Lump Sum Costs Agreements Consultation draft    

Lump Sum Costs Agreements
Consultation draft Version 1 19 November 2012 Level 30 400 George Street, Brisbane Qld 4000 PO Box 10310 Brisbane, Adelaide Street Qld 4000 T (07) 3406 7737 (Brisbane) or 1300 655 754 F (07 3406 7749 E [email protected] W Introduction
So‐called ‘fixed fee’ (or, to use a more modish term, ‘value pricing’ 1 ) costs agreements are one of the options available to law firms and to clients. These types of agreements provide an alternative to the more usual ‘item’ pricing or time costing arrangements. The Commission occasionally receives complaints about fixed fee costs agreements (or, more particularly, costs rendered pursuant to them) and in our experience some uncertainty attends these types of arrangements. The Commissioner has decided to issue this regulatory guide to help lawyers and users of legal services better understand a lawyer’s professional obligations in these circumstances and the factors the Commission takes into account in dealing with related complaints. 2 The guide summarizes the Commission’s approach as a ‘ready reference’ for lawyers and users of legal services. Nothing in this guide should be construed however as suggesting that fixed fee costs agreements are undesirable or problematic in themselves or that they should be discouraged. These types of costs agreements are useful and have a number of advantages for both lawyers and consumers. Legislation
The Legal Profession Act 2007 (the Act) allows a law firm to enter into a costs agreement with a client (and occasionally others 3 ). The costs agreement forms the basis of the relationship between the lawyer and the client; and also provides the basis for the legal costs charged by the lawyer 4 . The Act is not overly prescriptive when it comes to costs agreements and allows a broad range of options for lawyers and clients (at least in theory), subject of course to the lawyer’s ethical obligation to ensure the costs agreement is fair and reasonable 5 , and to any specific statutory provisions 6 . 1
In this paper, we will refer to them simply as ‘fixed fee’ agreements. 2
Please refer to Regulatory Guides: An Overview (the Overview) for further information about the regulatory guides and what we hope to achieve by publishing the guides, how we propose to go about developing them and, importantly, their status. The Overview is published on the Commission’s website at We emphasize, as we explain in the Overview, that the guides will not be, nor can they ever be binding. We note that ‘we hope and expect that the guides will promote adherence to high professional standards and help prevent non‐compliance, especially inadvertent non‐compliance by that vast majority of lawyers who want to do the right thing’, but that ‘they will not be, nor can they ever be binding. The Commission is responsible for promoting, monitoring and enforcing appropriate standards of conduct in the provision of legal services, not for setting them. The standards are set in laws enacted by parliaments, in the judgments of the disciplinary bodies and the courts and in the ‘conduct rules’ developed by the professional bodies.’ We add that the guides simply ‘set out the factors we will take into account in exercising our regulatory responsibilities in grey areas where it is uncertain how a lawyer’s professional obligations apply’ and that ‘this is no more than lawyers and users of legal services are entitled to expect of a transparent and accountable regulator.’ 3
See s 322 (1). 4
As to the consequences of not having a costs agreement, see s 319. 5
See s 328 and the discussion in Dal Pont Lawyers’ Professional Responsibility 3rd ed. at [14.165] & ff. 6
For example, ss 324, 325 and 327 Legal Services Commission: Lump sum costs agreements ‐ Consultation draft 2
Costs agreements commonly provide for legal costs to be paid on either a ‘per item’ or ‘scale’ basis; or on the basis of time costing. However, in certain areas of practice (notably criminal law and conveyancing) fixed fee agreements are more common. The key principles
The Commission believes that the following principles are applicable to matters conducted under fixed fee costs agreements: 1. fixed fee costs agreements like any other costs agreement must be both fair (i.e. entered into in circumstances which are fair) and reasonable (i.e. reasonable in its terms, including the amount of any fee); 2. the costs billed pursuant to a fixed fee costs agreement must (as with any other bill) be fair and reasonable; 3. the mere fact that a lawyer and client have entered into a fixed fee costs agreement does not, of itself, mean that the lawyer cannot be subject to professional discipline for charging excessive legal costs 7 ; in other words, if the costs are charged pursuant to the fixed fee costs agreement are excessive, the mere existence of the costs agreement is not an answer; 4. a lawyer’s fiduciary duty to a client means that the lawyer must not take unfair advantage of the client (particularly where the client is in a vulnerable position), nor must the lawyer prefer their own interests over those of the client; 5. the lawyer is in a position of distinct advantage over the client, as the lawyer is likely to be in a position to assess at the outset whether the proposed fixed fee is reasonable; whereas the client will most likely not be; 6. a lawyer proposing to enter into a costs agreement must 8 (consistently with the requirements of s 308 of the Act) make costs disclosure to the client 9 specifying the basis on which the legal costs will be calculated; in the case of a fixed fee costs agreement, this would appear to include details of the work to be done in exchange for the specified fee; 7. the Australian Consumer Law (the ACL) applies to the conduct of lawyers in entering into, and rendering bills pursuant to, fixed fee costs agreements where the legal services provided are of a “personal, domestic or household” nature. There may be other principles applicable in the context of a particular complaint received by the Commission. 7
See s 420 (b) of the Act. 8
Subject to any relevant exception – see s 311 9
And to associated third party payers – s 318 Legal Services Commission: Lump sum costs agreements ‐ Consultation draft 3
There appear to be three types of ‘fixed fee’ arrangements in common use. These are: 
what might be called ‘lump sum’ arrangements; 
‘capped’ arrangements; and  ‘staged’ arrangements. In a lump sum arrangement, the lawyer and the client agree on a price for the entire legal services to be provided. This amount is then ‘set in stone’, and is the amount that the client must pay for the services, come what may and regardless of the outcome of the matter. A capped arrangement is one in which the lawyer and the client agree on the basis on which the legal costs are to be calculated (say, time costing) but then agree on an upper limit to those costs. A staged arrangement breaks down the legal work into various defined stages with a set fee to be paid for each stage. In the Commission’s experience, the lump sum type of arrangement is the most likely to be the subject of a complaint. Money up front
One issue that sometimes arises is the question of how to treat money paid to a lawyer ‘up front’ under a fixed fee agreement. Section 237 of the Act defines the term ‘trust money’ as follows (emphasis added): “trust money means money entrusted to a 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 another person.” Accordingly, money paid ‘up front’ under a fixed fee agreement must be treated as trust money (indeed, this appears to have been the view adopted by the Supreme Court of Queensland in the decision of State of Queensland v Masman 10 ). Money received for future outlays (e.g. counsel’s fees or stamp duty) is ‘transit money’ and must also be treated as trust money. 10
[2009] QSC 430 Legal Services Commission: Lump sum costs agreements ‐ Consultation draft 4
Even if a costs agreement is of the ‘lump sum’ type, until services have been provided to justify the fixed fee, the money must be paid into and remain in a trust account. It may only be withdrawn in accordance with the requirements of the Act and the Legal Profession Regulation 2007. Early termination
The most common types of complaint that the Commission sees with fixed fee arrangements arise when the retainer is, for some reason, terminated early. Below are some examples:  Scenario 1: The lawyer is retained by the client shortly after the client’s arrest on criminal charges to defend those charges. The costs agreement provides that the lawyer will conduct the matter to the end of a jury trial for a ‘lump sum’ fixed fee of $100,000 including outlays. This amount is paid ‘up front’. The lawyer reviews the material and the police brief and engages a barrister. The matter proceeds to a committal hearing. At the committal, the magistrate refuses to commit the client for trial and he is released. The lawyer claims the entire $100,000, arguing the fee was ‘fixed’ irrespective of whether the matter actually proceeded to trial or not.  Scenario 2: The lawyer is retained in a personal injury matter. A ‘staged’ costs agreement is entered into providing for the following fees: Stage 1 – Pre‐proceedings steps ‐ $2,500 Stage 2 – Compulsory conference ‐ $3,000 Stage 3 – Issue proceedings ‐ $4,000 Stage 4 – Disclosure of documents ‐ $1,000 Stage 5 – Mediation ‐ $2,000 Stage 6 – Trial ‐ $6,000. At the end of the compulsory conference, no agreement has been reached. However, the insurer’s lawyer suggests that the matter might be able to be resolved by mediation. This is arranged and the matter settles. The lawyer sends a bill for $12,500; arguing he has taken the matter “to the end of Stage 5”. 
Scenario 3. The lawyer is engaged by the seller of a residential property. The costs agreement provides for a capped fee of $1,000 with time costing to apply below that amount. The building and pest inspection is satisfactory and transfer documents are prepared. However, finance is not approved and the contract ‘falls over’. The lawyer sends a bill for $1,000, arguing that “all the real work had been done”. The Commission’s views on these scenarios would be as follows:  In Scenario 1, the fee was ‘fixed’ on the basis of the matter proceeding to a jury trial. That did not occur. As a result, the basis for the fee has not been established. In addition, it can hardly be said to be ‘fair and reasonable’ to claim the entire $100,000. The lawyer should assess the work actually done on a fair basis (e.g. any applicable scale, or a reasonable hourly rate) and charge the client only that amount. The balance of the $100,000 should then be returned to the client.  In Scenario 2, the lawyer cannot ‘pretend’ that Stages 3 and 4 have been completed when they have not. The bill must reflect the stages actually completed (i.e. stages 1, 2 and 5). Thus, the bill should be reduced by $5,000. Legal Services Commission: Lump sum costs agreements ‐ Consultation draft 5
In Scenario 3, the outcome will depend on the work actually completed. If the work done at the applicable hourly rate exceeds $1,000 then the cap would apply and the bill is justified. If however the work completed only amounts to say $500, then the lawyer cannot claim the ‘cap’ and should reduce the bill by $500. Itemised bills
It appears to be a rather widespread misconception within the profession that having a ‘fixed fee’ arrangement means that a lawyer does not have to itemise a bill if requested by the client. It follows that lawyers need to maintain their client files in a manner that allows for an itemised bill to be drawn, even where a fixed fee arrangement is in place. There is no exception in s 332 of the Act for situations where a ‘fixed fee’ is agreed in a costs agreement. For more information, consult the Commission’s Regulatory Guide 1‐2012: Itemised Bills. Assessment
Bills rendered pursuant to a ‘fixed fee’ costs agreement are amenable to costs assessment under Part 3.4 Division 7 of the Act as with any other bill for legal costs 11 . Australian Consumer Law (ACL)
The ACL came into effect on 1 January 2011. It applies to lawyers providing legal services that are of a “personal, domestic or household” nature. It contains provisions relating to: 
misleading and deceptive conduct, 
unconscionable conduct, and  unfair contracts. Those provisions may also be applicable to lawyers’ conduct in both entering into fixed fee costs agreements and in rendering bills pursuant to those costs agreements. For more information, refer to the Commission’s Regulatory Guide 2‐2012: The Application of the Australian Consumer Law to Lawyers. 12 11
Subject to the exceptions in the Act relating to ‘sophisticated clients’ – see s 344 12
The Commission has entered into a Memorandum of Understanding with the Office of Fair Trading to the effect that complaints about lawyers which involve ACL issues will be investigated in the first instance by the Commission. The MOU is published on the Commission’s website. Legal Services Commission: Lump sum costs agreements ‐ Consultation draft 6