By Katherine Lau and Nick Satouris -
There are three documents in legal practice that are foundational to protecting the solicitor and the law practice, and every solicitor is taught this on their first day on the job: the client retainer, the costs agreement and the solicitor’s file note. The client retainer and costs agreement both, in distinct ways, establish the scope and terms of the solicitor-client relationship, but are often confused for one another as they are usually sent to the client in a bundle. In this article, we look at the difference between these two documents and the distinct value and importance of each.
What is a client retainer and what is a costs agreement?
In legal practice, a client retainer is a contract between a law practice or solicitor and its client, which establishes a professional relationship and the right to bill for services.
A costs agreement is also a contract between a law practice or solicitor and its client; however, unlike the retainer, it specifies the payment and quantification of legal costs that flow from the solicitor-client relationship. A costs agreement may be included within the client retainer; however, it is not the retainer agreement.
In essence, the client retainer creates the solicitor-client relationship, and the costs agreement defines the financial terms of that relationship.
Client retainer
A retainer can be evidenced in writing, orally or implied by the conduct of the parties;[1]however, the best way of establishing proof of an agreement between a law practice or solicitor and their client is a written document signed by both parties and which sets out the terms of the solicitor’s engagement. For example, a letter of engagement signed by the client.
A written retainer normally sets out the services to be performed by the solicitor or law practice.
A client retainer may come into existence before a costs agreement is entered into between the solicitor or law practice and the client.
Establishing the scope of a client retainer is essential for a solicitor discharging their professional and ethical obligations to their clients. It has been judicially remarked that “the relationship between the solicitor and the client is the primary focus for determining the solicitor’s duty.”[2]
Benefits of establishing a clear client retainer
A client retainer that clearly defines the nature and scope of work to be undertaken by a solicitor or law practice for their client is important for several reasons:
- It identifies the client and therefore provides clarity as to whom the solicitor owes duties in contract and tort to, as well as fiduciary duties
- It defines the scope of the solicitor’s obligations to the client and assists the solicitor determine the scope of their authority to act
- Clarity of the solicitor’s role at the outset of the solicitor-client relationship is fundamental to building a relationship of trust
- It can help to manage the client’s expectations
- Finally, a solicitor’s ability to claim costs and disbursements arises from the retainer. When a person engages a solicitor to perform legal services, this gives rise to an implied undertaking on the part of the client to pay costs on the basis specified in the contract. The retainer can be relied upon by the solicitor as evidence of the engagement.
Solicitors’ duties
The duties that a solicitor must observe under a retainer include:
- serving the client competently and diligently
- maintaining the confidentiality of the client’s affairs while giving them the benefit of all the information that is relevant to their affairs
- maintaining their paramount duty to the court and to the proper administration of justice
- avoiding potential and actual conflicts of interest
- complying with statutory and regulatory requirements in relation to costs, and
- maintaining professional independence to ensure that clients are afforded proper advice
Costs agreement
Costs agreements are not mandatory under the Uniform Law, however, there are good reasons for having one, particularly as a valid costs agreement determines a law practice’s entitlement to remuneration on terms it has agreed to with the client.
Benefits of a costs agreement
A valid costs agreement puts the solicitor in a better position to:
- have the benefit of the presumption granted under s 172(4) of the Uniform Law, which provides that a “costs agreement is prima facie evidence that legal costs disclosed in the agreement are fair and reasonable” (provided appropriate disclosures have been made)
- be able to enforce the contract for debt recovery[3]
- have the ability to charge interest on unpaid legal costs on terms more beneficial than provided under the Uniform Law (see ss 195(1) and (2))
- have a third party be liable for legal costs[4]
A clearly written costs agreement also provides more clarity (and therefore certainty) on:
- who is liable for fees, and
- the arrangements for payment of disbursements, including counsel’s fees, where relevant.
Types of costs agreements
The Uniform Law provides for two types of costs agreements:
- standard costs agreements, and
- conditional costs agreements
A standard costs agreement is used for most legal work that is carried out; however, it is common to find the use of conditional costs agreements in personal injury matters, the ‘no win no fee’ arrangement.
Standard costs agreements under the Uniform Law
As mentioned above, the Uniform Law grants clients of a solicitor or law practice a right to require the solicitor or law practice to provide and negotiate a costs agreement. If a costs agreement is entered into between a solicitor or law practice and its client, the following requirements must be satisfied.
- The costs agreement must be written or evidenced in writing[5]
- The costs agreement cannot provide that the legal costs to which it relates are not subject to a costs assessment[6]
The offer can be accepted in writing or by “other conduct”.[7] However, it is best practice to have the client sign the costs agreement as evidence of their receipt and acceptance of it. This is particularly important given that a law practice has an obligation under s 174(6) of the Uniform Law to “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.”
Solicitors or law practices that intend to charge for storage of files and documents should consider r 16 of the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (Conduct Rules) in relation to whether to have the client sign the costs agreement. Conduct Rule 16 provides that a law practice must not charge a client for storage of documents, files, or other property on behalf of the client, including retrieving same, unless the client has agreed. A costs agreement is a good place to obtain such agreement.
Conditional costs agreements under the Uniform Law
Under s181 of the Uniform Law, a law practice is permitted to enter into a conditional costs agreement, which provides that “the payment of some or all the legal costs, is conditional on the successful outcome of the matter to which those costs relate.” However, conditional costs agreements are prohibited in criminal proceedings and family law proceedings.
Conditional costs agreements must:[8]
- Be in writing
- Set out the circumstances that constitute the successful outcome of the matter. Refer to the article, Conditional costs agreements and the meaning of successful outcome, for guidance on this issue
- Be signed by the client
- Include a statement that the client has been informed of their right to seek independent legal advice before entering into the agreement, and
- Contain written notice of a cooling-off period of not less than 5 business days, during which the client may terminate the agreement
A conditional costs agreement can include an uplift fee. However, where it is a litigious matter, the agreement must not provide for an uplift fee unless the law practice has a reasonable belief that a successful outcome is reasonably likely, and the fee must not exceed 25% of the legal costs, excluding disbursements.
The basis of the calculation of the uplift fee must also be identified in the cost agreement.
If the client terminates a conditional costs agreement within the cooling-off period, the law practice may only recover the legal costs in respect of legal services performed before the termination. In such circumstances, a law practice cannot recover any uplift fees.
Costs disclosure
Information about the legal costs owing to the solicitor or law practice for the legal services provided is known as costs disclosure. It is a distinct legal obligation. It is separate to the client retainer and the costs agreement but may be contained in either.
Under s 174 of the Legal Profession Uniform Law (NSW) (Uniform Law), where the total estimate of costs in a matter exceeds $750 plus GST, costs disclosure is mandatory and must be in writing.[9] The obligation to disclose is ongoing; a solicitor or law practice must notify the client in writing of any substantial change to anything included in a disclosure.[10] A substantial change may be, for example, the need to brief counsel or obtain further evidence in a matter due to changes to the other side’s pleadings. It may also be, for example, when the client’s instructions have changed and, as a result, the solicitor’s advice and recommended course of action is different to what was initially provided to the client.
Failure to comply has serious consequences, including disciplinary action, and will render any costs agreement entered into between the solicitor and the client void.[11]
The information to be disclosed under s 174 of the Uniform Law includes:
- the basis on which legal costs will be calculated in the matter;[12]
- an estimate of the total legal costs;[13]
- the client’s right to negotiate a costs agreement with the law practice;[14]
- the client’s right to negotiate the billing method;[15]
- the client’s right to receive a bill from the law practice and to request an itemised bill after receiving a bill that is not itemised or is only partially itemised;[16] and
- the client’s right to seek the assistance of the designated local regulatory authority (in NSW, the Office of the Legal Services Commissioner) in the event of a costs dispute.[17]
Further guidance on costs disclosure under the Uniform Law is available in the Law Society of NSW’s Costs Guidebook.
Resources and further guidance
The Costs Committee of the Law Society of NSW has prepared a pro-forma standard costs agreement and conditional costs agreement, which can be accessed on the Law Society Website.
For further guidance on the ethical obligations of solicitors and law practices that arise from a client retainer, please contact the ethics line of the Professional Support Unit (PSU) on (02) 9926 0114 or email ethics@lawsociety.com.au.
For assistance with the Uniform Law requirements concerning costs agreements, contact PSU’s costs line on (02) 9926 0116 or email costs@lawsociety.com.au.
