Trust money in dispute

The safest course is often the simplest: don’t disburse trust money until you are clearly authorised to do so. Below are some of the most common queries that the Law Society of NSW’s Trust Accounts Department assists practitioners with.

Conflicting instructions for trust money held on behalf of multiple parties

What goes wrong

A practitioner holds trust money on behalf of not only their client but also another party (for example, conveyancing deposits, proceeds of sale, estates with multiple executors or funds held during matrimonial or commercial disputes). The relationship between the client and the other party breaks down and the practitioner receives inconsistent, competing or unclear instructions for the release of the funds. The practitioner acts on the instructions of one party, typically their client, without the agreement of all parties or a court order.

Why this is a problem

Section 138 of the Uniform Law provides that trust money may only be disbursed in accordance with a direction from the person(s) on whose behalf the money is received, a court order or as otherwise required by law. Where trust money is held for multiple parties, authority to disburse must be consistent and joint. Disbursing trust money on disputed instructions and without proper authority from all parties on whose behalf the money is held, is a breach of trust obligations under the Uniform Law. This may expose the practitioner to a claim for breach of fiduciary duties and breach of trust, as well as disciplinary action.

What should you do

• Consider whether it is appropriate to take on obligations to parties who are not your client.
• Treat the funds as disputed trust money.
• Do not disburse trust money without clear, consistent instructions from all parties on whose behalf the money is held, or a court order.
• Promptly notify all parties that the funds will remain in trust pending resolution of the dispute.
• Maintain clear, contemporaneous written records of the dispute and all communications.
• Where appropriate, seek court directions or consider payment of the funds into court.

Key takeaway: During a dispute, practitioners must not inadvertently act as adjudicators.

Using trust money to recover unpaid fees after termination of a retainer

What goes wrong

A client terminates the engagement mid-matter, leaving outstanding legal fees. The practitioner transfers trust money to the office account to ‘settle-up’, assuming an entitlement to the fees exists.

Why this is a problem

A belief that fees are owed is not the same as authority to withdraw trust money. In accordance with r 42 of the Legal Profession Uniform General Rules 2015 (General Rules), a law practice may withdraw trust money for payment of legal costs if it has given the person the bill and, after 7 business days, the person has not disputed it. Without a properly rendered bill and disclosure of the proposed withdrawal of trust money, the withdrawal must not be authorised.

What should you do

• Follow the costs disclosure and billing requirements under Part 4.3 of the Uniform Law. Refer to The Law Society of NSW’s Costs Guidebook for more information.
• Only withdraw money from trust to pay legal costs if:
  • a bill has been given to the client, referring to the proposed withdrawal, and no objection was received; or
  • the person has provided instructions that authorise the withdrawal; or
  • the practitioner is reimbursing the office account for money already paid out on behalf of the person, or
  • the money otherwise becomes legally payable.
• A lien may be exercised over trust money held for legal costs reasonably due and payable in accordance with s 144(2)(a) of the Uniform Law. Refer to How can liens assist your legal practice for further guidance.
• If fees are disputed and the matter has been referred to the Office of the NSW Legal Services Commissioner or for costs assessment, the money must remain in trust until resolved.
• Consider alternative debt recovery options.

Key takeaway: Trust accounts are not debt-recovery mechanisms.

Holding funds indefinitely ‘until things calm down’

What goes wrong

Following a dispute, trust money is left untouched for extended periods, on the assumption that no action is the safest option.

Why this is a problem

Inaction can itself amount to non-compliance. Section 137 of the Uniform Law requires trust money to be dealt with as soon as practicable after being received.

What should you do

• Actively manage disputed trust money by:
  • Communicating clearly with the parties about next steps.
  • Encouraging resolution; or
  • Seeking independent advice.
• Consider statutory pathways (e.g. payment of funds into court).
• Review dormant trust balances regularly.
• Maintain proper trust records and reconciliations throughout.

Key takeaway: Doing nothing may still have consequences

Sharon Blake is Chief Trust Account Investigator with the Law Society of NSW.