Conditional Cost Agreement". Nor did it explain that the effect of both was to remove the protective cap applicable to awards of less than $100,000. These were matters that the lay client was required to work out for herself. She was also required to work out the effect of signing a conditional costs agreement after the standard costs agreement had taken effect (if it did, as a result of her failing to sign the other agreement).
2. The task required of the client was not made easy. The opening statement of the Standard Cost Agreement was in the following terms: "It is important you understand legal costs and disbursements and we set the details out below. Some people can be daunted by the thought of legal costs but it is really very simple. We are keen to work with you to complete your claim as thoroughly and economically as possible. We only get paid our fees after you win your claim and the Defendant will usually have to pay a substantial contribution towards your costs. This standard document discloses information about the costs of legal services, and your rights, as required by the Legal Profession Act 2004 (NSW) ('the Act')."
3. Remarkably, precisely the same two statements were to be found as the opening statements of the Standard Conditional Cost Agreement. The last sentence in the first paragraph indicated that both were in fact conditional costs agreements.
4. Clauses (2) and (3) of the Standard Cost Agreement read as follows: "(2) When costs are payable We will not account to you for costs during the claim. We will only render a bill to you upon the completion of the matter (subject to Clause (15)). (3) Completion of the claim This means that the claim has been fully prosecuted and finalised in court or alternatively resolved as against the insurer or the defendant in accordance with your instructions or when our retainer has been terminated."
5. These were not the same as in the Standard Conditional Cost Agreement, where the respective clauses read as follows: "(2) When costs are payable We will not account to you for costs during the claim. We will only render a bill to you when there has been a 'Successful Completion' at the end of the claim (subject to Clause (15)). (3) Successful Completion of the claim This means when you receive a financial outcome that is in your favour, whether by way of Judgment, verdict, settlement, costs order in your favour, or other arrangement."
6. The standard agreement provided for payment "upon the completion of the matter", whereas the conditional agreement provided for payment "when there has been a 'Successful Completion' at the end of the claim".
7. Those appear to have been the only changes made. The standard agreement provided an estimate of costs in cl (4) which referred to the fees "payable by you upon the successful completion of the proceedings." Clause (5) set out rates payable, and noted that expenses, known as disbursements, would be paid by the firm on the client's behalf but repaid "as soon as practicable after the successful outcome of the work." Clause (7) noted that barristers' fees are a disbursement "usually paid at the completion of the claim and only if there is a successful outcome." (Emphasis added.)
8. Clause (10) (referring to the right to be given a bill of costs) stated that the firm would prepare "a full accounting for you after the successful completion of the matter". Clause (13) confirmed that barristers' fees would be payable only at the end of the claim and "only if there is a successful completion". (Emphasis added.) The last numbered clause cl (20) should be set out in full. "(20) Acceptance of this offer to enter into a costs agreement This document constitutes an offer to enter into a costs agreement with you. If you accept this offer you must sign and return this document to us. We will not do any work on your matter until this is done. If you do so you will have entered into a conditional costs agreement with us and will be bound by the terms and conditions in the agreement, including being billed in accordance with it. If you do not accept this offer within seven (7) days of dispatch we may withdraw the offer to act on your behalf."
9. The final paragraph of the agreement emphasised the conditional element: "Remember, our aim is to assist you to the best of our considerable ability and experience to get the best result for you. Subject only to Clause (15), we only get paid if you win the claim."
10. The standard contract was thus ambivalent as to whether it was a conditional contract or not. As the applicant signed a conditional costs contract on 4 May 2015, the question of the contractual effect (if any) of the standard contract is not in issue. However, it was a document provided to the client as the alternative or default arrangement which would apply if she did not sign the conditional contract. If she understood any of the material she was sent, that document must have given rise to confusion.

Content of disclosures

1. The disclosures which were made were identical in the two forms of agreement. As noted above, both started with the proposition that the document disclosed information "about the costs of legal services, and your rights, as required by the Legal Profession Act". It did not say where those matters were to be found, nor what their significance might be in deciding whether to seek independent legal advice, and whether to enter into either contract.
2. Clause (4) of the agreements provided an estimate of costs. It stated that "cases which result in smaller verdicts usually involve less preparation" and that "the following estimates in the table below for the total costs of a matter are fairly accurate." There was no reference to the statutory cap on small awards. The estimated range of fees was calibrated according to the value of the claim. The term "value of claims" was not identified but it may be implied that it referred either to the amount of damages sought, or recovered. The fee range for claims for $20,000-$50,000 was $7,000-$25,000; for claims from $50,000-$100,000, the costs estimate was $15,000-$45,000. The bottom end of the range was within the statutory cap, but the higher end of the range was above it. The estimate was followed by the statement: "Remember, a substantial allowance towards costs is usually recovered from the Defendant following the successful completion of the matter in the party/party costs allowance." There was no reference to any limit on the amount recoverable from the defendant in smaller cases.
3. Clause (5) informed the client that the firm would charge at an hourly rate and set out hourly rates for the principal and other employed solicitors and staff. There followed three pages of further details concerning arrangements for payment of costs and disbursements.
4. Clause (14) was headed "Costs in Court proceedings (Party/Party Costs)". It covered more than a page. It set out the "costs follow the event" rule and then stated in two paragraphs: "In personal injury cases where damages are assessed at over $100,000, the general rule applies and normal party/party costs are payable. In personal injury cases up to and including $100,000, the NSW State Government changed the rules so that the Defendant only has to pay a restricted amount. In most motor vehicle cases a peculiar rule applies and the amount of party/party costs payable by the Defendant is dependent on the extent of the damages awarded and not the complexity of the matter nor the amount of work that is undertaken in order to prosecute the claim. A different, and more restrictive, system operates with respect to work injury damages claims."
5. The language of the second passage set out above was both incomplete and misleading. The first sentence stating that the government "changed the rules" was polemical, rather than contractual language. The phrase "cases up to" suggested, incorrectly, that the rule dealt with claims rather than awards. The "restricted amount" was not specified. The next two sentences dealt with motor vehicle accidents ("a peculiar rule") and work injury damages. The next two paragraphs were descriptive and not contractual. The sixth paragraph gave estimates of likely recovery from a defendant in a successful case, depending upon the time at which the case was resolved, with no reference to the cap. The seventh and eighth paragraphs gave estimates of costs in the event that the proceedings were unsuccessful.
6. Clause (15) dealt with termination of the agreement; cl (16) with retention of documents.
7. Clause (17) identified "Disclosures required pursuant the [sic] Legal Profession Act 2004 (NSW)". The clause stated in summary terms the disclosures required by s 309 of the Legal Profession Act. It concluded with a statement that costs may be discussed with the solicitor having the carriage of the matter or the supervising partner and concluded by stating, "[y]ou have the right to obtain independent legal advice before entering into this conditional costs agreement." This statement was a purported compliance with s 323(3)(d) of the Legal Profession Act which said that the agreement "must contain a statement that the client has been informed of the client's right to seek independent legal advice before entering into the agreement": (emphasis added). That provision implied an obligation to inform the client before including such a statement in the contract. However, no issue was raised in this case as to whether the agreement complied with Pt 3.2, Div 5 of the Legal Profession Act and thus satisfied that element of s 339(1).
8. Critical to the respondent's success in this matter was cl (18), the first three subparagraphs of which were relied on as compliance with the requirements of s 339. (The last two paragraphs dealt with offers of compromise and the cooling-off period.) The relevant parts thus read: "(18) Costs Disclosures - Maximum costs recoverable and offers of compromise In accordance with relevant provisions of the Act and the Legal Profession Regulation 2005 (NSW) ('the Regulation') we are required to inform you of the following before you decide to enter into a costs agreement with us: a. Where the amount recovered in your claim does not exceed $100,000, the maximum amount of professional costs which you are required to pay us is 20% of the amount recovered or $10,000, whichever is the greater. This would include barrister's fees if a barrister is retained for your claim. The same restrictions also apply to any costs which can be recovered from the other party if your claim is successful; b. The amounts set out above do not include disbursements, ie payments made to others which are incurred by your lawyer or yourself in the preparation and running of your case. For example, the costs of medical reports, experts' reports, filing fees, external photocopying charges, etc. c. The restrictions on the professional costs you have to pay your lawyers, as explained above, do not apply if you enter into a costs agreement with us which complies with Part 3.2 of the Legal Profession Act 2004 and you will pay us in accordance with the costs agreement, if you enter into such an agreement with us. However, if you are successful, the amount of costs, which becomes recoverable from the other party, will still be limited to the maximum amounts set out in subparagraph (a) above, which will be less than our costs payable by you if you enter into the costs agreement. We can only act for you in accordance with this costs agreement and your acceptance of it."
9. There are five difficulties with the manner of this disclosure. First, cl 116(3) of the Regulation required a statement as to the operation of s 339, "but for the costs agreement". The disclosure set out in two paragraphs how s 339 operates, but without reference to the costs agreement. The effect of the costs agreement was then referred to in par (c). The first sentence in par (c) was ambivalent as to its effect. While it stated that the restrictions would not apply, it did so in terms which did not obviously engage the agreement in which the clause appeared. Thus, while par (a) explained the constraint on the costs you are required "to pay us", par (c) in part adopted the language of the third person, namely costs "you have to pay your lawyers". Secondly, it spoke of entering into "a" costs agreement with "us" which complied with Pt 3.2 of the Act, but did not say (i) that it was referring to this costs agreement, nor (ii) that this costs agreement complied with Pt 3.2, nor (iii) that it was this costs agreement which would have that effect. Rather, it stated that "you", the client, will pay us "in accordance with the costs agreement, if you enter into such an agreement with us."
10. This lack of clarity and level of imprecision was potentially fatal. Regulation cl 116(3)(a), in referring to the effect of s 339 "but for the costs agreement" required that the proposed costs agreement be identified as an agreement having the exclusionary effect. That was not identified in cl (18) in express terms, but only by way of an indirect inference, which a lay person may not have drawn, depending on the contextual material.
11. Thirdly, the second sentence in par (c) was confusing. Although it began "[h]owever", it did not qualify what had just been said; rather, it identified the practical significance of what had been said, namely that not only would the client have to pay at a higher rate, but would not be able to recover that extra amount. Stated as a qualification to the preceding sentence, it was apt to mislead. It could have been much clearer.
12. The primary judge, reflecting the respondent's submissions below, noted that disentitling a law firm to agreed costs where it had failed to make adequate disclosures was "very onerous for legal practices". [6] The judge continued: "But a virtue of Regulation 116(3) is that, however awkward it may be for a legal practice to express the concepts (in (a)-(e)) in practice, they at least provide some measure of certainty to the legal practice that it will obtain the capacity to contract out of the cap if the requirements are complied with."
13. As White JA put to the respondent in the course of argument, referring to cl 116(3)(a): [7] "It could be explained pretty simply: but for this costs agreement, Div 9 of Pt 3.2 of the Legal Profession Act would limit the maximum costs you could be charged for legal services provided to you to the amounts referred to in para a; if you enter into this costs agreement, the agreement will have the effect of excluding the operation of that division." Importantly, nothing in the text of the agreement directly alerted the reader to the fact that entering into "this" costs agreement would have that effect.
14. Fourthly, there was nothing in the agreement which suggested that this was, realistically, a significant issue for the client. The ordinary reading of the chapeau to cl (18) was that the solicitors were obliged by law to "inform you of the following". A lawyer, familiar with cl 116 of the Regulation might have inferred that this was a significant issue, as cl 116(5) stated that "[t]his clause does not require disclosure if the costs agreement in relation to the matter was entered into before the law practice could reasonably expect that the matter would involve a claim to which this clause applies."
15. Fifthly, the last sentence of par (c) which stated, "[w]e can only act for you in accordance with this costs agreement and your acceptance of it", suggested that the client had no choice but to accept the terms of the costs agreement, not that the firm would only act for the client if the client agreed to waive the protection provided by the statutory cap. That may have been accurate, because both forms of the agreement had that effect, and one applied in default, but it distracted attention from the cap, and denied the right to negotiate. [8]
16. Whether such a reasonable expectation was properly to be inferred from the fact of disclosure may be debatable; it is sufficient to note that no information supplied to the client indicated that she had been informed that this was a realistic possibility. Again, as was put in the course of argument by the Court, compliance with cl 116(3) of the Regulation would bring home to the prospective client that entering into the costs agreement would have the effect of excluding a statutory cap on the costs the lawyers could charge. It would alert the client to the existence of the statutory cap, which she or he could read if so minded, and bring home to the client that by entering into this costs agreement she or he would lose the benefit of the statutory protection. It was not established that cl (18) satisfied that purpose.
17. The response of the law firm was to emphasise the extent to which cl (18) complied with the specific requirements of cl 116(3) of the Regulation. Further, the Court was advised that it was standard practice in the profession for costs agreements to contain the statutory disclosure requirements within the terms of the agreement. Whether or not that is so, there are risks attached to such a practice. In particular, context is important. For example, an agreement may contain a separate page with a heading, "Important Information: Read This Before You Sign This Agreement", appropriately displayed. When dealing with the statutory cap, it might state: "It is possible that this may apply to you because your claim may not be worth more than $100,000: Ask our solicitor if you are in doubt about this."
18. The importance of meaningful disclosure was found in the terms of cl 116 itself. It was partly prescriptive, but also directive. It was prescriptive in that it required information in relation to the effect of "the costs agreement" (subcl (2)) and provided five categories of information, but as an inclusive, not a comprehensive, list (subcl (3)). Further, the information had to be "in relation to" the effect of the costs agreement, and had to be "in connection with" the operation of Div 9 of Pt 3.2 of the Act; that is in connection with the maximum costs in personal injury damages matters. This language was apt to ensure that the client was informed as to how the agreement could affect his or her recovery, as well as the effect, once the cap was engaged. It was important that the cap operated with respect to the "amount recovered" and not in respect of the amount claimed. Failure to emphasise that fact would have been a failure to disclose a critical fact likely to operate in the mind of the prospective client. The purpose of requiring the provision of information was to permit the client to make an informed choice.
19. As noted above, the agreement started with the statement: "It is important you understand legal costs and disbursements and we set the details out below. Some people can be daunted by the thought of legal costs but it is really very simple. We are keen to work with you to complete your claim as thoroughly and economically as possible." Such a statement was apt to undermine any advice which had been given (had it been given) that the client might or should obtain independent legal advice before entering into the agreement. Further, the draft contract stated that the agreement must be signed and returned to be effective and that the firm "may withdraw the offer to act on your behalf" if the offer were not accepted within seven days. The letter stated that if the conditional agreement were not executed and returned, the attached standard cost agreement, which contained many identical provisions, including cl (18), would apply. These statements might have led the prospective client to doubt the disclosed right to negotiate the costs agreement: contract, cl (17)(a).
20. As counsel for the respondent noted in her oral submissions, the primary focus of the legislation, as revealed in the second reading speech for the Civil Liability Bill, was to restrict the costs payable by a defendant insurer. [9] So much may be accepted: however, the effect of the constraint on costs payable by defendants was to impose a potentially significant constraint on the usual rule applying to party/party costs which, in the event of success, would be paid by the defendant. The purpose of the disclosure provisions was, at least in large part, to ensure that prospective clients were aware that a small amount recovered might be further reduced by legal expenses incurred under a costs agreement with their solicitors, which would be unrecoverable from the defendant. There was nothing in the Minister's observations as to the purpose of the legislation which undermined that protective purpose of the Regulation.
21. In rejecting the applicant's claim, Abadee DCJ dealt in careful detail with the submissions made to him. These reasons differ from the judge's approach in two main respects. First, the judge noted "[a] perennial concern about a philosophy of disclosure", namely, "how well the information is understood". [10] The judge understood that that concern gave rise to "the desirability of an advisory obligation, to supplement disclosure requirements." That led to a further conclusion as to the limited operation of the disclosure requirements, the judge stating: "[105] … To require the legal practice to fall under some amorphous advisory obligation under Regulation 116(2) on pain that it will lose its entitlement to charge for additional costs negotiated would not serve a 'consumer protection purpose'. It might even consequently mean that a lawyer may not wish to act at all; since the legal practice would not know what, in addition to Regulation 116(3) it was required to disclose. Rather, to the extent that Regulation 116(2) required some more substantive, but uncertain obligation of a legal practice, the regulation would likely have a punitive effect."
22. It may be accepted that the Regulation should not be read as imposing "some amorphous advisory obligation", but that is not to say that it should not be construed in accordance with its true purpose. As explained above, it has a distinct protective purpose, which must be given full effect. The primary obligation was identified in subcl 116(2) of the Regulation in terms which have been considered above. The inference that the matters identified in subcl (3) provided a full statement of the information to be disclosed underplays the express terms of the provision as inclusive, rather than comprehensive. The primary judge did not ignore these words, but read them down on the basis that pars (a)-(e) in cl 116(3) provided "some measure of certainty", and cl 116(2) had to provide "a reasonably practical result." [11] As explained above, the purpose of cl 116(2), given content by subcl (3), was neither obscure nor onerous.
23. Secondly, the primary judge approached the adequacy of the disclosures made on a textual basis, seeking the identification of information in cl (18) of the costs agreement. On the assumption that each of the matters identified in cl 116(3) was to be found in cl (18), the case was dismissed. With respect, that approach failed to test the contractual language, (i) for clarity in its own terms, and (ii) read in the context of other provisions of the contract, the covering letter and the other documents supplied by the respondent, against the apparent purpose of s 339 of the Legal Profession Act and cl 116 of the Regulation.
24. The judge understood the purpose of cl 116 as being "concerned about the disclosure of information as part of a bargaining process, on the subject of costs, between prospective solicitor and prospective client." [12] There was however no recognition of the fact that, whilst the costs agreement proclaimed the right of the client to negotiate a costs agreement, other provisions in the letter and the contract denied the reality of the right.
25. The judge also noted that there was alternative relief available to the client who could apply to a costs assessor to have the agreement or a provision of it set aside as "not fair or reasonable". [13] Whilst the availability of such relief may be accepted, and may militate against an "expansive" or strained reading of the statutory protections, [14] the availability of an alternative form of relief does not warrant the reading down of the purpose and effect of the Regulation.

Conclusion

1. Clause (18), which appeared in identical terms in all three copies of the costs agreements provided to the client (one purporting to be other than a conditional costs agreement, the others being duplicate copies of a conditional costs agreement) failed to satisfy the disclosure requirements in cl 116(2) of the Regulation. Read in context, the statements in cl (18) were apt to confuse or, as expressed by counsel in the course of argument, baffle the prospective client. They did not serve the statutory purpose.
2. That is not to suggest that there was any specific language or written document which must have been provided to satisfy the terms of the provisions, when in force. However, a formulaic disclosure in a context which tended to deny the practical effectiveness of a right to negotiate, and the opportunity for obtaining independent legal advice, in circumstances where the language used was conducive to misunderstanding, will not be sufficient.
3. The Court should make the following orders: 1. Grant the applicant leave to appeal from the judgment and orders of the District Court given and made on 6 August 2021. 2. Direct that the applicant file within 10 days a notice of appeal in the form of the draft notice of appeal contained in the white folder and dispense with requirements for service thereof. 3. Set aside order (2) made in the District Court and in lieu thereof: 1. order that the defendant pay to the plaintiff the amount of $26,200 together with interest from 17 October 2017; 2. order that the defendant pay the plaintiff's costs. 1. Order that the respondent pay the applicant's costs of the application for leave to appeal and the appeal.
4. LEEMING JA: I agree with Basten JA that there should be a grant of leave, the appeal allowed, the judgment of the District Court set aside and in lieu thereof judgment be entered in favour of Ms Todorovska. I agree generally with his Honour's reasons; what follows is by way of emphasis.
5. Sections 338 and 339 of the (former) Legal Profession Act 2004 (NSW) and cl 116 of the (former) Legal Profession Regulation 2005 (NSW) are reproduced by Basten JA. I start with the text. The language of "disclose" and "information" in relation to the "effect" of the costs agreement in cl 116(2) points to a construction which is not satisfied by a mere "tick a box" approach, but rather requires written words which will as a matter of substance inform the client or prospective client of the choice between the costs regime in relation to small claims ordinarily prescribed by statute and the alternative if the agreement is entered into.
6. Contrary to the view taken by the primary judge at [97], the five components in cl 116(3) are not "a miscellany of matters which have to be disclosed with no apparent unifying meaning". Instead they are the integers of the ordinary regime as to costs and the altered regime which will obtain if s 339(1) disapplies that regime; a comparison between the two will permit a disclosure of the "effect" of contracting out.
7. Some assistance may be derived from the context. It is to be borne in mind that s 339 authorises an approach which will invariably be financially advantageous to the law practice and financially disadvantageous to the client or prospective client. There will either be an actual fiduciary relationship, or an intention to bring into existence a fiduciary relationship, and if the law practice wishes to obtain a benefit over and above what is prescribed in the case of small claims, it is scarcely surprising that the regime requires not merely the client's or prospective client's consent, but also disclosure so as to make that consent one which is informed.
8. The Court was not taken to any extrinsic materials specifically bearing upon the legislative purpose of the provisions permitting a contracting out from the general cost-capping regime for small claims, or the disclosure obligations attendant upon the ability to contract out (as opposed to the purpose of the general regime, which was described in State of New South Wales v Avery (2016) 92 NSWLR 141; [2016] NSWCA 147 at [56]-[64] and in Certain Lloyd's Underwriters v Cross (2012) 248 CLR 378; [2012] HCA 56). Naturally, the precept that legislation is to be construed purposively requires attention to be given to the correct level of generality or abstraction at which purpose is to be identified. A familiar instance of this is seen in the adage that every provision in a tax act is not to be construed so as to promote the purpose of raising revenue: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue (NT) (2009) 239 CLR 27; [2009] HCA 41 at [51]. Perhaps an even clearer case is that provisions which are an exception from a general rule are not to be construed so as to promote the purpose underlying the general rule, for to do so would be to construe them narrowly in every case.
9. There is perhaps a further consideration too. There is every prospect that if the cost-capping regime is disapplied, then there will be disproportionality between the costs recoverable by the law practice and the damages awarded to the client, contrary to the principle reflected in s 60 of the Civil Procedure Act 2005 (NSW) that "the cost to the parties is proportionate to the importance and complexity of the subject-matter in dispute". In Newcastle City Council v McShane (No 3) (2005) 65 NSWLR 155; [2005] NSWCA 437 at [26] this Court said that earlier versions of the provisions reflected that principle.
10. All of this points to cl 116(2) and (3) being construed so as to require an effective disclosure of the fact that the maximum costs that would be charged, in the case of a claim not exceeding $100,000, was not limited to the greater of $10,000 or 20% of the amount recovered.
11. The respondent's primary submission was that cl 116(2) had no separate operation, but rather was a general, introductory statement adding nothing to the specific disclosures required by its successor. I do not accept the submission. It is inconsistent with orthodox principles of construction, which require a court to "strive to give meaning to every word of the provision": Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28 at [71]. Instead, disclosure of the effect of contracting out from the general cost-capping regime is required to be given to a client or potential client if the law practice is to take advantage of the dispensation. That is not to suggest - and Mr Walker SC explicitly disavowed any suggestion - that compliance with the regime turns upon the subjective understanding of the client or prospective client. Instead, one asks whether in a meaningful way there has been disclosure of the effect of contracting out of the ordinary regime. That turns on an evaluation of the documents as a whole. If there were a single page, readily comprehensible document described "disclosure", that may go far to enable a court to conclude that there has been compliant disclosure. If, alternatively, one must look at the individual clauses in a longer document, it may to that extent be more difficult to establish that the effect of contracting out has been disclosed. As Basten JA has explained in more detail, the swathe of documents provided by the law practice fell short of achieving an objectively effective disclosure.
12. WHITE JA: I agree with the orders proposed by Basten JA and with his Honour's reasons. I also agree with the additional observations of Leeming JA.

Endnotes

1. Todorovska v Brydens Lawyers Pty Ltd [2021] NSWDC 382 ("Todorovska").
2. District Court Act 1973 (NSW), s 127(2)(b).
3. District Court Act, s 127(2)(c).
4. Interpretation Act 1987 (NSW), s 33.
5. The title and headings were bolded capitals; the subheadings were bolded.
6. Todorovska at [105], referring to the Regulation, cl 116(6).
7. CA Tcpt, 04/03/22, p 19(16).
8. Cf Legal Profession Act, s 309(1)(b)(i).
9. CA Tcpt, 04/03/22, p 20(22). NSW Legislative Assembly, Parliamentary Debates (Hansard), 28 May 2002, p 2085.
10. Todorovska at [101].
11. Todorovska at [105].
12. Todorovska at [103].
13. Legal Profession Act, s 328(1),
14. Todorovska at [104]. 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: 29 March 2022