WK 10 – Duty to account, costs disclosure and cost agreement PDF

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WK 10 – DUTY TO ACCOUNT RULE: Part 4.2 and part 4.3 Legal Profession Uniform Law 2015 (NSW) The basic obligation  

Statute requires lawyers to deposit into a trust account with a financial institution money received for or on behalf of any person to be held exclusively for that person. The lawyers own money relating to the practice are held in an “office account” separate to the trust account.

 TRUST MONEY. 

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A law practice must deposit all trust money received in the form of cash in the law practices general trust account as soon as practicable after receiving the money, even if it has written direction to deal with it in some other way. Once deposited, the money can be dealt with in accordance with the written direction. Section 143 LPUL 2015 (NSW). Part 4.2 Division 1, Section 129 of the Legal Profession Uniform Law 2015 (NSW) defines ‘trust money’ as money received in the course of or in connection with the provision of legal services by a law practice for or on behalf of another person. Coming within the statutory reach of trust money is: o ‘controlled money’: trust money received or held by a law practice in respect of which it has a written direction to deposit in an account (other than a general trust account) over which it has, or will have, exclusive control. o Part 4.2, Division 2, Section 139 Legal Profession Uniform Law 2015 (NSW) Controlled money must be deposited in the account specified in the written direction as soon as practicable after receiving it. o Money controlled by a law practice pursuant to a power to deal with it for or on behalf of another person that is exercisable by the practice, or jointly and severally with the person or nominee. o ‘Transit Money’: is defined in section Part 4.2 , Division 1, section 128 of the Legal Profession Uniform Law 2015 (NSW). It defines transit money as money received by a law practice subject to its instructions to pay or deliver it to a third party, other than an associate of a law practice. o According to Part 4.2 Division, Section 140 (1) – A law practice must pay or deliver the money as required by the instructions relating to the money within the period (if any) specified in the instructions or as soon as practicable after received. o Part 4.2 Division, Section 140 (2) – A law practice must, in respect of transit money received record and keep brief particulars sufficient to identify the relevant transaction and any purpose for which the money was received. o Part 4.2 Division, Section 140 (3) – A law practice must keep the particulars mentioned above for 7 years.

ACCOUNTING FOR TRUST MONEY Duties related to accounting 

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The duty to account represents a necessary incident of a trustees personal obligation to hold and deal with trust property for the benefit of the beneficiaries. (Re Simersall 1992 35 FCR 584 GUMMOW J. It obliges a lawyer to maintain an accurate, accessible and ordered account of that trust money. It requires a system of financial controls relating to trust accounts capable of alerting lawyers and regulators to irregularities.

Records to be kept 

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Part 4.2, Division 2, Section 147 of the Legal Profession Uniform Law 2015 (NSW) requires lawyers to keep detailed accounts of all dealings with trust money that accurately disclose the state of accounts, and enable the convenient and proper auditing of receipt and payment of trust money. The requirements aim to ensure that lawyers financial transactions through a trust account are identified, isolated and protect clients by requiring contemporary records to explain and justify dealings with client funds. However, they are not to be taken as the measure of the lawyers fiduciary obligations in equity to the client. Sim v Craig Bell & Bond [1991] 3 NZLR 535 at 538 RICHARDSON J.

Duty to give account on request  

At general law, a trustee must give an account of receipts and payments to those interested in the funds when it is properly demanded. Wroe v Seed (1863) 4 Giff 425. The legal profession regulations entitle persons on whose behalf trust money is held to request in writing, and promptly receive, a statement of accounting of trust funds and their application. Rule 57 and 58 of the Legal Profession Uniform General Rules 2015 (NSW).

No mixing of trust with non-trust moneys 

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Part 4.2, division 2, section 146 Legal Profession Uniform Law 2015 (NSW) – A law practice must not mix trust money with other money unless authorised to do so by the designated local regulatory authority, and only in accordance with any conditions the designated local regulatory imposes in relation to authorisation. The practical result is that money held by a lawyer in trust must be kept in separate accounts. Re Todd (No 2) (1910) 10 SR 490. Johns v Law Society of New South Wales [1982] 2 NSWLR 1 at 24 Mahoney J.

Trust account not to be overdrawn

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Because a lawyer must follow instructions of the client whose trust moneys are held in the use and disbursement of those moneys, and that persons entitlement to do so is limited to the balance of their money, there is no reason for the trust account to be in debit. A lawyer who, without reasonable excuse, causes a deficiency in a trust account, or fails to deliver trust money is declared guilty of an offence. Part 4.2, division 2, section 148 Legal Profession Uniform Law 2015 (NSW) – A law practice, legal practitioner or any other person must not, without reasonable excuse cause deficiency in any trust account or trust ledger account; or a failure to deliver any trust money.

Duty to report defalcations 

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Part 4.2, division 2, section 154 of the Legal Profession Uniform Law 2015 (NSW) requires a lawyer who believes on reasonable grounds that there is an irregularity in connection with the receipt, recording or disbursement of any trust money received by a law practice, including the practice in which he or she is employed, to notify the authority in writing. A breach of this requirement may expose the lawyer to a penalty.

False names in trust account prohibited 

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Part 4.2, division 2, section 147 (3) Legal Profession Uniform Law 2015 (NSW) A law practice that knowingly receives money, or records receipt of money in the practice’s trust records under a false name; is liable to a penalty under statute. PART 4.2, division 2, section 147 (4) if the law practice is aware that a person on whose behalf trust money is received by the law practice is commonly known by more than one name, the law practice must ensure that the trust records all names by which the person is known. The falsity of a name in which a trust account is held is inconsistent with the lawyers duty to act with candour and honesty. In Cahill v Law Society of New South Wales (1988) 13 NSWLR 1, the NSW Court of Appeal held that a lawyer who allows transactions to be carried out in which clients adopted fictitious names, designed to effect a fraudulent purpose of which the lawyer was aware, was guilty of professional misconduct.

Prohibition on use or withdrawal of trust money without authorisation 

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Lawyers must refrain from treating trust moneys as their own property or as moneys for their own direct or indirect benefit. Brown v Inland Revenue Commissioners [1965] AC 244 The basic requirement or obligation is for lawyers to hold trust money exclusively for the person from whom or on whose behalf it was received – meaning a lawyer can only use the trust money according to that persons direction. (Re a Solicitor (1991)

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Trust account should be sacred, so that moneys paid into the account should only be paid out to the persons to whom the money belonged, or as they directed. (Re a Practitioner [1941]. Part 4.2, division 2, Section 138 -140 of the Legal Profession Uniform Law 2015 (NSW) prohibits lawyers from withdrawing trust money except to pay to, or disburse according to the direction of, the person for whom the money is held. This means that a lawyer is not liable to a third party who suffers loss as a result of the lawyer following these directions. Moffit P in Adams v Bank of New South Wales [1984] 1 NSWLR 285 AT 290 o The position is different for a lawyer who is knowingly involved in a conspiracy to defeat the interests of persons lawfully entitled to the benefit of the money; including where the lawyer’s knowledge is sufficient to impress her or him with recipient or accessory liability. o Care therefore should be taken in disbursing trust money at a client’s direction, as there is a prospect that the lawyer could be found liable- via constructive trusteeship- to a person beneficially entitled to the money but who has been deprived of that money as a result of the lawyer disbursing the money at the client’s direction. Part 4.2, division 2, section 144 (1) Legal Profession Uniform Law 2015 (NSW) prohibits a law practice from withdrawing trust money other than by cheque or electronic funds transfer. Section 144 (2) as above – Lawyers may withdraw unclaimed trust money or for another payment authorised by law. Section 47 – 47 Legal Profession Uniform Law Application Act 2014 (NSW) requires that a proportion of moneys held by lawyers on trust be lodged with a statutorily prescribed body, which may use the income from that investment for specified purposes.

Withdrawal of trust money in payment of professional costs 

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The withdrawal of trust money in satisfaction of costs rests on the lawyer following a prescribed procedure in rule 42 Legal Profession Uniform General Rules 2015 (NSW). The regulations generally entitle a law practice to withdraw trust money for costs where it has rendered a bill to the client, to which the client has not objected within seven days, or has objected but has not applied for a costs review within 60 days. o They alternatively allow a law practice to withdraw trust money for costs once it has given the client request for a payment, where the money is either withdrawn in accordance with a valid costs agreement or in accordance with clients instructions, or it is owed to the practice by way of reimbursement of money it has paid on behalf of the client.

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Where a lawyer is entitled to withdraw trusts moneys to meet costs owing, the proper course is to separate what is to become the lawyers money from the tusts moneys by withdrawing the amount from the trust account and paying it onto the lawyers office account.

Solicitors lien not prejudiced 

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Part 4.2, division 2, section 144 (2) Legal Profession Uniform Law 2015 (NSW)- The statutory requirements to apply money as directed do not affect any claim or lien, whether retaining or particular, a lawyer has in respect of money in a trust account at a financial institution. They do not authorise a lawyer to withdraw trust moneys by means of exercising a lien. Otherwise this would undermine statutory prerequisites for withdrawal of trust money.

Trust money not available to satisfy lawyer or third party debt  

Pt 4.2, div 2, Section 145 (1) LPUL 2015 Trust moneys are not available for the payments of personal debts of the lawyer, Pt 4.2, div 2, Section 145 (2) Nor are they liable to be attached or taken in execution for the purpose of satisfying a judgement against the lawyer.

Verification of trust accounts 

The legislation and rules in each jurisdiction provide for external independent monitoring of a lawyers trust accounts by means of audit / inspection.

External examiners and investigators 

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Part 4.2, div 3, section 155 LPUL 2015 (NSW)- Statute requires lawyers to engage an external examiner, generally once a year, to examine their records in respect of trust money. Lawyers must comply with the examiners legitimate request for access to relevant accounts and documents, respond to their inquiries and furnish all necessary authorities. Part 4.2 div 3, section 159 LPUL 2015 (NSW) An external examiner must report trust accounting breaches or irregularities to the requisite body, which can investigate the manner. Legislation also makes provision for the relevant professional body to appoint investigators to ascertain whether a law practice has complied, or is complying with

the trust accounting requirements and to detect and prevent fraud or defalcation (Rogerson v Law Society of the Northern Territory (1993) 88 NTR).

Confidentiality and privilege in trust account verification 

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Where an external examiner or investigator is conferred the rights to access trust records and documentation, a lawyer must comply despite any duty of confidentiality to the client. In order to protect the client, the examiner is prohibited from making unauthorized disclosure Part 4.2 div 3, section 159 (2) LPUL 2015 (NSW). Ofcourse, disclosure to the relevant professional body, which may use the information for the purposes of further investigation and possible disciplinary proceedings is permitted. The powers of investigation conferred on examiners or investigators are wide enough to oust privilege – Rogerson v Law Society of the Northern Territory (1993) Trust account records are not privileged communications and even for those that are privileged, any disclosure to an examiner is unlikely to effect a waiver of privilege for other purposes. Cf C-C Bottlers Ltd v Lion Nathan Ltd [1993] 2 NZLR 445 at 448.

FAILURE TO ACCOUNT Claims against the fidelity fund 

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Stature entitles a person who has suffered pecuniary loss by reason of a lawyers trust account defalcation to make claim against a ‘guarantee’ or ‘fidelity’ fund for compensation for loss. The nature of the defalcation that triggers a claim for compensation is defined as a ‘default’ – pt 4.5 div 1, s221- 223 LPUL 2015 (NSW). This term means a failure of a law practice to pay or deliver trust money or trust property received in the course of legal practice, or if the failure or dealing arises by a dishonest act or omission pt 4.5, div 1 section 219 LPUL 2015 (NSW) Where compensation is paid in response to a claim on the fund, the relevant body is, to the extent of that payment, subrogated to the claimant’s rights against the defaulting lawyer (LPUL 2015 (NSW) s246. This is in essence a statutory assignment to the professional body of the rights and remedies the client had at the time of payment out of the fund (Registrar-General v Gill) Most jurisdictions place caps on claims against the fund and the trend is now to exclude from fidelity fund coverage claims in respect of solicitors investment and mortgage schemes.

Other consequences of failure to account  The possible consequences of a breach of trust accounting requirements include professional disciplinary action and action by the client for compensation directly against the lawyer for breach of trust or even for negligence.  Lawyers who destroy or convert trust property to their own use may also be subjected to criminal penalties under the general criminal law legislation (Director of Public Prosecutions v Werden) or under the legal profession legislation, which prescribed penalties for failures to comply with account obligations (R v Cole).  In R v Cole, the NSW Court of Appeal made the following remarks as to the criminality in failure to account. o “Defalcations by persons in a position of trust have to be regarded by the courts as much more serious than other types of defalcations. In this regard the solicitor stands in a particular position. He is an officer of the court, he is held out to be a fit and proper person to practice his profession, to receive his clients money and to be the recipient of their justified financial trust and confidence. It is not possible for the court to regard lightly the defaulting solicitor whose actions tend to undermine the security of ordinary people and the fabric of a profession on which and on whose integrity the public are to such an extent dependent. This is particularly the type of case in which the court is entitled to express, on behalf of the community, its disapproval of the particular type of breach of trust involved. 

Dunford J in R v Smith (2000) 114 A Crim R 8 at 15 o When the communitys trust in lawyers is abused by the commission of fraud in any form, not only does the client or person of fraud suffer, but the integrity of the profession is necessarily called into question and courts must impose sentences which are calculated to ensure that no solicitor will be left in doubt as to the serious consequences that will follow from such conduct.

Chapter 21: Cost disclosure and cost agreements    

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A principal reason for public concern with and complaints against the legal profession is the mater of legal costs. Specifically the perception that lawyers charge too much and that access to the legal system is generally too costly. The issue of legal costs remains a live community issue and continues to attract the attention of government and law reform bodies. The concern over lawyers costs, coupled with lawyers virtual monopoly on legal services and their position of greater knowledge, has prompted the law to impose safeguards on the charging of costs by lawyers to clients, which including the following: o Extensive cost disclosure requirements o Disciplinary sanction for lawyers who charge grossly excessive fees o The review of a bill of costs by an independent adjudicator o The prospect of a costs agreement being set aside in certain circumstances. Pt 4.3, div 2, section 172 – legal costs must be fair and reasonable. The draft of the Legal Profession Uniform Law as implemented in New South Wales adds that “A law practice must not act in a way that unnecessarily results in increased legal costs payable by a client, and in particular must act reasonably to avoid necessary delay resulting in increased legal costs Pt 4.3, div 2, s173 LPUL 2015 (NSW). It is the retainer from which the lawyers claim to costs is derived. The absence of a valid provision governing the lawyer remuneration in the retainer- that is, a cost agreement- the lawyer is entitled to recover costs, and where no scale applies, costs are recoverable according to the fair and reasonable value of the legal services provided. The trend is to require lawyers to disclose to (prospective) clients, in writing in way that they can understand, the way in which the lawyer will charge and an indication of their likely costs exposure. o These initiative have been driven in part by competition policy, the assumption being that consumers of legal services should be able to make a sufficiently informed decision, and comparison as to the likely cost of those services. A cost disclosure statement should ideally be separate from the retainer or costs agreement to avoid the impression that every aspect of the statement has legal force, and also because costs disclosure may need to be made before the retainer or

costs agreement, and includes reference to the client’s right to negotiate a costs agreement. Cost disclosure obligations Pt 4.3, div 3, Section 174(1) Under the Legal Profession Uniform Law, in NSW and Victoria, a law practice must: o As soon as practicable after instructions are given “provide the client with information disclosing the basis on which legal costs will be calculated in the matter and an estimate of the total legal costs. o As soon as practicable after any significant change to anything previously disclosed above, provide the client with information disclosing the change, including information about any significant change to the legal costs that will be payable by the client; and o Provide information about the...