Category Archives: costs agreements

Costs under a void costs agreement

The case of Equuscorp Pty Ltd v Wilmoth Field Warne (a firm) [2007] VSCA 280 deals with the question of legal costs under a costs agreement which was void by operation of statute, but in the event, the client was estopped from alleging that the agreement was void. 

Equuscorp retained Wilmoth Field Warne as its solicitors. The agreement was a form of contingent fee agreement.  It provided that Wilmoth Field Warne would be remunerated at two different rates: a ‘normal rate’ of $400 per hour and a ‘discount rate’ of $66 per hour. Wilmoth Field Warne were to render monthly bills showing professional costs at both rates. Interim bills would be paid at the discount rate, but upon a “successful result” (ie, settlement or judgment and recovery from the judgment debtor) Wilmoth Field Warne would be paid the difference between the two rates.

A little less than a year after entering into the agreement, Equuscorp and Wilmoth Field Warne had a falling out. Equuscorp purported to terminate the agreement and demanded the return of its files. It alleged it had paid costs it owed under the agreement. By counterclaim, Wilmoth Field Warne alleged there were still costs outstanding and it was entitled to retain the files pursuant to a solicitor’s lien.

The legal action was protracted. Various questions were tried between December 2003 and March 2004, and judgment was handed down in the first trial in June 2004.  A second trial occurred in October 2005. Some six weeks after the conclusion of this second trial, and before judgment was delivered, Equuscorp applied for leave to re-open its case. It sought leave to amend its pleadings, alleging that that the agreement contravened s. 98(3) of the Legal Practice Act 1996.  That provision prohibited costs agreements under which a client was liable to pay a premium in the event of a successful outcome other than 25% or less of the costs otherwise payable.  (The current similar but not identical equivalent provision is s. 3.4.28(4) of the Legal Profession Act, 2004.) The trial judge allowed Equuscorp to amend.  A third trial occurred early in 2006. The trial judge held that the agreement was void because of s 102 (the equivalent of today’s s. 3.4.31). The question was then whether Wilmoth Field Warne was entitled to recover any of its costs, notwithstanding the fact that the costs agreement was void.As a restitution lawyer, the first thing which came into my head was the decision of Pavey and Matthews Pty Ltd v Paul (1987) 162 CLR 221. In that case, a builder entered into an oral contract with a homeowner.  The builder did not realise oral contracts were void under s 45 of the Builders Licensing Act 1971 (NSW). He completed the work, but when he came to demand payment, the homeowner, Mrs Paul, said that she did not have to pay because the contract was void. Nevertheless, the builder successfully sued Mrs Paul for unjust enrichment, claiming quantum meruit for the value of the work done. The High Court agreed that Mrs Paul would be unjustly enriched if she were allowed to keep the value of the builder’s services without paying for them.

However, unfortunately for Wilmoth Field Warne, this argument was not available to them. Section 102 provided that a legal practitioner who has entered into a contract which infringed s. 98(3) ‘is not entitled to recover any amount in respect of the provision of legal services in the matter to which the costs agreement related,’ and this provision took precedence over s 93 which did allow for fair and reasonable compensation to be paid in the absence of a valid costs agreement.  In other words, though parliament had contemplated that, as a minimum, lawyers should be remunerated on a ‘fair and reasonable’ basis even in the case of a void costs agreement, it had taken away that protection in the case of certain cases of voidness, occasioned by conduct which it presumably considered to be egregious.

Wilmoth Field Warne was forced to argue that Equuscorp was estopped from denying the validity of the costs agreement. Estoppel applies where a person has created a representation or an assumption on which the other person has relied to his or her detriment, such that it would be unconscionable (unfair) for the first person to resile from that assumption or representation. So let’s say I ask you to build a supermarket, and say that I’ll lease it from you when you finish building. We don’t actually conclude the terms of the contract, but you go ahead and build 70% of the supermarket. I know that you are building the supermarket. Shortly before it is completed, I turn around and say “Actually, I don’t want that supermarket any more, see you later.”

The landmark case of Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 was a case where this very scenario was played out. The High Court held that Waltons Stores was estopped from denying the assumption that it had created (ie, that the Mahers would be able to lease out the supermarket to it). The Mahers had relied on the assumption to their detriment (by building 70% of a supermarket premises to Waltons Stores’ knowledge).

However, not just any commercial transaction will give rise to estoppel. It has been made clear that corporations on an even playing field (with equal resources and bargaining power) will not be able to argue estoppel, particularly when what has occurred is more in the nature of a “cat and mouse game” played in a commercial negotiation. So in Austotel Pty Ltd v Franklins Self-Service Ltd (1989) 16 NSWLR 582 (another supermarket lease case), Kirby P said at 585–6 :

We are not dealing here with ordinary individuals invoking the protection of equity from the unconscionable operation of a rigid rule of the common law. Nor are we dealing with parties which were unequal in bargaining power. Nor were the parties lacking in advice either of a legal character or of technical expertise. The court has before it two groupings of substantial commercial enterprises, well resourced and advised, dealing in a commercial transaction having a great value. …

At least in circumstances such as the present, courts should be careful to conserve relief so that they do not, in commercial matters, substitute lawyerly conscience for the hardheaded decisions of business people …

The wellsprings of the conduct of commercial people are self-evidently important for the efficient operation of the economy. Their actions typically depend on self-interest and profit making not conscience or fairness. In particular circumstances protection from unconscionable conduct will be entirely appropriate. But courts should in my view, be wary lest they distort the relationships of substantial, well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges.

As it turns out, the relative bargaining power of the parties and the commercial context of the dispute were important in the present case. Wilmoth Field Warne argued that estoppel applied to prevent Equuscorp from denying the validity of the costs agreement. The Victorian Court of Appeal accepted that argument (overturning the decision of the trial judge). Buchanan, Ashley and Neave JJA said at [75] – [77]:

In our view there is no doubt that WFW has suffered detriment as the result of its reliance on the parties’ common assumption that the agreement was valid. Prior to the termination of the agreement WFW provided extensive legal services to Equus because it assumed that the parties’ legal relationship was regulated by the agreement. WFW acted for Equus in a number of proceedings and Equus paid WFW for its legal services at the ‘discount rate’ set out in the agreement. After Equus sought to terminate the agreement the parties fought two trials to their conclusion on the assumption that the parties’ relationship was governed by the agreement. In addition to its legal costs, WFW experienced the stress and anxiety associated with the conduct of that litigation and is now faced with the prospect that its efforts in defending the action will have been entirely pointless. In Verwayen Deane and Dawson JJ accepted that the stress and anxiety occasioned by litigation may amount to detriment for the purposes of estoppel and this proposition also seems to have been assumed by Mason CJ.

WFW must also show that it would be unconscionable for Equus to contend that the agreement was void because of s 102 of the Act. His Honour considered that this requirement was not satisfied because:

[i]t is not suggested that [Equus] contributed in any way to the assumption of WFW that the deed of costs was not void. It has not been established that it knew of the statute but, nevertheless, permitted the agreement to be implemented and indeed litigated. The fact that the consequence of the point Equus now takes is that it has had the benefit of WFW’s legal work without payment is a result of the decision of Parliament to visit this draconian punishment upon the legal practitioner.

In our view it was unnecessary to show that Equus contributed to WFW’s assumption. As we have already said…it may be unconscionable for a party to seek to depart from an assumption which provided the basis for their relationship with the other party, even if that assumption was not based on a representation made by the party sought to be estopped. In our view it would be unconscionable for Equus to now assert that the agreement is void.

It was important that Equuscorp was a well-resourced commercial party and that there was no inequality of bargaining power between Equuscorp and Wilmoth Field Warne. Both the Court of Appeal and the trial judge noted that the costs agreement had been negotiated by the then managing director of Equuscorp, an experienced businessman and litigant. The Court of Appeal inferred that the policy behind the provisions of the Legal Practice Act which had been contravened in this instance was to prevent vulnerable and powerless clients from being exposed to excessive costs. It was material that the agreement did not expose Equuscorp to excessive costs, but indeed in some respects, it operated against the interests of Wilmoth Field Warne. Therefore, the Court of Appeal found that because the policy of the Act was not contravened by the particular agreement, the terms of the Legal Practice Act did not operate to exclude estoppel.

In my opinion, this appeal was correctly decided.  Although the costs agreement between Wilmoth Field Warne and Equuscorp technically breached those provisions, in fact it did not expose Equuscorp to excessive costs. In addition, very importantly, the parties had been litigating for four years on the basis of the assumption that the costs agreement was valid before Equuscorp actually raised the argument that the agreement was void. In those very particular circumstances, it seems fair that Equuscorp be estopped from denying the validity of the agreement. Whether or not estoppel will operate to prevent the operation of a particular statute will depend on the particular circumstances of the case, and whether the policy of the statute would be subverted if estoppel was allowed to operate.

Postscript: I was inspired to write on this case after reading about it on Stephen Warne’s blog here and a subsequent discussion over coffee with Stephen. My gut feeling (without reading the case) was that estoppel was inappropriate in the context of void costs agreements, but interestingly, once I read the case in full, I changed my mind.

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