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Episode 140 Buy Episode

The Price of Justice: Navigating the Ethics of Conditional Costs Agreements

Law as stated: 13 January 2025 What is this? This episode was published and is accurate as at this date.
Charlotte Morson, Principal Solicitor at The Legal Costs Consultants, joins David to discuss the ethical obligations lawyers face when handling conditional cost agreements. Charlotte explains how these agreements, often known as "no win, no fee," work in practice and the key ethical considerations involved.
Ethics and Professional Responsibility Ethics and Professional Responsibility
13 January 2025
Charlotte Morson
1 hour = 1 CPD point
How does it work?
What area(s) of law does this episode consider?Costs agreements and disclosures; conditional costs agreements.
Why is this topic relevant?One of the most common sources of complaints for lawyers is poor communication when it comes to costs, and this is all too common when dealing with fairly simple so-called ‘due and charge’ engagements at hourly rates with an estimate, or even fixed fee engagements.  It can be even more challenging to communicate about costs when it comes to conditional costs agreements, often called ‘no win, no fee’ arrangements, which are ubiquitous in personal injury matters, but are becoming increasingly common in other areas of practice as well.

These conditional costs agreements not only affect how legal costs are structured, but they also require some careful consideration and thought about the circumstances that define a successful outcome, which is often the trigger for the payment. This underscores the need for lawyers to be well informed about their ethical obligations in costs agreements and the implications for their clients.

What legislation is considered in this episode?Legal Profession Uniform Law 2014 (NSW); Legal Profession Uniform Law 2014 (Vic); Legal Profession Uniform Law 2022 (WA)

Legal Profession Uniform General Rules 2015 (NSW); Legal Profession Uniform General Rules 2015 (WA)

What cases are considered in this episode?Musgrave v SRM Lawyers Pty Ltd [2023] NSWDC 242

  • A dispute arose between the executor of the late Mark Musgrave’s estate and a law firm over the interpretation of “successful outcome” in a conditional cost agreement regarding Federal Court proceedings. The issue was whether “successful outcome” should be narrowly defined as resulting in a monetary benefit to the trustee in bankruptcy or more broadly as the resolution of proceedings in various forms, such as the winding up of a company. The District Court upheld the review panel’s finding in favour of SRM Lawyers, concluding that the conditional cost agreement contemplated a spectrum of potential resolutions, including outcomes that did not involve a monetary payment.
What are the main points?
  • A cost agreement is essential for determining how you will be compensated when working for a fee and is mandatory when the amount exceeds $750. It should include details about how you will be charging, such as hourly rates or fixed fees.
  • A cost agreement differs from a cost disclosure, which involves informing the client about the rates and estimated costs, with the client’s continued instruction implying agreement, while a cost agreement typically requires the client’s written consent.
  • Failure to properly disclose to the client or issue a cost agreement can result in findings of unsatisfactory professional conduct or professional misconduct. Additionally, clients are not obligated to pay fees until they are assessed, requiring solicitors to go through a costly cost assessment process to recover their fees.
  • Having a valid cost agreement in place and properly disclosing costs is crucial for maintaining a healthy solicitor-client relationship. Breakdowns often occur when communication and proper disclosure is lacking.
  • A conditional cost agreement is an arrangement where a client only pays costs upon the satisfaction of a specified condition, typically success in the proceedings.
  • Conditional cost agreements must be in writing, clearly defining the conditions for success, signed by the client, and include a statement informing the client of their right to seek independent legal advice, as well as a cooling off period of at least five business days.
  • Success in legal matters is typically defined as a favourable outcome, such as winning a case or receiving a costs order.
  • Clients may mistakenly expect that upon success, solicitor’s fees will be entirely covered in the award of costs. Often in these arrangements, the award of costs may fall short of the total amount owed to the solicitor.
  • In cases where a law firm fails to disclose cost estimates, the assessment is typically done based on a quantum meruit basis, aiming to ensure fair payment for the work performed. Despite lacking disclosure, solicitors often still recover most of their fees, with only minor reductions occasionally applied.
  • Non-disclosure may result in having to pay additional fees, such as the fees of the cost assessor, which can vary in magnitude.
  • If a conditional cost agreement lacks adequate disclosure, such as an updated estimate or a single estimated figure, it may be deemed void, preventing the law practice from recovering any excess amount beyond what would be allowed if the agreement was valid.
  • If a cost agreement is void, you will not be able to recover the uplift fee.
What are the practical takeaways?
  • Many struggle with providing accurate cost estimates at the start of legal proceedings due to the uncertainty in any given matter. Often solicitors will provide an estimated range of fees, despite the Uniform Law requiring a single figure. It is crucial to update the estimate throughout the process to ensure transparency with your client and compliance with the Uniform Law.
  • There is a little-used rule that allows solicitors to remedy non-disclosure within two weeks of noticing it, as long as it would not have affected the client’s decision to retain them.
  • When making a conditional cost agreement, it’s crucial to ensure that the solicitor explains everything clearly in plain language. It’s important to address any misunderstandings, such as the concept of “no win, no fee” and the potential costs the client may have to pay if they lose the case.
  • Under the Uniform Law, after receiving instructions, solicitors must provide a cost disclosure within a couple of days.
  • It is important to read the relevant rules and regulations that govern the legal profession, including those that concern cost disclosure. Also, regularly review judgements on costs.
Show notesOffice of the NSW Legal Services Commissioner, Annual Report 2022-2023 (Report, 2023)

Law Society of New South Wales, Costs Guidebook, (Law Society of New South Wales, 7th ed, 2017)

LawCover Resource Centre

00:00:00DT:Hello and welcome to Hearsay the Legal Podcast, a CPD podcast that allows Australian lawyers to earn their CPD points on the go and at a time that suits them. I’m your host, David Turner. Hearsay the Legal Podcast is proudly supported by Lext Australia. Lext’s mission is to improve user experiences in the law and legal services, and Hearsay the Legal Podcast is how we’re improving the experience of CPD.

Today on Hearsay, we’re talking about conditional cost agreements. Now, one of the most common sources of complaints for lawyers is poor communication when it comes to costs, and this is all too common when dealing with fairly simple so-called due and charge engagements at hourly rates with an estimate, or even fixed fee engagements that can be even more challenging to communicate about costs when it comes to conditional cost agreements, often called ‘no win, no fee’ arrangements, which are ubiquitous in personal injury matters, but are becoming increasingly common in other areas of disputes practice as well.

These conditional cost agreements not only affect how legal costs are structured, but they also require some careful consideration and thought about the circumstances that define a successful outcome. This underscores the need for lawyers to be well informed about their ethical obligations in cost agreements and the implications for their clients.

Joining us today to help us understand conditional cost agreements and our ethical obligations in relation to them is Charlotte Morson, principal solicitor at The Legal Costs Consultants. With extensive experience in legal costs management and a deep understanding of the ethical issues that arise when dealing with legal costs, Charlotte is well equipped to provide valuable insights into the complexities of cost assessments and the ethical responsibilities that we lawyers face.

Charlotte, thank you so much for joining me today on Hearsay.

00:01:52CM:Thank you so much, David, for having me today.
00:01:54DT:Now, I’m looking forward to getting into this topic. As I said, just before we started recording, these sort of skin in the game type cost agreements are a particular area of interest for me but before we do that, tell me a bit about your career background. How did you get into legal costs and being a specialist in legal costs?
00:02:10CM:Okay. So I started my career as a litigation lawyer actually and worked as an employed solicitor for about 10 years. Obviously, as a litigation solicitor, as most of my colleagues would know, you have to have a bit of exposure to cost assessments, either at the end of a matter, when your client has to pay costs or receives a cost order in its favour, and also solicitor client cost assessments when you’re trying to recover fees from a client. So I started doing more of that whilst working in litigation, eventually had a couple of kids and thought about opening my own practice and actually I decided to run with the legal costs side and did a huge amount of training for myself, research, work on the job and opened my practice The Legal Cost Consultants about five years ago. Now I manage a couple of consultants and paralegals who work for us in legal costs and do a lot of expert costs work, a lot of cost assessments for both solicitor clients and party, party costs assessments. That’s probably our most common area – party, party – but we still do a lot of solicitor, client costs assessment and we do often come across conditional cost agreements in that area as well.
00:03:21DT:And as I said at the top of the episode, they’re certainly common in personal injury practice. Anecdotally, I’ve heard that they’re becoming more common in other areas of disputes practice. Does that gel with, kind of, what you’re seeing in your practice?
00:03:44CM:Yes, absolutely. We often see it in mostly personal injury, sometimes wills and estates or family provisions claims, not often in commercial litigation, though, although I do also understand that they are there as well.
00:03:58DT:Yeah, I suppose one slight variation on the theme that a lot of the tips we’ll be talking about today, especially in terms of defining successful outcomes, equally apply to this kind of cost agreement is permissible success fees, which are chargeable both in disputes matters and in transactional matters subject to a cap. I’m certainly aware of a few commercial matters where I believe the cap is 25% of the fees charged can be uplifted as a success fee.
00:04:26CM:That’s right. Yes. Yes. 25% uplift. I have seen that quite a lot, actually. There’s specific rules around the uplift, but it is capped at 25%, yes.
00:04:34DT:All right. Well, let’s get into it. And maybe the best place to start is with a quick refresher on the basics, because I think sometimes we think we know what we’re meant to be doing with costs and experience accretes over time and maybe replaces knowledge of the actual rules. So let’s start with the basics. In what circumstances do we have to issue cost agreements when dealing with our clients? Let’s start at the most basic level. What’s the role of the cost agreement in regulating our relationship with us and our clients?
00:05:03CM:Okay, so a cost agreement is, I guess, the whole foundation as to how you get paid. So if you are working for a fee, then it’s probably the most important thing that you can do when a client is retaining you. If it’s under a certain threshold, I think it’s around $750 at the moment, but it does change, you don’t have to have a cost agreement, but as soon as it looks like it might go over that amount, you do have to have a cost agreement. The cost agreement, if it’s a disclosure to the client, you need to disclose the basis on how you’re charging, whether that’s an hourly rate or a time basis or a fixed fee. This all doesn’t have to be in the cost agreement, but it has to be given to the client as a disclosure. So, I guess most of the time, a cost agreement and a cost disclosure will overlap. A cost agreement is a little bit different to a cost disclosure, you don’t have to have a cost agreement where the client signs the form and says, “yes, I agree to this,” but you have to give disclosure. So that can be a little bit different in that you can disclose the rates and give an estimate of what the costs are going to be and the client is assumed to have agreed to that if they continue instructing you, whereas a cost agreement might have something where the client has to agree in writing. So they might have to sign it. For example, a conditional cost agreement has to be in writing and it has to be signed by the client, which is a little bit different to just a regular cost disclosure.
00:06:29DT:Yeah, that’s a great point. And I think we often, even as solicitors, conflate these two documents. Certainly clients do. The cost agreement and the cost disclosure are distinct. The cost agreement is optional. The cost disclosure is not but in the circumstance that we’re talking about today, conditional cost agreements, they can’t be affected but for having a cost agreement in place, a written contract between yourself and the client that defines things like the definition of a successful outcome.

TIP: Under section 174(1)(a) of the Legal Profession Uniform Law, a law practice must 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. This also entails an obligation to inform the client about any significant change to legal costs that will be paid by the client – that’s (1)(b) of section 174. 

Importantly, there is no ability to provide a range of estimates, a lower and higher bound of your estimate, you must provide a single estimate of total legal costs. However, in lower value matters, under section 174(4) of the Uniform Law, a law practice doesn’t actually have to give any cost disclosure if the legal advice is going to cost less than $750, not including disbursements and GST. Similarly, under section 174(5) of the Uniform Law, if the total legal costs excluding disbursements and GST are less than $3,000, then the lawyer can provide a standard cost disclosure form rather than the usual full cost disclosure. 

Charlotte’s also outlined some requirements around the information that has to be included when ordinary cost disclosure obligations apply. That’s when the services to be provided are worth more than $3,000. Those requirements are listed in section 174(2)(a) of the Uniform Law. 

Now, what are the consequences for us not having a cost agreement in place in circumstances where we might need one, like a conditional cost agreement and what are the consequences for not giving adequate cost disclosure? I mean, the big one is that you’re not allowed to charge for the work you’ve done, right, or at least you’re not allowed to sue to recover the fees.

00:08:32CM:Yes, that’s exactly right. So there’s a couple of consequences of not properly disclosing to the client or having a cost agreement which needs to be issued in circumstances such as a conditional cost agreement. The first one is that it can be unsatisfactory professional conduct or professional misconduct. So you could actually be struck off the role of lawyers depending on the severity. I’ve seen warnings issued before by the Legal Services Commissioner. I haven’t, thankfully, seen worse, but it is possible. The second is that your client doesn’t have to pay your costs until they’ve been assessed. So you have to go through a cost assessment process if you want to recover your fees and your client refuses to pay. You can’t sue your client for the costs which, especially when there may be only a couple of thousand dollars, you have to go through the cost assessment process, which can be costly and disproportionate to the amount that you are wanting to get paid.
00:09:26DT:Yeah. So naturally, I mean, most lawyers tend to come into contact with the cost assessment process, as you said, at the end of a litigation matter where the award of costs is subject to the cost assessment process. No one wants to be going through the cost assessment process over a relatively small bill because they’ve failed to adequately disclose. So, very important to do that. And as I said at the top of the episode, this is a really common area for complaints to the Legal Services Commissioner and to the Law Society, right?
00:09:55CM:Yes, that’s exactly right. And look, most of the work that we do in terms of solicitor, client costs is where a client’s refusing to pay the solicitor. And almost all of the matters that we work on, there is no valid cost agreement or they have failed to disclose. And I think that is probably representative of the fact that we are sort of like doctors where we work on only matters where the relationship has broken down. So where there is a cost agreement that’s in force or you have properly disclosed your cost, you’ve given an accurate estimate or you’ve updated it along the way and the client is fully apprised of the cost that they’re going to be incurring, it’s much less likely that the relationship breaks down and the client is obviously happier to pay and that’s why we don’t see that. I’m hopeful that that’s the case and it’s not the fact that nobody discloses properly but yeah, I think that a valid cost disclosure or cost agreement is definitely a good step in keeping a healthy relationship with the client.

TIP: So Charlotte was just talking about the proportion of cases she sees where there are inadequate disclosures by solicitors. In the 2022-2023 financial year, the Office of the Legal Services Commissioner received a total of 2,842 written complaints. Of those, 588, that’s just over 20% roughly, were cost dispute complaints. Overcharging complaints made up 12.9% of those complaints alone – that was the third most complained about issue received by the Legal Services Commissioner. 

Negligence and communication issues were just above overcharging in terms of frequency, they were the two most common types of complaints but if you were to add general costs complaints and issues with cost disclosure to the number of complaints about overcharging, then that would be the largest portion of complaints to the OLSC, that kind of basket of costs issues. 

Which areas of practice most commonly see cost disputes? Well, family law matters are most commonly involved in cost disputes, 26.7% of cost disputes relate to family law matters, followed by other civil matters at 14%, criminal matters at 10%, personal injury matters specifically at 8%, and probate and family provision matters at just under 8%.

00:12:02DT:I’d be interested to know this; in the matters that you see where there’s been inadequate or really no cost disclosure, what proportion of those is there no cost disclosure or inadequate cost disclosure up front and in what proportion of matters is there great, robust, responsible cost disclosure up front, and then a real failure to update that as the matter evolves? Because I think everyone has had the experience, if we’re prepared to admit it to ourselves, where often very good at getting the cost agreement signed and getting a well thought through, well scoped and estimated cost disclosure out to the client at the outset of a matter but as the scope changes a little bit and as the matter evolves, we’re maybe a little less disciplined and a little less diligent about updating that cost disclosure, which is still an important responsibility just as important as the initial cost disclosure, no?
00:12:53CM:Yes, that’s exactly right. And I think everybody struggles with giving an estimate at the start that will cover the whole proceedings because we all know, especially in litigation matters, just how much the cost can change for various reasons. To be honest, most of the time, the initial costs estimate that we see doesn’t comply with the Uniform Law. The Uniform Law provides that you have to give an estimate. There is a guideline that was produced by, I think, the Legal Services Commissioner that says that the estimate has to be a single figure estimate, and it has to be inclusive of disbursements and counsel fees. It can’t be a range, and most of the time, especially in larger matters, we see a range given. I think a range is sometimes softer to a client and I understand why it’s given because sometimes I want to give a range as well because It’s also most accurate, say costs could be 50,000 or they could be 100,000 and it’s nicer to say to the client, “it won’t necessarily be 100,000” as an alternative to saying “it’s going to be 100,000” because that might scare a client off, but at the same time it could be, but it could also be half that depending on what happens but I guess the way around that is that you can update it along the way. If you wanted to go with the lower estimate, but then things happen, you have to update it along the way. So to answer your question, I guess, most of the time, we actually see the initial cost agreement isn’t valid because the estimate’s not been provided properly and then it’s common again, that it’s not updated along the way of the proceedings as well.
00:14:24DT:Yeah, I think those ranges are still really common because it was not so long ago that that was a permissible practice.
00:14:30CM:That’s right.
00:14:31DT:And I think a lot of lawyers haven’t updated their internal practices to stop giving ranges, which yeah, for a lot of us seem more intuitive or as you say, at least a little less scary. Now, let’s talk about conditional cost agreements now, that’s the main event for today. How do they work? What distinguishes them from normal cost agreements?
00:14:50CM:Okay, so a conditional cost agreement is, I guess, traditionally a cost agreement where a client only has to pay the costs on the satisfaction of a condition and normally that condition is success. It might not be success, it might be a certain outcome in the proceedings, but it should be defined in the cost agreement. It might also say, for example, that the client has to pay disbursements, but not professional fees. It might say they only have to pay a portion of professional fees unless they’re successful, but it should be. In writing and sent to the client. There are also a couple of formal requirements, a conditional cost agreement, different to just a disclosure, it has to be in writing and it should be in plain language to the client. It has to set out the circumstances that constitute the successful outcome of the matter. For example, it should say whether success means the resolution of the proceedings, or does it mean a certain amount in damages being awarded to the client, or does it mean any damages awarded to the client, does it mean a cost order in the client’s favour. That should be defined very simply. It has to be signed by the client. It also has to include a statement that the client has been informed of their right to seek independent legal advice before entering into the agreement. And it should also contain a cooling off period of not less than five business days.
00:16:11DT:I didn’t know about the cooling off period. There you go.
00:16:14CM:Yeah, I expect it’s probably something that obviously has to be given, but it’s probably not taken up a whole lot by the client.

TIP: A quick note on cooling off periods for conditional cost agreements. If a client terminates a conditional cost agreement during that cooling off period, then the law practice is entitled to only recover the legal costs for services performed before the termination, provided that those services were performed under the client’s instructions and with the client’s awareness that the services would be carried out within that period. That’s section 181(5)(a) of LPUL. And the law practice cannot recover any uplift fee in that case where the cost agreement has been terminated during the cooling off period. 

Another little tidbit on conditional cost agreements is that they can provide that the client pay the law firm’s disbursements regardless of the outcome, that’s section 181(6).

00:17:03DT:Now, you said one of the most important things is to clearly define the circumstances that constitute a successful outcome. From your experience looking at these sorts of cost agreements, and I suppose most importantly seeing where they’ve gone wrong, what’s the most common method by which practitioners are defining a successful outcome and, maybe more importantly, what’s the most common method that you see going wrong where they’ve defined a successful outcome in a way that’s produced a dispute or an issue about the way costs have been assessed?
00:17:33CM:Okay, so success is normally defined as a successful outcome being a win in the proceeding. So if you’re the successful party or if you are in receipt of a costs order in your favour, I do see quite often that clients have caused a bit of a dispute with their solicitor when clients understand success to mean that they’re going to get money to pay all of their solicitors fees when that might not always be the case. So, for example, even though they might win the case and be the successful party, they are then responsible for their solicitors fees and sometimes they’re still out of pocket for those fees and they don’t quite understand that.
00:18:20DT:I see. So. I suppose one way you could characterise that misconception that clients often have is; the award that they’re receiving is exclusive of costs, if you’re defining the cost agreement by reference to a particular award. Is that right?
00:18:33CM:Yeah. So, for example, in a personal injury matter, the client receives 100,000 inclusive of costs, and that would be a successful outcome in most of these sort of conditional cost agreements that we see but in, actually, quite a few of these sort of matters, if it’s inclusive of costs outcome, the cost might be more than 100,000. So the client might not end up getting anything at the end of the day, and they might still be responsible for a portion of their solicitor’s costs that aren’t covered by that determination. So that’s definitely something that has caused disputes in our experience.
00:19:07DT:Yeah, I could imagine. I suppose whether or not cost disclosure has been adequately provided at the outset of a matter or whether it’s been adequately provided at the outset and then it’s fallen short as the matter has evolved, is that kind of unremediable? You know, once that’s happened, once we failed to give cost disclosure at the outset of the matter or failed to give it when we’ve exceeded an estimate or the scope of the matters changed, is there anything we can do about that?
00:19:29CM:Good question. Yes, there actually is and it’s little used. I think it’s in the general rules. There is a rule that says if a solicitor hasn’t disclosed and within two weeks of noticing the lack of disclosure, they can remedy it. The rule contains a requirement that it wouldn’t have made a difference to the client retaining the solicitor in the first place, but it absolutely can be remedied and I think a lot of solicitors don’t actually know that. So definitely one to remember.
00:19:58DT:Yeah, absolutely, especially for those kind of scope creep type of matters where you’re likely to notice as you exceed the estimate that you get around to billing day and you say, “oh, geez, we’re very close to that threshold estimate that we gave at the outset of the matter. Might be time to update,” that two week window is really handy.

TIP: Regulation 72A of the Legal Profession Uniform General Rules 2015 gives lawyers a grace period for disclosure obligations. It exempts legal practitioners from disciplinary action for non-compliance with disclosure obligations as long as they’ve made reasonable efforts to comply with the disclosure obligations initially and rectify any issues with compliance within 14 days of discovering the breach by providing all necessary information, including any cost estimates or revisions, and if the breach was minor and that there was no reasonable likelihood that the client’s decision would’ve changed had proper disclosure occurred earlier. 

I promised I wouldn’t get onto this tangent, but it seems I can’t help myself. I was just talking to our team this morning about the prohibition on contingency fees, so being awarded a proportion of the plaintiff’s award in disputes matters. This is a longstanding prohibition said to come out of the prohibition on maintenance and champerty, this idea that if lawyers had some skin in the game, some proportionate interest in the awards given to their clients, then they’d be motivated to bring more litigation and claim larger amounts. It strikes me that the circumstance you’re describing that’s, you know, not uncommon where a lawyer secures an engagement on a no win, no fee basis only to receive substantially all of the award the plaintiff was to be awarded embodies the same undesirable outcome that the prohibition on contingency arrangements is supposed to prohibit and would have in fact been avoided by a contingency arrangement.

00:21:50CM:Yes, that is so true, but obviously it works both ways. Do we want more litigation just because it can become a sport or a money making venture for lawyers? I don’t know. Huge ethical considerations there, but correct, it would absolutely solve a lot of these problems where often say, especially in personal injury matters, the money that the client has received to deal with terrible injuries for the rest of their life is eaten up by solicitor fees, which is incredibly sad, but part of the game, I guess.
00:22:20DT:Yeah. Yeah. Well, at the very least we should be able to compete with the litigation funders who are doing it every day but I’ll get off my soapbox now and get back to our topic for the day, which is conditional cost agreements. So I suppose there’s in any cost agreement in any matter that involves cost disclosure, whether or not there’s a cost agreement, there’s always a risk that however clearly the solicitor believes they’ve disclosed their costs and this might be in circumstances of a conditional cost agreement, but it might also be in circumstances where they’re charging a fixed fee based on a particular scope, certain things are outside of that scope and will be charged at an hourly rate, there can always be misunderstandings between the client and the lawyer about how a cost agreement is to work. And I think the risk of that is heightened with a conditional cost agreement where the understanding of what that successful outcome might be is so critical to the lawyer being paid at all and a potentially quite acrimonious cost assessment following that if the party’s expectations are quite different. So I suppose I’m asking you practically now rather than legally, what are some of your tips for lawyers who do work on a conditional basis to really clearly communicate with their clients about the nature of the cost agreement the client’s entering into, the basis on which they’re going to be paid, and really giving themselves some comfort that the client understands what they’re getting into.
00:23:44CM:Okay. Good question. All right. I think the first thing to really make sure that the solicitor understands in making a conditional cost agreement is that the sort of matters where conditional cost agreements are used the most, say personal injury, that sort of thing, are matters where the clients are probably not experienced litigants. This might be the very first time they’ve been in court, had a court case for them or against them, and all they know about a cost agreement, lawyers’ fees is what their friends have told them, what they’ve seen on TV or what you are telling them when you make the disclosure. So it has to be in plain language. It’s so important to talk to them, ask them questions about whether they understand it. Make sure they ask any questions about every single part of it. “Do you know what ‘success’ is?” Ask them for examples, “would this be ‘success’?” Try and make it as clear as you possibly can. One of the misunderstandings I see a lot is that clients don’t understand no win, no fee to start with but a lot of people going into these sort of agreements don’t realise that they have to pay the other side’s costs if they lose. So, that needs to be set out in the cost agreement as well. It’s a requirement under the Uniform Law, so you need to explain to the client if they lose, yeah, they might not have to pay your fee, but they might have to pay hundreds of thousand dollars in cost to the other side.
00:25:06DT:Yeah, that is such a good point about the adverse costs order actually, because I think we often use no win, no fee because it’s client friendly language, it’s good, sort of, marketing copy as well, but it sounds intuitive. Even I had not really consciously acknowledged that, of course, you take enormous risk pursuing any litigation so far as you’re exposed to the adverse costs or your solicitors are not going to pay the other party’s costs if you’re unsuccessful, so that is such an important thing to disclose and look, it might not be a breach of the particular provisions of the LPUL so far as they concern cost disclosure and cost agreements, but you’re still very likely to face a complaint or at least a very disgruntled client if they’re surprised by that result.
00:25:48CM:Absolutely. And when the client goes into a conditional cost agreement, I don’t think that they really realise the quantum of fees that can be incurred in these sort of proceedings and quite often I have people come to me at the end of a proceeding and they’re not complaining about their lawyer’s fees, but they’re obviously just in distress because their lawyer’s fees might’ve been covered, but they’re coming to me saying, “I thought that I wouldn’t have to pay anything if I lost and the other side’s given me a bill for their costs of 3,400,000.” And sometimes these clients, they only have their family home and that has honestly happened quite a lot. I think they don’t understand the magnitude that the costs can get to from the other side because they haven’t consciously realised how much their own solicitors are putting into the matter as well.
00:26:33DT:All right. Well, we’ve had a good discussion of conditional cost agreements and some of the practical tips that we might want to take on board when drafting one, especially when it comes to defining what success looks like and communicating that to the client, especially some of the counterfactuals, what failure might look like and including an adverse costs order but it’s always helpful to talk through some cases, see this in practice. So are there any recent cases or seminal cases that we might want to look at when it comes to conditional cost agreements?
00:27:04CM:Yes. So there has been a recent case, I think it was 2023, it was Musgrave v SRM Lawyers. Now, in this case, the costs were subject to a cost assessment and a review and the cost assessors said that what was a conditional cost agreement, the definition of success had been reached and therefore the client was liable to the solicitor for the fees. The client said, “no, I haven’t succeeded in the case and so I’m not paying.” In that case, the actual definition of success was the resolution of Federal Court proceedings and I think one of the claims in those Federal Court proceedings was actually that a company be wound up. So the company was wound up and therefore, the Federal Court proceedings were resolved and the client should be liable but the client said, “no, I didn’t get a payment of money.” So as we’ve discussed, I think the client was still liable or out of pocket for the solicitor’s fees and the client didn’t quite understand that even though it was out of pocket for the fees, it still had to pay them; success didn’t mean, you know, money coming into the client’s pocket to pay for the fees and, unfortunately for the client, the District Court agreed with the review panel. So the client did have to pay the fees.
00:28:20DT:But this is a case where the solicitor has been engaged to bring a creditor’s petition to wind up a company.
00:28:28CM:Yes.
00:28:29DT:They’ve brought that creditor’s petition. They’ve been successful in winding up the company that’s the subject of that petition. That’s a win, right? That’s a win in those proceedings.

TIP: Charlotte and I just talked about Musgrave v SRM Lawyers, a 2023 decision of the District Court. This case examined the interpretation of a successful outcome in relation to costs under a no win, no fee arrangement and the holding in that case relates to section 181(2) of the Uniform Law. 

The case involved the dispute between the executor of the late Mark Musgrave and a law practice, SRM lawyers, that had entered into a conditional cost agreement. The definition of a successful outcome in the conditional cost agreement was the following:

“The successful outcome of the matter, as agreed with you, is the resolution of Federal Court Proceedings NSD1639/2018.”

The resolution of the proceedings is the operative part of that definition. The plaintiff argued that a successful resolution should only apply when the outcome resulted in a financial benefit to the estate. The court disagreed and found that when the parties entered into the conditional cost agreement, they contemplated a range of potential outcomes. Those outcomes could vary significantly and shouldn’t be restricted to monetary compensation for the estate. 

In that case, Judge Newlands emphasised:

“… the parties were contemplating not just one outcome of the Federal Court proceedings but, if you like, a spectrum of potential resolutions, all of which might be described as successful. If the claim by the trustee in bankruptcy produced a payment of $1 million, that would obviously be successful. But so too might an outcome producing $100,000, or even the winding up of the company, as that was the only relief sought.”

The plaintiff argued that simply winding up the company would not constitute a successful outcome, as the condition was intended to mean only a monetary result benefiting the plaintiff but his honour concluded that the federal court’s dismissal of both the claim and the cross claim qualified as a resolution under the terms of the conditional cost agreement, entitling the defendant to payment of their legal fees. 

So the takeaway for both law firms and their clients is to be very specific about how a successful outcome is defined in a conditional cost agreement.

It strikes me as an unusual one to offer a conditional cost agreement on actually, because you don’t ever get an award in winding up proceedings, but maybe there were some related proceedings that sort of ran along with it and I guess the other unusual feature of that case that makes it an unusual one for a conditional cost agreement is that if you suspect a company is insolvent, by definition, you’re expecting a bit of trouble in recovering costs from them in the aftermath but that’s an interesting one because we were talking earlier about how you might define a successful outcome. ‘Resolution’ is very broad. It’s certainly helpful to the solicitor, but you can really easily see the client getting a bit of a misapprehension there about what a resolution of the proceedings in its favour might look like.

00:31:10CM:Definitely. I mean, and obviously it depends on what type of proceedings they are, but resolution of the proceedings is, I mean, almost all proceedings resolve in some way, but there’s also the difference between some solicitors will take a delayed fee structure, they might agree to receiving funds at the end of a matter, but it’s important to differentiate that to an actual conditional cost agreement where, yeah, there is a success condition that can be defined in the cost agreement.
00:31:37DT:Yeah, absolutely. I mean, that’s probably another one to talk about. I often enter into cost agreements with clients that’s said to be built on completion, often completion self evident, but I wonder whether sometimes there’s matters where it’s more obvious to me than it is to the client or vice versa.
00:31:51CM:Yes, that’s true. I hadn’t thought about that but yeah, could a deferred fee arrangement where you bill on completion, what if the matter doesn’t complete?
00:31:58DT:Yeah, that’s right. Although, as you say, certainly in a disputes matter, everything resolves one way or the other, whether it’s dismissed or withdrawn or an order’s made. So yeah, really important to be specific about those successful outcomes. So we’ve talked about what our listeners should be doing to do the right thing when it comes to cost disclosure generally and conditional cost agreements specifically, where disclosure isn’t adequate, as we discussed at the top of the episode, to recover your fees, you’ll need to go through the cost assessment process. I can see a situation occurring where a conditional cost agreement is in place, but disclosure has been inadequate and so the matter ends up before a costs assessor. Is the cost assessment process a little different in those circumstances, where the cost assessor is looking at both the costs allowable and layering on top of that an assessment of whether the conditional cost agreement applies?
00:32:52CM:So ordinarily where a law firm has failed to disclose, say for example, hasn’t given an adequate estimate of their costs, a cost assessment usually proceeds in the same way as if they had disclosed in our experience. So what happens is the costs are assessed on a quantum meruit basis, which means essentially to be paid fairly for the work that you’ve done. In my experience, that is generally fair and reasonable costs anyway. And a solicitor has to bill in a way that is fair and reasonable. I don’t really see a huge difference in the outcome of assessments on that basis. Often, even where you haven’t disclosed, a solicitor’s able to still recover 100% of the fees billed, or there might be a very small reduction. Usually the hourly rates are upheld, but just say your disclosure included hourly rates of, say, maybe 2,000 an hour and the disclosure was deficient, they might be reduced to a fair and reasonable rate. Whereas if the cost agreement or the disclosure was in compliance with the Uniform Law, a higher hourly rate might be allowed by the costs assessor but in practice, that hasn’t happened, actually, a whole lot. The other thing is if you haven’t disclosed, a lot of the time you’ll have to pay the cost assessor’s fee and the cost assessor’s fee can be anywhere from $2,000 or $3,000 to upwards of $10,00 in larger matters.
00:34:19DT:Just because 100% of your fees are going to be awarded doesn’t mean that the cost assessment process is without consequence, right? You’re going to be paying the cost assessor’s fees and there’s a potential delay in getting paid.
00:34:30CM:Yes, so you might have to pay the cost assessor’s fee. Interestingly, you don’t always have to pay the cost assessor’s fee. I have seen cases where a solicitor hasn’t disclosed and the other side, being the client, still has to pay the cost assessor’s fee. So it’s not always, but if you have disclosed properly and your costs aren’t reduced by very much, there’s a very good chance that the client will be paying that fee. Now, when it comes to conditional cost agreements, if your conditional cost agreement does not contain adequate disclosure. So for example, you didn’t update the estimate or the estimate was a range and not a fixed single figure. If the cost agreement is made to be void, unfortunately, a law practice isn’t entitled to recover any amount in excess of the amount that they would be entitled to recover if it was not void.

TIP: So what happens if a law practice fails to meet its disclosure obligations? Well, first, the cost agreement, if any, in place between the law practice and its client is void under section 178(1)(a) of the Uniform Law. Neither the client nor the associated third party payer is obligated to pay the legal costs until they’ve been assessed – that’s section 178(1)(b). The law practice in question is prohibited from initiating or continuing proceedings to recover those costs until they’ve been assessed, that makes sense if there’s no obligation to pay them, that’s section 178(1)(b). The breach might be considered unsatisfactory professional conduct, even professional misconduct by the principle of the law practice or indeed any principle of that law practice – that’s section 178(1)(d). And the law practice is actually obliged to apply for a cost assessment, they have to do that within 12 months of issuing the bill. That’s section 178(3) and (4). 

So, for example, where a law practice and a client enter into a conditional cost agreement, if it’s a success fee, but the cost agreement is void, if it wasn’t for the Uniform Law section 185, potentially the solicitor would be able to be paid even if the success wasn’t reached, but because of that section 185(2), you still can’t. So the cost agreement is void, but not void in that respect.

00:36:37DT:Not void in your favour.
00:36:39CM:Yes, that’s right. The other thing is if the cost agreement is void, then you can’t recover the uplift fee as well.
00:36:46DT:Oh, really? That’s interesting because I was just thinking about that sort of perverse outcome where someone’s entered into a conditional cost agreement, they’ve failed to comply with the requirements of the LPUL in relation to the conditional cost agreement and as a consequence, they’re able to recover their fees in an unsuccessful outcome because the cost agreement is void. So it’s an interesting bit of belts and braces the legislature has done there to make sure that perverse outcome’s avoided. But tell me a bit more, so in the event that in that cost assessment process, if the success fee based cost agreement is void, you’re unable to recover the 25% uplift.
00:37:19CM:Yes. So if you haven’t complied with the regulations of section 182 of the Uniform Law, which is say, for example, with the uplift fee, it has to be signed by the client and in writing. If all of that hasn’t been done, you can’t recover the uplift at all. No, definitely not.

TIP: So as Charlotte just mentioned, there are rules that regulate uplift fees in cost agreements. When a law practice enters into a conditional cost agreement that includes an uplift, it has to disclose to the client how that uplift will be calculated. The agreement has to provide an estimate of the uplift fee, or if an exact estimate isn’t feasible, a range of estimates and an explanation of the main variables that could impact the calculation of the uplift – that’s section 182(3) of the Legal Profession Uniform Law

I pause at this point to note that it’s an unusual feature of the Uniform Law that it’s not permissible to provide a range of estimates for the cost estimate itself but an uplift on those estimated costs is permitted to be provided by way of a range of estimates. I’m not sure that works out. 

A conditional cost agreement may allow for the payment of an uplift fee on a successful outcome in the matter – that’s section 182(1) of the Uniform Law, excluding any unpaid disbursements. For conditional cost agreements in litigious matters, the agreement can’t provide for an uplift fee unless the law practice reasonably believes that a successful outcome is likely, and the uplift fee, in that case, cannot exceed 25% – that’s section 182(2) of the Uniform Law. 

I should say here that a belief that the case is reasonably likely to succeed, that a successful outcome is likely, is a materially higher bar than a belief that the case has reasonable prospects of success, which is ordinarily the bar that a solicitor needs to be satisfied of in order to commence proceedings. 

A law practice that enters into a cost agreement with an uplift fee in violation of section 182, if it doesn’t provide an estimate of that fee, doesn’t clearly specify how it’s to be calculated, if it were to breach or exceed those rules that relate to litigation matters, then the law practice isn’t permitted to recover any part of the uplift fee and has to repay any received portion of it back to the payer. So that’s not merely that the cost agreement is unenforceable, they’re not actually permitted to retain the fee at all. Also, conditional cost agreements with uplift fees have to meet additional requirements.

00:39:31DT:Do you ever see matters where the disclosed hourly rates are lower than they otherwise would have been and the uplift is intended to bring them back in line with commercial hourly rates? I’m thinking about a kind of no win, no fee ‘lite’ where the fees are in practice reduced in the event of an unsuccessful outcome because they’re charged at a lower rate and the success fee is used to return them to a fair and reasonable rate that the firm would ordinarily be charging. I’m wondering whether there’s a risk there for lawyers who use that structure to de-risk the litigation for their clients that they may, because they’re unable unable to recover the 25% fee, have their costs assessed at a lower than ordinary rate.
00:40:15CM:Definitely a risk. Although in my experience where I have seen conditional cost agreements, the hourly rates are often higher than non-conditional cost agreements. I think obviously there’s a risk involved when you’re acting on a no win, no fee basis and if you are going through that risk, most firms charge a slightly higher rate than they usually otherwise would.
00:40:37DT:I mean if your hourly rate is $500 an hour, and you expect to win nine out of ten cases and lose the last one. You might be incentivised to charge five hundred and fifty dollars an hour to defray the cost of that tenth case. So this is the common argument about why conditional cost agreements do inflate hourly rates a little bit.
00:40:55CM:And on that point actually, it’s interesting because often where we see a higher than usual hourly rate charged by solicitors on a no win, no fee basis, in circumstances where the client is successful and they go through a party, party costs assessment, those hourly rates usually aren’t recoverable against the other party. So it sometimes leaves a bit of a gap there where the client still has to pay their solicitor’s fees. For example, if the solicitor’s charging $1,000 an hour, which is common in no win, no fee basis cost agreements, they may only recover, say, 700 an hour from the other side. So all of the work that was done by their solicitor at the higher rate is therefore that gap’s going to be payable by the client directly.
00:41:36DT:Yeah, that’s a good point that I suppose we’re used to telling clients that there is that gap between an indemnity costs order and an ordinary basis costs order of 75-80%. We can expect that gap to be larger in those matters where by virtue of the conditional nature of the cost agreement the hourly rate is higher, that’s a really good point and something that I think probably should, as we were saying, it’s not strictly a cost disclosure issue, but it is an important thing for the client to consider when they’re considering the risk of an adverse costs order or even just the risk of success in the proceedings in terms of unrecoverable costs. Earlier in the episode, you were talking a bit about, I guess what we’d call the bias in the kinds of matters that, as a cost specialist, you see. You know, as you said, a bit like a doctor, you tend to see people who are unwell, you tend to see the matters. And I suppose for a lot of our listeners, a lot of lawyers, this idea of having to go through a costs assessment with your own client because there’s been some failure to comply with the rules or they’re not happy with what you’ve charged, that sounds like quite scary and acrimonious, that sounds like a pretty torturous sort of process to go through, you’re definitely going to lose that client at the very least. You’re potentially going to lose the fees that you were hoping to charge and recover from them. Have you ever seen a law firm deal with a costs dispute or deal with a costs assessment with their client in a way that help to repair the relationship between the lawyer and the client. Is there anything that a lawyer can do where a costs dispute or a disclosure issue arises to repair that relationship and keep it from getting too acrimonious in the way that a lot of our listeners would expect that situation to be?
00:43:16CM:Okay, that’s really interesting. Honestly, I wish I saw that more. I guess usually it’s when the relationship has broken down and this has happened but occasionally I’ve seen situations where a client hasn’t paid the fees because of a good reason. Maybe they’re waiting on selling a house or they’re waiting on funds and the solicitor appreciates that as they usually do but to protect their position, they might have to go through the costs assessment process just to sort of crystallise the amount the client’s going to have to pay and often that’s quite a nice process. The client definitely should have its own legal representation, though, during that process but in those circumstances, the relationship doesn’t have to deteriorate. The other reason is sometimes a client might be complaining about the fees and the solicitor might say, “we don’t want this to cause the relationship to break down. Why don’t we get an independent person to look at the costs?” And so in those circumstances, they might go through the costs assessment process, or sometimes I’ve seen them get a referee, it might be a costs consultant or a costs assessor but on a private basis and the costs assessor will go through the fees in the way that a mediator might work out an amount that the client is happy to pay and the solicitor is happy to accept.
00:44:24DT:I guess, barring those circumstances that you’ve described where the parties are basically engaging the cost assessment process voluntarily to try and head off a dispute, by the time something gets to cost assessment, it’s because the parties have failed to deal with it amicably, because they’ve failed to negotiate an outcome that everyone can live with. I suppose the best hope for keeping that relationship with the client, keeping things from getting too heated and acrimonious, is to deal with disclosure and costs issues as they arise or deal with them quickly after they arise. We were talking about this little used but important provision around a two week grace period to deal with disclosure issues where there’s been inadequate disclosure, especially where there’s been scope creep and an estimate that’s been given previously isn’t valid anymore. I want to present a hypothetical and get your thoughts on this. Say I’m three weeks out of that grace period, I’ve gone back and I look at the work in progress or the time that’s recorded on my matters every month and I get to that day of the month and I’m looking at the time recorded on a matter and I realise that three weeks ago we blew past the estimate. It’s going to be a lot more than what I thought it was going to be and I’m out of time to correct that mistake. What do I do in that circumstance? Should I just ignore it, hope they don’t notice?
00:45:44CM:Okay. So, well, actually it would be two weeks from the date that you notice. So it would be two weeks from today.
00:45:49DT:Interesting.
00:45:50CM:Yeah, but I guess if just say you noticed and then something came up and you were very busy for that next two weeks and it was a bit late, what could you do? That’s a really interesting question. I guess you could utilise the costs assessment process to make sure that you’ve got an amount that’s fairly and reasonably billable to the client. I think that if you updated it after the two weeks, as long as the relationship with the client is still there, you probably wouldn’t have too many issues. It would have to be another breakdown with the relationship with the client to force, I think, the client to not pay the bill or to go through the cost assessment process themselves. The other thing is when you’re issuing cost disclosure, the rule is that when or as soon as practicable after the instructions are received, that is when you have to provide a cost disclosure and there’s case law to say that’s a couple of days after you receive instructions or you start work. Two weeks is too long after you receive instructions to issue a cost disclosure for it to comply with the uniform law but the rule to update the estimate in my experience is a little bit more flexible. So, for example if you were doing your billing for the month and realised “oh, a month ago we went over the estimate.” In practice if you were to then update the estimate in writing to the client it probably wouldn’t have much effect in the costs assessment process. In my experience the costs assessors are a little bit more flexible when it comes to updating the estimates along the way than they are to making sure that you issue a disclosure at the very start of the matter.
00:47:17DT:I’m sure there’s a few listeners right now thinking about their revised estimates that they haven’t sent out who are breathing a sigh of relief, so thanks for explaining that. Now, Charlotte, we’re nearly out of time, but on Hearsay I always like to finish each episode with a question for our listeners who might just be starting out their careers in the law, recent graduates or soon to graduate law students. It strikes me that we don’t think about costs and our client engagements very much at an early stage of our career, we’re more concerned with the substantive law work, if you like, doing the research and drafting the contracts and we’re only really exposed to the realities of estimating the cost of the work that we do, providing disclosure, negotiating cost agreements with our clients at a much later stage in our career and so proportionately speaking, to the time we’ve been in practice, we have a lot less experience with it than our clients might be entitled to expect. For some of our listeners who are just starting out and don’t have a lot of exposure to the way costs are disclosed, the way cost agreements are negotiated, and some of the different ways that costs can be structured, like conditional cost agreements or success fees, what is your advice to them to upskill a bit in this area earlier than they otherwise would be?
00:48:32CM:Okay. That’s very true. I think at the start of your career, you know, it’s usually your principal who’s making the cost disclosures to the client, who’s dealing with budgeting and estimates, that sort of thing. I guess the Law Society actually has some really good resources. They have a legal costs guide, which can assist in all different areas of costs. So from disclosure to costs recovery, it sets it out really simply and definitely good for younger lawyers to read through.

TIP: Charlotte just mentioned that the Law Society has some great resources including a legal costs guide. LawCover also produces some useful guides on legal costs and we’ll leave a link to both of those resources in the show notes.

Personally, I look through the judgments almost every day and I like to see what comes out with costs. There’s not a huge amount of case law that comes out about costs actually, so it’s just the sort of really pointy issues that make its way to a judgment. The other area is the Uniform Law itself, it’s not a huge piece of legislation. There’s the Act, there’s the Application Act, the Regulations and the Rules, but each of them only have a very small couple of sections on disclosure and it’s really important to actually know about the disclosure rules because in a lot of cases, you, even as an employed solicitor might have responsibilities and if you don’t comply, there’s still a risk of professional misconduct. So it’s really important to make sure you’re up to date with the rules, the Solicitor’s Rules, all of the Uniform Law sections. Have a read through, they’re quite simply written and that’s a good place to start.

00:50:06DT:You know, that’s a great, simple tip that I don’t think we give enough. When I started my career, I was working in the litigation team for a partner who did a lot of federal court work and she said to me, “just go and read the Federal Court rules. They’re not that long. You should go and read them. They’re your tool bag. They’re your armoury of all of the procedural and other tools that you have at your disposal when dealing with litigation in the Federal Court, you should go and read them.” And I think we often think about legislation as something we go to, and we’ve got a specific thing to look up and we find the right provision and we read that and we go away. It’s a great tip to just go ahead and read. The LPUL, read it cover to cover, read the disclosure bits if you press for time, but that’s a great tip. I think also everyone can subscribe to LawCover’s publications, certainly if you’re based in New South Wales, they’re our statutory insurer and they provide plenty of guidance on cost disclosure and cost agreements because complaints about costs make up such a large proportion of the complaints that they deal with. So they’re also a great resource to go to as well. Charlotte, thank you so much for joining me today on Hearsay.
00:51:05CM:Thanks so much for having me, David.
00:51:17DT:As always, you’ve been listening to Hearsay the Legal Podcast. I’d like to thank my guest today, Charlotte Morson, for coming on the show. Now, if you’re all across your responsibilities when it comes to cost estimates, but you want to learn more about how a court might determine them, check out one of our earlier episodes called; ‘Costs assessments: fair, reasonable… and proportionate?’. In that episode, we talk with Mike Dudman, a specialist cost practitioner. That’s episode 37 – fair way back in the catalogue.

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