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15 August, 2008  
Why the punter should never trust a trust account

Could you lend me your wallet for a while? The trust account is both a sacred cow and a milch cow. Anyone who thinks trust accounts should be trusted probably believes, along with Homer Simpson, that wallet inspectors also exist

imageIn a 2007 article on Power Imbalances in Contracts Associate Professor Machteld de Hoon of Tilberg University (The Netherlands) pointed to three types of imbalances in contracts involving two parties: mental and/or physical predominance, information asymmetry, and dependency asymmetry (an imbalance in the level of dependency on the other party).

She then identified the two ways in which low power contracting parties can be assisted: “outcome based intervention” and “process based intervention”.

In “outcome based intervention” the contract is typically overturned for being tainted by duress, fraud, mistake, undue influence or unconscionability.

In “process based intervention” the law creates procedures that the most powerful party must comply with in order to create an enforceable contract.

Perhaps the most common such prescribed procedure is “disclosure” – the more powerful party has to disclose prescribed information to the other party.

In practice, thanks to lawyers in government and lawyers in law reform commissions, it is lawyers who get to specify which imbalances should be rectified and how.

There is a heavy emphasis on useless types of process based intervention (deluge the client with disclosure documents that actually don’t pin the lawyer down much at all) and precious little outcome based intervention (fixing-up what has happened).

One off clients are particularly vulnerable. They do not know what to expect and therefore can be easily outmanoeuvred.

When it comes to extracting fees from them, lawyers can be especially ruthless. They will be thinking:

“If this is the only time I have to deal with this one-shot client whose money I am taking, then I want to work a transfer of as much of the client’s capital as possible to my account because as far as I know this is the only chance I will have to do so.”

Transferring clients’ capital to lawyers is made easier by the clever device of solicitors’ trust accounts, which enable lawyers to have direct access to clients’ capital.

The client doesn’t write out the cheque for fees, the lawyer does, although to be technically correct the process will usually be effected by journal entries in a ledger.

The client is then told afterwards how much the lawyer took. The dirty deed is done before the client gets a chance to object.

Of course, the client still can object, but the sight of the lawyer already dancing off into the distance with the money is discouraging.

All of this is a far cry from Victoria in 1890.

Back then s.492 of the Crimes Act prescribed a special procedure for criminal cases where the solicitor was appropriating fees from the client’s money over which the solicitor had control.

The Victorian legislature correctly assumed that one simply couldn’t trust lawyers to be honest in such a situation.

The solicitor had to write out a bill, without being asked for it, and had to send a copy to the Supreme Court to be checked by a judge’s associate.

The bill had to be accompanied by a sworn affidavit by the lawyer, and s.493 said the lawyer could be summoned and questioned on oath for the purpose of ascertaining the truth of any matters relating to the bill of costs.

Imagine what would happen today if lawyers had to swear on oath: “I really did all the hours I have charged.”

Now THAT would be a useful reform. The torrent of perjury that would result would eventually sink the legal profession as we know it.

Sad to say the Victorian Chief Justice torpedoed s.492 in 1897 and his appalling decision was upheld by a court of three judges when it was appealed.

The appeal court even had the cheek to say, “The effect of this decision is not to repeal s.492”.

The principal purpose of solicitors’ trust accounts is to create a big trough full of client money for lawyers to stick their snouts into.

Nearly all lawyers accept that they can’t simply flog the lot. They must limit themselves to flogging excessive fees.

There will always be, however, a few excessively rotten apples who do flog the lot.

That is frowned upon, because other lawyers have to make up the shortfall via fidelity fund levies.

Of course, the profession could abolish fidelity funds. In fact, it has been working on this for years and has sliced back fund coverage considerably.

However, if fidelity funds were entirely abolished no one would trust lawyers any more to handle their money.

There is a simple solution.

Abolish trust accounts. It could be done, but that would mean goodbye to the “snouts in the trough for fees” caper.

Abolition would give clients too much power. The profession is caught between a rock and a hard place.

In January this year NewsAsia reported:

“Last year, the Law Society [of Singapore] tightened rules to curb lawyers from misappropriating monies from clients. But the Chief Justice noted such measures cannot stop or prevent desperate or crooked lawyers from bending the rules. He said, ‘The obvious solution is to bar lawyers from receiving clients’ monies. However, this will change radically a conveyancing system which has been in place for more than one hundred years. It may be a serious effect on the efficiency of the property market. We need to study the ramifications of such a change’.”

Such “process based intervention” would also make it impossible for litigation lawyers to swipe excessive fees out of litigation settlement proceeds.

South Africa has a compulsory third party road accident scheme. The Road Accident Fund (RAF) has declared war on lawyers by paying out on claims direct to the plaintiffs.

Ayanda Vilikazi, the head of marketing and communication at the RAF, said:

“The new payment method would protect claimants who were not being paid what they were entitled to by lawyers.”

This echoes the ongoing battle between Allstate Insurance and the plaintiffs’ bar in the US, over Allstate’s campaign to get injured people to deal with it direct.

Allstate says it has a “free speech” right to tell people they should cut out lawyers.

However, it seems that free speech (normally treasured in the US) doesn’t apply if it deprives lawyers of business. See : Do you need a lawyer?

South Africa’s lawyers are not having any of this “cut out your lawyer” stuff either.

Around about July 29 the Law Society of South Africa asked the Cape High Court to declare the RAF’s new procedures to be unlawful.

On August 8 the RAF was ordered by the court to put the changes on hold.

The lawyers are now priming the torpedo.


Reader Comments

Posted by: Anonymous
Date: August 23, 2008, 3:42 am

Can you tell me the name of the 1897 case where the CJ torpedoed the fees' provision of the Crimes Act?
Posted by: Anonymous
Date: August 27, 2008, 10:56 pm

In re Powling 1897 Volume 23 Victorian Law Reports beginning at page 273