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4 September, 2007  
The shiftiness of costs shifting

There is plenty of judicial hand-wringing about costs shifting and hectares of rules to try and manage this burgeoning industry. It’s all got out of hand since the Statute of Gloucester was misconstrued and once again it’s Tulkinghorn who has the solution – carrots for lawyers, not sticks

imageLawyers often describe legal fees and disbursements as “costs”, and the practice of offloading part or all of the bill onto someone (other than the client) can be described as “costs shifting”.

Lawyers like costs shifting because if they can offload some of the bill, they can often get away with increasing what’s left and, even if a court sets the figure, the lawyers can take that amount and then ask the client for a “top up” to some other figure.

One should resist the temptation, encouraged by lawyers, to see costs shifting as something that occurs only in civil litigation. Once it is understood that all of the costs shifting practices that exist have been created by the legal profession, one might be more inclined to question the standard lawyer argument that shifting costs is a good idea because it discourages frivolous claims and defences.

In 1995 the Australian Law Reform Commission said it had considered a number of economic analyses of the costs rules.

“Most of these found that the total cost of litigation to the parties is expected to be higher under the costs indemnity rule than under a rule that each party bears his or her own costs.”

There is a bit of “loser pays” in the USA, but not much. US law professor Herbert Kritzer is an opponent of it. In an article entitled Loser Pays Doesn’t he says that, “Proponents of making loser pays the policy in the US rarely talk about its administrative costs”.

imageLast month the Queensland CJ Paul de Jersey (pic) said:

“It is not unknown for a costs assessment to extend over a period longer than the duration of the trial, and even to cost more than the trial itself.”

Costs shifting actually occurs all over the place. For example, in property transactions, lessees can find themselves landed with a bill from lessors’ lawyers, so they end up paying for both lots of legal protection.

This sort of thing can also happen to borrowers in lending transactions, although this has become less common as mortgage markets have become more competitive.

Down the track, some lessors and banks end up suing their tenants and borrowers, at which point a clause may surface which says that the tenants and borrowers (if they lose) must pay the bank’s lawyers or the lessor’s lawyers at whatever rates those lawyers traditionally charge their big business clients, and not at the (lower) party-party rates that civil courts normally award.

An impoverished borrower or lessee ends up paying expensive lawyers at solicitor-client rates, just as though they had hired them themselves, which they never did. Matters can then get horrendously expensive and complex.

imageIn May this year Justice Simon Whelan (pic) of the Victorian Supreme Court was faced with a bank claiming $263,094.93 from a borrower, which was, to quote the judge, “substantially, if not exclusively, constituted by legal costs incurred in the various recovery proceedings”.

As the judge and the borrower probed further, it turned out that the bank was entitled to a rebate of fees from the bank’s solicitors on a sliding scale based upon total annual fees for all matters.

The $263,094.93 claimed considerably exceeded what the bank had (at the end of the day) paid its lawyers.

In the criminal law, legal aid is a form of costs shifting by defence lawyers, although it’s not seen by lawyers as such. However, despite what they claim are low legal aid rates of pay, defence lawyers are not allowed to demand a top up from the client to make good the “shortfall”.

imageAlso in the criminal law, the “costs” of a private client can be shifted directly onto the prosecution, at better than “legal aid” rates, if the client is acquitted. This situation has been quietly created by the profession over the last 30 years or so. In 1996 the Commonwealth DPP Michael Rozenes (pic) said:

“A … significant development is the increase in the incidence of costs being awarded to successful defendants. When I started practice 25 years ago the award of costs to a successful defendant was a rarity. Today, at least in the courts of summary jurisdiction, it is an every day event – and appropriately so.”

An interesting twist is that lawyers who “defend” their own parking tickets, for example, can rely on the Chorley exception, while non-lawyer litigants can’t.

In 1997 a Brisbane a lawyer said that where he regularly parked his BMW was not a footpath. He was awarded personally $1,800 in professional costs to be paid by the ratepayers of Brisbane City Council. I have no idea how that was assessed.

In 2006 the Deputy Mayor of the Gold Coast was acquitted on a criminal charge by a magistrate. His lawyers then asked for costs of $102,461.21, being the amount billed by them to their client. The magistrate said he was not satisfied that in the case before him it was appropriate to make an order as to costs.

Last week Queensland District Court Judge Nicholas Samios reversed that and ordered that the prosecution “pay the appellant’s costs to be awarded at a higher amount than that prescribed by regulation”. I wonder what that means.

In civil litigation costs shifting is the norm, but that does not apply to the Family Court or various tribunals. Civil litigation lawyers, unlike criminal defence lawyers on legal aid, are allowed to demand a top up from their clients to remedy the shortfall created by the “gap” between party-party rates and solicitor-client rates.

The size of the gap cannot be described with any particularity, except to say it’s getting bigger all the time. In March this year Queensland District Court Judge John McGill said:

“In my experience, costs assessed on a standard basis usually amount to about half what the average solicitor actually charges the average client.”

In late 1993 Justice Ian Sheppard of the Federal Court said:

“To a successful party to litigation, the practice must seem extraordinary. The provisions of the court’s rules (which are not dissimilar from those of other courts) appear to intend a full indemnity, but this is not what is recovered. It is not profitable to explain the reason for the disparity. One would need to make an extensive study of the history of the matter before being satisfied that one understood the reasons why things have developed as they have. For present purposes it is enough to say that … members of the profession, both solicitors and counsel, and also professional witnesses, have refused to accept as a proper or sufficient guide to their costs and fees the provisions of scales of costs and charges provided for in schedules such as the second schedule to the Federal Court Rules.”

In April 1994 a majority of the High Court, perhaps oblivious to Justice Sheppard’s warning, decided to explain the partial indemnity disparity:

“It has not been doubted since 1278, when the Statute of Gloucester introduced the notion of costs to the common law, that costs are awarded by way of indemnity (or, more accurately, partial indemnity) for professional legal costs actually incurred in the conduct of litigation. They were never intended to be comprehensive compensation for any loss suffered by a litigant.”

The statute did not talk about “professional legal costs”. It mentioned only court filing fees. It seems it was the lawyers who thereafter stretched things to include their own fees, and exclude the litigant’s non-legal expenses.

In 1967 the US Supreme Court said:

“This statute [Statute of Gloucester] which expressly mentioned only ‘the costs of his writ purchased’ was from the outset liberally construed to encompass all legal costs of suit, including counsel fees.”

We now have hectares of costs rules, an increasing amount of court time swallowed up in “costs disputes”, a new breed of professional known as “costs consultants”, and the prospect of “costs courts” or “costs offices” dealing solely in costs disputes.

This is entirely the wrong approach. Use carrots, not sticks. We need better incentives than “the longer it lasts the more you get”.

For example, in civil matters entitle the lawyer to $2Y for a settled case, and $1Y for a trial. In mega-litigation no fees at all after 10 days. In criminal matters pay defence lawyers $2X for guilty pleas and $1X for trials. If the lawyer proves them innocent, then the lawyer gets $10X.

Soon defence lawyers would be seeking out poor innocent people instead of rich (or lavishly legally aided) guilty ones. What a change that would be.