Liability for refunds of legal fees, disbursements, or personal costs orders

May 1st, 2023
x
Bookmark

There are many instances where a legal practice will be called on to make payment to a former client or other third party in circumstances that will not be covered by a professional indemnity (PI) insurance or other policy. This article highlights two such instances, namely –

  • claims for refunds of fees or disbursements (trading losses); and
  • punitive costs orders made against the practice when acting as a legal representative in litigation.

I highlight these two instances as they are very commonly notified to the Legal Practitioners Indemnity Insurance Fund NPC (the LPIIF).

Trading debts

The LPIIF receives numerous claim notifications from legal practitioners where a former client or another third party seeks to recover legal fees or disbursements that had been paid to the practice. Claims for refunds or recoveries of fees or disbursements are trading debts and excluded from the indemnity provided under the LPIIF policy. The LPIIF have been notified of claims where, for example, the entity that had paid the fees or disbursements to the practice is in liquidation and a recovery of the money paid to the firm is sought on the basis that it is a voidable disposition. In other instances, the relationship between the firm and the erstwhile client has broken irretrievably and the latter seeks a refund of money that had been paid to the former. Whatever the trigger is for the claim for the refund of fees or disbursements, the LPIIF policy, like many other PI insurance policies, will not respond to such claims as they are regarded as the trading debts of the practice and thus excluded. PI insurance policies primarily cover the liability of the insured legal practices in respect of claims for damages suffered by the claimant in course of the practice conducting legal services where a cause of action is made out against the practice for contractual or delictual liability. In other instances, the claim against the legal practice is framed as a breach of a fiduciary duty it had to the claimant. PI insurance policies are aimed at covering claims for compensation for the losses suffered by the claimant and not at indemnifying a legal practice for its own business losses.

Trading debts in the context of a PI insurance policy do not have the same meaning as that ascribed to the term in an accounting or other business sense.

The LPIIF Master Policy is available online at www.lpiif.co.za. The policy defines a trading debt as follows:

‘XXVII Trading Debt: A debt incurred as a result of the undertaking of the Insured’s business or trade. (Trading debts are not compensatory in nature and this policy deals only with claims for compensation). This exclusion includes (but is not limited to) the following:

    1. a) refund of any fee or disbursement charged by the Insured to a client;
    2. b) damages or compensation or payment calculated by reference to any fee or disbursement charged by the Insured to a client;
    3. c) payment of costs relating to a dispute about fees or disbursements charged by the Insured to a client; and/or
    4. d) any labour dispute or act of an administrative nature in the Insured’s practice’ (emphasis in the original).

The trading debt exclusion in the LPIIF policy is framed as follows:

‘16. This policy does not cover any liability for compensation:

    1. a) arising out of or in connection with the Insured’s Trading Debts or those of any Legal Practice or business managed by or carried on by the Insured.’

Many of the PI insurance policies available in the commercial market have framed their exclusions of trading losses in a similar manner to LPIIF policy.

Punitive costs orders

The LPIIF policy also excludes liability for punitive costs orders made against legal practices. Clause 16(g) of the policy excludes any liability ‘arising from or in connection with any fine, penalty, punitive or exemplary damages awarded against the Insured, or from an order against the Insured to pay costs de bonis propriis’ (emphasis in the original).

An order that the attorney, or other representative, pay costs de bonis propriis is sometimes confused with an order that one party pay the costs of the opposing party on the attorney and client scale. These two types of costs orders are different as was explained by the court in Pieter Bezuidenhout Larochelle Boerdery (Edms) Bpk en Andere v Wetorius Boerdery (Edms) Bpk 1983 (2) SA 233 (O). An order that an attorney pay costs de bonis propriis is a sanction by the court of that attorney’s behaviour and not an order to pay compensation (see Dr Bernard Wessels The Legal Profession in South Africa: History, Liability and Regulation (Cape Town: Juta 2021) at pages 484  485). Dr Wessels (at page 485) makes the following points, which are worth quoting at length:

‘Personal costs orders against legal practitioners are unusual, but an overview of the law reports suggest that they have been awarded on a more frequent basis in the recent past. As we will see below, these orders seem to fulfil five fundamental goals. Firstly, they provide the court with an opportunity to mark its displeasure with the practitioner’s conduct and punish them for ultimately having abused the litigation process in some way or another. Secondly, issuing a personal costs order against an erring practitioner may also deter other legal practitioners from similar wrongdoing in the future and motivate practitioners to provide their legal services in a more effective, responsible, and professional manner. In turn, this may promote the constitutional right to access to justice. Thirdly, awarding a costs order against a legal practitioner is a very practical way to hold them to account for their grossly negligent or intentional conduct, which caused the incurring of unnecessary expenses and the delay of justice. Personal costs orders, therefore, promote accountability within the legal profession. Fourthly, ordering legal practitioners to personally pay the costs associated with unnecessary litigation indemnifies clients and ensures that they are not to be burdened by unnecessary costs. Fifthly, the court has recently also suggested that personal costs orders may play an important role to ensure that taxpayer funds are not wasted in unnecessary litigation. All in all, the personal costs order promotes justice and is in the interest of the administration of justice’ (see also the comments made by that author regarding the function of a personal costs order being granted against a legal practitioner (p 493) and costs de bonis propriis costs orders (p 488-492)).

It will be noted from the passage quoted above that personal costs orders are aimed at penalising errant behaviour on the part of the legal practitioner concerned and ensuring that the client is not unfairly saddled with the costs flowing from such errand behaviour (see paras 24 and 25 of the judgment in Goliath and Another v Chicory SA (Pty) Ltd (ECM) (unreported case no 3382/2018, 7-2-2023) (Laing J)).

This has nothing to do with the indemnity afforded under a PI insurance policy, which aims to indemnify an attorney against claims by third parties for damages claims framed in contract (breach of mandate), delict (breach of a duty of care or negligence in executing the mandate, for example) or a breach of a fiduciary duty owed by the legal practitioner to the claimant. This must be distinguished from the case where, for example, a client who was saddled with a costs order, places the blame for those costs with the legal practitioner and later brings an action against that legal practitioner to recover the costs on the basis that the practitioner acted negligently in the litigation resulting in the costs order against the client.

Dr Wessels (at pages 495 – 529) also highlights the instances where cost orders de bonis propriis have been awarded for gross negligence or intentional misconduct, respectively, on the part of the legal practitioner. The instances of gross negligence he highlights are –

  • failure to comply with court rules;
  • exploitation of the court rules;
  • settling without authority;
  • gross negligence relating to postponements;
  • failure to produce an accurate copy of the document on which a claim is based;
  • gross negligence relating to the handling of the record;
  • failure to prepare for a hearing;
  • failure to read correspondence from the court before filing it;
  • abuse of process;
  • failure to properly ventilate real issues that called for judgment;
  • dilatory and obstructive conduct of legal practitioners;
  • failure to file a practice note;
  • fruitless defences and unsigned affidavits;
  • failure to inform a person or entity of their obligation under a court order; and
  • failure to respond to correspondence.

The examples of intentional conduct that have been sanctioned are listed as –

  • intentional failure to heed the court’s warnings about appeal records;
  • dishonesty;
  • intentional conduct that results in an abuse of process;
  • litigating recklessly;
  • misleading the court;
  • dilatory tactics;
  • pursuing a hopeless case; and
  • frivolous and vexatious litigation.

The conduct underlying many of the examples above will also be a breach of the Legal Practice Act 28 of 2014 (LPA), the Rules made under the authority of ss 95(1), 95(3) and 109(2) of the LPA or the Code of Conduct for all Legal Practitioners, Candidate Legal Practitioners and Juristic Entities. In addition to the exclusion in clause 16(g) of the LPIIF Master Policy, clause 16(t) may also apply as the claim will arise from legal services carried out in violation of the LPA and the Rules. To the extent that there is dishonesty or fraud, the exclusion in clause 18 of the Master Policy could also be triggered.

Letsi v Mepha and Another (FB) (unreported case no 42/2021, 13-5-2022) (Opperman J) and Goliath are recent examples of cases where the courts have considered the principles relating to costs orders de bonis propriis.

Liability for punitive costs orders against legal practitioners can be avoided by complying with the standards of professional conduct expected of practitioners, towards their clients, their opponents, and the courts. A failure to do so will result in practitioners having to pay the resultant costs orders out of their own pockets. Properly supervise all staff in the practice as those with a propensity to conduct matters in a grossly negligent or reckless manner may also be inclined to conceal punitive costs orders and you may only become aware of such an order when your firm is called on to make payment. Some of the examples listed also open legal practitioners to the risk of disciplinary action by the Legal Practice Council.

Practice prudently and honestly to avoid the risk of having to pay costs from your own pocket and placing your future as a legal practitioner on the line.

Thomas Harban BA LLB (Wits) is the General Manager of the Legal Practitioners Indemnity Insurance Fund NPC in Centurion.

This article was first published in De Rebus in 2023 (May) DR 12.

 

X