Federal Court sets aside statutory demand in respect of unpaid legal costs issued during the period in which costs may be assessed  

The recent Federal Court of Australia decision of Rusca Bros Services Pty Ltd v Dlaw Pty Ltd, in the matter of Rusca Bros Services Pty Ltd (No 2) [2019] FCA 1865 serves as a timely reminder that a statutory demand may be at risk of being set aside when issued in circumstances where a statutory period for assessment of costs comprising the debt claimed has not yet expired.

Background

Rucsa Bros Services Pty Ltd (Rusca) engaged Dlaw Pty Ltd trading as Doyles Construction Lawyers (Doyles) to act on their behalf in a dispute with Lendlease Building Pty Ltd (Lendlease) connected with construction works at RAAF Tindal in the Northern Territory in about September or October 2017.

Throughout the course of the retainer, Doyles rendered invoices to Rusca totalling $500,529.79.  Rusca paid a total of approximately $300,000 to Doyles between about October 2017 and about March 2018.

In April 2018 a director of Rusca sent an email to Mr Doyle of Doyles expressing surprise at the size of the recent invoice given the significant fees already paid to that point and stating that Rusca would need to go through each of the bills to ensure that they were reasonable.[1]

On 8 May 2018, Rusca requested that Doyles provide it with an itemised invoice for all of the bills rendered by Doyles to Rusca.[2]  By section 187(3) of the Legal Profession Uniform Law (NSW) (LPUL) Doyles were required to provide the itemised bill within 21 days of the request.[3]

Also on 8 May 2018, Rusca received a statutory demand from Doyles dated 7 May 2018 seeking payment of a total sum of $191,022.15 being the unpaid balances of 3 invoices issued in February, March and April 2018 less funds held in trust.[4]

On 25 May 2018, Rusca filed an application to assess the costs charged to it by Doyles over the course of the retainer.[5]

As at the date of the hearing, whilst the costs assessor had completed his assessment of the costs, his fees had not been paid and neither Rusca nor Doyles had taken steps to obtain the costs assessor’s Costs Determination (the equivalent of a certificate of assessment in Queensland).[6]

Statutory Demand

Rusca applied under sections 459H and 459J of the Corporations Act 2001 (the CA) to set the statutory demand aside.

The grounds relied upon included, relevantly:

  • as the legal costs comprising the debt the subject of the Demand were the subject of an assessment application, there was a statutory prohibition on proceedings to recover the costs and the debt the subject of the Demand was not presently due and payable; and
  • Doyles had failed to give an adequate estimate of total legal costs at the commencement of the retainer and as a result, was not permitted to commence or maintain proceedings for recovery of its costs until the costs had first been assessed. This also constituted a statutory prohibition on proceedings to recover the costs and for this reason as well, the debt the subject of the Demand was not presently due and payable

In ordering that the Demand be dismissed, Markovic J referred to section 198(7) of the LPUL.  That section provides that once an application for costs assessment has been made:

the law practice must not commence any proceedings to recover legal costs until the costs assessment has been completed.

There are similar provisions in other jurisdictions in Australia.[7] The Queensland equivalent is section 338 of the Legal Profession Act 2007 (LPA), which is identical to section 198(7) of the LPUL save that a law practice may commence proceedings with the leave of the court.

Her Honour cited authority to the effect that:

if a statute prohibits commencement of proceedings to recover a debt, then so long as the statutory prohibition remains in place the debt is not “due and payable” and consequently cannot found a statutory demand.[8]

Her Honour held that:

the statutory prohibition in s 198(7) means that the debt the subject of the Demand can no longer be said to be immediately “due and payable” as required by s 459E of the Act. This is because the debt the subject of the Demand cannot presently be enforced by action by the commencement of any proceeding for recovery. That is so even if the Demand was served prior to the commencement of the Assessment Application. While the debt might have been due and payable at the time of service of the Demand because there was no prohibition on the commencement of a proceeding for recovery at that time, that status changed as soon as the Assessment Application was filed.[9]

After determining that the costs assessment application was not complete because the Costs Determination had not been obtained, in the result her Honour held that:

the Assessment Application is not complete. As that is the case, it follows that Doyles is precluded by s 198 of the LPUL from taking steps to recover its costs and, in those circumstances, the debt the subject of the Demand is not due and payable and the Demand should be set aside pursuant to s 459J(1)(b) of the Act.[10]

Other grounds relied upon

Her Honour also dealt briefly with other grounds relied upon by Rusca in order to set aside the Demand, including, relevantly, the contention that Doyles had failed to provide a proper estimate of legal costs at the commencement of the retainer.

Her Honour held that Doyles had failed to give sufficient costs disclosure (noting that the estimate given at the outset ultimately comprised 2% of the total costs billed) and that by operation of section 178 of the LPUL, Doyles could not commence or maintain proceedings to recover the legal costs until they had been assessed, with the result that the costs the subject of the Demand would not be payable until they had been assessed[11].

There are also equivalents to section 178 of the LPUL in other Australian jurisdictions[12].  The equivalent provision in Queensland is section 316 of the LPA, which provides that a client “need not pay the legal costs unless they have been assessed” in circumstances where adequate disclosure has not been made.

Conclusion

The key takeaways for practitioners from the decision are:

  1. If a client files a competent application for costs assessment after a statutory demand has been issued in respect of unpaid legal costs, the statutory demand is liable to be set aside pursuant to section 459J(1)(a) of the CA on the basis that the costs the subject of the statutory demand are not “due and payable” until the costs assessment process is complete.

    In Queensland, a client may apply for assessment of costs without leave within 12 months of receiving the final bill or request for payment[13], so the period of risk extends for at least that length of time; and

  1. A court may be prepared to in effect ‘look behind’ a statutory demand issued in respect of unpaid legal costs to determine whether adequate disclosure has been made for the purposes of the applicable statutory regime and if it determines that it has not, the statutory demand may be set aside as a result.

 

Adrian Robins is a Special Counsel at James Conomos Lawyers where he practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact him. 

3004 8216 |    |  adrian@jcl.com.au

[1] Rusca Bros Services Pty Ltd v Dlaw Pty Ltd, in the matter of Rusca Bros Services Pty Ltd (No 2) [2019] FCA 1865 (Rusca Bros Decision) at [7].

[2] Rusca Bros Decision at [8].

[3] The equivalent provision in Queensland, secion 332 of the Legal Profession Act 2007, provides that a firm must provide an itemised bill within 30 days of such a request.

[4] Rusca Bros Decision at [8].

[5] Rusca Bros Decision at [15].

[6] Rusca Bros Decision at [21] and [22].

[7] Legal Profession Uniform Law (Vic), section 198(7)(b); Legal Practitioners Act 1981 (SA) Schedule 3 section 44 (called ‘adjudication’ of costs); Legal Profession Act 2008 (WA) section 298(b); Legal Profession Act 2007 (Tas) section 323(b).

[8] Rusca Bros Decision at [53], citing In the matter of Chameleon Mining NL; Chameleon Mining NL v Atanaskovic Hartnell [2009] NSWSC 602 at [35] per Austin J.

[9] Rusca Bros Decision at [63].

[10] Rusca Bros Decision at [71].

[11] Rusca Bros Decision at [77].

[12] Legal Profession Uniform Law (Vic), section 178; Legal Practitioners Act 1981 (SA) Schedule 3 section 18; Legal Profession Act 2008 (WA) section 268; Legal Profession Act 2007 (Tas) section 300.

[13] LPA sections 333(2) and 335(5).