Shi v Mills Oakley
[2020] VSC 498
•17 August 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COSTS COURT
S ECI 2019 05127
| XIAQI SHI | Applicant |
| v | |
| MILLS OAKLEY | Respondent |
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JUDICIAL REGISTRAR: | Gourlay JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 28 April 2020 |
DATE OF JUDGMENT: | 17 August 2020 |
CASE MAY BE CITED AS: | Shi v Mills Oakley |
MEDIUM NEUTRAL CITATION: | [2020] VSC 498 |
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COSTS COURT – Legal Profession Uniform Law 2014 – Costs agreement void for noncompliance with disclosure – Sections 174 and 178 – Basis of assessment – Sections 6 and 172-Johnston v Dimos Lawyers [2019] VSC 462.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Ms S F Cherry | T J Lawyers |
| For the Defendant | Mr M Lapirow | Mills Oakley |
JUDICIAL REGISTRAR:
The hearing of the applicant’s Summons filed 13 November 2019 occurred on 26 April 2020. At the conclusion of the hearing the decision was reserved and I now publish the decision and reasons. A mediation had been held but the matter failed to settle. The applicant maintains that the respondent’s costs agreement is void as the respondent has failed to comply with mandatory disclosure obligations in sub-ss. 174(1) (a) and (b) of the Uniform Law.[1]The applicant submits that the respondent has failed to disclose an estimate of total legal costs[2] and also failed to disclose any significant change to the legal costs that will be payable by the client[3] as required by Legal Profession Uniform Law (‘The Act’).[4]
[1]Applicant’s outline of submissions paragraph 2.
[2]The Act ss 174 (1) (a).
[3]The Act ss 174 (1) (b).
[4] Legal Profession Uniform Law Application Act 2014 -Schedule 1—Legal Profession Uniform Law.
In support of the summons the applicant relied on a Notice of Dispute filed on 20 January 2020, a further Notice of Dispute dated 28 February 2020, and his affidavit sworn on 8 April 2020 (‘the applicant’s affidavit’) and written submissions filed on 9 April 2020. The respondent filed two tranches of documents including a costs agreement dated 11 November 2016, costs disclosure statements and updates of legal costs. In addition the respondent relies on an affidavit sworn by James Tobin on 23 April 2020 (‘the respondent’s affidavit’) and written submissions also dated 23 April 2020.
The applicant was a Chinese National at the time of the retainer and swears that he has a limited ability to speak, write or read English.[5] He swears that he relied on interpreters, software translations or his nephew to assist with his dealings with the respondent. The respondent disputes the limit of the applicant’s ability to communicate in English. In his affidavit Mr Tobin swears that:
I do not suggest that he was fluent in English to the degree of a person with English as a first language. He speaks with a thick accent and he sought assistance, and in my assessment, was assisted by his nephew or other interpreters with a better command of English. However, the Applicant was capable of making decisions and communicating with MO without restriction, both in person and via written communications. [6]
[5]Applicant’s affidavit at par 3.
[6]Respondent’s affidavit par 21.
The applicant initially retained the respondent to advise and provide legal services to assist with the sale of shares in a company of which he was the sole shareholder and director around August 2016.[7] As part of the sale process the purchaser, Mr Wu deposited $50,000 in the respondent’s trust account and transferred a further sum to the applicant’s interests in China as part of an agreed payment of $270,000. The invoices from the respondent for the legal work undertaken before October 2016 had been were paid by the applicant in October 2016[8] and do not form part of this dispute.
[7]Applicant’s affidavit para 6.
[8]Applicant’s affidavit para 7 and are not included in this proceeding.
On 2 November 2016 the applicant, his nephew, Wei Chen, and Mr Venn King of the respondent met to discuss issues on the contract.[9]On 4 and 8 November 2016 the purchaser had sent two emails that purported to terminate the contract and request a repayment of the deposit that he had paid. On 9 November 2016, the applicant forwarded Mr Wu’s emails and other documents to Mr King. The next day he attended a conference with Mr King and Mr Edwin Fah accompanied by his nephew as an interpreter to discuss the return of the business premises and stock by Mr Wu.[10] Between November 2016 and March 2017 attempts were made to settle the dispute without resorting to the issue of proceedings. After March 2017, little occurred on the file for 11 months. In February 2018, Mr Wu issued proceedings in the County Court against the applicant. On being advised of the Writ that had been issued the applicant instructed the respondent to defend the proceedings and to file a Counter-Claim. The matter ran to verdict after a trial held on 30 April, 1, 2, 3, 6, 7, 30 May, and 4 June 2019. In the judgement delivered on 19 June 2019, Judge McNamara dismissed the purchaser’s proceeding and ordered Mr Wu to pay the applicant’s costs on a standard basis up to 25 October 2018 and thereafter on an indemnity basis. These costs have not, yet, been quantified or paid.[11]
[9]Applicant’s affidavit para 8.
[10]Applicant’s affidavit para 9 and exhibit “XS-1”.
[11] Wu v Shi [2019] VCC 858 (19 June 2019).
Costs Agreement and Costs Disclosures given
On 9 November 2016, following the applicant’s emails and before the conference on 10 November 2016, Mr King wrote to the applicant:
There is one thing I should bring to your attention, however – we are outside the Scope of work and fee estimate I previously gave you. It isn’t possible to determine what work will be necessary to do in relation to this dispute, and therefore how much it will cost. As a result, I will be charging my usual hourly rate in working for you, which is $475 per hour.[12]
[12]Exhibit “XS-2”.
In the course of the conference on 10 November 2016, Mr King advised the applicant that estimated cost of the dispute including any potential proceedings could cost him $100,000 and the purchaser $150,000, a total cost for both parties of $250,000.[13] Mr King forwarded the applicant a summary of the meeting at 6.37pm that day.[14] This summary includes a plan of action and requests a payment into the respondent’s trust account of $10,000 as a pre-payment of costs. No written estimate of future legal costs, or the reference to the estimate was included.
[13]Applicant’s affidavit para 12.
[14]Exhibit “XS-3”.
The next day the respondent emailed the applicant a Scoping Letter and a separate Engagement Terms (‘the 11 November documents’). The documents detail the terms on which the respondent was prepared to act for the applicant. They included a document headed Schedule -Scope of Works & Fee Estimate and a document titled Engagement Terms that included the Costs Agreement, the terms of engagement and the Disclosure Statement.[15] The documents were said to set out the terms and conditions on which we will work for you.[16] The Matter is described as issues regarding the sale of all shares in TSCLink Pty Ltd (ACN 166 794 092) to Mr Qintao Wu. The Scope of Work details expected the work to be undertaken and gives a fee estimate as follows:
TCSLink Sale Issues
[15]The entire documents are Exhibit “XS-5” consisting of a 5 page letter and 19 page Engagement Terms.
[16]Applicant’s affidavit para 14 and exhibit XS-5.
Schedule – Scope of work & Fee Estimate
(as at a.m. Friday 11 November 2016)
Item
Task
1.
Review of current documents and recent correspondence to determine legal position
2.
Preparation, discussion and finalisation of pan of action regarding Matter
3.
Determining position relating to repossession of physical assets to minimise losses.
4.
Correspondence with Mr Wu demanding performance of sale contract.
5.
Potential drafting, settlement and service of Statement of Claim.
6.
Correspondence, negotiations and meetings with Mr Wu and his advisers
7.
Potential court appearances regarding matter.
TOTAL Fee Estimate
$50,000 (+ disbursements + GST)
After the estimate the document includes:
A. Notes
1. Work and Fees
1.1 Scope of Work – it is difficult to estimate the amount of work required for the matter, as it may resolve quickly, or take significant effort to reach a solution, and it is not possible to predict what route it will follow at this stage. This is usual in matters involving potential disputes or litigation.
1.2 Fees- Therefore, while we have at this point provided an estimate of our total fees for legal work in this Matter, this should be viewed as tentative. If things become clearer, we intend to update you with a revised scope and estimate at the earliest opportunity. Otherwise, all legal work on this Matter will be charged in accordance with hourly rates (plus costs and disbursements[17]) referred to in our covering letter.
[17]Part III of the Disclosure Statement at 2.2 defines Expenses as amounts ‘we incur in the course of working on your matter, which represent amounts charged by third parties for services supplied’ including search, lodging and enquiry fees, travel and accommodation expenses, expert’s fees and barrister’s fees among other expenses. Disbursements are ‘out of pocket expenses incurred in properly representing you’.
And
B.Assumptions:
1.Fees- All fee estimates above are based on a blended rate of $350 / hour + GST and no more than the number of hours of work noted for each item; any more time incurred would be at our standard hourly rates.
The number of hours of work, as referred to in the Assumptions are not given in the table.
The hourly rates, excluding GST, for the core team of lawyers stated to be expected to work on the matter were Mr Warren Scott (Partner) at $620, Mr Venn King (Special Counsel) at $475, Ms Ellen Rattray (Law Graduate) at $220, Mr James Tobin (Partner) at $560 and Mr Edwin Fah (Senior Associate) at $430.[18] In addition to the charges for the named lawyers the costs disclosure included a range of rates for our Corporate Advisory team based on positions within the firm. Time was to be charged in 6 minute units[19] and the Engagement Terms/Costs Agreement states that in respect of Our estimate of total fees and expenses – We estimate our total legal costs, including our charges and disbursements, for your matter to be as set out in our Scoping Letter.[20]
[18]3.3 (a) of the Costs Agreement.
[19]Costs agreement para 4.2.
[20]Costs Agreement para 6.1.
After acceptance of the costs agreement by the applicant on 17 November 2016, the respondent gave the following updated costs disclosures:
(a) 19 December 2016 Mr King emailed the applicant that all costs in respect to the Sale Transaction (5532097) had been paid and that for the Wu Dispute (5548873) work in progress totalled $24,059, disbursements of $13.20 and GST of $2,407.22. He advised that the first account for the matter would total of $26,479.42. The email also had included a ‘fees breakdown of unbilled charges’.
(b) On 6 March 2017, Mr King in reply to an email from the applicant, headed about the case and lawyer fees, and requesting that fees be kept to a minimum:[21]
[21]Exhibit “XS-12”.
The law is an expensive environment and protecting your commercial interests will cost money. You will recall that we said at the beginning that this could cost you up to $250,000. We won’t incurred costs if they aren’t necessary, and we actively try to minimise the time we spend on your matter, so we can keep costs at a minimum.
(c) On 26 February 2018, Mr Fah emailed the applicant to advise that a County Court Writ had been issued by Mr Wu and sought instructions to accept service. On 1 March 2018, the applicant replied that he was in China, and that, as he had faith in the respondent’s professional knowledge and ability, he would entrust the respondent to continue the case. He then stated that:
But because of my limited financial resources, I have the following questions in advance:
1. What is the probability of winning?
2. If we win, how much will the total cost be paid?
3. If we fail, how much will I have to pay for it?[22]
[22]Exhibit “XS-14”.
In reply on 5 March 2018[23] Mr Fah advised:
[23]Exhibit “XS-15”.
As we advised previously, we believe you have good prospects of success, but you would likely need to file a counterclaim. At this early stage it is difficult to predict what your costs would be, but in the event that the matter ran all the way to trial, it would not be a surprise if your own legal costs approached $100,000. Mr Wu’s costs would likely approach that.
If you win, and receive a standard costs order the general rule is that you would get back approximately 65% of your costs. Of course, if you lose, you would likely be ordered to pay Mr Wu’s costs, as well as your own.
(d) On 11 April 2018, Mr Fah emailed the applicant advising that a barrister should be retained to draft the Defence and Counterclaim as it will be cheaper for you than us doing it.[24] The email recommended that Gabi Crafti be retained at her hourly rate of $400 including GST. The applicant replied accepting the advice to retain Ms Crafti.[25] On 20 April 2018, Ms Crafti forwarded her fee agreement and estimated the total legal costs of drafting a defence and counterclaim and prepare and attending a mediation would total $14,400. These documents were signed by Mr Tobin on 23 April 2018.[26] I am unable to ascertain that this costs estimate and fee agreement was given to the applicant as they do not form part of any exhibits to the party’s affidavits.
[24]Exhibit “XS-18”.
[25]Exhibit “XS-18”.c
[26]It forms part of the respondent’s disclosure documents filed and served on 17 December 2019.
(e) On 25 September 2018, in reply to the applicant’s email advising that the respondent’s accounts department had requested the payment of outstanding fees and in respect of the costs estimate Mr Fah replied:[27]
[27]Exhibit “XS-20”.
Firstly, you will recall when we meet in late March this year we discussed costs. Relevantly, we estimated that if this matter went to trial, it could cost you perhaps more than $100,000. You said you would not be returning Wu’s $270,000 and would be seeking your losses from him, and that you understood that this was going to be expensive.
(f) The same day the applicant replied to Mr Fah:
I do remember what we discussed about the costs. Mr Venn has told me that it would costs me nearly $100,000 to settle the lawsuit. But I am in trouble now….. The first request is whether I can pay after the case? and the second I want to know details of the costs.
(g) On 12 November 2018, the applicant wrote to the respondent complaining about a number of charges in invoices received by him on about 10 November 2018. The applicant wrote that:
About the bills I have 3 requirements:
First, please ask your accountant to mark how many minutes and charge standard of everything after each invoice.
The second is the mail which is communicated with the third party, please forward to me at the same time. It includes court, Gabi Crafti, the plaintiff’s lawyers etc.
Thirdly, at the beginning of this lawsuit, you and Venn told me that I would have to pay nearly $100,000 for the whole case, and the other party would have to pay about $150,000, but now I don’t know how much more it will take to finish this lawsuit. Can you control it within $100,000?
(h) On 11 December 2018, after the unsuccessful mediation Mr Tobin wrote to the applicant:[28]
[28]Exhibit “XS-22”.
As you know, this matter did not resolve at mediation on 16 October 2018, and a trial date has been scheduled for five (5) days duration, commencing 6 February 2019.[29]
[29]This date was incorrect and a later email confirmed the correct listing date.
In this respect, we estimate that your legal costs and disbursements from now until the end of the trial will be approximately $60,000 (inclusive of GST) which includes counsel’s fee and the costs of preparation for trial. This estimate does not however include any provision for experts’ reports, namely, the accounting reports substantiating your losses, that we understand you are obtaining yourself.
(i) On 19 March 2019, an email[30] was sent to the applicant providing details of interpreters and the likely costs of an interpreter for a five day trial. An estimate of $4,000 to be borne equally by both parties was given.
(j) On 19 March 2019, Mr Tobin wrote to the applicant[31] advising that Gabi Crafti had provided a fee estimate to the end of the trial at $40,400. The respondent included her costs disclosure and costs agreement dated 14 March 2019. The respondent also advised that we estimate that our costs, from now until the end of the trail, will be a further $30,000. The total estimated costs from that date to the end of the trial was a further $70,400. The letter advises this estimate is higher than the estimate given in December 2018 as a number of new material events have occurred including the need to subpoena witnesses and delay in obtaining a report from the applicant’s accountant as to his losses in the resale of the business. The estimate expressly excludes costs of drafting issuing and service of subpoenas, the costs of any expert reports and witnesses, the costs of interpreters or transcript.
[30]Document produced by the respondent as part of its costs disclosure documents.
[31]Exhibit “XS-24”.
On 24 October 2019, after the decision had been delivered, the respondent wrote to the applicant detailing the total costs of the proceeding at $267,888.87, consisting of disbursements of $74,092.30, the respondent’s fees of $169,605.50 and GST of $24,191.07. The letter advised that all the disbursements and $60,768.35 of professional costs had been paid. The sum owed by the applicant was $128,391.16.
The relevant Legislation
The relevant legislation is the Legal Profession Uniform Law. The sections referred to in these reasons are:
(a) Section 6 of the Act defines legal costs as:
(a)amounts that a person has been or may be charged by, or is or may become liable to pay to, a law practice for the provision of legal services; including disbursements but not including interest;
(b) Sections 174(1) (a) and (b) relate to required costs disclosures and states:
A law practice—
(a)must, when or as soon as practicable after instructions are initially given in a matter, provide the client with information disclosing the basis on which legal costs will be calculated in the matter and an estimate of the total legal costs; and
(b)must, when or as soon as practicable after there is any significant change to anything previously disclosed under this subsection, provide the client with information disclosing the change, including information about any significant change to the legal costs that will be payable by the client.
(c) The consequence of a failure to give the required costs disclosures is contained in section 178 as follows:
178 Non-compliance with disclosure obligations
(1)If a law practice contravenes the disclosure obligations of this Part—
(a) the costs agreement concerned (if any) is void; and
(b)the client or an associated third party payer is not required to pay the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority; and
(c)the law practice must not commence or maintain proceedings for the recovery of any or all of the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority or under jurisdictional legislation; and
(d)the contravention is capable of constituting unsatisfactory professional conduct or professional misconduct on the part of any principal of the law practice or any legal practitioner associate or foreign lawyer associate involved in the contravention.
(3) Client's consent and understanding
If a disclosure is made under subsection (1), the law practice must take all reasonable steps to satisfy itself that the client has understood and given consent to the proposed course of action for the conduct of the matter and the proposed costs.
(6) Disclosure to be written
A disclosure under this section must be made in writing, but the requirement for writing does not affect the law practice's obligations under subsection (3).
(d) Section 185 in respect of a void costs agreement provides that:
185 Certain costs agreements are void
(1)A costs agreement that contravenes, or is entered into in contravention of, any provision of this Division is void.
Note
If a costs agreement is void due to a failure to comply with the disclosure obligations of this Part, the costs must be assessed before the law practice can seek to recover them (see section 178(1)).
(2)A law practice is not entitled to recover any amount in excess of the amount that the law practice would have been entitled to recover if the costs agreement had not been void and must repay any excess amount received.
(e) If the costs agreement is void section 172 provides that:
(4)A costs agreement is prima facie evidence that legal costs disclosed in the agreement are fair and reasonable if—
(a)the provisions of Division 3 relating to costs disclosure have been complied with; and
(b)the costs agreement does not contravene, and was not entered into in contravention of, any provision of Division 4.
Submissions
The applicant submitted that there was no valid costs agreement as the respondent:
(a) failed to disclose the basis on which costs were to be charged as soon as practicable after the commencement of the retainer;
(b) failed to give an estimate of total legal costs; and
(c) failed to disclose any significant change to the costs estimate given.
In support of the first issue the applicant submitted that the 11 November 2016 documents are ambiguous, confusing and internally inconsistent in respect of advice of the basis of charge. The 11 November 2016 documents give the hourly rates charged by specific lawyers working on the applicant’s file. There is also reference to two generic lists of fee-earners and their range of hourly rates based on their level of seniority in the respondent firm ranging from legal assistants at $150 per hour to partners at a maximum of $720 per hour. The estimate of legal costs was said to be based on a blended rate of $350/hour (+GST)[32] that bore little or no relevance to the disclosed hourly rates. The applicant submitted that by reason of the use of the blended rate to calculate the estimate of legal costs the basis of charge and the estimate were unclear. If the basis of charge was the hourly rates then this is not clearly stated in the costs disclosure. Further, the blended rate has no relationship to the disclosed hourly rates of the lawyers engaged in the file or the ranges given in the generic rates. Therefore, the applicant submitted the resulting disclosure of the basis of charge was misleading and imprecise. The applicant submitted that the confusion between hourly rates and the so-called blended rate……. and the estimate of total legal costs plus disbursements and GST represents less than 20 per cent of the costs that were ultimately charged and the respondent has failed to comply with its disclosure to disclose both the basis of charge and estimate of total legal costs so the costs agreement is void. [33]
[32]Paragraph B1 on page 4 of 5 of the schedule headed “Scope of Work and Fee estimate”.
[33]Transcript page 6 lines 19 – 24.
In reply, the respondent submitted that the applicant had failed to properly analyse the respondent’s costs agreement and costs disclosure. The respondent submitted that there is no evidence that the applicant was misled by the respondent’s use of a blended rate to calculate the estimate of legal costs. The use of the blended rate is explained in the Assumption reproduced in paragraph 10 above as a way to emphasise that the work would be conducted by several members of staff. Further if the Assumption is ambiguous the respondent submitted that the Court should simply strike it from the contract without having any impact on the terms of the costs agreement.
The second matter the applicant relied on was that the estimate of total legal costs was $50,000 + disbursements + GST which is not an estimate of total legal costs within the meaning of the Act as it specifically excludes disbursements. The definition of legal costs in s 6 (see paragraph 13(a) above) clearly states that legal costs include disbursements. The Scope of Work, reproduced in Paragraph 9 above, includes the tasks of filing of a Statement of Claim and Court appearances. By including these two items in the estimate the respondent expected that legal proceedings would be commenced by the applicant and that filing fees and possibly barrister’s fees to draw, settle and fees to serve a Statement of Claim would be incurred. By excluding disbursements from the estimate of total legal costs the fee estimate is not reasonable, does not allow the applicant to make an informed choice about his legal options and the costs of pursuing the options[34] and does not comply with the requirements of s 174(1)(a).
[34]Section 169 objective of Part 4 .3 of the Act.
In reply, the respondent submitted that the initial estimate of total legal costs was made on the basis of very early instructions given on 10 November 2016 that there was a commercial dispute between Mr Shi and Mr Wu. The Court should not find that the estimate was confusing as the applicant has not sworn that he was confused by the use of the blended rate or by the scope of work.[35] The failure to include disbursements was reasonable at that time as in fact only minimal disbursements were charged up to March 2018 ($41.90) when the County Court proceeding was issued.[36] The respondent’s written submission states:
Insofar as “total legal costs” are concerned, the Solicitor properly estimated those as being professional costs only. At the time, and for the items identified, there were no disbursements anticipated, and none incurred, save for 2 search fees totalling $41.90. The omission to note $41.90 in 2 search fees is a “de minimus” omission. Further, even when those disbursements are included, the total billed to the commencement of the Writ was $43,030.50, approximately $8,000.00 less than the estimate.[37]
[35]Transcript page 27 lines 10-20.
[36]Transcript page 27 lines 29-31.
[37]Respondent’s submission par 6.
The respondent submitted that it would be unreasonable to find that there had been a breach of the requirement to give an estimate of total legal costs as the estimate given was reasonably made at the time it was given based on the instructions received at the time as reflected in the Scope of Works. Instructions were never given to issue proceedings and reasonable attempts were made to mitigate the applicant’s losses by mediation and by advising that the applicant should not issue proceedings against Mr Wu. Further:
Now, no solicitor - … can foresee with any degree of accuracy the costs of potential litigation in circumstances where the litigation isn’t defined and has not been brought. It's just not possible. And the solicitor’s obligation is to, when reasonably practical to do so, provide the estimates. What was done between November 2016 and March 2017 was perfectly reasonable.
…Even as at March 2018 the costs of the client were not greater than $50,000 plus GST. Now, the client did receive throughout the period periodic accounts.
The third failure to disclose alleged by the applicant was that when a significant change in the matter occurred the costs estimate given was not a realistic update to the estimate of total legal costs. Updates are required to be given as soon as practicable after the law firm became aware that the estimate was, in fact, no longer accurate or there had been a significant change to any previous disclosures. It was incumbent on the law firm to provide information disclosing the change including any significant change in legal costs payable by the applicant.[38]
[38]Transcript page 6 lines 25 – 29 and section 174 (1) (a).
Primarily updates are required whenever there was a substantial change in the matter. Therefore when Mr Wu issued proceedings in the County Court against the applicant it was reasonable for the respondent to give an update to the costs disclosure as soon as practicable after receiving instructions to defend that proceeding. An update to the estimate of total legal costs, the applicant submitted, should be just that and not advice as to future costs. The update of all legal costs should include all disbursements to be incurred in the matter. The applicant submitted that respondent did not ever do this.
The respondent gave the applicant a number of written and oral costs estimates. The applicant submitted that the oral estimate of $250,000 was disputed and it is incumbent on the respondent to prove when and how that estimate was given. Section 174 (6) requires all cost estimates and updates to be in writing. The respondent has not exhibited in Mr Tobin’s affidavit any file notes to show that Mr King told the applicant, on 10 November 2016, or at any other time, that legal costs could be up to $250,000. The only reference to that conversation is the letter five months later from Mr King dated 6 March 2017.[39] The applicant disputes that the conversation on 10 November 2016 was in those terms and the applicant’s letter of 25 September 2018 states that Mr. Venn has told me it would costs me nearly $100,000 to settle this law suit[40] and in the letter of 12 November 2018[41] Mr Shi wrote:
at the beginning of this lawsuit, you and Venn told me that I would have to pay nearly $100,000 for the whole case, and the other party would have to pay about $150,000, but now I don’t know how much more it will take to finish this lawsuit.
The respondent did not at the time of receiving either of these letters dispute their contents.
[39]Exhibit “XS -13” to the applicant’s affidavit.
[40]Exhibit “XS -20” to the applicant’s affidavit.
[41]Exhibit “XS -21” to the applicant’s affidavit.
The respondent’s written updated costs estimate on 5 March 2018, after being advised the County Court Writ had been issued by Mr Wu, but before service of the Writ had occurred, states:
At this early stage it is difficult to predict what your costs would be, but in the event that the matter ran all the way to trial, it would not be a surprise if your own legal costs approached $100,000.
The next estimate was given on 25 September 2018 and re-affirmed the 5 March 2018 estimate stating it could costs you more than $100,000. On 10 December 2018 the respondent’s letter to the applicant stated that we estimate that your legal costs and disbursements from now until the end of the trial will be approximately $60,000 (inclusive of GST) which includes counsel’s costs for preparation and costs of the trial. The estimate does not include any provision of expert reports, namely accounting reports to substantiate the your losses, that we understand you are obtaining yourself. This estimate was updated on 19 March 2019 to be $70,400 inclusive of counsel’s estimated fees of $40,400. The letter explains that the estimate has changed due to the applicant’s accountant’s failure to provide finalised accounts and the need to correct the draft reports provided. In addition, it had become necessary to subpoena a number of proposed witnesses as they have failed to co-operate. This estimate excludes the costs of subpoenas, expert reports, transcript or interpreters, all of which should have been included in an estimate of legal costs.
In respect of these estimates the applicant submitted that each of the estimates was non-compliant with s 174 (1) (b) and was woefully inadequate[42] where the final total legal costs was in excess of $270,000. The applicant submitted that each of the two estimates given that to the applicant, that legal costs could approach $100,000, or be up to $100,000 were estimates of total legal costs and not an estimate of future legal costs[43] as the respondent had submitted.[44] The applicant submitted that the estimates of 10 December 2018 and 10 March 2019 were the only estimates of legal costs of the respondent and counsel and specifically excluded any other expected disbursements. These estimates were for future costs to the end of the trial and after 25 September 2018 it was never clear that the estimates excluded past billed costs.
[42]Transcript page 10 lines 11.
[43]Transcript page 11 lines 1-9.
[44]Respondent’s written submission par 9.
The applicant submitted that the total possible amount estimated was no more than $160,400 incorporating the billed cost to the date of each estimate. This was nearly $100,000 less than the total billed for the entire retainer of $267,000. The applicant submitted that as none of the costs estimates were for total legal costs, as in every estimate excluded known or expected disbursements. In these circumstances the respondent failed to comply with both s 174 (1) (a) and (b) and the costs agreements are void.
The respondent replied that all the costs estimates given were cumulative so the 10 December 2018 estimate was an estimate that legal costs would be $160,000.[45] The estimate was for an additional $60,000 from that date to the end of the trial. At the time the respondent had billed less than $75,000 of the original estimate of $100,000. So the respondent was not required to give another estimate. Similarly, when the estimate was increased on 10 March 2019 by $70,400 the respondent submitted that that amount was in addition to the $100,000 and $60,000 estimates previously given. Therefore the respondent had estimated that the total legal costs up to the end of the trial to be $230,400. By 10 March 2019 about $90,000 had been billed. Therefore, the respondent submitted the following in relation to the estimates given throughout the whole of the matter were:
What is clear is that initially the solicitor assessed $50,000 for what was foreseeable at the time. It then assessed $100,000 or up to $100,000 which, in my submission, is $100,000, plus disbursements, and it then advised on disbursements, so all the way through the client was being given a proper future estimate and it has to be taken into account that that estimate takes in - is for the future costs. [46]
[45]Transcript page 11 lines 10-31, $100,000 + $60,000.
[46]Transcript page 37 lines 2-14.
And further on the respondent’s counsel stated that:
If the client had considered that the estimate was ambiguous in any way, the plaintiff could have raised that with the solicitor. The client didn't.
The solicitor clearly acted to its detriment by continuing to act in circumstances of making it clear to the client they would only do so on the basis of the rates and the fee agreement, and the solicitor continued to act in circumstances where it had told the client don't do litigation in 2016, where the client (sic) told the client in 2017 do a commercial settlement, where the solicitor told the client in 2018 after the client had ameliorated his loss by the sale of whatever was left of his business, don't become involved in this litigation.[47]
And further on:
It's not a situation where a client has been led along the garden path, and I am certain that there are many instances where the costs court has seen this, where a solicitor has not made both their view of the strength of the litigation and the costs of the litigation compared to the costs of the client as clear as Mills Oakley did to this client in this case. In my submission, when one looks at the advice that's been given to a client with regard to the costs of litigation, the court should take such matters into account. It shouldn't be a circumstance which is the sort of argument I believe that my learned friend is putting forward. It is that you take everything away from the communication and you put your emphasis on one numeral in the letter and say ‘gotcha’. [48]
[47]Transcript page 36 lines 8 -11.
[48]Transcript page 37 lines 18-page 38 line 1.
The respondent relied on statements in letters that as the respondent understood the applicant was in financial difficulties and that its costs were a significant expense to him, that litigation is a costly endeavour and that as a defendant in the proceeding he could abandon the defence and pay Mr Wu’s costs.[49] In the letter of 25 September 2018, Mr Fah wrote that:
If costs are going to be an issue, we might need to stop acting, as we cannot continue to incur debts on your behalf (for example, the barrister’s costs) with you not being prepared to pay them.
Please let me know how you would like to proceed.
[49]Exhibit “XS-22” and also letters of 6 March 2017.
Mr Lapirow submitted that it was always open to the applicant to engage another law firm that was cheaper than the respondent[50] if he was dissatisfied with the respondent’s costs and that as the client was receiving regular bills he was aware of the costs to date and also knew what the out of pocket expenses were.[51]
[50] Transcript page 34 lines 14 – 18.
[51]Transcript page 34 lines 28 – 31.
Ultimately the respondent submitted that:
The standard of disclosure can be, if one takes the approach of the applicant, one where the court is being asked to make an assessment in artificial circumstances, and the circumstances are that in - where it's now being asserted that my client's costs agreement was ambiguous, but the client himself doesn't say that it was, and when there were plenty of opportunities available to the client to question any of the bills, that he doesn't choose to do so, even in circumstance where he's told to go elsewhere, it's something the court shouldn't entertain.
It's always possible - I think, that in politics it was referred to as - is it reactionary or was it - it was a term where people would reinvent history in order to fit the legal dialectic, and this sort of approach to the solicitor's compliance with Uniform Law should be moderated by the fact that nobody knows the future, and did the solicitor provide what he was supposed to do in accordance with the letter of the law and, in my submission, he did so. So that's all I can say. [52]
[52]Transcript page 58 lines 5-23.
In reply the applicant submitted that the Act does not require that the client has been misled by the costs disclosures, but that the costs disclosures must comply with s 174.
The applicant submitted that if the costs agreement is found to be void the Court has discretion to determine the basis of charge that should apply to the taxation of the respondent’s costs. The Court can find that:
It is open to the court, on the authority of Johnston v Dimos to find that notwithstanding a void costs agreement, costs may nevertheless be assessed by reference to the rate disclosed in that agreement if it is fair and reasonable to do so in all of the circumstances.[53]
[53]Transcript page 13 lines 29- page 14 line 3.
The applicant submitted that Johnston v Dimos Lawyers [54] is distinguishable as in that matter the Court found that the client was fully informed about the estimate of total legal costs from the outset having been given a surprisingly accurate estimate of total legal costs. The non-compliance in Johnston was that the estimate was verbal rather than written. In Johnston throughout the retainer the client had been given a number of accurate updates and the court found that the disclosure deficiencies were technical in nature. The applicant submitted that in this matter:
That is a very stark contrast to what the court has before it in this matter where we see a total lack of accurate estimate at the outset, an initial estimate to excludes disbursements and GST, subsequent estimates of approximately 100,000 or 'might be over 100,000' over the course of many months – those are the only two estimates of total legal costs ever given after the costs agreement – and then two updates estimating costs between the date of the update and the time of trial at 60,000, and 70,400, those are the last updates given and both of them turn out to be woefully inadequate and, in any event, don't constitute an update to the total figure.
On top of that in this case you have a number of added complexities that didn't feature in the Johnston v Dimos decision, including the fact that English is not this client's first language. [55]
[54][2019] VSC 462.
[55]Transcript page 14 lines 29- page 15 line 12.
In addition, here the law firm did not take any steps to confirm that the client understood and consented to the proposed conduct or the proposed costs as required by s 174 (9). The applicant was not advised about the use of the blended rate to estimate the total legal costs. In these circumstances, the applicant submitted that the method of negotiation of the initial agreement was not fair due to the failure to clearly explain or set-out the basis of charge. No documents were produced by the respondent to show that the costs agreement and costs disclosures were explained to the client and that he understood the documents contents particularly where there are internal inconsistencies in the basis of charge and the calculation of the estimate of total legal costs.
As to reasonableness it may be that it will be necessary to consider each item in the bills and the Court decide whether the rates applied are reasonable for the work undertaken. However, the applicant submitted that it would be reasonable to use the rate of $350 per hour as that was the rate used to calculate the estimate of total legal costs for, at least, the first estimate of $50,000 rather than higher hourly rates of individuals acting in the matter. The other alternative is to have the costs assessed on the basis of the County Court scale of costs as the litigation was conducted and concluded there. If this course was followed the applicant submitted that the respondent has undertaken some work in order to quantify the applicant’s costs entitlements pursuant to the costs order made on 4 July 2019 as evidenced in the account dated 30 September 2019.
The respondent’s position was that as there had been compliance with s 174 (1) (a) and (b) the costs agreement was not void. The taxation of the invoices should be conducted on the rates in the costs agreement. The submissions advocating the use of the blended hourly rate should be dismissed as they had no merit and were not relevant to the charges in the bills.
Discussion
In this matter the respondent’s position was that it had made reasonable and appropriate cost disclosures and that the costs agreement was not void. The respondent argued that, at every stage in the retainer, it was always open to the applicant to question the costs disclosures given to him and if he was not satisfied with the charges being made he could go elsewhere and utilise the services of another law firm. The respondent submitted that, using the words of Associate Justice Wood in Johnston v Dimos Lawyers, the application was opportunistic. However, in my view the first costs disclosure is limited to the described scope of work and once the County Court Writ had been issued the solicitors should have given further and accurate costs disclosures. The estimates relied on by respondent that the costs would approach or be in excess of $100,000 come from the 10 November 2016 conference prior to receipt of initial instructions to act. There does not appear to have been any further consideration of the substantial change caused by the Writ being issued. In both cases where the estimate is in writing the lawyers refer back to the initial verbal estimate without reference to the costs charged to date or the substantial changes in the matter. They are inadequate, particularly if taken to include the likely disbursements, including counsel’s fees, up to the end of the trial. Both of the later estimates of $60,000 and $70,400 do include counsel’s fees and preparation for trial, but exclude all other reasonable disbursements such as translators/interpreters, the costs of issuing and serving subpoenas, and transcript fees. In the circumstances I conclude that the applicant was not given proper disclosure of the anticipated legal costs. These estimates cannot be described as ‘accurate’.
The Legal Service Council in October 2018 published guidelines to assist legal practitioners to give costs disclosure and states:
An estimate of total legal costs is a reasonable approximation of the total legal costs that a client is likely to have to pay. In this context, it includes professional costs, disbursements and GST.
The Act does not define ‘total legal costs’ however ‘legal costs’ are professional costs and disbursements. In this matter each of the estimates of legal costs until 10 December 2018 specifically exclude disbursements. If the first disclosure is compliant because it was reasonable to assume that no disbursements were to be incurred then once the Writ was issued the matter had so changed as to be a new retainer that required a new costs agreement and full disclosure of total legal costs. If the matter was a continuation of the initial retainer then the obligation to provide proper updated costs disclosure did not occur and reference to conversations in November 2016 some 16 months earlier is not satisfactory.
The respondent cannot rely, as it does seek to do, on:
progress payments or the delivery of regular invoices for work already completed do not satisfy the Act. Section 174(1) requires an initial estimate of total future legal costs and a regular updating of this figure when this has significantly changed and is out of date. Section 174(6) mandates these to be in writing.[56]
[56]Johnston at par 19.
The respondent’s argument that the Court should moderate its approach to failures to comply with costs disclosures in misconceived. The Court has no discretion to moderate any failure to disclose as s 178 (1) states:
178 Non-compliance with disclosure obligations
(1)If a law practice contravenes the disclosure obligations of this Part—
(a) the costs agreement concerned (if any) is void.
The note to s 185 (1) states that:
If a costs agreement is void due to a failure to comply with the disclosure obligations of this Part, the costs must be assessed before the law practice can seek to recover them (see section 178(1)).
In paragraph 20 of Johnston Associate Justice Wood states that (citation omitted):
Any failure to comply with any of the provisions in relation to disclosure in Part 4.3 of the Act renders the costs agreement void. Non-compliance therefore equals void. There is no discretion to be exercised around ‘substantial’ compliance. If there was, I would have exercised it given the accurate oral estimate given at the outset. Failure to comply is no longer a matter that merely amounts to a potential ground for a discount of costs at the conclusion of the taxation as was the case under the former regime in the Legal Profession Act 2004. The limited future estimates that were provided in writing in this matter were insufficient to satisfy s 174(1)(b) of the Act.
In this matter each of the costs estimates given to the applicant failed to comply with the requirements of s 174 (1) (a) and (b). The initial disclosure included reference to the applicant issuing legal proceedings therefore an estimate of total costs should have included reasonable disbursements that were expected to be incurred in the foreshadowed proceeding. This was not done. Instead only limited costs disclosure was given and the scope of work and disclosed legal costs were not updated. It is clear that an estimate of total legal costs was never provided to the applicant. Each of the costs disclosures given were limited in some way or other by making reference to earlier conversations or by only disclosing future legal costs that excluded some disbursements. The respondent failed to produce any file notes to support the verbal costs estimates relied on. In Johnston the respondent had detailed file notes as evidence of the verbal costs estimates.[57]
[57]Johnston par 14.
It may be reasonable to consider that, when the County Court proceeding was issued, a new retainer began that warranted a new costs agreement and costs disclosure being given considering that the change in the applicant’s instructions was so substantial and Mr Wu commencing proceedings was unexpected after 12 months. The applicant touched on this possibility briefly in submissions, but did not make a detailed submission in this regard.
The last invoice sent before Mr Wu’s solicitors wrote to the respondent in late February 2018 advising that proceedings had been issued was dated 30 April 2017, some 10 months earlier. The period in which the work in that invoice was undertaken was on 6 March 2017. The invoice narration refers to the preparation of a response to the applicant’s email sent on the same date where the respondent instructs the respondent to limit costs and end the dispute with Mr Wu.[58] In reply the respondent advises the applicant to wait and see what Mr Wu will do to either issue proceedings or walk away. I consider that on the receipt of instructions to defend the Writ a new matter and a new retainer began. Therefore, any earlier costs estimate, including the one given on 11 November 2016, that did not consider the possibility of defending proceedings against Mr Shi has failed to comply with the disclosure requirements of s 174 (1) (a) and (b).
[58]That email and the response is Exhibit “XS-13”.
A further consideration is that no costs disclosure updates have been produced to show that the applicant was informed of increases in the charge-out rates of the lawyers who acted in the matter. The invoices show that the hourly rate of Mr Fah was $430 as disclosed in the costs agreement and was billed up to the 28 April 2017 invoice. However, invoices between 30 April 2018 and 30 June 2018 bill his hourly rate at $450 an hour and from 1 July 2018 until the end of the retainer his rate was $475 an hour. Similarly Mr Tobin’s disclosed hourly rate changes at the same times from $560 to $590 in the 30 April 2018 invoice and then to $630 an hour for work undertaken after 1 July 2018. Again the respondent has not produced disclosures of the rate increases. Mr Lapirow in response to a question from me as to whether the applicant was notified of the changes in hourly rates considered that there’s a possibility that the firm sends out universal mailing on the point[59] that do not form part of the respondent’s file and that in other matters I’ve acted for the same solicitor in other litigation ….I have seen general advices sent out ……by the accounting department of the firm.[60]He did concede that:
If it turns out that the solicitor didn’t advise the client of the updated rates, in that case the – when the bill in assessed, the original rates, would apply. [61]
[59]Transcript page 4 line 31 to page 48 line 4.
[60]Transcript page 48 lines 15 – 17.
[61]Transcript page 48 lines 9 - 11.
It seems that the applicant initially knew and understood the hourly rates charged for the work undertaken by the respondent prior to 9 November 2016. The respondent terminated that retainer on 9 November 2016 as the new instructions were outside the previous scope of work. The respondent then sent a new cost agreement on 11 November 2016. That the same step was not undertaken in or around February 2018 is difficult to understand. Therefore, in my view it is reasonable to conduct the taxation of costs for the work undertaken in 2016 and 2017 on the rates of the costs agreement as those rates had been agreed to by the applicant on 11 November 2016. After that date, no new and reasonable costs estimates were given that can be said to comply with s 174 (1) (a) or (b). So that in respect of the bills given after 5 March 2018 the legal costs should be taxed on the County Court scale of costs as the only relevant basis that can be applied. In my view the respondent failed to provide a new costs agreement or relevant costs disclosure for the new retainer. This scale reflects the Court’s view of reasonable costs at a reasonable rate for work undertaken in the County Court. It will be necessary for the respondent to prepare bills drawn on the scale before the taxation can be conducted.
Within seven days, the parties are to submit any proposed minute of consent orders in respect of these reasons and the costs of this application or, in the absence of consent, any short submissions on costs limited to four pages.
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