Introduction: A Cautionary Tale
The Supreme Court of Victoria's decision in Shi v Mills Oakley [2020] VSC 498 serves as a stark reminder of the critical importance of proper costs disclosure and agreement in legal practice. The case involved a Chinese national with limited English proficiency who retained Mills Oakley initially to assist with the sale of shares in his company. What began as a commercial transaction evolved into complex litigation when the purchaser, Mr Wu, issued proceedings against Mr Shi in the County Court. When the matter concluded, the total legal costs exceeded $267,000—far beyond initial estimates—and the law firm's costs agreement was deemed void for non-compliance with disclosure obligations under the Legal Profession Uniform Law.
The Importance of Proper Scope Definition
One of the fundamental issues in Shi v Mills Oakley was the failure to properly redefine the scope of work when the matter evolved significantly. The initial costs agreement provided an estimate of $50,000 (plus disbursements and GST) for what was essentially pre-litigation commercial work. However, when Mr Wu issued proceedings in February 2018, the nature of the retainer fundamentally changed.
Judicial Registrar Gourlay stated in paragraph 45 of the judgment: "It may be reasonable to consider that, when the County Court proceeding was issued, a new retainer began that warranted a new costs agreement and costs disclosure being given considering that the change in the applicant's instructions was so substantial and Mr Wu commencing proceedings was unexpected after 12 months."
When Does a New Retainer Come into Being?
The Shi case provides valuable guidance on when a new retainer may be considered to have come into existence, requiring fresh costs disclosure. The court identified several key factors:
Substantial change in scope: When the nature of the legal services changes significantly from what was originally contemplated (in Shi, from commercial dispute to litigation defence)
Passage of time: The court noted the 10-month gap in work before the County Court proceedings as significant
New explicit instructions: Receipt of instructions to undertake work substantially different from the original retainer (defending formal proceedings versus negotiating a commercial dispute)
Unexpected developments: Events that weren't reasonably foreseeable at the time of the original retainer
Judicial Registrar Gourlay concluded at paragraph 46 that "on the receipt of instructions to defend the Writ a new matter and a new retainer began. Therefore, any earlier costs estimate, including the one given on 11 November 2016, that did not consider the possibility of defending proceedings against Mr Shi has failed to comply with the disclosure requirements of s 174(1)(a) and (b)."
Legal Requirements for Costs Disclosure Under the Uniform Law
The case turned on the interpretation of sections 174 and 178 of the Legal Profession Uniform Law. Section 174(1) requires a law practice to:
Provide the client with information disclosing the basis on which legal costs will be calculated and an estimate of total legal costs; and
Provide updated information promptly when there is any significant change to anything previously disclosed.
Importantly, "legal costs" is defined in section 6 to include disbursements—a point that Mills Oakley failed to address adequately in their estimate. The court noted that each estimate specifically excluded disbursements, contrary to the definition of "legal costs" under the Act.
Updating Costs Estimates When Circumstances Change
The most significant lesson from Shi v Mills Oakley relates to the obligation to provide updated costs disclosures when circumstances change materially. Despite the matter evolving from a commercial dispute into full-blown litigation spanning multiple days of trial, the law firm's updates were found to be inconsistent and inadequate.
The court noted at paragraph 44 that: "It is clear that an estimate of total legal costs was never provided to the applicant. Each of the costs disclosures given were limited in some way or other by making reference to earlier conversations or by only disclosing future legal costs that excluded some disbursements."
The court was particularly critical of the practice of referring to earlier verbal estimates from 16 months prior, and of providing estimates that excluded foreseeable disbursements such as interpreters, subpoena costs, and transcript fees.
Consequences of Non-Compliance: The Void Agreement
The consequences of failing to comply with disclosure obligations are severe and non-discretionary. Section 178(1) plainly states that if a law practice contravenes the disclosure obligations, "the costs agreement concerned (if any) is void."
The court rejected the law firm's arguments that the approach to disclosure requirements should be "moderated by the fact that nobody knows the future." Citing Johnston v Dimos Lawyers [2019] VSC 462, Judicial Registrar Gourlay emphasized at paragraph 43 that: "Any failure to comply with any of the provisions in relation to disclosure in Part 4.3 of the Act renders the costs agreement void. Non-compliance therefore equals void. There is no discretion to be exercised around 'substantial' compliance."
The practical effect in Shi was that costs for work undertaken in 2016 and 2017 were to be taxed at the rates in the costs agreement, but costs for work after March 2018 (when the matter significantly changed) would be taxed on the County Court scale.
Distinguishing Johnston v Dimos Lawyers
The court distinguished Shi from Johnston v Dimos Lawyers [2019] VSC 462, where a costs agreement was also held void but costs were assessed by reference to the rates in the void agreement. In Johnston, the client had been given "a surprisingly accurate estimate of total legal costs" from the outset, and the non-compliance was considered "technical" in nature (a verbal rather than written estimate).
By contrast, in Shi, the estimates were neither accurate nor comprehensive, with no evidence that the law firm took steps to ensure the client (who had limited English proficiency) understood the costs implications as required by section 174(3).
Best Practices for Practitioners
To avoid finding yourself in a similar situation, consider these best practices:
Provide comprehensive initial estimates: Ensure estimates include all foreseeable costs, including disbursements, and are based on clearly disclosed charge rates.
Document all costs discussions: Unlike in Johnston v Dimos Lawyers where the law firm had detailed file notes of verbal cost estimates, Mills Oakley failed to produce documentation supporting their claimed discussions.
Recognise when a new retainer exists: When a matter fundamentally changes in scope, involves a significant time gap, requires substantially different work, or encounters unexpected developments, issue a new costs agreement rather than simply updating the old one.
Provide regular, written updates: Section 174(6) mandates that disclosures be in writing. Verbal estimates, while valuable, do not satisfy the statutory requirements.
Include all elements of "legal costs": Remember that "legal costs" include disbursements—excluding them from an estimate contravenes the Act.
Document client understanding: Section 174(3) requires that the law practice "take all reasonable steps to satisfy itself that the client has understood and given consent to the proposed course of action for the conduct of the matter and the proposed costs."
Conclusion
The Shi v Mills Oakley decision emphasises that costs disclosure is not merely an administrative burden but a cornerstone of the solicitor-client relationship. The court's analysis provides valuable guidance on when a new retainer comes into existence, requiring fresh costs disclosure—particularly when litigation commences unexpectedly after a period of relative inactivity.
Practitioners should view proper disclosure as an opportunity to build trust and clarity with clients. When scope changes significantly, a new retainer is likely formed, requiring a new costs agreement with comprehensive, written estimates that include all elements of legal costs as defined by the Act.
Failure to recognise when a new retainer has formed and to provide appropriate disclosure not only risks rendering your costs agreement void but may also damage the client relationship and potentially constitute unsatisfactory professional conduct.
In an environment where clients are increasingly cost-conscious, the lessons from Shi v Mills Oakley [2020] VSC 498 serve as a valuable reminder that clarity in costs is not just good practice—it's the law.