The forgotten disclosure?

The above information must be provided as soon as practicable after instructions are initially given.

Additionally, section 174(1) requires the law practice to disclose any significant changes to previously disclosed information, including changes to legal costs payable, as soon as practicable after such a change occurs. The practitioner must provide enough detail regarding the impact of the change on legal costs so that the client is able to make informed decisions about how their matter is to be conducted in the future.

Section 174(2) deals with additional information to be provided, requiring a law practice to inform clients of their rights on a number of general matters, such as their right to:

• negotiate a costs agreement
• negotiate the billing method
• receive a bill and request that it be itemised, and
• seek assistance from the designated local regulatory authority in the event of a legal costs dispute.

However, we find that practitioners often forget about their disclosure obligation under section 174(3).

This might be because the equivalent of section 174(3) did not appear in the Legal Profession Act 2004 (NSW) (which has since been superseded by the Uniform Law).

However, it is no less critical.

Section 174(3) is not really about separate disclosure, or what you need to disclose, but how disclosure must be made. Section 174(3) provides:

“If a disclosure is made…the law practice must take all reasonable steps to satisfy itself that the client has understood and given consent to the proposed course of action for the conduct of the matter and the proposed costs”.

Let’s take s 174(3) apart.

First, there has to be a ‘proposed course of action for the conduct of the matter’. This means that, at the start of the contract for provision of legal services, the law practice must set out what legal work is likely to be done, that is, ‘what is proposed’. Although not stipulated in the Uniform Law, our recommendation is to put this in writing.

Second, there must be a disclosure of ‘the proposed costs’ of that course of action. These words pick up the requirements in s 174(1) to disclose the basis on which legal costs will be calculated, and an estimate of the total legal costs.

Remember, it is the total legal costs that must be disclosed – that means fees, expenses and GST for the whole of the proposed course of action.

Practitioners should be wary of thinking that the obligation under s 174(3) can be discharged using a standard costs disclosure form. Section 174(3) is telling us that disclosure must be made properly and how that is done must depend on the client, not the legal practice. One size does not fit all.

Simply disclosing the proposed course of action and the proposed costs in writing and giving it to be client may not be enough. The law practice must ‘take all reasonable steps to satisfy itself that the client has understood and given consent’ to both the proposed course of action and the costs. In other words, it is important to obtain the client’s consent and determine that they understand the contents of the disclosure.

The requirement of section 174(3) is an important one, and we would recommend not relying on solely providing verbal disclosure. As the old saying goes, “A verbal agreement isn’t worth the paper it’s written on!”

The legislation does not however, prescribe how a law practice must discharge its duty under s 174(3).

In Malvina Park Pty Ltd v Johnson [2019] NSWSC 1490 (Malvina), the Supreme Court of NSW said that the steps a law practice may need to take will be influenced by the attributes of the client and what the client communicates before and after receiving the disclosure documents.

Malvina involved a solicitor who acted for their client in a motor vehicle matter that settled on an inclusive basis (including costs) at $500,000.  The solicitor was engaged under a cost agreement which had a fixed fee but an ascending scale in respect of charges that would be incurred as the matter advanced.

On assessment and on review, it was found that the solicitor’s emailing of the notice, cost agreement and disclosure to the client did not discharge their obligation under s 174(3).

The solicitor sought leave to appeal the decision.

The Court observed that instead of making arrangements to meet with their client, to discuss and explain the cost agreement, the solicitor chose instead to send three confusing and complex letters to their client.

There was also no evidence put forward by the solicitor that they took any steps to satisfy themselves that their client understood the cost agreement and was providing their consent to the proposed course of action and conduct of the matter. All the solicitor appeared to have done was simply send documents to their client and asking them to sign and return them.

The Court found that the solicitor’s evidence in relation to his state of mind and whether he formed a “reasonable opinion” about his client’s understanding of the cost agreement was relevant. Importantly however, the evidence of those subjective beliefs of the solicitor as a principal of the law practice needs to be assessed in light of the actions taken by the law practice at the time of the disclosure under s174 and, in particular, the actual steps taken by the law practice to meet its obligations under s174(3).

The Court accepted that the legislation does not prescribe how a law practice must discharge the duty under s174(3), and that this reflects the reality that what will be necessary to discharge the duty will vary according to the circumstances of the case and the client.

The steps a law practice may need to take will be influenced by the attributes of the client and what the client communicates before and after receiving the disclosure documents.

In Malvina, the Court found that the approach taken by the law practice did not constitute reasonable steps to satisfy itself that the client had understood and given consent to proposed costs when formulated on a fixed-price basis, let alone, the proposed course of action for the conduct of the matter.

So how can solicitors make the client understands the disclosure provided?

If we look at Malvina, it’s likely not enough to merely email the costs disclosure and say to your client “here’s our costs disclosure document, please sign and return,” unless the client is commercially aware and sophisticated. Even then, it is unlikely enough if, for example, the client does not know about statutory caps on costs in a particular area.

It is also probably not enough if the client does doesn’t have the funds to pay and is unaware or only dimly aware that they may have to pay their own costs and most of the other sides’ costs.

The client’s consent can only be legitimately given after the client has been appropriately advised of the proposed course of action, the proposed costs, and other relevant matters.

Another relevant case to consider is Todorovska v Brydens Lawyers Pty Ltd [2022] NSWCA 47, which found that:

• a law practice owes a fiduciary duty to its client and requires the client’s consent to receive a financial benefit
• clients must be made aware of caps on costs
• one purpose of the Uniform Law is to ensure that the costs to the parties is proportionate to the importance and complexity of the dispute
• the client should not be given the impression that they must enter into a costs agreement. Rather, there should be a meaningful explanation of the client’s right to negotiate and seek independent legal advice at least in the context where a law practice was contracting out of the costs caps that would otherwise apply
• the effectiveness of disclosures must be assessed in the context in which the disclosures were made. That includes things such as the sophistication and awareness of the client, their ability to understand, and so on.
• Solicitors should be a beware of enclosing advertising material with disclosure documents. Advertising claims like, ‘you can rely on us to look after your best interests’ or ‘be calm and trust your legal representatives. We have many years of specialist personal injury law experience’ may be contrary to the risks the client should be made aware of by the disclosure documents.

The Law Society has put together a factsheet on reasonable steps when giving cost disclosure.

It provides helpful hints and ideas about how you’re going to comply with the reasonable steps obligations and should be treated as guidance only.

Reasonable steps will depend on individual facts and circumstances. They include things like:

1. Asking your client to complete a client information sheet.
2. Identifying your client. Are they sophisticated or vulnerable? Is English their first language. You may also want to use Lawcover’s checklist for client identification.
3. Asking your client what they want to achieve.
4. Explaining in detail the proposed course of action plainly and clearly.
5. Explaining available options and an estimate of legal costs associated with those options.
6. Confirming your client’s instructions after you have made preliminary search results, including conflict of interest searches and perused any available relevant documents.
7. Letting your client know that they can ask questions.
8. Asking the client to explain to you in their own words their understanding of the proposed course of action and the costs involved and making a contemporaneous file note setting out the actual words of the client recorded in the first person.
9.  Sending a detailed letter to the client confirming their proposed course of action and the proposed costs, and;
10.  If there is any significant change to anything previously disclosed to the client, providing the client with information disclosing the change, including any significant change to the legal costs that will be payable by the client.

The requirement in section 174(3) is a reminder of the high standards the legal profession is held to, particularly the fiduciary obligation we owe our clients.

The Law Society’s Professional Support Unit (PSU) provides free and confidential guidance to all solicitors regarding their obligations under the Legal Profession Uniform Law in the areas of costs, ethics and regulatory compliance.

Enquiries can be made to PSU by telephone, email, or in person. For guidance on costs, contact [email protected] or (02) 9926 0116