Batrouney v Forster

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2015 0054

NOEL BATROUNEY and ANDREW LYLE (in their capacity as receivers of the law practice known as HOLLOWS LAWYERS ABN 32 840 058 016)	Applicants
v
DAVID BRIAN FORSTER	Respondent

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JUDGES:	SANTAMARIA, BEACH and McLEISH JJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	27 & 28 October 2015
DATE OF JUDGMENT:	27 April 2016
MEDIUM NEUTRAL CITATION:	[2016] VSCA 80
JUDGMENT APPEALED FROM:	Batrouney v Forster [2015] VSC 230 (Robson J)

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SOLICITORS – Receivers appointed to law practice of the defendant under the Legal Profession Act 2004 – Proceeding by receivers to recover moneys paid from clients’ trust accounts to the solicitor’s office account under s 5.5.14 of the Act – Whether payments made ‘in breach of trust, improperly or unlawfully’ – Whether solicitor ‘knew or believed’ that payments made ‘in breach of trust, improperly or unlawfully’ – Whether by reason of payments, solicitor ‘became indebted or otherwise liable’ to a client – Legal Profession Act 2004 s 5.5.14(1).

SOLICITORS – Allegation that solicitor withdrew moneys from the trust accounts to meet invoices containing sums for disbursements incurred on behalf of the clients when disbursements had already been paid from the clients’ trust accounts – Whether the payments from the trust accounts were made ‘in breach of trust, improperly or unlawfully’ – Solicitor estopped from denying that the payments were made in breach of trust – Whether because of the payments the solicitor became indebted or otherwise liable to the practice or the clients – Solicitor was liable to account to clients for breach of trust – Solicitor ‘otherwise liable’ to clients – Whether liability to account affected by clients being indebted to solicitor under other invoices – Appeal allowed.

SOLICITORS – Solicitor agreed to charge clients professional fees on scale – Whether obligation to calculate fees on scale or not to charge more than scale – Solicitor failed to calculate fees charged on scale – Whether withdrawal of moneys from the trust account to meet legal fees charged to the clients were made ‘in breach of trust, improperly or unlawfully’ – Payments made in breach of trust – Whether the solicitor ‘knew or believed’ that payments were made ‘in breach of trust, improperly or unlawfully’ – Whether the solicitor ‘became indebted or otherwise liable’ to clients – Appeal allowed.

SOLICITORS – Consideration of s 3.3.20 of the Legal Profession Act 2004 and the circumstances in which a solicitor may withdraw trust moneys held on behalf of a client for legal costs owing by the client – Solicitor gave client estimates of professional fees before they accepted settlements – Relevance of solicitor’s belief that he had not charged more than estimated fees.

SOLICITORS – Consideration of the entitlement of a solicitor to exercise a lien over the fruits of litigation – Exercise of lien distinguished from withdrawal from trust – Whether the solicitor may withdraw funds from trust account to satisfy fees for legal services under the lien without a court order or otherwise complying with one or other of the procedures provided for in s 3.3.21(1)(b) of the Legal Profession Act 2004.

STATUTORY CONSTRUCTION – Words and phrases – Meaning of ‘instructions’ in reg 3.3.34(3)(a)(ii) of the Legal Profession Regulations 2005 – Meaning of ‘a bill’ in reg 3.3.34(4)(a) of the Regulations.

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APPEARANCES:	Counsel	Solicitors
For the Applicants:	Mr N Young QC with Ms C van Proctor	Hall & Wilcox Lawyers
For the Respondent:	Duty Barrister Scheme: Mr A W Sandbach with Mr M I Borsky, Mr H de Kock and Mr G C Kozminsky

SANTAMARIA JA
BEACH JA
McLEISH JA:

Introduction

On 12 April 2010, the Court (Emerton J) appointed Noel Batrouney and Andrew Lyle (‘the receivers’) to Hollows Lawyers (‘the law practice’) which was owned and operated by David Forster (‘the respondent’). By the order appointing them, the receivers were given authority to bring proceedings against the respondent to recover deficiencies in the trust accounts of the law practice.

Section 5.5.14(1) of the Legal Profession Act 2004 (‘the Act’) gave the receivers standing to recover amounts paid out of the trust account where it could be established that the payments had been made ‘in breach of trust, improperly or unlawfully’. Under s 5.5.14(1)(a), the receivers had to establish that the transferee ‘knew or believed’ at the time of the payment that it was done ‘in breach of trust, improperly or unlawfully’. Under s 5.5.14(1)(c), they had to establish that where moneys had been paid ‘in breach of trust [etc]’, the solicitor had thereby become ‘indebted or otherwise liable’ to the client.

In one group of cases, deficiencies had arisen because the law practice had debited its trust account more than once in respect of the same disbursements. The first debit had been appropriated directly in payment of the invoices of third parties such as barristers. The second debit had been appropriated by the law practice itself. When the double payments were discovered, the respondent wrote back in his accounts amounts owing to him by his clients (which he had previously written off) and, then, treated the second payment as satisfying debts still owing to him. The trial judge held that the respondent was estopped by the decision of Emerton J from contending that the second payment had been made lawfully.[1] However, he found that the receivers were not entitled to recover the double disbursements as they had not established that, at the time that they were paid to the law practice, the respondent, as the transferee of the funds, had thereby become ‘indebted or otherwise liable’ to the client within s 5.5.14(1)(c) of the Act.
[1]Batrouney v Forster [2015] VSC 230 (‘Reasons’).

In the second group of cases, the respondent had entered into agreements with several of his clients that provided for his professional costs to be calculated on scale, plus an uplift of 25 per cent. The trial judge found that the respondent had charged those clients for professional costs by rendering invoices for costs not calculated at scale but on a time costing basis with a premium added in some cases. The trial judge held that the receivers had not established either that the payments had been made ‘in breach of trust, improperly or unlawfully’ or, if they had been, that the respondent ‘knew or believed’ at the time of taking the payments that it was done in breach of trust, improperly or unlawfully within s 5.5.14(1)(a) of the Act. He drew a distinction between the rendering of invoices calculated in breach of the agreements and the withdrawals from the trust account to pay the invoices. He also found that, while the respondent knew that he had not calculated his professional fees according to scale, he did not believe that he was recovering a sum in excess of what he was entitled to charge.

Further, the trial judge also held that the respondent was justified by the Legal Profession Regulations 2005 (‘the Regulations’) in withdrawing trust money as he (a) had secured from his clients ‘instructions’ that authorised the withdrawal from the trust account and (b) had given his clients ‘a bill relating to the money’ to which none had objected.

Finally, having decided that the payments had not been made ‘in breach of trust, improperly or unlawfully’, the trial judge also rejected an argument that the receivers could recover the payments under s 5.5.14(2)(c) of the Act.[2]
[2]See Reasons [783]–[784], [1126], [1128].

The receivers have sought leave to appeal from the decision below. For the reasons given below, the application for leave to appeal should be granted and the appeal allowed. Briefly stated, when the Court ordered that receivers be appointed, it found that, when he had paid the disbursements on the second occasion, the respondent had made payments out of the trust account in breach of trust. A consequence of that finding was that the respondent became liable to his clients to account for the funds that had been improperly appropriated. Where the respondent had entered into agreements with clients to charge professional costs at scale, he was entitled to withdraw moneys from his trust account only when his costs had been calculated according to scale. In creating invoices, he relied upon time costing and not scale and, in withdrawing funds from the trust account in reliance on those invoices, he acted in breach of trust. In every case, he knew that he was acting in breach of the scale fee agreements. He was thus liable to account to his clients for the funds that had been improperly appropriated. Finally, his ‘authorisations’ from clients were ineffective; the clients had not given their informed consent to his departure from the fee agreements. His reliance upon his entitlement to deliver a lump sum bill was similarly misconceived where the bill had been prepared without regard to the fee agreements.

Summary of facts

On 10 February 1964, the aircraft carrier HMAS Melbourne and the destroyer HMAS Voyager collided off Jervis Bay, NSW.[3]
[3]See Commonwealth v Verwayen (1990) 170 CLR 394.

From around 1994 until 2010, the respondent, as principal of the law practice, acted on a ‘no win no fee’ basis for 86 sailors seeking compensation from the Commonwealth for injuries suffered as a result of the collision.

The Commonwealth settled many of the claims and made compensation payments including for legal costs. Those payments were paid into the statutory trust account of the law practice. Some clients also paid money into the trust account in anticipation of costs, disbursements and expenses during the course of their litigation.

After the settlements occurred, the law practice received into trust sums in excess of $27 million on behalf of these clients. From the trust account the respondent transferred $18,300,703 to the law practice’s office account and $4,085,408 to pay third parties directly for disbursements. The 86 clients received $6,046,739 of the total settlement funds.

On 28 October 2008, two inspectors from the Law Institute of Victoria were appointed to examine the trust accounts and records of the law practice. In the opinion of the inspectors, a number of trust account deficiencies and breaches of the Act and the Regulations had occurred. A report authored by Mr Colin Chun dated 28 April 2009 (‘the Chun Report’) identified irregularities in the law practice’s trust account.

Based on the findings of the Chun Report, the Legal Services Board (‘LSB’) applied for the appointment of receivers to the law practice. That application was heard by Emerton J in a trial that lasted 15 days. Justice Emerton found that there were deficiencies in the trust account of the law practice that were sufficiently serious to warrant the appointment of a receiver.[4] Justice Emerton found that disbursements that had been included on invoices were paid directly from the trust account and, then, further moneys were subsequently transferred from the trust account to the office account which were allocated to pay invoices that included the paid disbursements (‘double disbursement payments’). She found that this resulted in trust account deficiencies for the purposes of s 3.3.21 of the Act.
[4]Legal Services Board v Forster (2010) 29 VR 277; [2010] VSC 102. The authorised report does not contain the whole judgment. Therefore, all references hereafter will cite the medium neutral citation.

Justice Emerton also found that, in the case of clients with whom the law practice had an agreement to charge according to scale, the respondent did not appear to have billed in accordance with the fee agreements. Justice Emerton found that the task of the receivers may, depending on what was subsequently found, involve recovering moneys taken in breach of trust, improperly or unlawfully.

At a subsequent hearing on 12 April 2010, Emerton J appointed Mr Batrouney and Mr Lyle as receivers of the law practice under Part 5.5 of the Act.

By summons dated 27 January 2012, the receivers applied for a further extension of the receivership to enable them to institute and prosecute a recovery proceeding against the respondent. On 1 March 2012, Emerton J granted that application. The respondent unsuccessfully appealed, inter alia, the order made by her.[5]
[5]Forster v Legal Services Board [2013] VSCA 131 (Weinberg and Harper JJA and Kyrou AJA).

Summary of proceedings and issues

By writ and statement of claim dated 13 February 2012 (which was subsequently amended culminating in the plaintiff’s second further amended statement of claim (‘SFASOC’) dated 7 November 2013), the receivers commenced a recovery proceeding against the respondent.

The receivers sought to recover from the respondent:

(a) the sum of $1,507,750.45 for double disbursement payments;

(b) the sum of $217,207.37 for money improperly or unlawfully transferred from the trust account for fees issued to two clients, Mr Dawson and Mr Martin; and

(c) the sum of $5,250,683.35 for money improperly or unlawfully transferred from the trust account for fees issued to 30 clients who had entered into ‘scale’ fee agreements, where the respondent had allegedly breached those agreements by charging fees otherwise than in accordance with the terms agreed, and then making trust account to office account transfers for those fees.

In respect of each cause of action pleaded, the receivers sought recovery of regulated property unlawfully or improperly transferred by the respondent, pursuant to s 5.5.14 of the Act.[6]
[6]Section 5.5.14 is extracted in [75] below. The Act was repealed by the Legal Profession Uniform Law Application Act 2014. Section 4 of that Act applies the Legal Profession Uniform Law (which is set out in Schedule 1 to that Act) as a law of Victoria which may be referred to as the Legal Profession Uniform Law (Victoria). The Legal Profession Uniform Law (Victoria) contains provisions relevant to the handling of trust funds which correspond to those contained in the Act.

The trial commenced before the trial judge (Robson J) on 17 June 2013, and ran over four separate sittings over 37 hearing days, concluding on 15 August 2014.

On 27 May 2015, the trial judge delivered reasons for decision and dismissed all of the receivers’ claims. He ordered that there be judgment for the respondent.

By their application filed 23 June 2015, the receivers have sought leave to appeal part of the reasons delivered. They seek to appeal against the findings dismissing their claims in respect of the double disbursement payments, and the findings made in respect of their claims for recovery of professional fees charged by the law practice to scale fee agreement clients.

Application to amend application for leave to appeal

On 7 October 2015, the trial judge delivered reasons in relation to the costs of the proceedings. He ordered that (a) the receivers pay the respondent’s costs of and incidental to the proceeding up to 12 February 2014 on the standard basis save that the receivers also pay the reasonable disbursements and expenses incurred by the respondent in the conduct of the proceeding on an indemnity basis; (b) the receivers indemnify and hold the respondent harmless against any claim by the LSB or the receivers for paid or unpaid fees, costs and expenses paid or payable to the receivers or the LSB from the respondent relating to or incidental to these proceedings; and (c) the receivers refund to the law practice any moneys recovered by the receivers from the practice relating to or incidental to the proceeding.[7]
[7]Batrouney v Forster (No 2) [2015] VSC 541.

On 21 October 2015, the receivers gave notice of an application to amend their existing application for leave to appeal. In the proposed amended application, the receivers are seeking leave to appeal from the order in relation to costs. On 21 October 2015, the Court refused the receivers’ application to file an amended application for leave to appeal but reserved the receivers’ right to renew that application at the hearing of the application for leave to appeal.

At the commencement of the hearing of the present application, the Court directed that the application to amend the existing application in order to deal with the question of costs should be adjourned until after the delivery of these reasons.

In their original proposed grounds of appeal, the receivers did not challenge the ruling of the trial judge that, in respect of the scale fee agreement clients, the receivers had not made out a case that the respondent had become ‘indebted or otherwise liable’ to the clients. The matter was in issue at trial.[8] As it happened, the trial judge said that the receivers had not made out a case under s 5.5.14(2)(c) as they had not established that the withdrawal of funds in respect of the scale fee agreement clients had taken place ‘in breach of trust, improperly or unlawfully’. The trial judge did not then go on to address the matter on the assumption that the withdrawals answered that description. At the commencement of the hearing of the appeal, the receivers applied to amend their proposed grounds of appeal so as to be able to contend that, in respect of the scale fee agreements, they had established a case under both s 5.5.14(2)(a) and s 5.5.14(2)(c). The respondent opposed the application to amend. The respondent opposed the amendment sought on the basis that the receivers’ contention was without merit and therefore the amendment would be futile.
[8]Reasons [764]. It was addressed by the trial judge at [1126]–[1128].

The double disbursements claim

The receivers broadly alleged that in respect of 46 clients:

(a)the respondent received trust money from the Commonwealth and the clients;
(b)in conducting the cases, the respondent properly incurred disbursements (for counsel fees, actuaries and relevant medical fees) on behalf of his clients;
(c)the respondent paid those disbursements on behalf of his clients from the trust account of the law practice direct to the third parties;
(d)some of the disbursements paid were also identified and included as debts due to the law practice in invoices sent to the clients;
(e)when the respondent transferred money from the trust account to the office account to pay these invoices that included the disbursements already paid directly from trust, he did so unlawfully and improperly, as a trust account deficiency was created within the meaning of s 3.3.21 of the Act;
(f)having unlawfully and improperly transferred to himself regulated property, and thereby created a trust account deficiency, the respondent was obliged by s 3.3.13 of the Act to restore the deficiency by paying the money back into trust and accounting lawfully to his clients;
(g)this obligation to pay the money back into trust meant that the respondent became indebted or otherwise liable to the law practice as trustee of that money, and indebted or otherwise liable to the clients in the amount of the offending transfers; and
(h)the respondent did not do what the Act required him to do, and accordingly, ss 5.5.14(2)(a) and (c) of the Act provided a statutory basis for the receivers to recover that money from him.

The receivers’ case turned on the construction of the Act and the Regulations. There was no dispute that the payments made by the respondent and the transfers of regulated property did occur in the manner and on the dates alleged. The underlying records of the law practice for each payment alleged in the SFASOC were tendered during the trial.

In the respondent’s defences, he contended (broadly) that:

(a)the accounting errors occurred as a result of honest and inadvertent mistake;

(b)none of the accounting errors gave rise to any financial disadvantage to any client;
(c)each of the clients owed him money for fees and expenses that was more than the money he transferred from the trust account to the office account;
(d)he had a ‘particular lien’ that entitled him to transfer money from trust for professional fees due to him;
(e)each client consented to the relevant transfers;
(f)specific authorities from clients authorised the payments and such authorities were found in instructions to settle, authorities to transfer trust monies and the terms of the fee agreements;
(g)the allocation of funds to an invoice occurred in the office account, and the respondent was entitled to re-allocate funds in the office account to any outstanding invoice at any time before he communicated the allocation to his client;
(h)there was therefore no error in the trust account as the amounts transferred reduced the total amounts owing by each client to him (in each case the amount transferred was less than what was owing at the time of the transfer);
(i)the initial error in allocation of money in the office account was corrected in the office account;
(j)the respondent informed his clients of the accounting errors with accompanying trust statements and notices regarding legal costs; and
(k)accordingly, the transfers from trust to office, even if each did create a trust account deficiency, did not give rise to a debt or liability of the respondent to the law practice or to the client.

On day three of the trial (19 June 2013), the respondent outlined his defence (then contained in his amended defence delivered 16 June 2013 and later amended further). At the commencement of day four of the trial, the receivers made an application that certain issues then raised by the respondent were the subject of issue estoppel by reason of the findings of fact made in several previous proceedings involving the respondent and the conduct of his practice.[9]
[9]The cases are (a) Legal Services Board v Forster (2010) 29 VR 277; [2010] VSC 102 (in this case, the Court (Emerton J) directed that receivers be appointed to the respondent’s law practice); (b) Forster v Legal Services Board(Legal Practice) [2011] VCAT 2216 (in this case, VCAT (Ross J) refused an application by the respondent to review a decision of the Legal Services Board not to renew the respondent’s practicing certificate); (c) Forster v Legal Services Board (No 1) [2013] VSCA 73 (in this case, the Court of Appeal dismissed an appeal from the decision of VCAT); and (d) Forster v Legal Services Board (No 2) [2013] VSCA 131 (in this case, the Court of Appeal dismissed an appeal by the respondent against an order made by the Court (Emerton J) extending the receivership).

The parties provided written submissions on the estoppel application both during and at the conclusion of the trial. The trial judge found that the respondent was estopped from denying that the payment of double disbursements created a deficiency within the meaning of s 3.3.21 of the Act, but not estopped from asserting that the payment of the double disbursements did not cause an ‘accounting deficiency’.[10]
[10]Reasons [272]–[342].

Having found that the payments made by the respondent were unlawful (the estoppel operating against the respondent to prevent him from contending the transfers were lawful), the trial judge found, however, that the state of account between the respondent and the clients was such that the respondent did not become indebted or otherwise liable to the clients.[11]
[11]Under s 5.5.14(1)(c), the receivers had to establish that regulated property of or under the control of a law practice had been taken by, paid or transferred to a person ‘in breach of trust, improperly or unlawfully and the transferee … because of the taking, payment or transfer, became indebted or otherwise liable to … a client of the practice’ (emphasis added).

The trial judge made findings of fact concerning one of the 46 clients in relation to this claim (the first client, Mr Barltrop). The trial judge concluded that the respondent was not indebted or otherwise liable to any of the clients at the time of the payments, because the clients were indebted to the respondent for greater sums of money than the quanta of the payments (including the double disbursement payment).

The double paying of disbursements

In his reasons, the trial judge took the case of Mr Barltrop and treated it as an example of what happened in each other case.[12] The details are contained in the Reasons.[13]
[12]The receivers have complained about the course adopted by the trial judge. They said that the trial judge required the parties to file submissions in relation to each of the clients affected by the double disbursement claim but that he elected to deal only with Mr Barltrop in dismissing the receivers’ claims, without hearing from the parties as to whether such a course was appropriate and without recourse to the submissions made by the receivers in respect of cases that departed from the facts scenario in relation to Mr Barltrop’s file.
[13]The trial judge complained about the manner in which the elements of the double disbursement claim were treated in the evidence. In his reasons, there are several versions of the details of the claim. In the Reasons [27]–[44], the trial judge summarises the allegations made by the receivers. In [45], he extracts the respondent’s defence. In [46]–[81], the trial judge summarises the evidence. Part of the evidence is drawn from ‘a report from [the respondent’s] trust ledger account of Mr Barltrop’: [50], [67]; part is drawn from the tender of invoice 4012 dated 14 September 2007 and the attachments to it: [52]; part is drawn from letters written by the respondent: [62]; part is drawn from a report generated by the ‘Infinity Law system’, an accounting software package, that was used by the practice: [60], [64]; part is drawn from a report headed ‘Detailed Accounts Rendered – Barltrop JL. Matter 1 – Melbourne Voyager – Personal 1’: [68]. The trial judge said of this report that: ‘The report is not of the trust accounts but of the office accounts. It does not disclose what was recorded in the trust accounts. The report includes details of invoices 3583, 3716, 3893, 4012 and 4142.’: [68].

On 7 June 2000, Mr Barltrop entered into a costs agreement with the respondent. That agreement provided for fees and costs to be paid in the event that Barltrop recovered money from the Commonwealth. It provided that Barltrop authorised the respondent ‘to immediately deduct any unpaid solicitor/client costs from any money recovered from your case’.[14]
[14]See reg 3.3.34(3)(a)(i). Section 3.3.20(1) of the Act authorises a law practice to withdraw money from its trust account if it complies with the procedures and requirements prescribed by the Act and the Regulations. Part 3.3 of the Act deals with trust money and trust accounts. Reg 3.3.34 deals with when money can be withdrawn from a trust account. It is extracted at [71] below.

How the double disbursements came about

The law practice raised several invoices in respect of the legal services that had been provided to Mr Barltrop. One of those invoices included, as disbursements, amounts owing to various barristers. Subsequently, Mr Barltrop’s claim against the Commonwealth settled on the basis that the Commonwealth would pay a lump sum plus costs to be taxed. When the Commonwealth paid the lump sum to the law practice, that sum was paid into its trust account. Then, the law practice remitted part of the funds in the trust account to Mr Barltrop and applied the balance to outstanding invoices. After the payment to Mr Barltrop, and the application of the balance to outstanding invoices, the funds remaining in the trust account were not sufficient to meet the invoice that had contained the disbursements. That invoice remained outstanding as having been part paid. Thereafter, costs were assessed and the Commonwealth made a further payment to the law practice in respect of those costs. When those further funds were received, the law practice also placed them into the trust account. Immediately, the law practice debited the trust account with the amount necessary to pay the disbursements which remained outstanding and paid the disbursements directly to the barristers who were entitled to them. Thereafter, the law practice debited the trust account with funds necessary to meet the outstanding balance on the invoice. That balance still contained an amount referring to the disbursements; it had not been adjusted to account for the fact that they had already been paid directly to third parties. As a result, the law practice transferred from the trust account to its office account an amount which included the amount allocated to disbursements in the outstanding invoice. In the event, the trust account had been debited twice to meet those disbursements: (a) when they were paid directly to the barristers and (b) when the invoice in which they had been included was separately met from trust funds.

It transpired that the funds in the trust account were insufficient to pay all the invoices of the law practice: an outstanding balance was due. Upon the instructions of the respondent, an amount corresponding to the outstanding balance was recorded as written off in the office account.

When the inspectors discovered the double disbursements payment, the law practice did not repay an amount equivalent to the disbursements back into the trust account or make any payment to Mr Barltrop in respect of them. Rather, the respondent wrote back the amount which had been written off. He then raised a further invoice addressed to Mr Barltrop. The accounts appear to have been adjusted in such a way that an amount which was the equivalent of (or greater than) the amount that had been allocated to disbursements in the original invoice was written back and, this time, was allocated to the law practice. Subsequently, the law practice wrote to Mr Barltrop telling him that his file was finished and that there were no additional moneys owing. The letter informed Mr Barltrop that the inspectors had ‘discovered errors in some of the accounting procedures which had been used in our files’.[15]
[15]See the text of the letter at [63] below.

The particulars of the Barltrop account

In his reasons, the trial judge identified the transactions that gave rise to the double disbursement claim in relation to Mr Barltrop.

Before Mr Barltrop settled with the Commonwealth, the law practice had issued several invoices to him including (a) invoice 3390; (b) invoice 3583; (c) invoice 3716; and (d) invoice 3893.

On 3 September 2007, Mr Barltrop accepted an offer from the Commonwealth to pay him $175,000.00, plus costs.

On 11 September 2007, $173,028.40 was credited to the trust ledger account as having been received from the Australian Government Solicitor.

On 14 September 2007, $35,715.00 was debited to the trust ledger account of Mr Barltrop. That represented a cheque paid to him in part settlement of his claim.

After the payment to Mr Barltrop, the balance remaining in the trust account was recorded as $137,313.40.[16]
[16]$35,715.00 + $137,313.40 = $173,028.40.

On 14 September 2007, the law practice issued invoice number 4012 in an amount of $160,712.15. Invoice 4012 contained amounts representing disbursements said to have been incurred by the law practice.[17]
[17]In every case, the disbursements represented amounts payable to barristers retained by the law practice.

On 21 September 2007, the law practice transferred $137,313.40 from the trust account to its office account. In doing so, it recorded that:

(a) $334.75 was appropriated to invoice 3583 satisfying the full invoice amount;
(b) $280.24 was appropriated to invoice 3716 satisfying the full invoice amount;
(c)$1,531.80 was appropriated to invoice 3893 leaving a balance of $5,000.00 still to be paid; and

(d) $132,088.86 was in part payment of invoice 4012.[18]

[18]Accordingly, $28,623.29 remained outstanding on invoice 4012. ($160,712.15 - $132,088.86 = $28,623.29).

The notation recorded in the report of the trust transactions in respect of the debit of $137,313.40 to Mr Barltrop’s trust account stated as follows:

transfer Trust to office
Transfer for payt bill nos.
3390, 3583, 3716 and
p/payt bill nos.
3893, 4012

The effect of the transfers from the trust account was to leave:

(a)       $5,000.00 outstanding on invoice 3893;
(b)      $28,623.29 outstanding on invoice 4012; and
(c)       to reduce the trust account to a nil balance.[19]

[19]It appears from the notation extracted in [47] that the balance was appropriated to invoice 3390.

Accordingly, as at 21 September 2007, Mr Barltrop remained indebted to the law practice in the sums of $5,000.00 and $28,623.29.

On 20 August 2008, the law practice received a further $57,552.95 from the Commonwealth which was then credited to the trust account of the practice.[20]
[20]It appears that the payment of $57,552.95 represented the payment of the ‘costs’ portion of the amount agreed to be paid by the Commonwealth in settlement of Mr Barltrop’s claim.

On 21 August 2008, there were two debits to the trust account:

(a)$15,000.00 was debited to the trust ledger account of Mr Barltrop and used to pay a cheque paid to him in further settlement of his claim;[21] and
(b)$5,610.55 was debited to Mr Barltrop’s trust account and used to pay disbursements directly to the barristers identified on invoice 4012.

[21]Accordingly, the balance of the trust account now stood at ($57,552.95 - $15,000.00 = $42,552.95).

After these two payments, the balance in the trust account was $36,942.40.[22]
[22]$57,552.95 - $20,610.55 ($15,000.00 + $5,610.55) = $36,942.40.

On the same day, invoice 4142 was raised. It was for disbursements of $11,507.39.[23]
[23]Reasons [62], [63], [64], [70]. Sometimes invoice 4142 was described as invoice 4042.

By letter dated 21 August 2008, the respondent wrote to Mr Barltrop. In that letter, he said:

(a)the final account came to $18,894.40;
(b)the law practice had discounted that amount by $7,387.01 making the amount payable of $11,507.39 on the basis that the account was accepted by Mr Barltrop in full and final settlement;
(c)the amount payable would be paid from the balance of the moneys received from the Commonwealth.

The letter also enclosed (i) invoice 4142 which contained a full bill history and (ii) a cheque for $15,000.00.

On 22 August 2008, the law practice transferred $36,942.40 from the trust account to its office account. In doing so, it recorded that:

(a)$5,000.00 was appropriated to invoice 3893 satisfying the remaining balance on that invoice;
(b)$28,623.29 was appropriated to invoice 4012 satisfying the full invoice amount; and
(c)$3,319.11 was appropriated to invoice 4142 leaving a balance due of $8,188.28.[24]

[24]$11,507.39 - $3,319.11 = $8,188.28.

It will be noticed that, in appropriating $28,623.29 to invoice 4012, no account had been taken of the fact that the disbursements provided for in that invoice had already been paid directly. It is in these circumstances that the disbursements are said to be ‘double paid disbursements’. They were paid for the first time when the trust account was debited and they were paid directly to the third parties. They were paid for the second time when $28,623.29 was debited to the trust account and credited to the office account.

As a result of these payments, Mr Barltrop remained indebted to the law practice in the amount of $8,188.28.[25]
[25]Reasons [361]. The receivers did not tender in evidence the office ledger maintained by the law practice in respect of Mr Barltrop: at [353]. In finding that, at the end of August 2008, Mr Barltrop remained indebted to the law practice in the sum of $8,188.28, the trial judge said that he was relying upon an inference: at [361].

Subsequently, the Detailed Accounts Rendered Report[26] recorded that, on 11 September 2008, $8,188.28 was written off on invoice 4142. According to the report, that write-off left nothing outstanding on any of the invoices issues by the law practice to Mr Barltrop. Beside the record of the 11 September 2008 transaction there was the following notation: ‘W/off to close file as DF’s instructions’.
[26]See above n 13. This report is a report of the office accounts of the practice, not the trust account.

Apart from his letter dated 21 August 2008, described above, the respondent did not communicate to Mr Barltrop anything about the state of the account.

At some stage between August 2008 and March 2009, the LSB investigators told the respondent that there was a problem with the trust account records. Presumably, he was told by the inspectors that the disbursements contained in invoice 4012 had been paid twice: (a) on 21 August 2008, directly to the third parties and (b) on 22 August 2008 when part of the funds in the trust account were used to satisfy the balance of invoice 4012 (which balance included an amount for those disbursements).

The law practice did not pay into its trust account an amount equivalent to the disbursement amount which had appeared on invoice 4012 dated 14 September 2007. Instead, it made adjustments to its office accounts designed to restore the amount which had been written off so that its records once more showed Mr Barltrop remained indebted to it.[27] The trial judge said:

The entries to the office account were to write back the sum of $8,188.28 that had been written off on 11 September 2008 and to reduce the amount owing by Mr Barltrop by the amount of the disbursements wrongly included in invoice 4012. The office account entries for these transactions were not tendered. I can only infer that the balance written off the office account was reduced from $8,188.28 to $2,577.73, that is, $8,188.28 minus $5,610.55.[28]

[27]Reasons [362].

[28]Ibid [363].

On 5 March 2009, the law practice raised a further invoice (invoice 4445) addressed to Barltrop.[29]
[29]Ibid [76]–[77].

On 16 June 2009, the law practice sent Mr Barltrop a letter which closed the account. It also referred to the fact that adjustments had been made. However, it did not explain why those adjustments had been made or their nature. The trial judge summarised the correspondence as follows:

On 16 June 2009, Hollows Lawyers sent to Mr Barltrop a letter that informed Mr Barltrop that his file was finished and there were currently no additional moneys owing. The letter said that during a recent inspection of Hollows Lawyers’ trust records Hollows Lawyers ‘discovered errors in some of the accounting procedures which have used on our files’. The letter said that —
[T]his meant in some cases that items billed to you and later paid from your trust account moneys remained on your billed account without it being reduced in the appropriate way. As these errors were found they have been corrected, using various methods such as; the writing back on of debtors, expenses and disbursements then issuing adjustment notes, credit and debit accounts where necessary.

The letter did not contain any reference to any sums or amounts. The letter referred to enclosures ‘Adjustment Note, Invoice and trust Statement’. These attachments were not tendered. In particular, neither party appears to have tendered the ‘adjustment note’ as distinct from invoice 4445.[30]

[30]Ibid [77]–[78].

According to the trial judge:

The adjustment transactions carried out in 2009 were not fully explained in the evidence. The office ledger account for Mr Barltrop was not tendered in evidence. Presumably that ledger account would have shown the adjustments whereby the amount written off in Mr Barltrop’s ledger account on 11 September 2009 ($8,188.28), was written back and the outstanding amount reduced by $5,610.55 being the amount of the disputed disbursements included in [the invoice which had originally been part paid].[31]

[31]Reasons [81].

The relevant provisions

Part 3 of the Act (and the associated Regulations) contained the requirements for dealing correctly with trust money. Part 3.3 was entitled ‘Trust Money and Trust Accounts’. Division 1 of Part 3 was entitled ‘Preliminary’. It contained the following definitions:

general trust account means an account maintained by a law practice or an approved clerk with an approved ADI for the holding of trust money received by the practice or clerk, other than controlled money or transit money;
trust money, in relation to a law practice, means money entrusted to the law practice in the course of or in connection with the provision of legal services by the practice, and includes—
(a)money received by the practice on account of legal costs in advance of providing the services; and

(b) controlled money received by the practice; and
(c) transit money received by the practice; and
(d)money received by the practice, that is the subject of a power, exercisable by the practice or an associate of the practice, to deal with the money for or on behalf of another person;

trust money in relation to an approved clerk, means money received by an approved clerk on account of the legal costs of one or more barristers in advance of the provision of the legal services to which those costs relate.

Section 3.3.7 of the Act provided:

When money is received
(1) For the purposes of this Act, a law practice receives money when—
(a) the practice obtains possession or control of it directly; or
(b)the practice obtains possession or control of it indirectly as a result of its delivery to an associate of the practice; or
(c)the practice is given a power enabling the practice to deal with it whether alone or with an associate; or
(d)an associate is given a power enabling the associate to deal with it, on behalf of the practice, whether alone or with another associate.

(2)For the purposes of this Act, a law practice or associate is taken to have received trust money if the money is available to the practice or associate by means of an instrument or other way of authorising an ADI to credit or debit an amount to an account with the ADI, including, for example, an electronic funds transfer, credit card transaction or telegraphic transfer.

…

Division 2 of Part 3.3 was entitled ‘Trust accounts and trust money’. The relevant provisions of Part 3.3 were as follows:

3.3.13 Certain trust money to be deposited in general trust account
(1)Subject to section 3.3.17A, as soon as practicable after receiving trust money, a law practice or an approved clerk must deposit the money in a general trust account of the practice or clerk unless —
(a)the practice or clerk has a written direction by an appropriate person to deal with it otherwise than by depositing it in the account; or

(b) the money is controlled money; or
(c) the money is transit money; or
(d)the money is the subject of a power given to the practice or an associate of the practice to deal with the money for or on behalf of another person.

Penalty:         120 penalty units.
3.3.14            Holding, disbursing and accounting for trust money
(1)       A law practice or an approved clerk must —
…
(b)disburse the trust money only in accordance with a direction given by the person.

Penalty: 120 penalty units.
…
(3)A law practice or an approved clerk must account for the trust money as required by the regulations.

Penalty: 60 penalty units.
3.3.20 Dealing with trust money: legal costs and unclaimed money
(1)A law practice may do any of the following, in relation to trust money held in a general trust account or controlled money account for a person—
(a)exercise a lien, including a general retaining lien, for the amount of legal costs reasonably due and owing by the person to the practice;
(b)withdraw money for payment to the practice’s account for legal costs owing to the practice if the relevant procedures or requirements prescribed by this Act and the regulations are complied with;
(c)after deducting any legal costs properly owing to the practice, deal with the balance as unclaimed money under the Unclaimed Moneys Act 1962.[32]

…
3.3.21 Deficiency in trust account
(1)An Australian legal practitioner or an approved clerk is guilty of an offence if he or she, without reasonable excuse, causes —
(a) a deficiency in any trust account or trust ledger account; or
(b) a failure to pay or deliver any trust money.
[32]The relevant regulation in respect of withdrawing money from a trust account was reg 3.3.34, which is set out at [71] below.

Penalty:         Level 4 imprisonment (15 years maximum).
…
(3)       In this section —
cause includes be responsible for;
deficiency in a trust account or trust ledger account includes the non-inclusion or exclusion of the whole or any part of an amount that is required to be included in the account.
3.3.22Reporting certain irregularities and suspected irregularities – legal practitioners
(1)As soon as practicable after a legal practitioner associate of a law practice becomes aware that there is an irregularity in any of the practice’s trust accounts or trust ledger accounts, the associate must give written notice of the irregularity to —
(a)       the Board; and
(b)if a corresponding authority is responsible for the regulation of the accounts concerned – the corresponding authority.

Penalty: 60 penalty units.

Part 3.4 of the Act was entitled ‘Costs Disclosure and Review’. Division 3 of Part 3.4 was entitled ‘Costs disclosure’. It included:

3.4.9 Disclosure of costs to clients
(1)A law practice must disclose to a client in accordance with this Division—
(a)the basis on which legal costs will be calculated, including whether a practitioner remuneration order or scale of costs applies to any of the legal costs; and

…

Division 4 of Part 3.4 was entitled ‘Legal costs generally’. It included:

3.4.19 On what basis are legal costs recoverable?
Subject to Division 2, legal costs are recoverable—
(a)under a costs agreement made in accordance with Division 5 or the corresponding provisions of a corresponding law; or
(b)if paragraph (a) does not apply, in accordance with an applicable practitioner remuneration order or scale of costs; or
(c)if neither paragraph (a) nor (b) applies, according to the fair and reasonable value of the legal services provided.
Note
See section 3.4.44(2) for the criteria that are to be applied on a costs review to determine whether legal costs are fair and reasonable.

Part 3.3 of the Regulations was entitled ‘Trust Money and Trust Accounts’. Division 6 of Part 3.3 of the Regulations was entitled ‘Trust Money Generally’. It included:

3.3.28 Trust account statements — law practices
…
(6) A trust account statement is to be furnished —
(a)as soon as practicable after completion of the matter to which the ledger account or record relates;

…

Division 6 of Part 3.3 of the Regulations also included reg 3.3.34 which prescribed the procedures referred to in s 3.3.20(1)(b). Regulation 3.3.34 provided:

3.3.34 Withdrawing trust money for legal costs—law practices
(1)This regulation prescribes, for the purposes of section 3.3.20(1)(b) of the Act, the procedure for the withdrawal of trust money held in a general trust account or controlled money account of a law practice for payment of legal costs owing to the practice by the person for whom the trust money was paid into the account.
(2)The trust money may be withdrawn in accordance with the procedure set out in either subregulation (3) or (4).

(3) The law practice may withdraw the trust money—
(a) if—
(i)the money is withdrawn in accordance with a costs agreement that complies with the legislation under which it is made and that authorises the withdrawal; or
(ii)the money is withdrawn in accordance with instructions that have been received by the practice and that authorise the withdrawal; or
(iii)the money is owed to the practice by way of reimbursement of money already paid by the practice on behalf of the person; and

(b)if, before effecting the withdrawal, the practice gives or sends to the person—
(i)a request for payment, referring to the proposed withdrawal; or

(ii) a written notice of withdrawal.

(4) The law practice may withdraw the trust money—
(a)if the practice has given the person a bill relating to the money; and

(b) if—
(i)the person has not objected to withdrawal of the money within 7 days after being given the bill; or
(ii)the person has objected within 7 days after being given the bill but has not applied for a review of the legal costs under the Act within 60 days after being given the bill; or

(iii) the money otherwise becomes legally payable.

(5) Instructions mentioned in subregulation (3)(a)(ii)—
(a) if given in writing, must be kept as a permanent record; or
(b)if not given in writing, must be confirmed in writing either before, or not later than 5 working days after, the law practice effects the withdrawal and a copy must be kept as a permanent record.

(6)For the purposes of subregulation (3)(a)(iii), money is taken to have been paid by the law practice on behalf of the person when the relevant account of the practice has been debited.

Division 5 of Part 3.4 of the Act was entitled ‘Costs agreements’. It included:

3.4.29 Contingency fees are prohibited
(1)A law practice must not enter into a costs agreement under which the amount payable to the law practice, or any part of that amount, is calculated by reference to—
…
(b)the amount of any award or settlement or the value of any property that may be recovered in any proceedings to which the agreement relates.

Penalty: 120 penalty units.
(2)Sub-section (1) does not apply to the extent that the costs agreement adopts an applicable practitioner remuneration order or scale of costs.

Division 6 of Part 3.4 of the Act was entitled ‘Billing’. It included:

3.4.34            Bills
(1)       A bill may be in the form of a lump sum bill or an itemised bill.
…
3.4.36            Request for itemised bill
(1)If a bill is given by a law practice in the form of a lump sum bill, any person who is entitled to apply for a review of the legal costs to which the bill relates may, within 30 days after the day the bill is given, request the law practice to give the person an itemised bill.

…

Chapter 5 of the Act was entitled ‘External Intervention’. Part 5.1 was entitled ‘Introduction and Application’. Section 5.1.1 described the purposes of Chapter 5. Section 5.1.2 of the Act contained a definition of ‘regulated property’ in relation to a law practice. It meant ‘trust money or trust property received, receivable or held by the practice’. Part 5.5 of the Act was entitled ‘Receivers’. Section 5.5.4 described the role of a receiver. It included the role of being ‘the receiver of regulated property of the practice’. Section 5.5.6(1) provided ‘a receiver for a law practice may take possession of regulated property of the practice’. Section 5.5.8(2) provided ‘the receiver may deal with the regulated property in any manner in which the law practice might lawfully have dealt with the property’.

Section 5.5.14 was entitled ‘Recovery of regulated property where there has been a breach of trust etc’. It provided:

(1)This subsection applies if regulated property of or under the control of a law practice has, before or after the appointment of a receiver for the practice, been taken by, paid to or transferred to, a person (the transferee) in breach of trust, improperly or unlawfully and the transferee—
(a)knew or believed at the time of the taking, payment or transfer that it was done in breach of trust, improperly or unlawfully; or
(b)did not provide to the practice or any other person any or any adequate consideration for the taking, payment or transfer; or
(c)because of the taking, payment or transfer, became indebted or otherwise liable to the practice or to a client of the practice in the amount of the payment or in another amount.

(2) The receiver is entitled to recover from the transferee—
(a)if subsection (1)(a) applies—the amount of the payment or the value of the regulated property taken or transferred; or
(b)if subsection (1)(b) applies—the amount of the inadequacy of the consideration or, if there was no consideration, the amount of the payment or the value of the regulated property taken or transferred; or
(c)if subsection (1)(c) applies—the amount of the debt or liability—

and, on the recovery of that amount from the transferee, the transferee ceases to be liable for it to any other person.

Trial judge rejects other contentions that the transfer had been unlawful or in breach of trust

The trial judge held that, in order to justify recovery under s 5.5.14, the receivers were required to establish that:

(a) the transfer of regulated property to the respondent had been done ‘in breach of trust, improperly or unlawfully’; and

(b) as a result, the respondent became ‘indebted or otherwise liable’ to the clients.[33]

[33]Reasons [161].

The trial judge held that by reason of an issue estoppel arising from the judgment of Emerton J, the payment of disbursements that had already been paid gave rise to a trust account deficiency under the Act,[34] and that the respondent’s allocation of payments from funds transferred from trust was unlawful within the meaning of s 5.5.14(1) of the Act[35] (giving rise to an obligation under s 3.3.21 to transfer the double disbursement sum back into trust).[36]
[34]Ibid [20]: ‘the payment giving rise to the deficiency was unlawful’, [375], [376]: ‘the payment of $5,641.61 in excess of the sum due under invoice 4012 was unlawful’, [385].
[35]Ibid [20], [25], [193], [195], [376].
[36]The trial judge held that Emerton J had made ‘a finding that the double disbursement payments made by [the respondent] caused a deficiency within the meaning of s 3.3.21 of the Act and that [he] was obliged to rectify the deficiency’: at [331]. As a result, he found that the respondent was ‘estopped from denying that the payment of the double disbursements created a deficiency within the meaning of s 3.3.21 of the Act’: at [342]. He said: ‘I find that the payment of $5,641.61 in excess of the sum due under invoice 4012 was unlawful. I find that Mr Forster is estopped from disputing that, as Emerton J found, that (sic) the allocation in the office accounts of the payment of $28,623.29 to invoice 4012 constituted a payment of a legal fee that was not due to Mr Forster as it had already been paid. I find that the payment created a deficiency within the definition in the Act (as Emerton J held)’: at [376]. The trial judge acknowledged that the respondent had failed to deposit the double disbursement back into trust, and that this failure may constitute a breach of the Act: at [452]. However he held, any such failure did not have the consequence that the respondent thereby became ‘indebted or otherwise liable’ to Mr Barltrop. In the case of two clients (Mr Simmonds and Mr Spaulding), the receivers contended that the double disbursements were transferred twice from the trust account to the office account.

The trial judge, however, rejected several other contentions raised by the receivers in support of a holding that the transfer had been in breach of trust, or unlawful.

(a) First, there had been no breach of s 3.3.13(1). That provision required payments to be made into a trust account; it did not regulate payments out of a trust account.[37]
[37]Ibid [377]–[378].

(b) Secondly, there had been no breach of s 3.3.20(1). That provision regulated dealings with trust money. The only relevant dealing was the payment of $36,942.40 out of the trust account and into the office account on 22 August 2008. The receivers had contended that that payment to the law practice was unlawful as it represented the satisfaction of invoice 4012 which included disbursements (in an amount of $5,641.61) which had themselves already been paid directly to third parties. However, the judge held that the amount of $36,942.40 was less than the amount which was owing by the client to the law practice as at 20 August 2008. The trial judge said:

The fact that the allocation of part of that sum to invoice 4012 constituted a payment of a sum that was not due does not mean the payment of the $36,942.40 was for [a]n amount in excess of the legal costs owing to the practice. That question does not deal with the allocation between invoices. It is directed at the global figure.[38]
[38]Ibid [384]. The parties agreed that there was an error in the text of Reasons [383]. They agreed that the text should read ‘[i]t was for [no] more than was owed by Mr Barltrop’. In the published text, the word ‘no’ was omitted.

(c) Third, there had been no breach of s 3.3.21. That provision made it a criminal offence for a legal practitioner, without reasonable excuse, to cause ‘a deficiency in any trust account or trust ledger account’. The trial judge accepted that, by reason of the issue estoppel arising from the decision of Emerton J, ‘the payment of invoice 4012 did create a trust accounting deficiency’.[39] However, he continued:
[39]Ibid [387].

Whether Mr Forster breached s 3.3.21 is a different issue. The section creates a serious criminal offence. The offence requires that a deficiency be created without a reasonable excuse. The receivers do not allege that Mr Forster made the double payment of disbursements in invoice 4012 without a reasonable excuse and thereby became criminally liable. I am not satisfied that Mr Forster breached s 3.3.21.[40]

(d) Fourth, the trial judge rejected a contention that the respondent had breached his fiduciary duties in making the payment of $5,641.61 to invoice 4012. In their pleadings, the receivers identified several ways in which they said the respondent had breached his fiduciary duties. In respect of each of those ways, they relied on the fact that $5,641.61 was allocated to invoice 4012 that was not due on invoice 4012. The respondent contended that, in transferring from the trust account an amount which he agreed was in part referable to disbursements that had been paid, he had not transferred to himself any amount that was in excess of what Mr Barltrop owed him. The trial judge held that there was no evidence that the respondent gained a financial advantage for himself or caused financial detriment to his client.[41]

[40]Ibid.

[41]Ibid [389]–[396].

The trial judge held that the receivers had not established that the respondent had, thereby, become ‘indebted or otherwise liable’ to Mr Barltrop. He said that the fact that there was a ‘deficiency’ within the meaning of s 3.3.21 did not mean that there was necessarily an accounting deficiency: ‘That is, it might not give rise to any indebtedness from an accounting perspective on the part of the person who caused the deficiency’.[42]
[42]Ibid [349].

The receivers had contended that, if a solicitor had brought about a deficiency in a trust account, an obligation arose under s 3.3.21 to reinstate the trust account and remove the deficiency. They had contended (a) ‘that the appropriation of $5,641.61 from the transfer of $36,942.40 from the trust account to the office account was unlawful and that it is irrelevant that the amount of $36,942.40 was less than the amount owing by Mr Barltrop to Mr Forster on 22 August 2008’;[43] (b) that it was irrelevant that, as at 22 August 2008, the respondent was entitled under his fee agreement to transfer the whole $36,942.40 from the trust account to the office account; (c) that if the respondent had a ‘particular lien’, he was not entitled to transfer that amount from the trust account to the office account; and (d) even if he had been so entitled ‘it would be irrelevant to whether the amount appropriated in the office account to invoice 4012 was $5,641.61 in excess of the amount actually due under invoice 4012’.[44]
[43]Ibid [414].
[44]Ibid [415].

The trial judge rejected each of these contentions. He said:

I do not agree. First, the error in appropriation was an error in the office books of account that could be corrected at any time prior to the appropriations being communicated to Mr Barltrop by Mr Forster. Secondly, for reasons discussed above, Mr Forster was entitled to transfer the sum of $36,942.40 from the trust account to the office account. The transfer was lawful and proper. It was the subsequent mistaken book entry in the office account that created the deficiency under the Act and the obligation under s 3.3.21 to transfer the double disbursement sum back into trust. The transfer did not create any accounting deficiency.
If the money had been transferred back from the office account to trust, no debt or entitlement would have been created in favour of Mr Barltrop. Mr Forster had outstanding invoices for a sum in excess of the amount that would be transferred. Mr Forster would have a lien over the moneys transferred to the trust account. As a result of the transfer, no moneys would be owed to Mr Barltrop. Mr Forster would be beneficially entitled to the sum transferred back to the trust account.
Accordingly, the double payment of the disbursement, did not give rise to any entitlement of the receivers under s 5.5.14(2)(c) to recover the sum claimed.[45]

[45]Ibid [416]–[418].

Finally, the trial judge addressed the remaining contentions of the receivers. They had said that the respondent was not entitled to set off his own claim in respect of amounts that Mr Barltrop still owed him against the trust account. The trial judge said there was no issue of set-off; ‘the payment transferred did not satisfy the liability’ owed to the respondent.[46] Next, on 11 September 2008, the law practice had closed the account of Mr Barltrop. The receivers had contended that the respondent, as a fiduciary, could not thereafter ‘unilaterally write up an old bill and use client money to pay himself without accounting by way of an invoice and in accordance with the Act’.[47] The trial judge said that there was no evidence that the write-off had been communicated to the client; as a result, when the respondent discovered the error in his office account (that is, he had written off too much from the account owed) it was open to him to adjust the write-off.[48] Next, the receivers submitted that the adjustment notes or further invoices constituted an admission that there was a debtor liability. The trial judge held that those notes could not alter ‘the true state of accounts between Mr Forster and Mr Barltrop when the alleged deficiency arose’.[49] Finally, the judge accepted a submission that, as soon as the respondent had provided services under the retainer, a debt arose in his favour for the work that he did notwithstanding that the recovery of that debt may be regulated by the Act and the Regulations. The transfers from the trust account to the office account were in part satisfaction of what was owed under the retainer. The fact that part of the debt was misdescribed (as disbursements owing) did not mean ‘that the transfer was any less a partial satisfaction of the debt actually due’.[50] The fact that there had been a contravention of the Act did not mean that any debt or liability arose.[51]
[46]Ibid [419]–[421].
[47]Ibid [423].
[48]Ibid [427].
[49]Ibid [428]–[429].
[50]Ibid [441].
[51]Ibid [441]–[453].

The trial judge completed this part of his judgment by examining the contention of the receivers that the respondent became indebted to Mr Barltrop because, having created a deficiency in the trust account, he was obliged as soon as practicable to deposit the double disbursement amount back into trust. The trial judge said that, even if there was an obligation to pay moneys back into the trust account and that the failure to do so may have constituted a breach of the Act, that alone would not have resulted in the respondent becoming ‘indebted or otherwise liable to’ Mr Barltrop:

Even if the moneys were paid back into the trust account, Mr Barltrop would have been indebted to Mr Forster on the outstanding invoices for a sum in excess of the money in trust. Mr Forster would have held a lien over the amount in trust for his fees which exceeded that amount. The moneys deposited back into trust could not have been paid to Mr Barltrop, nor were they owed to Mr Barltrop.
The obligation to pay the double disbursement back into trust, would not have resulted in any indebtedness in Mr Forster to Mr Barltrop. Rather, at all relevant times the state of account between Mr Forster and Mr Barltrop would be that Mr Barltrop was indebted to Mr Forster.
If Mr Forster had paid the money back into trust under s 3.3.21 he would have been entitled to use those moneys to satisfy the sums owed by Mr Barltrop on the other outstanding invoices.
In other words, payment of moneys back into the trust account would not have created any indebtedness or other liability to Mr Barltrop by Mr Forster.[52]
[52]Ibid [448]–[451].

Proposed grounds of appeal: double disbursements

In their proposed grounds of appeal, the receivers said:

(1) The trial judge erred in law:

(a)in holding that the respondent's failure to restore the double payment of disbursements to the firm's trust account did not cause him to become indebted or otherwise liable to his clients because, at the time, the relevant clients owed him (for outstanding fees) an amount that exceeded the amount of the double payments;
(b)in finding that, because the respondent held a ‘particular lien’ over trust moneys, he was not indebted or otherwise liable to his clients to restore trust account deficiencies; and
(c)in failing to hold that by reason of:
(i)the respondent's obligation to pay the double disbursements back into trust in accordance with the Act and his duties as a fiduciary; and/or
(ii)the fact that the making of the payments was unlawful and created a trust account deficiency within the meaning of s 3.3.21 of the Act that had not been rectified;

the respondent was indebted or otherwise liable to the law practice or the clients of the law practice for the purpose of s 5.5.14(1)(c) of the Act.[53]
[53]Ibid [20], [26], [193], [194], [264]–[270], [343], [347], [416], [418], [449], [452]–[453], [457].

(2) The trial judge ought to have held, consistently with the findings of Emerton J and the Court of Appeal, that entries in the office books of account:

(a) did not address or alter the unlawfulness of the conduct giving rise to the deficiencies; and

(b) did not correct or restore the trust account deficiencies in compliance with the Act and the Regulations.

(3) The trial judge ought to have held that the adjustment notes and summary review document tendered in evidence by the receivers contained relevant admissions:

(a) that the respondent was liable or indebted to the clients in respect of the sums adjusted in respect of double paid disbursements;

(b) that such sums were trust moneys within the meaning of s 3.3.13 which were required to be paid into a general trust account; and

(c) that the receivers were entitled to recover the payments made as alleged pursuant to s 5.5.14(2) of the Act.

(4) The trial judge erred in failing to give reasons or adequate reasons for finding that the issue of ‘set off’ did not arise.[54]
[54]Ibid [421].

(5) The trial judge ought to have held that the creation of adjustment notes by the law practice, the writing back of previously written off debts and the respondent’s assertion of a ‘particular’ lien, were an unlawful attempt by the respondent to set off debts purportedly due from the clients against trust account deficiencies, which was not permitted by the Act and the Regulations.

(6) The trial judge also erred in law by failing to consider or rule upon the receivers’ claims in respect of clients Simmonds and Spaulding where the receivers alleged, consistent with the findings of Emerton J, that the law practice billed the client twice for the same disbursements and transferred trust money to pay those bills or invoices when the disbursements were not owing to the law practice.

(7) The trial judge ought to have held, in respect of all of the payments identified by the receivers as double paid disbursements, that the payments made to the law practice were unlawful and created a liability to the law practice or the clients that entitled the receivers to recover those payments pursuant to s 5.5.14(2) of the Act.

Contentions of the Receivers on the Double Disbursements

In addressing the question whether the payment of the disbursements for the second time had been made ‘in breach of trust, improperly or unlawfully’, the receivers said that, given the findings of Emerton J, it was not open to the trial judge to have found other than that the payments had been made in breach of trust and unlawfully.[55] In addressing the question whether, because of the payments, the respondent had become ‘indebted or otherwise liable’ to his clients, the receivers said that the respondent’s failure to keep proper accounts was a breach of his fiduciary duties and that there were clear signs that should have alerted him to the errors. By not paying the funds back into the trust account, he had effectively misappropriated the funds to his own use.[56] They said that the trial judge had failed to consider the liability of a trustee to restore misappropriated trust funds.[57] The trial judge had, in effect, excused the respondent by accepting that the respondent was authorised to set off the second payment against the residual indebtedness of the clients to him. The receivers said that it was not proper to set off commercial entitlements against trust liabilities.[58] They said money paid for a specific purpose is not available for set off. Further, they said that, while the respondent may be entitled to exercise a particular lien in respect of settlement moneys, the trial judge was in error in accepting that the respondent’s particular lien could be set off directly against trust liabilities. The entitlement of a solicitor to exercise a particular lien did not entitle the solicitor to appropriate trust funds unless the statutory requirements in s 3.3.20(1)(b) of the Act were satisfied.[59]
[55]The receivers referred to the finding of Emerton J that the double payment of disbursements, by means of an appropriation from trust, in each case gave rise to a trust account deficiency and a breach of the Act and the Regulations, that the law practice benefited financially from the errors and that the respondent did not restore the overpayment to the trust account. They referred to Legal Services Board v Forster (2010) 29 VR 277; [2010] VSC 102, [273]–[287].
[56]The receivers referred to The Law Society of the Australian Capital Territory v Lardner [1998] ACTSC 24 [172] (‘Lardner’), stating that by not paying the funds back into the trust account, to the credit of the client, the respondent had ‘not only the temporary benefit of the credit balance in the client’s ledger, but also the benefit of those funds on an indefinite basis’.
[57]Although the trial judge acknowledged the obligation upon the respondent to pay the double disbursement back into trust, and despite the fact that no such payment was made by the respondent, the trial judge nonetheless found that such obligation did not result in any debt or liability owed by the respondent: Reasons [416], [418], [449], [452].
[58]Lloyds Bank NZA Ltd v National Safety Council of Australia Victorian Division (in liq) [1993] 2 VR 506, 515 (J D Phillips J with whom Fullagar J agreed): ‘The cross claims, if between the same parties, are not between them “in the same interests”’. Marks J said: ‘it goes without saying that money in the hands of the trustee in that capacity is not held in his “interest” as a party to dealings on his own account (not as trustee) with the debtor’: at 508.
[59]The Receivers propose to return the funds recovered to the trust account, account to each of the clients and invite them to review the costs and disbursements billed in accordance with their entitlements under the Act; and to seek directions from the Court in respect of a regime for dealing with any costs disputes.

The receivers said that the respondent’s reliance upon his fee agreement and s 3.3.20(1)(a) of the Act was misconceived. The fee agreement was of no assistance to the respondent: any ‘authority’ conferred by the client on the respondent to deduct ‘unpaid solicitor/client costs’ did not include payments on account of disbursements already paid. Similarly, the double disbursement payments were not withdrawals of money for payment to the practice’s account for legal costs owing to the practice, which is the only circumstance in which s 3.3.20(1)(b) could apply.[60] Finally, the respondent had not suggested that the double disbursement payments were made in accordance with a costs agreement or pursuant to any ‘bill’ for legal costs, and thus did not suggest that he had complied with procedures and requirements prescribed by the Act and the regulations. No instructions from clients authorised the payment of disbursements already paid.
[60]The respondent referred to Legal Services Board v Gillespie-Jones (2013) 249 CLR 493, 521–22 [102]–[104] (Bell, Gageler and Keane JJ) (‘Gillespie-Jones’).

Contentions of the respondent

The respondent conceded that it had been already determined that the payment of the double disbursements was unlawful. However, s 5.5.14(1) had distinct elements: the fact that the payments might have been unlawful did not mean that the respondent thereby became ‘indebted or otherwise liable’ to his clients. He said that the receivers had failed to establish any such debt or liability to the clients as ‘the clients were at the time of the unlawful payments already indebted to the respondent for greater amounts’. In particular, he relied upon the evidence of independent accounts which was accepted by the trial judge. The finding of Emerton J that there was a statutory deficiency did not involve any finding that there had been ‘an accounting deficiency’; she did not make ‘any findings on the question of the respondent’s indebtedness or net position’. The trial judge’s consideration of the lien was only ‘a secondary consideration’. However, the trial judge was right to hold that the respondent ‘had a particular lien for a sum due and owing in excess of the amount transferred out of trust and applied to pay invoices (even after taking into account the double disbursement payment)’.[61] Further or alternatively, the receivers had not established non-compliance by the respondent with s 3.3.20(1)(b) (and reg 3.3.34(3)).
[61]The respondent referred to Reasons [231]–[233], [248], [264], [267]–[270].

During the hearing of the appeal, counsel for the respondent provided to the Court a document entitled ‘Mechanics of the “Double Disbursement” Payments’. The document comprised eight short paragraphs that sought to analyse the transactions on the Barltrop trust account and the respondent’s office account between September 2007 and 22 August 2008. The purpose of the document was to demonstrate that there had been no misappropriation from the trust account; rather, there had been a misallocation in the office account. The document commenced with the information contained in [46]–[49] above: that the effect of the transfers on 21 September 2007 was that there was a nil balance in the trust account. It then identified (a) the receipt of funds from the Commonwealth on 20 August 2008;[62] (b) the payment of the disbursements that were debited to the trust account on 21 August 2008;[63] (c) the payment to Mr Barltrop that was debited to the trust account on 21 August 2008;[64] and the balance in the trust account after the two aforesaid debits.[65] The document then stated:

5.On 22 August 2008, $36,942.40 was transferred from trust to office (according to the trust ledger account notation) ‘to pay bill No 3893, 4012, 4042[66] (Part) ‘Barltrop’.
6.At that time, (according to the office account report) a total of $45,130.68 was owing under those three invoices ($5,000 on invoice 3893, $28,623.29 on invoice 4012 and $11,507.39 on invoice 4142).
7.Within the office account, appropriations or allocations were then made in purported payment of the sums outstanding on invoices 3893 and 4012 and part payment (in an amount of $3,319.11) of invoice 4142.[67]
[62][50] above.
[63]See [51(b)] above.
[64]See [51(a)] above.
[65]See [52] above.
[66]The respondent submitted that the reference to invoice 4042 was in error and that invoice 4142 must have been intended.
[67]Citations omitted.

This document is discussed below.[68]
[68]See [97].
Analysis

The existence and proper maintenance of trust accounts has been and remains an essential feature of a solicitor’s practice. In holding their clients’ funds in trust accounts, solicitors are trustees. As such, they are subject to the general law of fiduciary obligations; they are also subject to the statutory obligations imposed by the Act. Compliance with those obligations secures the integrity of a significant aspect of legal practice; it is at the heart of the administration of justice.

Part 3.3 of the Act regulated trust money and trust accounts. Section 3.3.1 identified the purposes of the Part which include ensuring ‘that trust money is held by law practices … in a way that protects the interests of persons for or on whose behalf money is held, both in and outside this jurisdiction’.[69] Section 3.3.14(1)(a) provided that a law practice must ‘hold trust money deposited in a general trust account of the practice … exclusively for the person on whose behalf it is received’. Section 3.3.14(1)(b) provided that a law practice must ‘disburse the trust money only in accordance with a direction given by the person’. Section 3.3.20 empowered certain dealings by a law practice ‘in relation to trust money held in a general trust account’. Section 3.3.20(1)(a) permitted a law practice to exercise a lien for the amount of legal costs reasonably due and owing; s 3.3.20(1)(b) permitted a law practice to withdraw money for payment of legal costs owing to it ‘if the relevant procedures or requirements prescribed by this Act and the regulations are complied with’.[70]
[69]Section 3.3.1(a).
[70]The relevant regulation in respect of withdrawing trust money is reg 3.3.34.

Section 3.3.21(1) provided that a legal practitioner ‘is guilty of an offence if he or she, without reasonable excuse, causes — (a) a deficiency in any trust account or trust ledger account; or (b) a failure to pay or deliver any trust money’. Section 3.3.21(3) defined deficiency in a trust account to include ‘the non-inclusion or exclusion of the whole or any part of an amount that is required to be included in the account.’ The effect of these provisions was that a solicitor was only permitted to withdraw money from a trust account if he or she complied with the provisions of the Act and the Regulations.[71]
[71]Gillespie-Jones (2013) 249 CLR 493, 503 [23] (French CJ, Hayne, Crennan and Kiefel JJ), 520–21 [100]–[102] (Bell, Gageler and Keane JJ).

Was the transfer made in breach of trust, improperly or unlawfully?

Section 5.5.14(1) of the Act provided for the recovery of regulated property by a receiver. In the case of the ‘double disbursements’, it was necessary for the receivers to establish that trust funds had been ‘paid to or transferred to, a person (the transferee) in breach of trust, improperly or unlawfully’[72] and that the solicitor, ‘because of the taking, payment or transfer, became indebted or otherwise liable to the practice or to a client of the practice in the amount of the payment or in another amount’.[73] So, did the receivers establish that, in paying out from trust the whole of invoice 4012, the respondent did so ‘in breach of trust, improperly or unlawfully’, and that, as a result, he became ‘indebted or otherwise liable’ to a client of the practice?
[72]Section 5.5.14(1) (emphasis in original).
[73]Section 5.5.14(1)(c).

The provision of a lump sum bill did not deliver the respondent from his obligation to make withdrawals from his trust account in payment of his fees only where those fees had been calculated according to the costs agreement he had made with his client.

Finally, the receivers contended (pursuant to their amended application for leave to appeal) that, in so far as the withdrawal of trust funds had taken place in breach of trust, the respondent was liable to account to his clients and, thus, he was ‘indebted or otherwise liable’ to his clients such that the payments were also recoverable under s 5.5.14(2)(c) of the Act.

Contentions of the respondent

The respondent said that the fact that, in calculating his professional fees, he had breached the scale fee agreements did not mean that he had acted unlawfully or improperly in paying himself from trust funds. The receivers had cited no authority for their contention that no lawful payment could be made given the finding of breach of contract. Further, there had been no breach of s 3.3.20(1)(b) as he had complied with the requirements of reg 3.3.34. Either he had an authority from his client to withdraw the funds (reg 3.3.34(3)) or he had provided his client with a lump sum bill and the client had not objected to that bill (reg 3.3.34(4)).[185] Further, the receivers had not established that he ‘knew or believed’ that the payments were improper or unlawful. The trial judge had found that he subjectively believed that he had not paid himself more than he would have been entitled to under the scale fee agreements. There had been no suggestion that the respondent’s belief was not honestly held.
[185]Ibid [1084]–[1097]. The respondent said that he had provided lump sum bills to his clients and that a solicitor ‘had a right to render a lump sum bill irrespective of whether the costs agreement provided for time costing or scale costing’.

Respondent’s submissions on his notice of contention

The respondent said that, upon its proper interpretation, the term in the scale fee agreements that legal costs ‘were to be calculated and determined on the Supreme Court costs scale’ was ambiguous. The better interpretation was that the term ‘provides for a ceiling on the quantum of the legal costs’ that the respondent was allowed to charge the relevant clients. The trial judge had erred in interpreting the term as prescribing a method of calculation of costs. He should not have held that the respondent had breached that term where the receivers had ‘failed to establish that there was a difference between the legal costs billed by the respondent and what the fees would have been had they been calculated on scale’. The receivers had not established that any of the relevant clients was overcharged and, therefore, had not established that the transfer of funds from the trust account to the office account to pay fees as set out in the lump sum bills was done ‘in breach of trust, improperly or unlawfully’. Moreover, the question at issue was not whether there had been a breach of contract but whether the statutory description (‘in breach of trust, improperly or unlawfully’) applied to the making of the payments. Further, the entitlement of a law practice to issue a lump sum bill and that of either the client or the law practice to have it reviewed meant that the trial judge erred in finding that the clients could not enjoy the benefit of the scale fee agreements unless their bills were calculated according to scale.

Finally, the respondent said that the relevant clients had agreed ‘by implication’ to vary the scale fee agreement term as there was an agreement on the actual quantum of the legal fees set out in the lump sum bill, subject to the client’s right to have such fees reviewed. The respondent pointed to (a) the exigencies of the mediations; (b) his having provided estimates of costs and of recoveries net of costs to his clients prior to their accepting settlement offers; and (c) his clients having signed instructions to settle and release trust moneys. He said that, on no occasion, did a client receive less than the estimate and that, on several occasions, the client received more than the estimated net receipt.

Receivers’ response on the notice of contention

The receivers said that the respondent was only entitled to take his fees out of trust pursuant to invoices calculated pursuant to the scale fee agreements. In so far as he removed funds using an incorrect method of calculation, his conduct was in breach of trust and breach of contract and was, thus, unlawful. A solicitor who enters into a fee agreement with a client is not at liberty to break it and to leave it to the client to prove loss. Having committed a breach of trust, a trustee is strictly liable even if the breach is innocent. Accordingly, the breach by the respondent of the scale fee agreements was plainly relevant to the question whether he made the transfers or payments to pay the invoices in breach of trust, improperly or unlawfully. Further, while a lump sum bill did not require a narration of each item of work, such a bill had nonetheless to be calculated in the manner required by the fee agreement. The receivers rejected the contention that the scale fee agreements were ambiguous and should be interpreted as providing a ceiling upon costs; the natural meaning of the word ‘calculated’ required an ‘arithmetical or mathematical reckoning; computation’. Further, there had been no implied variation to the scale fee agreements; while it was true that the respondent had provided fee estimates to clients before settlements, it had not been disclosed to those clients that the estimates had not been calculated according to the agreements. There had been no informed consent to any variation of the scale fee agreements. The receivers also pointed out that the contention that there had been an implied variation to the costs agreement had not been argued at trial.

Analysis

At trial, the respondent had admitted the allegation that it was a term of the scale costs agreements that the law practice’s legal costs were to be calculated and determined on the Supreme Court costs scale plus an additional 25%.[186] In respect of the individual clients that he examined, the trial judge found that their legal costs had not been calculated according to scale but had been calculated on a time costing basis.[187] In respect of all the other scale fee agreement clients, the trial judge held that the professional fees were not calculated according to scale.[188] Finally, the trial judge also found that the respondent ‘knew he was acting in breach of the scale costs agreements’.[189]
[186]Ibid [762], [941].
[187]In respect of Mr Baker, see ibid [890]; Mr Bate [907]; Mr Bellette [922]; Mr Burk [932] and Mr Church [937].
[188]Ibid [938]–[939].
[189]Ibid [1124].

Furthermore, Emerton J had said that there was no evidence before the Court that clients who entered into a fee agreement for scale costing were told that they had been billed on a different basis at least from 2005 onwards.[190] The trial judge found that the respondent had not disclosed to his clients that he was withdrawing their funds otherwise than in accordance with the agreement that he had with them. There was evidence that the respondent had approached several of his scale fee clients and asked them to accept a revised method of calculating his fees and they had refused to do so.
[190]Legal Services Board v Forster (2010) 29 VR 277; [2010] VSC 102 [282].

Notwithstanding these findings, the trial judge also found that the payments made from the trust account to the office account ‘were not illegal or improper as alleged by the receivers’.[191] He also found that he was not satisfied that the respondent ‘knew or believed that he was recovering fees in excess of what he was entitled to charge’.[192]
[191]Reasons [762].
[192]Ibid [763].

It will be recalled that s 5.5.14(1) involved a two stage enquiry. The first stage involved the question whether the payments were made ‘in breach of trust, improperly or unlawfully’. The second stage involved the question whether the respondent knew or believed at the time of the payment whether what he was doing was done ‘in breach of trust, improperly or unlawfully’ or whether, because of the payment, the respondent had become ‘indebted or otherwise liable’ to the client.

The proper construction of the scale fee agreements

In his notice of contention, the respondent contended that the trial judge had erred in failing to hold that, upon their proper construction, the scale fee agreements did not stipulate a method for the calculation of professional fees but merely placed a ceiling upon the fees that could be lawfully charged.

The contention should be rejected. As can be seen, the scale fee agreements were not uniform.[193] But, in every case, they were terse to the point of being lapidary. In the case of Mr Bate, the agreement simply said ‘SCALE: Supreme Court’. In the accompanying letter, the respondent said that his method of costing was ‘Supreme Court Scale of Costs plus 25% No Win No Fee uplift’. In the case of Mr Burk, the agreement provided ‘We confirm our earlier advice that you will be charged in accordance with the Supreme Court Costs scale with 25 per cent uplift’.
[193]See [130]–[135] above.

In his reasons, the trial judge said that the receivers had alleged that the scale costs agreements contained the following terms:

(a)Subject to conditions therein, the law practice would not charge legal costs (including counsel fees, but excluding other disbursements to third parties and some expenses) unless the client recovered money from the case; and
(b)The law practice’s legal costs were to be calculated and determined on the Supreme Court cost scale, plus an additional 25 per cent uplift.[194]

The respondent had admitted this allegation in his defence.[195]

[194]Reasons [770].

[195]Ibid. Later, the trial judge said: ‘As indicated above, Mr Forster admitted the allegation that it was a term of the scale costs agreements that the law practice’s legal costs were to be calculated and determined on the Supreme Court costs scale plus an additional 25 per cent’: at [941].

It appears that, during final submissions, the respondent, without objection from the applicants, submitted that it was not in fact a term of the costs agreements that the respondent would carry out the scale calculations to determine the scale fees due from each client.[196] In his submissions, the respondent said that the correct interpretation was that the term provided for a ceiling on the quantum of the legal costs that he was allowed to charge the scale fee agreement clients. In their submissions, the receivers construed the charging clauses as providing that legal fees would be ‘calculated on a particular Court scale’. Curiously, few of the fee agreements used those precise words. However, when the actual words that were used are considered, the respondent’s contention is untenable. The relevant words used in each case should be interpreted, as they were interpreted by the trial judge, to mean that the respondent was under an obligation to ‘calculate the scale fees when determining the fees to be billed to each client’.[197]
[196]Ibid [942].
[197]Ibid [952].

Were the scale fee agreements varied?

In his written submissions relating to his notice of contention, the respondent said that the trial judge should have held that the pre-mediation dialogue between the respondent and his clients meant that there was an implied variation to the scale fee agreements. The contention cannot be sustained. There could only be a variation if the clients knew that the costs estimate being provided to them involved a departure from the agreed basis for the calculation of their costs. As the trial judge found, the clients were not provided with the information (disclosure) necessary for there to have been a variation of their costs agreements.

Were the withdrawals from trust in respect of the scale fee agreement clients made ‘in breach of trust, improperly or unlawfully’?

The trial judge found that the receivers had not established that the payments were made ‘in breach of trust, improperly or unlawfully under s 5.5.14(1)’.[198] However, as will appear below, his own findings meant that the making of the payments were properly to be so characterised.
[198]Ibid [1123].

Although he made findings as to whether the respondent had breached his fiduciary duties to his clients, the trial judge does not appear to have made any express finding as to whether the payments out of trust were in breach of trust.[199] The payments were in breach of trust in so far as they involved the withdrawal of funds held exclusively on behalf of the respective clients otherwise than in accordance with the agreement that authorised the respondent to deal with them. Notwithstanding that the withdrawal was in breach of the agreements, it would have been open to the respondent to seek the informed consent of his clients to withdraw the funds otherwise than in accordance with the agreements. However, no such informed consent was obtained, and in some cases it was sought and refused. As indicated above, the clients were wholly unaware that the respondent was proceeding otherwise than in accordance with the agreements that they had made with him.
[199]See ibid [1126]–[1128]. However, see also above n 88, which discusses whether breach of trust was an issue at trial.

On the question whether the payments had been made ‘improperly’, the trial judge said:

On the first issue, the making of the Payments was not improper simply because Mr Forster breached the costs agreements. Rather, something more needed to be shown. The receivers were required to show impropriety in the making of the Payments. This means they were required to show that the breaches of the costs agreements in some way tainted the Payments such that the making of them could be called improper.[200]
…
In light of Mr Forster’s unchallenged reasons for calculating the bills the way he did, and the receivers’ failure to establish that the clients were overcharged, I find that the breaches of the scale costs agreements do not result in any impropriety in the making of the Payments. That is, the Payments were not made improperly simply because the bills underlying the Payments were not calculated in accordance with the scale costs agreements.[201]

[200]Reasons [1067].

[201]Ibid [1071].

As is evident from the foregoing, in interpreting s 5.5.14(1), the trial judge drew a distinction between, on the one hand, the preparation of an invoice by a solicitor (including the manner in which the solicitor has calculated professional costs) and the issue of the invoice and, on the other hand, the payment or transfer of funds from a trust account to meet that invoice. The trial judge said that the section only addressed the latter issue: ‘Proving that Mr Forster breached the scale costs agreements is distinct from proving that the Payments were made improperly’.[202] Accordingly, a finding that an invoice had been unlawfully or improperly calculated did not determine whether, when funds were transferred from a trust account to meet that invoice, the funds ‘had been taken by, paid to or transferred to a person in breach of trust, improperly or unlawfully’.
[202]Ibid [1064].

However, the distinction is untenable. The respondent’s lawful entitlement to withdraw funds that he held in his trust account depended upon his complying with (a) his agreement with his client and (b) the Act.

The payments were unlawful because (a) they were in breach of trust; (b) they were in breach of the scale fee agreements; and (c) they were in contravention of the Act.

The payments contravened the Act in various respects. First, s 3.3.20(1) stipulates the circumstances in which a solicitor may withdraw trust money held in a general trust account. The solicitor may withdraw such money for payment of legal costs ‘if the relevant procedures or requirements prescribed by this Act and the regulations are complied with’.

The relevant procedures or requirements prescribed by the Act are contained in Part 3.3 (Trust Money and Trust Accounts) and Part 3.4 (Costs Disclosure and Review) of the Act. Regulation 3.3.34 provides the procedure for the withdrawal of trust money held in a general trust account for payment of legal costs owing to a practice ‘by the person for whom the trust money was paid into the account’.[203] In short, money may be withdrawn either (a) in accordance with a costs agreement[204] or (b) in accordance with instructions;[205] or (c) where a bill has been provided and the client has not objected to the withdrawal of the money.[206]
[203]Regulation 3.3.34(1).
[204]Regulation 3.3.34(3)(i).
[205]Regulation 3.3.34(3)(ii).
[206]Regulation 3.3.34(4).

Did the respondent receive instructions to withdraw moneys from trust?

The relevant procedures or requirements prescribed by the Regulations in respect of withdrawing trust money are contained in reg 3.3.34.[207] As indicated above, reg 3.3.34(3) regulates the withdrawal of trust moneys where no bill has been provided to the client and reg 3.3.34(4) regulates the withdrawal of trust moneys where the practice has given the person a bill relating to the money.
[207]See [71] above.

In the present case, the trial judge said that each of these regulations was a true alternative: a solicitor complied with the regulations prescribed by s 3.3.20(1) if the solicitor complied with either reg 3.3.34(3) or reg 3.3.34(4).[208] Further, within reg 3.3.34(3), there were several possibilities that needed to be considered: relevantly, had the money been withdrawn in accordance with a costs agreement? Or, had the money been withdrawn in accordance with instructions that had been received by the practice?
[208]See [71] above.

Regulation 3.3.34(3)(a)(i) authorised the withdrawal of trust moneys if ‘the money is withdrawn in accordance with a costs agreement that complies with the legislation under which it is made and that authorises the withdrawal’.

Regulation 3.3.34(3)(a)(ii) authorised the withdrawal of trust moneys if ‘the money is withdrawn in accordance with instructions that have been received by the practice and that authorise the withdrawal’.

The trial judge said that the onus was on the receivers to exclude all of these possibilities. Demonstrating that the money was withdrawn otherwise than in accordance with a costs agreement was insufficient; the receivers also had to demonstrate that the money was withdrawn otherwise than in accordance with instructions that had been received by the practice.

In the present case, it was accepted that the respondent had withdrawn funds otherwise than in accordance with the costs agreement. However, the trial judge found that the receivers had not established that the respondent had failed to withdraw money in accordance with instructions that he had received. The trial judge said:

As to reg 3.3.34(3)(a)(ii), Mr Forster gave evidence that he obtained authorities from each client to transfer moneys from trust for his fees. The receivers did not seek to establish otherwise or that Mr Forster did not withdraw moneys from trust in accordance with instructions that had been received by the practice and that authorised the withdrawal. Accordingly, the receivers have not satisfied me that reg 3.3.34(3)(a) was not complied with.[209]

Here, the trial judge was referring to evidence given by the respondent as to the course he took prior to the settlement of cases and, in particular, prior to the mediation process which resulted in funds coming into his trust account. In the costs agreement that the respondent made with his clients, the difference between

‘party–party’ costs and ‘solicitor-client’ costs was explained: the former were said to be the costs recoverable from a judgment debtor and the latter were said to be the costs which the respondent would be entitled to charge his client (and which would usually exceed party–party costs recoverable from the other side). The respondent gave evidence that, when a mediation was scheduled, (a) he would write to the client informing the client that there would be a mediation and explaining the mediation process, (b) he would meet the client a few days before the mediation and provide several documents including an estimate of the costs of his firm. The respondent said that he would secure from the client an instruction to transfer trust moneys and a completed ‘authority to pay’ document. During the mediation, the respondent would keep his clients informed as to how much they would recover on the basis of the offers that were being made. In effect, it appears that he told his clients, that an offer would be made for a dollar sum plus (party–party) costs and that, as a rule, in order to meet his professional costs, (a) the respondent would retain the costs portion of any offer and that (b) it may also be necessary for him to retain part of the dollar sum itself. In other words, clients were given an estimate of the net amount that they would secure for themselves. The respondent also said that there was no occasion in which a client received less than had been estimated and that, in about 30–50% of the cases, he forwarded more to the client than the net amount that the client had been prepared to accept at the mediation.[210] Frequently, the respondent was able to do this either by discounting his own professional costs or by not requiring a client to reimburse him for the payment of disbursements.

[209]Reasons [1088].

[210]Ibid [981]–[988]. The respondent’s evidence was corroborated by a Mr Pinto who was employed by the practice from July 2007 to November 2008: at [1031]–[1049].

In the event, the respondent contended that the instructions provided by his clients before and during the mediation process were ‘instructions within the meaning of reg 3.3.34(3)(b)(ii)’.

When a client has entered into a costs agreement with a solicitor and that agreement authorises the withdrawal of funds held on trust for the client, that authority will supply the relevant instruction to the solicitor. It may be accepted that, notwithstanding the existence of such an agreement containing such an authority, a client may provide to the solicitor an instruction that departs from or is inconsistent with the agreement and the authority.

It then becomes necessary to determine the meaning of ‘instruction’ in the regulation. The context must be recalled.[211] It concerned the circumstances in which a solicitor was lawfully permitted to remove money from a trust account that was held exclusively for the benefit of the client. For a communication of authority to be an ‘instruction’ for the purpose of the regulations, it had to be an informed communication. The Act, through its disclosure provisions, attached great importance to the client acting on the basis of proper information. An authority secured by the solicitor in any other circumstances would not answer the statutory description of an ‘instruction’.
[211]CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408.

Accordingly, the ‘instruction’ would not be an instruction within the meaning of the regulation unless the client had given his or her informed consent to the departure from the authority in the agreement. Unless that was done, the client would be entitled to assume that any such instruction was governed by the agreement.

In the present case, there was no such lawful instruction because there was no informed consent to the departure from the authority contained in the costs agreement. There could be no such informed consent because the respondent did not disclose to any of the scale fee agreement clients that, in estimating their costs, he was not proposing to comply with the agreement he had with them. Apart from any other consideration, for such an instruction to be an instruction within reg 3.3.34(3)(a)(ii), there must be disclosure which complies with regs 3.4.9 and 3.4.16.

Was the respondent entitled to withdraw funds because he had issued a lump sum bill?

The respondent also relied upon the lump sum bills that he had provided to his clients. As indicated above, reg 3.3.34(4) authorises the withdrawal of trust moneys if (a) the practice has given the person a bill relating to the money and (b) the client has not objected to the withdrawal of the money within seven days of being given the bill. The respondent said that he had always given his clients a bill in the form of a lump sum bill within s 3.4.34 of the Act and that none of his clients had objected to the withdrawal of the money.

However, the reference to ‘bill’ in reg 3.3.34(4) must be a reference to a bill that complies with the Act. As it was put in argument: ‘the mere existence of a piece of paper headed “Bill” will not authorise the withdrawal of trust money’. Where there is an agreement that a bill be calculated on scale, a bill that has been calculated otherwise than in accordance with scale is not a ‘bill’ within the meaning of the relevant regulation. A bill which authorises the withdrawal of moneys in a trust account will be a bill that complies with the Act; it will be a bill that has been prepared in conformity with the provisions of the Act dealing with fee agreements and the disclosure that is mandated in respect of them.[212] There must be disclosure of the basis upon which fees are to be calculated; and, there must have been disclosure of any changes that were proposed to the method of calculation.[213]
[212]Implicit in the respondent’s argument was the proposition that a lump sum bill may be for any amount selected by the solicitor, and that such a bill becomes enforceable if the client does not object to it within the statutory period. The expression of the implicit proposition shows it to be untenable.
[213]The present case concerns the circumstances in which a solicitor may lawfully withdraw funds held in trust. It does not address directly the circumstances in which a solicitor may commence proceedings for the payment of a bill. See Liati v Fitzsimmons (1996) 68 FCR 402, 405.

It was said that the preparation of such a bill is both laborious and burdensome. The Court was told that, more often than not, bills are estimates of a law practice’s entitlements. The preparation of a bill in which each item of work has been measured against the scale may prove costly; it may well work to reduce the net recovery by the client. However, where there has been an agreement that costs will be calculated according to scale, any such estimate must have two essential features: (a) the estimate must be informed by the scale and (b) the client must be informed that the bill is an estimate.

In this respect, it will be recalled that the trial judge found that, when he prepared a bill for his clients, the respondent had no regard to the costs agreement or disclosure information provided to the client.[214] The trial judge found that the respondent ‘knowingly calculated the legal professional fees for scale fee agreement clients not on scale but primarily using the time costing Infinity Law system’.[215]
[214]Reasons [1020].
[215]Ibid [1030].

Further, the respondent pointed out that the delivery of a bill in the form of a lump sum bill is not a final statement of a client’s rights. Pursuant to s 3.4.36 of the Act, where a bill has been given in the form of a lump sum bill, the client is entitled to request an itemised bill. Further, where an itemised bill is provided, the solicitor is not restricted to proving the amount demanded in the lump sum bill.

It was accepted that the money was not withdrawn in accordance with a costs agreement that authorised the withdrawal; reg 3.3.34(3)(a)(i). It was not withdrawn in accordance with an ‘instruction’ as there was no relevant instruction within the meaning of the regulations; reg 3.3.34(3)(ii). It was not withdrawn pursuant to a ‘bill’ as there was no relevant bill within the meaning of the regulations; reg 3.3.34(4). It follows that none of the available procedures or requirements for withdrawing moneys from a trust account was satisfied when the relevant payments were made.

Payments in breach of scale fee agreement were in breach of trust

The final issue is whether the receivers had made out their case under s 5.5.14(1) of the Act.

In so far as the payments were withdrawn from the trust account (a) without authority or (b) in breach of trust, the respondent had created a trust account deficiency within the meaning of s 3.3.21.

As indicated above, the trial judge made no express finding as to whether the payments were in breach of trust. However, he did consider whether, by making the payments, the respondent breached his fiduciary duties to the scale fee agreement clients.[216] In making those allegations, the receivers had said that the respondent had breached his fiduciary duties to the relevant clients by:
[216]Ibid [1107]–[1112].

(a) not acting in the best interests of the scale fee agreement clients;

(b) failing to exercise his powers and to discharge his duties as a trustee in good faith and in the best interests of the scale fee agreement clients in respect of money held on trust for them by the law practice;

(c) failing to account candidly, properly and lawfully to the scale fee agreement clients in respect of money held on trust by the law practice for them;

(d) gaining an advantage for himself; and/or

(e) causing a financial detriment to the scale fee agreement clients.

The trial judge said that these allegations were based upon an assumption that the respondent was not entitled to the amounts for professional fees that he transferred from the trust account to the office account. He concluded:

the receivers did not seek to establish that the fees recovered exceeded what he was entitled to. The receivers did not establish any financial loss to the detriment of the scale fee agreement clients or any gain to Mr Forster. The receivers have not established any of the alleged breaches of fiduciary duty.[217]

[217]Ibid [1111].

Each of these findings misconceives the nature of a solicitor’s duties with respect to trust funds held in a trust account exclusively on behalf of a client. Each of the findings is based on the assumption that a solicitor may set off a client’s liabilities to the solicitor against the funds held on behalf of the client in the trust account. The findings also appear to be based upon the earlier finding of the trial judge in respect of particular liens. But, for the reasons given above, each of these findings should be rejected.[218]
[218]See [115]–[127] above.

Because of the payment, did the respondent become ‘indebted or otherwise liable’ to the client?

A solicitor who without lawful authority removes funds from his trust account comes under an immediate liability to restore those funds. Thus, upon withdrawing funds without authority from the trust account, the respondent came under an immediate liability to account to his clients. For the reasons already given, that liability was not affected by the existence of any debt said to be owed by the client to the solicitor.

It follows that the receivers made out their case under s 5.5.14(1)(c) in respect of the scale fee agreements. Accordingly, we will grant the receivers leave to amend their application for leave to appeal in the form referred to in paragraph [26] above.

Should the judge have found that the respondent did not know or believe at the time of the withdrawal that the withdrawals were done ‘in breach of trust, improperly or unlawfully’?

As indicated above, the trial judge held that, although the respondent knew he was acting in breach of the scale fee agreements, nevertheless he did not know or believe that what he was doing was done in breach of trust, improperly or unlawfully. The trial judge seems to have found that, because the respondent had a clear conscience about what he was doing, it was not possible to find that he knew and believed that the payments were made in breach of trust, improperly or unlawfully. However, it is necessary to recall what the respondent did know. He knew that:

(a) the scale fee agreements imposed upon the respondent a contractual and fiduciary duty to render invoices according to scale;

(b) he was rendering invoices in breach of the scale fee agreements;

(c) some of his clients had refused his request that he alter the basis upon which he was entitled to charge;

(d) in breaching the scale fee agreements, he did not have the informed consent of his clients; and

(e) the payments out of trust were calculated on a basis other than that provided for in the scale fee agreements.

The appellants contended that the knowledge that s 5.5.14(1)(a) speaks of is knowledge of the essential facts that make conduct unlawful; it is not knowledge in a solicitor of the legal character of his acts. In this respect, they referred to Yorke v Lucas,[219] Rural Press Ltdv ACCC,[220] and R v Tang.[221] Yorke v Lucas considered what must be established to demonstrate that a person was ‘involved’ in the contravention by a corporation of s 52 of the Trade Practices Act 1974 (Cth). Rural Press Ltd v ACCC considered the same issue in respect of the contravention by a corporation of ss 45(2)(a)(i) and (b)(i) of the Trade Practices Act. R v Tang considered the proper construction of the expression ‘intentionally: (a) possesses a slave or exercises over a slave any of the other powers attaching to the right of ownership’ within s 270.3(1) of the Criminal Code 1995 (Cth).
[219](1985) 158 CLR 661.
[220](2003) 216 CLR 53.
[221](2008) 237 CLR 1.

At least in the present case, it is difficult to see what s 5.5.14(1)(a) adds to s 5.5.14(1)(c). Both provisions apply if regulated property has ‘been taken by, paid to or transferred to, a person (the transferee) in breach of trust, improperly or unlawfully’. Paragraph (c) provides for the restitution of property where the transferee ‘because of the taking, payment or transfer became indebted or otherwise liable’. Paragraph (a) applies where the transferee ‘knew or believed at the time of the taking, payment or transfer that it was done in breach of trust, improperly or unlawfully’.[222] It would appear that paragraph (a) applies where the practitioner has subjective knowledge (knew etc that property had been transferred in breach of trust etc) of the situation to which paragraph (c) objectively applies (because of the transfer the transferee became indebted or otherwise liable).
[222]Emphasis added.

The very words of s 5.5.14(1)(a) seem to raise considerations different from statutory words that refer to ‘involvement’ in a contravention. However, given that we have decided that the respondent was liable to make restitution under s 5.5.14(1)(c), it is unnecessary for us to resolve the meaning of s 5.5.14(1)(a).

For these reasons, the receivers’ appeal in relation to the scale fee agreements should be allowed.

Conclusion

There will be a grant of leave to appeal to the receivers and their appeal in relation to both the double disbursements and the scale fee agreements must be allowed.

[2016] VSCA 80

27 April 2016