How paid legal fees may be treated by the Family Court

Our Consultant, Robyn Hadley reviews the most recent Full Court of the Family Court of Australia decision Trevi & Trevi [2018] FamCAFC 173.

The treatment of paid legal fees can arise in property settlement cases.  One or both parties may argue that paid legal fees should be notionally added back to the asset pool thus increasing the size of the asset pool available for division.  This argument usually arises where one party has paid significantly more towards their legal fees then the other party or where either party or both parties have used capital to pay their legal fees. The Full Court of the Family Court of Australia has recently considered the issue of add backs for legal fees in the decision of Trevi & Trevi [2018] FamCAFC 173.

In summary, the Full Court held:

1. The decision to addback or not addback paid legal fees remains a matter of discretion. But, a finding that it is just and equitable to not addback an amount of legal fees so paid is a finding that it is just and equitable for the other party to contribute to the costs of the first party in that proportion as part of an overall assessment of the justice and equity governing their property division.
2. Paid legal fees occupy a particular position in the consideration of addbacks by reason of s 117(1) of the Act; a matter not relevant to any other form of expenditure or dissipation of property the subject of an addback claim. An order failing to addback legal costs is a pre-emptive decision about one party paying the other’s legal costs. The statutorily prescribed default position in s117(1) is that neither party pays all or some of the other party’s costs unless consideration is s117(2A) are met.  If, contrary to the demands of that section, there is to be a payment of costs, the award is dependent upon a finding of justifying circumstances which, in turn, is dependent upon (non-exhaustive) considerations in the Act – for example, whether one party has been “wholly unsuccessful” and “the conduct of the parties to the proceedings”.  An award of the costs of trial, if any, is in the usual run of events made after the respective entitlements of the parties to a settlement of property have been assessed and, importantly, any awarded costs are paid from the assessed entitlement to property received by the paying party.

The Full Court stated two fundamental premises emerge from the decision of Omacini (2005) FLC 93-218 and the well-established guideline emerging from Chorn and Hopkins (2004) FLC 93-204 and the authorities preceding it:

1. First, “adding back” is a discretionary exercise. When the discretion is exercised in favour of adding back, it reflects a decision that, exceptionally, in the particular circumstances of a case, justice and equity requires it.
2. Second, in cases that are not “exceptional” justice and equity can be achieved, not by adding back, but by the exercise of a different discretion – usually by taking up the same as a relevant s 75(2) factor.  Indeed, it has been said that the latter is “a course which is, perhaps, technically more correct” than adding back to the list of existing interests in property.

The “guideline” from Chorn and Hopkins makes a distinction between legal costs met from property that would otherwise be available at trial and legal costs met from funds “generated by a party post-separation from his or her own endeavours or received in his or her own right (for example, by way of gift or inheritance)”. The proposition there advanced, that such expenditure “would generally not be added back”, also needs to be seen as a guideline informing the relevant discretion rather than determining it.  A further distinction is suggested in Chorn between funds generated in that manner and “[f]unds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement”.

On the facts of Trevi & Trevi, each party contended at trial that significant sums expended by the other should be notionally “added back” to the parties’ existing property interests, and credited against the entitlement of the other party to existing property.  The wife claimed $587,032 should be added back against the husband.  The relevant sums comprising that total did not include any amount for legal fees paid by the husband.  The husband claimed against the wife addbacks of $913,772 which included $437,628 in paid legal fees.  There were concessions during the Appeal and the issue then centred on the refusal to addback the wife’s paid legal fees of $437,000.  Of note is that the husband is a lawyer and his costs of preparation for the proceedings were absorbed in house by his firm.  The Trial Judge found “there is no clear evidence that the husband will ever have to pay his legal fees” which the trial Judge was an unusual factor to be taken into account under s75(2)(o), although he had paid Counsel fees of $142,587 from his income.

The Full Court found the trial Judge erred as she ought to have considered the question of money expended on legal fees when exercising her discretion in considering the established “guidelines” and she did not do so.  The effect of her decision was that the husband had to meet 60% of the wife’s (indemnity) costs and she did not justify or explain how that decision was just & equitable.  She also did not consider the dollar impact of failing to addback that sum and the consequential impact on the dollar value of the parties’ contributions assessed in percentage terms.

Robyn Hadley I Consultant I Accredited Family Law Specialist | Nationally Accredited Mediator (AIFLAM)