Recovering costs from the fruits of litigation

Introduction

Family Law litigation can be very expensive. It is labour intensive work, and the strong emotions that are stirred in clients who find their families falling apart around them can add complexities that are not found elsewhere in the legal system. And when the going gets tough, clients will sometimes express their dissatisfaction and disappointment by changing their lawyers.

This can present significant headaches to practitioners who might have been carrying fees for a client in the expectation that those fees would be paid at the end of the matter out of the proceeds of an anticipated property settlement. If there's no money in trust and no security over property, just what rights do practitioners have in the fruits of their labour?

What are the principles?

There's a distinction to be drawn here between property of the client which comes directly into the solicitor's hands in the course of his or her professional employment, and other property of the client.

As we all know, at common law we're entitled to a general possessory lien for all professional costs over the first variety of property until the costs have been paid. But as far back as 1940 Jordan CJ had noted in Ex parte Patience; Makinson v. The Minister (1940) 40 SR (NSW) 96 at 99 that a "solicitor has no lien for his costs over any property which has not come into his possession".

So does that mean that if the solicitor doesn't have possession of any of the client's property he or she has to whistle 'Dixie', even if the client obtains a significant property settlement in their favour after the solicitor ceases to act?

Fortunately, no.

Jordan CJ continued:

[i]f, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client's right to receive the money to or any part of that right, he acquires a right to have his costs paid out of the money, which is analogous to the right which would be created by an equitable assignment of a corresponding part of the money by the client to the solicitor.

This right flowing from a judgment, award or compromise for the payment of money is often referred to as an equitable lien over the fruits of litigation.

Is the 'equitable lien' really a lien?

The right to have costs paid out of the fruits of litigation in fact bears no resemblance to a lien, and there is a long line of authority establishing that it is, in Jordan CJ's words, "merely a claim to the equitable inference of the Court to have that judgment held as security" for the debt.

How is the right activated?

The actual right exists independently of court intervention; accordingly, while seeking declaratory relief from the court might be useful in some circumstances, this is not necessary either to give life to the right or to render it assignable. The authorities are clear that the court's role is in enforcement of the right rather than in its creation.

Notice

As with most other equitable rights, the provision of notice is an absolute essential. Once notice is given to the person who owes the money to the client, only the solicitor can give a good discharge for that part of the total that equals the solicitor's costs. And if the third party debtor refuses to pay, the solicitor can approach the Court for assistance in enforcement. If the debtor has paid the debt to the former client after receiving notice, they still have no answer to the solicitor's application.

The big exception to notice arises in cases of collusion. In Ex parte Patience; Makinson v. The Minister (referred to above) Jordan CJ had noted that "if the client and a judgment debtor make a collusive arrangement for the purpose of defeating the solicitor's right, the Court will enforce that right against the judgment debtor notwithstanding the arrangement and notwithstanding that no notice of the solicitor's claim had been given to the judgment debtor prior to the arrangement."

So what constitutes collusion?

The central problem that arose in Gadens Ridgeway v Paroulakis (1992) FLC 92-311 was that after a long and bitter fight in the Family Court as a result of which the husband was awarded $400,000.00 (which amounted to less than half of the fees his solicitors charged him!), the wife appealed seeking to have the first instance judgment overturned.

At the Full Court's doorstep the parties settled on terms that allocated nothing to the now bankrupt husband. The solicitors sought to intervene in the appeal and, among other things, conduct the appeal in the husband's name.

In quoting from Brunsdon v Allard (1859) 2 El&El 18 at 28, Nygh J noted that

"the court will not interfere with any fair settlement that [the parties] may come to, although it will probably restrain them from carrying out a collusive arrangement made on purpose to defraud the attorney of either.''

His Honour proceeded to observe that the onus rests upon the solicitor to establish that the arrangement has been a collusive one.

In Gadens Ridgeway v Paroulakis, Nygh J ended up finding that the wife had no intention of depriving the solicitors of any interest they might have in a judgment, as it had always been her position that "the husband should not receive a single penny." Accordingly, her decision to appeal was unimpeachable, and if collusion required her conspiracy with the husband against the solicitors, then there could have been no collusion.

But it had also been argued before His Honour that all that was required was for the husband to intend to defraud his former solicitors for there to be collusion. Unlikely as it was that this could be the case, Nygh J found that in any event he was satisfied that the parties had resolved to bring the proceedings to an agreed finality to end the trauma that the conflict was putting their children through.

Significantly, provided that was the husband's primary motivation, His Honour did not feel it mattered that the husband might also have been willing to enter into the arrangement with the wife on the basis that he had nothing to gain personally from the judgment:

"In my view, the husband was entitled to conclude that in view of any lack of personal benefit to him, the difficulty of extracting any payment out of the Paspalis group of companies and the harm it was inflicting upon his family including the children and his own impecuniosity, it was no longer worth his while to continue the proceedings and his best course was to obtain the best possible terms he could get from his wife. He was, in my view, not obliged to protect the interests of the proposed interveners as long as he was not principally motivated by a desire to deprive them of their costs." [emphasis added]

Chilling words indeed for the husband's former solicitors, who ended up not only kissing goodbye to over $600,000.00 in unpaid fees, but who also had to wear the costs of their application before both Nygh J and the Full Court.

Among the many take-home lessons from this shipwreck of a case (from the solicitor's perspective at any rate) is the caution that must be taken in intervening too precipitately on the basis of perceived collusion: just because a settlement looks like a set-up, doesn't mean it will be easy to get over what's a pretty high evidentiary hurdle.

Of course there's also the one about keeping a close eye on unsecured costs blowouts!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.