By Dora Chan -
A frequent and common frustration faced by solicitors is chasing clients for unpaid legal costs. Unpaid costs adversely impact a law practice’s cashflow and, ultimately, its financial wellbeing.
The Legal Profession Uniform Law (NSW) (LPUL) requires certain conditions to be met before a law practice can commence legal proceedings to recover its unpaid costs. This article sets out those conditions and provides a guide on how to review your costs arrangements to ensure they withstand scrutiny. It also discusses the different avenues for pursuing unpaid costs and key considerations a solicitor should have before pursuing their clients or third-party payers for unpaid legal costs.
A guide to reviewing your costs arrangements
Step 1 – Reviewing your costs disclosure
Consider whether you have provided a valid costs disclosure under Division 3 of Part 4.3 of LPUL. This includes:
- ensuring the disclosure is in writing;
- containing information about the client’s rights to:
- negotiate a costs agreement;
- negotiate a billing method;
- receive a bill and to request an itemised bill after receiving one that is not itemised or is only partially itemised; and
- to seek the assistance of the Office of the NSW Legal Services Commissioner (OLSC) in the event of a costs dispute;
- if there is an associated third-party payer, ensuring written disclosure was also provided to that party; and
- ensuring reasonable steps were taken to satisfy yourself that the client has understood and given consent to the proposed course of action for the conduct of the matter and the proposed costs.
If any of the above requirements are not met, your costs agreement is void under s 178(1)(a) of LPUL. Additionally, your client or any associated third-party payer is not required to pay your legal costs until:
- the costs have been assessed, or
- if there is a dispute, until that dispute has been determined by the OLSC under s 178(1)(b) of LPUL.
It follows that your law practice is unable to commence proceedings to recover unpaid costs until the above has occurred.[1]
Step 2 – Reviewing your costs agreement
While a costs agreement is not a requirement under LPUL, if a law practice enters into one with a client, then it must satisfy the requirements under Division 4 of Part 4.3 of LPUL.
If you are seeking to rely on your costs agreement as the basis for a claim in debt recovery proceedings:
- it must be written or evidenced in writing;
- it cannot include a term that the legal costs to which the agreement relates are not subject to a costs assessment;
- if it is a conditional costs agreement, it must satisfy the requirements of s 181 of LPUL;
- it cannot include a term that costs are calculated by reference to the amount of any award or settlement or the value of any property that may be recovered in legal proceedings to which the agreement relates; and
- if it includes a term that imposes interest on late payment of fees, it must comply with s 195 of LPUL.
Step 3 – Reviewing your invoices
Section 194 of LPUL prohibits a law practice from commencing legal proceedings to recover its unpaid costs unless a bill has been given to the client in accordance with the requirements of LPUL and its Rules. Before taking any action to recover unpaid costs, you must therefore ensure that your invoices:
- clearly state the due date for payment;
- include or is accompanied by a written statement setting out:
- the avenues that are open to the client in the event of a costs dispute, for example, seeking costs assessment; and
- any time limits that apply to any dispute that is raised by the client; and
- have been properly served on the client in accordance with rule 73 of the Legal Profession Uniform General Rules 2015.
You can give the client a bill as either a lump sum or itemised bill. If you have provided a lump sum bill, the client is entitled to request an itemised bill within 30 days of the due date for payment. If an itemised bill is requested, ensure that you comply with the request within 21 days of it being made.
Step 4 – Consider the implications of discounting bills
If you have issued your client with a discounted bill, you cannot then withdraw it and substitute it for a higher amount except under certain circumstances.[2] For example, if there is an agreement between you and the client that you will reinstate the original bill if the client fails to pay the discounted bill on time. Such a condition would be subject to the court’s right to strike down the condition if it is unfair.
Step 5 – Costs Assessment
Commencing legal proceedings may not be the most appropriate or timely means for recovering your outstanding costs.
Legal proceedings can be stressful, time-consuming and expensive. They may also be risky, as the client can file a counter-claim alleging overcharging or negligence on your part, which would trigger the obligation to notify Lawcover.
From a practice guidance perspective, costs assessment is the recommended means to recover outstanding costs as it has more benefits than debt recovery proceedings.
Benefits of costs assessment include:
- It’s paper driven, which means there is no need for the parties to appear in court.
- The process is usually quicker than debt recovery proceedings. The time standard for determining a costs assessment is “within 3 months from date of referral to an assessor where the costs claimed are less than $100,000.00, and within 6 months…where the costs claimed are $100,000.00 or more.”[3]. However, in some cases, it may take longer than the time standard for a costs assessment to be completed.
- The costs assessor allocated to the matter is required to determine limited issues such as whether a cost agreement exists and whether the legal costs are fair and reasonable. The client can prepare objections to your costs and submissions in response but cannot file a counterclaim or defence.
- The costs incurred are substantially less than legal proceedings due to the limited issues for determination by an assessor and the relative speed within which a determination is made.
- Should the client fail to pay your costs following the issuing of a certificate of determination, you can file the certificate(s) of determination in a court of competent jurisdiction and enforce it as a judgement debt.
Information about the costs assessment process, including the relevant forms and fees, can be accessed on the Supreme Court of NSW website here.
Time limits of Costs Assessment
Under s 198(3) of LPUL, an application for costs assessment must be made within 12 months after the bill or request for payment was made to the client or third-party payer. Section 198(4) of LPUL only permits an out of time application to be made by the costs assessor or the client or third-party payer but not the law practice.
The case of Dive Lawyers Pty Ltd v The Manager, Costs Assessment [2024] NSWSC 721 held that a law practice may file an out of time application with the Supreme Court Costs Assessment Section; however, the Manager, Costs Assessment has to determine if it is “just and fair” to grant the extension of time to the law practice. Notwithstanding such possibility, it is best practice to file a costs assessment application within the 12 months’ time limit to avoid the uncertainty of whether the Manager, Costs Assessment will find there are “just and fair’ grounds for granting the extension.
Steps 6 – Issues to consider before commencing legal debt recovery proceedings
If you decide that legal proceedings are the most appropriate course of action for recovering your unpaid costs, you should consider the following before commencing your action:
- Have you waited an appropriate amount of time? You need to wait 30 days after giving the client your bill before you can commence legal proceedings. If the client subsequently requested an itemised bill, you need to wait at least 30 days after you gave the client the itemised bill.
- Whether your costs are disputed. If your costs are disputed and subject to a dispute resolution process, for example, with the assistance with the OLSC, you need to wait until that process has ended before commencing legal proceedings.
- The outstanding amount owed to you. Remember to initiate the proceedings in a court of competent jurisdiction.
- Limitation periods. There is an article in the Law Society Journal, “Limitation issues in solicitor/client costs” that discusses limitation issues when a solicitor is seeking recovery of legal fees.
- Who is representing you/your firm in the proceedings? If you are a principal of a law practice and you represent yourself in legal proceedings for the recovery of your legal costs, you cannot claim for the time you spent on the litigation if you are successful in the proceedings.[4] However, you may be able to claim the time spent by solicitors in your employ.[5]
Regardless, you should consider the prudence of acting for yourself, as well as potential conflicts of interest and lack of professional detachment.
For further information about the implications of self-representation in proceedings to recover legal costs, refer to these articles in the Law Society Journal:
- Cost of using employed solicitors in proceedings
- Latest developments to the Chorley exception
- Chorley resurrected? High court finds employed solicitor rule applies to law firm
Summary checklist
Before taking action to recover your unpaid costs:
- Review your costs disclosure to ensure that it is in writing and complies with the relevant requirements under Division 3 of Part 4.3 of LPUL.
- Review your costs agreement to ensure that is in writing and complies with the relevant requirements under Division 4 of Part 4.3 of LPUL.
- Review your invoices to ensure that the date for payment is clear and includes or attaches a written statement on avenues available to the client to raise and resolve a costs dispute.
- If you have discounted a bill and subsequently wish to pursue the original undiscounted bill, ensure there is a prior agreement with the client for you to take this course of action.
- Consider whether costs assessment or debt recovery proceedings is the most appropriate course of action.
- If you decide to commence legal debt recovery proceedings in a court of competent jurisdiction, ensure the appropriate amount of time has passed and that any dispute raised by the client with the OLSC has been resolved.
- Be aware of the rules that apply when seeking costs in proceedings to recover your unpaid costs.
Further guidance
The Costs Committee of the Law Society of NSW’s Costs Guidebook has information and practical guidance about legal costs. You can access the latest edition of this publication here.
Solicitors who would like further guidance and support can contact the costs team of the Professional Support Unit (PSU). PSU provides free and confidential guidance to solicitors in NSW who require assistance understanding their regulatory, ethical and professional obligations in legal practice.
| AML/CTF | amlctf@lawsociety.com.au | (02) 9926 0249 |
| Costs | costs@lawsociety.com.au | (02) 9926 0116 |
| Ethics | ethics@lawsociety.com.au | (02) 9926 0114 |
| Regulatory Compliance | regulatory.compliance@lawsociety.com.au | (02) 9926 0115 |
Dora is a Professional Support Solicitor with the Law Society of NSW. Dora assists members of the legal profession in relation to practising certificate conditions, regulatory obligations in legal practice management and legal costs.
