Lump Sum Costs Agreements
19 November 2012
IntroductionSo‐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.
LegislationThe Legal Profession Act 2007 (the Act) allows a law firm to enter into a costs agreement with a client (and occasionally others3). 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 lawyer4. 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 reasonable5, and to any specific statutory provisions6. 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 www.lsc.qld.gov.au. 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
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 principlesThe 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 costs7; 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 answ 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 must8 (consistently with the requirements of s 308 of the Act) make costs disclosure to the client9 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
VariantsThere 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 frontOne 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 Masman10). 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  QSC 430
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.