Stacy Ford discusses the importance of asserting solicitors’ liens in protecting the payment of legal fees. Read on for the latest in KWM’s inhouse-centred series: From our inhouse to yours.
‘Creditors have better memories than debtors’ – Benjamin Franklin
I am convinced that few other words have caused greater consternation to the legal profession than the word ‘lien’. Its pronunciation varies from lawyer to lawyer. Some say ‘lean’, others say ‘le-ien’. To add to the anguish, its lineage derives from the Old French word, ‘loien’, meaning to bind or hold. And its pronunciation has certainly placed a lot of people in a bind.
The one thing that we can be certain on though, is that it is an important mechanism for law firms to protect payment of their fees.
What is a lien?
Liens stem from common law, equity and statute. We will focus on common law and equitable liens in this article.
At common law, a lien allows a creditor to retain possession of property owned by a debtor to secure payment of a debt. The creditor is not allowed to sell or otherwise dispose of the property. They simply have the right to retain the property until the debt has been paid.
An equitable lien is a right against property to secure the discharge of the debt. It is not technically a lien but rather a form of equitable charge over the property.
So, what is the practical difference?
Under a common law lien, you have possession of the property. The debtor says, ‘give me back my property!’ and you say, ‘not until you have paid your bill!’.
Under an equitable lien, you do not have to have possession of the property. You have a right over the property. You can enforce that right by Court order.
Why are liens important to law firms?
Picture this, you have been working on a commercial litigation matter and have spent most of your time and energy on it. You have an outstanding invoice that your client has promised to pay, ‘first thing in the morning’, for the past three months. You receive a letter from another law firm advising you that your client has now appointed them to act in the matter and have requested that you transfer your file.
What do you do? Your fees reflect your time, effort and expertise on the matter and shouldn’t be written off.
You assert your lien…or liens.
Liens relevant to law firms
Before we delve into when and how to assert a lien, we need to understand the two types of liens that are relevant to law firms. These are:
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The possessory lien
A lien over the client’s property, particularly client documents and funds in trust.
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The ‘fruits of the action’ lien
A charge over monies from a judgment or settlement, where your efforts have contributed to the recovery of those monies (‘fruits of the action’).
Key features include:
When to assert a lien?
You should immediately assert your lien with the new solicitor upon being advised of their appointment and/or receiving a request to transfer client documents in your possession. If no new solicitor is being appointed, and your client has requested the documents, then you should assert your lien with the client.
Where a ‘fruits of the action’ lien is applicable (ie where you have acted in relation to proceedings), you should assert both your possessory lien and your ‘fruits of the action’ lien at the same time, whilst also noting that that the ‘fruits of the action’ lien is in addition to and separate from the possessory lien.
How to assert a lien?
You should assert your lien in writing, outlining that:
- you are owed fees (and disbursements) from the client, including the amount and any interest
- you are exercising a possessory lien over the client documents and will retain the client documents until your fees are paid or, in the case of current proceedings, subject to receipt of an undertaking, reasonable security, or entering into an agreement (discussed below)
- you are exercising an equitable ‘fruits of the action’ lien, if applicable, and
- you require the recipient to acknowledge the existence of the liens.
Where a lien is acknowledged and there is agreement to pay your fees from judgment or settlement monies, it should be recorded in a tripartite deed between you, the incoming solicitor and the client. The deed requires your fees to be paid from judgment or settlement monies prior to disbursement to the client. A handy precedent tripartite deed can be found on The New South Wales Law Society’s website.
If no agreement is reached, then you can apply to the Court for an order to enforce the lien, particularly if you need to enforce a ‘fruits of the action’ lien.
Am I compelled to handover documents?
Under the Solicitor Rules, you must handover client documents which are ‘essential to the client’s defence or prosecution in current proceedings’, where:
- the new solicitor undertakes to hold the documents subject to the lien and maintains reasonable security for the unpaid costs or
- an agreement is put in place requiring payment of your fees upon completion of the relevant proceedings (ie tripartite deed) or
- you are otherwise provided with a form of reasonable security for the unpaid costs.
A Court may also order the production of client documents where such production is in the interests of the administration of justice.
What if my client goes into liquidation?
Where the client is in liquidation and a liquidator has made a request for books, including client documents as part of a matter file, you are required to produce the documents in accordance with the Corporations Act. However, you are still able to preserve your lien by making it clear that you are producing the documents ‘without prejudice’ to your lien.
It is also important to note that liens operate as security and as the holder of a lien (Lienee) you are a secured creditor for the purpose of insolvency administration: see Bennett & Co v CLC Corporation & Anor [2001] WASCA 51. Accordingly, a law firm is entitled to be paid in full from the available circulating assets of the company with priority over unsecured creditors.
The importance of liens
Liens are an important mechanism in protecting payment of legal fees. If you have outstanding fees, you should consider asserting a possessory lien as a soon as you become aware of the appointment of a new solicitor and/or a request to handover your file. If you have acted in relation to proceedings, you should also consider asserting a ‘fruits of the action’ lien in addition to a possessory lien.
Further information
If you need further guidance on liens, please reach out to your KWM contact or Patrick Mackenzie.
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