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Cost Law Commentary

Third Party Payers and Costs Agreement - A New Perspective

The decision of Justice Emerton in Hamilton v Russell Kennedy is an interesting exploration of the rights of third party payers in regards to cost agreements. The background to the decision is somewhat tortuous and on close review highlights a potential problem with an earlier case involving the parties.  The present decision arises from an appeal from VCAT but it is necessary to look at earlier VCAT proceedings involving the appellant, Mr Rohan Hamilton, his brother, Mr Alan Hamilton, their mother and the respondent law firm.

Put very simply, Mr Alan Hamilton, as joint administrator of his mother's financial affairs, consulted and entered into a cost agreement with Russell Kennedy in relation to a dispute with Mrs Hamilton's neighbours.  Mr Rohan Hamilton was not a party to that agreement.  Subsequently, Mr Alan Hamilton commenced VCAT proceedings, seeking a reduction in the costs charged, alleging inaccurate cost estimates, and unnecessary work had been undertaken.

Mr Rohan Hamilton applied to be joined as an applicant to these proceedings, as the other joint administrator of his mother's estate.  Russell Kennedy objected to this application on the basis that he was not a party to the costs agreement.  Orders were made joining Mr Rohan Hamilton, "partly because Mr Rohan Hamilton, as a joint administrator of his mother's affairs, ought to be bound by or have the benefit of any order made in the proceedings ..... partly because Mr Rohan Hamilton has an obligation to protect his mother's estate, which would be affected by the outcome of the proceedings."

Orders were made that both Messrs Hamilton pay the invoices rendered by Russell Kennedy, with a minimal reduction, "calculated in accordance with the costs agreement signed by Mr Alan Hamilton".

Mr Rohan Hamilton subsequently brought proceedings in VCAT seeking that the cost agreement be declared null and void on the grounds that it had not been entered into by the joint administrators.  By this time, State Trustees had been appointed administrators, and shortly after these proceedings commenced, Mrs Hamilton died. Although Mr Rohan Hamilton was a joint executor in her estate, probate was not granted until after judgement in these proceedings.  Senior Member Vassie dismissed this proceeding 0n the grounds of both issue and Anshun estoppel, finding the cost agreement had been dealt with in the first proceedings.

Mr Hamilton sought and was granted leave to appeal.  However, Lansdowne AsJ dismissed the appeal, accepting Russell Kennedy's submissions that Mr Hamilton had no standing to bring the second proceeding, as he was not a "client" within the meaning of s 3.4.21 of the Legal Profession Act, and nor did he have standing as his mother's representative.

"The respondent correctly asserts that s. 3.4.32 required an application by “a client”. Sub-section 3.4.32(10) defines a “client” for the purposes of that section as “a person to whom or for whom legal services are or have been provided”. The parties agree that the person for whom the services were provided was the appellant’s mother. Section 3.4.26(6) extends the definition of “client” in certain circumstances to an “associated third party payer”. An “associated third party payer” by virtue of s. 3.4.2A is defined to be a person who was not the client of the law practice but was under a legal obligation owed to the law practice to pay all or any part of the legal costs for legal services provided to the client. Section 3.4.26(6) now provides, and did so at the time of the application to VCAT, as follows:

(6) A reference in section 3.4.32 and in any prescribed provisions of this Part to a client is, in relation to a costs agreement that is entered into between a law practice and an associated third party payer as referred to in subsection (1)(d) and to which a client of the law practice is not a party, a reference to the associated third party payer. (emphasis added)."

Justice Emerton was dealing with Mr Hamilton's appeal from the decision of Lansdowne AsJ and dealt with the argument that he was an associated third party payer, by virtue of the orders in the first VCAT proceeding requiring Mr Hamilton to pay the legal costs owing to Russell Kennedy.  Her Honour rejected this argument finding:

"I have considered whether a person can fall within the extended definition of ‘client’ if the person was an associated third party payer, but not the associated third party payer that entered into the relevant costs agreement. Section 3.4.26(6) refers to ‘an’ associated third party payer in relation to the costs agreement, but finishes by referring to ‘the’ associated third party payer as the client. In my view, the plain meaning of s 3.4.26(6) is that the associated third party payer that is the ‘client’ is the associated third party payer that is a party to the costs agreement with the law practice. An associated third party payer may apply to have the costs agreement set aside if he or she is a party to the costs agreement.

This construction is consistent with an intention to limit the entitlement to make application under s 3.4.32 to set aside costs agreements to the person to or for whom the legal services were provided, and/or the person who entered into the agreement for the provision of those services and is obliged by the agreement to pay for those services. This prevents interlopers from seeking to set aside agreements to which they are not parties."

Thus Mr Hamilon's appeal fails, and he is required to pay costs pursuant to a cost agreement, to which he was not a party, the one fact which he, his brother and Russell Kennedy all appear to be in heated agreement on.

And there is the rub.  If he wasn't a party to the agreement, how can he be bound by its terms, and why would he have to pay fees calculated in accordance with the agreement, in light of s 3.4.19 of the Legal Profession Act?

Subject to Division 2, legal costs are recoverable-

(a) under a costs agreement made in accordance with Division 5 or the corresponding provisions of a corresponding law; or

(b) if paragraph (a) does not apply, in accordance with an applicable practitioner remuneration order or scale of costs;

Given that he was not a party to the cost agreement, it would appear that VCAT was in error in the first proceedings in ordering that Mr Rohan Hamilton pay costs calculated other than pursuant to a scale of costs.

The decision highlight another issue, which is that an associated third party payer can not make an application to set aside a cost agreement unless it is the only party to the cost agreement - i.e. the client is not a party to the cost agreement.  If the client is also a party, it is only the client who can apply to set aside the cost agreement.  One can envisage circumstances where this could have an unhappy outcome - for example, where directors of a company provide a guarantee in the cost agreement.  The guarantee creates the associated third party relationship, but the guarantors have no rights to set aside the cost agreement in so far as it applies to themselves.