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Worst practice: 20 ways to lose your money

Feature Articles

Cite as: December 2012 86 (12) LIJ, p.32

Practitioners need to take great care when devising and updating costing agreements.

By Associate Justice Jamie Wood and Judicial Registrar Meg Gourlay

We hear a lot about “best practice” but, sadly, there is another side to that coin. While the vast majority of practitioners strive to do the right thing when costing work done for their clients, there is a minority who cause problems for themselves and others by failing to properly calculate, and communicate, their costing agreements. Not only do they cost themselves money, but they also jeopardise their own reputation and that of the profession as a whole.

Here are some fairly obvious pitfalls. Most practitioners know how to avoid them, but they should serve as a timely reminder for the errant few.

1: Failure to comply with the disclosure provisions in s3.4.9 of the Legal Profession Act 2004 (LPA) or any of the other relevant provisions.

If your client reviews your costs there are three potential consequences.

(i) Your overall costs entitlement can be reduced under s3.4.17(4) of the LPA, which states:

“If a law practice does not disclose to a client or an associated third party payer anything required by this Division to be disclosed, then, on a review of the relevant legal costs, the amount of the costs may be reduced by an amount considered by the Costs Court to be proportionate to the seriousness of the failure to disclose”.

(ii) Irrespective of the outcome of the review, you can be ordered to pay the costs of the review; s3.4.45(2)(b) of the LPA states:

“Unless the Costs Court otherwise orders and subject to subsection (3), the law practice to which the legal costs are payable or were paid must pay the costs of the review if — . . . (b) the Costs Court is satisfied that the law practice failed to comply with Division 3”.

(iii) The Victorian Civil and Administrative Tribunal (VCAT) has found that a failure to give costs disclosure constitutes unsatisfactory professional conduct. Non-compliance with the LPA could potentially expose you to disciplinary proceedings.1

2: Drawing up a costs agreement with your client but not getting them to sign it and not discussing with them your hourly rate or the basis of charging, then compounding the error by failing to send them the requisite disclosure material and failing to corroborate the existence of the agreement in any subsequent letter or phone conversation. Relying on the fact that the agreement contains words to the effect that the client is deemed to have entered into the agreement even if they do not sign, if they continue to give you instructions, is no guarantee of protection.

The client could successfully run an argument several years later alleging that they did not receive the agreement or disclosure material and you are unable to prove, on the balance of probabilities, that these were posted or that the client received them. The result will be that the costs are reviewed on scale. If the affidavit that attempts to prove service is inaccurate you may also end up with a fine.2

3: Failure to update the costs agreement or costs disclosure if your instructions change and you are engaged to act in new matters or litigation.

A likely outcome is that the new retainers are not covered by the agreement and you can only recover costs for the additional work on scale.

4: Changing the content of your disclosure material so it becomes misleading, or using disclosure material that has been outdated since 2007. The LPA was amended in relation to interest in December 2007 (from penalty interest to the Reserve Bank cash target rate plus 2 per cent) and the review period was changed from 60 days to 12 months in May 2007. A significant number of bills still contain the outdated information.

A likely outcome is a reduction of your costs in line with point 1 above. Advising the client that the review period is 60 days, instead of the correct 12 months, dramatically increases the client’s chances of obtaining an extension of time to review bills under s3.4.38(6) of the LPA.

5: Failure to make accurate contemporaneous file notes with start and finish times, and instead relying on time sheets filled in by someone else at the end of the day, or the next day, with insufficient detail of the attendance. Bundling multiple types of work activities into one time record means you are unable to establish how much time was spent on each activity, and including non-recoverable travel time confuses things further.

A likely outcome is that you will be unable to satisfy your burden of proof in relation to the reasonableness of the time spent or the activity undertaken, and the costs may be disallowed or reduced.

6: Giving a low and unrealistic cost estimate at the start of the retainer and failing to update the estimate as costs increase. This is in breach of s3.4.16 of the LPA, which states:

“A law practice must, in writing, disclose to a client any substantial change to anything included in a disclosure already made under this Division as soon as is reasonably practicable after the law practice becomes aware of that change”.

The problem will be compounded by failing to send interim bills but just billing the client at the end with a large bill that bears no relationship to the initial estimate.

Result: a review of your costs is almost guaranteed, and then they will be reduced because of non-compliance with the LPA in line with point 1.

7: Making the costs agreement uncertain in relation to the hourly rates by inserting a wide range of hourly rates for any named individual in your costs agreement. For example, stating that your hourly rate will be between $300 and $550 depending on how complex you determine the work to be at a later point in time. An additional problem is caused by including details of named individuals who will be doing the work, then using other individuals and not updating your disclosure or agreement as the personnel change.

This is likely to mean that you have failed to specify “the amount or rate or other means for calculating the amount of costs” in the agreement (as required by s3.4.44A of the LPA). The Costs Court may then exercise a discretion not to review your costs in accordance with the agreement. In relation to the work performed by individuals not in the agreement, you will be met by the argument that the work is not recoverable as it is performed outside the ambit of the costs agreement.

8: Making the costs agreement uncertain or ambiguous, or allowing the disclosure material to contradict the agreement. For example, saying you will charge on scale in the costs disclosure yet specifying hourly rates in the costs agreement, or describing the hourly rates as inclusive of GST in one and exclusive of GST in the other.

This scenario may increase the likelihood of your work being reviewed on scale because the agreement is void for uncertainty.

9: Becoming aggrieved if you receive a request for an itemised bill after delivering a lump sum bill – even though the client is merely exercising a right under the LPA – and attempting to punish the client by ensuring the itemised bill claims much more than the lump sum one.

A likely outcome is a review because the itemised bill is inflated. Even if you have fully complied with disclosure requirements, you will pay the costs of the review because the client will easily be able to reduce the bill by 15 per cent in accordance with s3.4. 45(2)(a) of the LPA.

10: Failure to abide by the terms of your agreement if it states that you will engage barristers and will consult the client about the cost before doing so. For example: briefing a barrister without consulting the client; not asking what their hourly rate is beforehand; not checking on their progress or finding out what the progressive cost is, so that you are surprised at the size of the invoice when it arrives; failing to get funds in from the client, so that you remain responsible for the barrister’s fees if the client does not pay; not asking for a detailed breakdown of fees when the invoice comes in from the barrister and just accepting an invoice that says “reading, preparation, settling documents, conferences, settling witness statements with witnesses, consulting with opposing counsel, submission and appearing – $60,000”.

The following outcome may occur: when the client reviews your bill (which includes the fees of the barrister), a large amount will be taxed off because you have insufficient information to justify their fees and have no idea what time has been spent on each activity. For example, who the conferences were with, when they were, or how long they took. The client’s liability to you will be reduced, but your liability to the barrister is the same and you will bear the impact of the difference.

11: Attending a mediation in a litigious matter to negotiate a settlement with no accurate estimate of costs to that point, contrary to s3.4.13 of the LPA, and then settling the matter on the basis that it is “inclusive of costs”. The situation will be made worse if, after settlement, you deliver a bill for an amount in excess of your estimate.

This will almost certainly guarantee a review, with the consequences outlined in point 1.

12: Ignoring the proportionality provisions in the overarching obligations contained in s24 of the Civil Procedure Act 2010. For example, running up costs of $50,000 in a case involving a dispute over $40,000, without specific instructions to do so.

Costs consequences on review may result.

13: When you receive a request for an itemised bill, unilaterally deciding to abandon the costs agreement in favour of costing on scale, which will be much more advantageous to you because you have inadequate time records.

A review is a likely outcome, with the consequences outlined in point 1.

14: Serving an itemised bill of costs, years after the client has made a request, for a total that is significantly larger than the previous lump sum bill, then commencing recovery proceedings in the Magistrates’ Court.

The likely result is that the client will be within the 12-month period to apply to have costs reviewed and the recovery proceedings will be stayed. You will then be more likely to be required to pay the costs of the review proceedings and the costs recovery proceedings because 15 per cent is likely to be taxed off the inflated amount of the bill.

15: Issuing proceedings in the Costs Court to recover your costs in an attempt to save the costs of recovery proceedings in the Magistrates’ Court or VCAT.

The Costs Court will look at the adequacy of your costs agreement and costs disclosure, and this will guarantee a review that may involve the consequences outlined in point 1 if there are errors.

16: Redrafting the statement of rights of the client to seek a costs review, make a costs complaint or apply to VCAT, because you think that these rights are unfair to you.

This course of conduct will guarantee the consequences outlined in point 1 on any review.

17: If you are acting in a Family Court matter, failing to update your disclosure material to take account of the amendments that were introduced from 1 July 2008 in relation to the client’s right to review in the Costs Court.

This will involve the consequences in point 1 on any review.

18: Ignoring a request for an itemised bill altogether, in the hope the client will not take it further.

This will invariably result in a review of costs in the Costs Court.

19: Providing your client with a brief summary of the disclosure material required and including a statement to the effect that you will provide a complete version on request.

This will not comply with the LPA and the consequences in point 1 will apply.

20: Ignoring the relevant parts of this article in relation to disclosure, so that in the event of an audit of your billing practices there will be multiple breaches of the Act as they will have occurred on most of your files over a significant period of time.

The likely result will be a multiplication of the consequences outlined above.

Ask yourself: is it worth it?

ASSOCIATE JUSTICE JAMIE WOOD was appointed an Associate Judge of the Supreme Court of Victoria from 2008 and Costs Judge from 2010 upon the establishment of the Costs Court. JUDICIAL REGISTRAR MEG GOURLAY was appointed as a Judicial Registrar of the Supreme Court of Victoria in January 2011 and was assigned to the Costs Court.

1. Legal Services Commissioner v Dwyer (Legal Practice) [2012] VCAT 886.

2. Legal Services Commissioner v Nowicki (Legal Practice) [2011] VCAT 1003.


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