Adding back these legal fees but not those

Let’s consider this not uncommon scenario:

• A husband and wife of 25 years separate.
• They have 2 adult children.
• The husband was the “˜primary income earner’ through his employment; the “˜financial spouse’.
• The wife did not pursue her career in favour of raising the parties’ children.  She was the “˜primary homemaker and parent’; the “˜non-financial spouse’.
• Together the parties have about $300,000 in cash, a real property or two, cars and so on.
• The wife is recently employed but earns well below average wage.  
• The husband continues to earn his good income and doesn’t pay any maintenance because the wife has sought to avoid paying the fees to run, and otherwise risk, the litigation.
• By trial the wife has spent $150,000 on lawyers; the husband about $100,000.
• The wife’s income is barely enough to support herself.  She has used savings to meet her legal fees.
• By contrast, the husband’s income is sufficient both to support a standard of living well above that of the wife and to meet his legal fees.
• At trial the husband argues that the wife’s legal fees should be added back, and his should not because they were met from “˜post-separation income’.

Save for a bit of discretion here and there, this scenario is probably straight forward.

Now, replace “through his employment” with “through his business“, and introduce the concept that the business is operated through a family trust of which the wife is a beneficiary, and, say, shareholder of the corporate trustee.  Less straight forward.  

Why?

The Full Court in Trevi & Trevi¹ reminded us that those famous paragraphs in Chorn & Hopkins² established guidelines.  There is a strong flavour of an analysis of the interests in the parties in the funds: income vs capital, but also the more complex situations.

In setting out the relevant principles in Trevi, Murphy J reiterated the distinction between pure income as a source and funds generated from assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement.³

His Honour identified that the latter suggestion recognises the discretion inherent in the task and that adding back sums generated post-separation in the different manners suggested might create injustice as much as it might cure it.⁴

Trevi involved a first instance decision not to addback any notional property, including over $400,000 of the wife’s legal fees.  The husband was a solicitor and had the advantage of his legal fees being “absorbed in-house”.   He incurred about a third of the cost of the wife.  

Rather than treating the issue of the wife’s legal fees as an addback, Thornton J purported to consider the matter under section 75(2)(o).  But in conclusion her Honour said, in relation to section 75(2)(o), “[I] do not propose to make any “adjustment” to the pool for the funds which the wife has spent to pay some of her legal costs“.⁵

Murphy J spent considerable time explaining how the trial judge confused two established and alternative approaches:

1. to addback legal fees; or 
2. to take into account paid legal fees under section 75(2)(o) in the consideration of whether to adjust the contributions-based assessment, and if so, to what extent.  

But the confusion of two distinct exercises of discretion is not the source of the appealable error.  The error was summarised in paragraph 72:

In my view, her Honour’s confusion as to the approach to the wife’s paid legal fees led to her Honour taking into account irrelevant considerations in her s 75(2) assessment and, concomitantly, failing to take account of relevant considerations.

The impact of not adding back legal fees was to have the husband responsible for 50 per cent of the wife’s indemnity costs on the contributions assessment, and 60 per cent of the wife’s indemnity costs on the final outcome.   Thornton J did not include those considerations in her reasons.  The Full Court found that to be a failure to take into account a relevant consideration.

Further, the Full Court was of the view that, despite discussing the circumstances of paid legal fees under a heading referring to section 75(2)(o), insufficient reasons were given to explain how the trial judge took into account the expenditure in circumstances where it was not added back.  

In relation to the irrelevant consideration of the trial judge, it is useful to set out the relevant passage from her Honour’s reasons:

In both Calder & Calder and Chorn & Hopkins the Full Court affirmed that whether to take into account legal fees is a matter of discretion. This is an unusual circumstance where the wife was obliged to pay her legal fees of $437,628.10 whilst the husband, who is a solicitor, had the advantage of not being required to pay all of his legal fees other than approximately $142,587 which he has paid. Where there is no clear evidence that the husband will ever have to pay his legal fees, these are unusual facts which the justice of the case requires to be taken into account under s 75(2)(o) of the Act. In the unusual circumstances of this case and notwithstanding that the source of the funds paid by the wife for her legal fees was from joint property, I accept the submissions of counsel for the wife and do not propose to make any “adjustment” to the pool for the funds which the wife has spent to pay some of her legal costs. (emphasis added)

To the extent that the “unusual circumstances” were the reason not to give any weight to the paid legal fees, the Full Court said at [71]: 

The “sole matter” informing the decision to not addback emerges as the same sole matter in her Honour’s purported consideration of the wife’s paid legal fees as a relevant s 75(2) factor. Again, I am respectfully unable to see how that factor, notably expressed as a reason for not adding back the fees, is relevant to the s 75(2) analysis. … (emphasis added)

That must mean that the Full Court took the view that the parties’ financial and historical circumstances, underpinning the disparity in their paid legal fees, was an irrelevant consideration in the section 75(2) analysis.  

That being said, I do not purport to ignore the words “notably expressed as a reason for not adding back the fees”.  

Interestingly, in the decision on re-exercise, no weight was placed on those “unusual circumstances” at all.⁶  The wife’s legal fees were added back, the husband’s were not, and there was no discussion in the section 75(2) analysis of the “unusual circumstances”.

I struggle to understand how even in that circumstance it could be said to be irrelevant to whether any weight is placed on those circumstances in the section 75(2) analysis.  

I think that is because it is not an irrelevant consideration.

In Oamra & Williams the Full Court considered Trevi and said:⁷

110. As the Full Court in Trevi intimates at [42], when considering whether or not to add back paid legal fees, “source of funds” should be subservient to the overall discretionary consideration of the interests of justice in the circumstances of a particular case.
111. As discussed during submissions, an example of an injustice which might occur is if a party, who had developed significant earning capacity during a course of a long marriage, was able to use that earning capacity to pay legal fees when the other party, who did not have that earning capacity, was left with a liability to pay legal fees from their share of the property settlement order. Another example of possible injustice arises in this case where it was agreed that an unspecified amount of monies from a redundancy payment received by the husband were contained in bank accounts added to the table of assets and liabilities, yet the husband asserted that an unspecified part of the redundancy payment used to pay legal fees should not be added back.
112. In this case the primary judge declined to exercise a discretion to add back paid legal fees because of an inadequacy in the evidence on both sides in relation to the source of funds used to pay them.

The analysis in Trevi has been endorsed by subsequent Full Courts.⁸

Yes, Trevi is a case that turned on its own facts.  However, the essence of those facts cannot be said to be so unusual: 

• the husband on a considerable income met his legal fees from his income; 
• the wife on very little income relied on capital;
• the success of the husband’s career could only be said to be something to which the other party had made a significant contribution in her role as primary homemaker and parent.

The wife did not have the same opportunity to meet her legal fees from her income, nor was she a partner in a law firm which carried much of her costs of litigation.  The husband had that opportunity due in part to the efforts of the wife throughout their marriage.  

Thornton J identified those circumstances in the broader section 75(2) analysis:⁹

402. By reason of the arrangements made during what is indisputably a long marriage, the wife did not enhance her income earning capacity in any meaningful way.  The wife attempted to contribute financially during the marriage in undertaking work for approximately 12 months in 2006 which was ultimately not viable because of the low remuneration, the needs of the children and the husband’s work commitments.

The recent decisions merely emphasise that the process of consideration of legal fees paid or owing is a discretionary exercise guided by authority.

A more cynical view could be that despite failing to give reasons for departing from guidelines is not an appealable error of itself, it is dangerous to do so.

What then for the family lawyer whose client is at risk of being punished for having no ability to meet their legal fees other than from capital?  

In my view, whatever your argument is, articulate it well.

Fear often accompanies the section 75(2) case due to uncertainty in achieving anything from it.  But the recent cases in which legal fees are not added back usually involve an inadequacy of evidence about the quantum and/or source of paying legal fees.  I have included some cases below for example.  Do not be the lawyer who does not produce sufficient evidence.  

Some cases involve a concession to addback fees paid by capital, with no argument to addback the fees paid by income, and then some hopeful attempt for a section 75(2) weighting.

In the circumstances I have addressed in this paper, I think that more emphasis could be placed on the types of “injustice” alluded to in Trevi and Oamra & Williams and seek that both parties’ fees be added back despite their sources because of the nature of the circumstances.  

Doing so does not offend section 117, and it arguably requires no weighting under section 75(2) as in essence the overwhelmingly offsetting factors are found in subsections 75(2)(b) and (k), the latter of which provides:

(k) the duration of the marriage and the extent to which it has affected the earning capacity of the party whose maintenance is under consideration

An important observation from the cases is that the difference between the parties’ fees is often a major consideration in the section 75(2) analysis.

If a refusal to addback legal fees is argued, it should be accompanied with at least a recitation of principle that the impact of that decision must be considered.

Despite being described as a “de facto costs order” by Judge Morley,¹⁰ a refusal to addback legal fees apparently does not require consideration of subsection 177(2A).  It is often argued that consideration of parties and their costs is best left to an application after trial.  But the authorities on costs do not discuss the critical circumstances, such as subsection 75(2)(k), relevant to the parties’ expenditure on legal fees.  

But of all the reported decisions, no distinctive pattern emerges even in this decade.

Baumann J put it aptly in Duffy & Duffy:¹¹

50. I am satisfied that justice and equity between the parties is better achieved by adding back the sums the husband has elected to pay to his chosen lawyers rather than for the wife to not only be required to represent herself but to, effectively, make a contribution of the husband’s costs by his use of the funds that would otherwise have remained in the pool.
51. Mr Moxon, to his credit, valiantly contended that the discretion should not be exercised relying on two authorities of the Full Court where the Full Court found the primary judge was not in error in those cases in not adding back for legal expenses (see Oamra & Williams (2021) FLC 94-035; Dulton & Dulton (2020) FLC 93-984). In my view, those authorities are of little assistance (and are distinguishable on their individual facts) and can be offset by numerous Full Court authorities where a primary judge did addback legal expenses and no error was found to exist. This is, essentially, the nature of a discretion.

Review of the cases is important for context to inform the possible outcomes, rather than reliance on purported authority.

Judge Glass applied the comments from Oamra & Williams in Emmeran & Emmeran:¹²

9. Generally the payment of legal fees from post-separation income rather than from funds that existed at separation would not be added back unless they were generated from “assets or businesses to which the other party had made a significant contribution or has an actual legal entitlement.”[7] However, that focus on the source of funds should be subservient to the overall discretionary consideration of the interests of justice in the circumstances of the particular case.[8] It may be unjust where a party “who had developed significant earning capacity during a course of a long marriage, was able to use that earning capacity to pay legal fees when the other party, who did not have that earning capacity, was left with a liability to pay legal fees from their share of the property settlement order.”
10. Here, Ms Emmeran developed her significant earning capacity that exceeds $100,000 per annum during the parties’ 18 year marriage. She had the benefit of income from Mr Emmeran during the period in which she was able to accumulate funds to pay her legal fees. Ms Emmeran did not establish that Mr Emmeran was able to pay his legal fees which are anticipated to be owing in the amount of approximately $41,000. He nevertheless made contributions to Ms Emmeran’s household which persisted for 18 months after he left the former matrimonial home from his more modest income of approximately $65,000 per annum.
11. In those circumstances, I consider it would create an injustice for Ms Emmeran’s paid legal fees not to be added back. Given her ultimate concession that the totality of her savings ought be included in the assets to be divided between the parties had she not paid her legal fees from those savings, there would have been an increase in the funds available for distribution to Mr Emmeran by the same sum. To fail to add back Ms Emmeran’s paid legal fees would have the effect of requiring Mr Emmeran to contribute to her legal costs contrary to the position enshrined in subsection 117(1) of the Act.

In Jong & Jeng the Full Court said:¹³

64. Fundamental to a consideration of whether expenditure is “added back” into the assets of the parties for division is the source of those moneys.  In circumstances such as in this case where a party has been earning an income since separation, it would be necessary to demonstrate that the source of the funds in question was connected to the marriage in some way.

In Kasiopoulos & Garapiperis¹⁴ the Full Court considered an appeal in which the trial judge erroneously recorded that the husband accepted that his about $70,000 in legal fees should be added back.  He in fact opposed that addback on the basis that he met his fees largely from post-separation income.  On the re-exercise, the Full Court said:

107. The evidence before the trial Judge in relation to the funds available to the husband in the post-separation period, from capital and income to which we have earlier referred is in our view sufficient to justify adding back the husband’s paid legal fees in the sum of $77,292.15. This is particularly so given that the wife’s paid legal fees of $47,206.06 should be added back. The evidence reveals the wife to have received materially less income or capital than the husband did in the post-separation period.

In Bazzi-Cirino & Cirino,¹⁵ the wife ran a professional practice from which she met her legal fees and otherwise by a line of credit.  The husband had loans from his family to meet legal fees.  The wife argued that no legal fees should be added back and no loans relating to legal fees should be included in the balance sheet.  The husband sought that both paid legal fees and the loans should be included.  Rees J determined not to include in the balance sheet either paid or loans for legal fees.  Instead, her Honour took into account under section 75(2) the “difference in their liabilities for legal fees”.

The complexity of addbacks especially in the most settled category, legal fees, remains.  The guidelines are too blurred.

¹Trevi & Trevi [2018] FamCAFC 173 Murphy J with whom Alstergren DCJ and Kent J agreed.
²Chorn & Hopkins [2004] FamCA 633 Finn, Kay & May JJ.
³At [31]; see also [41].
⁴At [42].
⁵Trevi & Trevi [2017] FamCA 321 at [424].
⁶Trevi & Trevi (Re-Exercise) [2019] FamCAFC 51 (Murphy J with whom Alstergren CJ and Kent J agreed), see for example [46].
⁷Oamra & Williams [2021] FamCAFC 117 (Strickland, Watts & Sutherland JJ).
⁸Carron & Laniga [2019] FamCAFC 115 at [56] (Aldridge, Kent & Austin JJ).
⁹Trevi & Trevi [2017] FamCA 321.
¹⁰Ungur & Inaba [2021] FedCFamC2F 65 at [175] and [177], for example.
¹¹Duffy & Duffy [2022] FedCFamC1F 635.
¹²Emmeran & Emmeran [2022] FedCFamC2F 1507.
¹³Jong & Jeng [2014] FamCAFC 156 (Finn, May & Ainslie-Wallace JJ ). Cited with approval in Eufrosin & Eufrosin [2014] FamCAFC 191 at [41] and [42] (Thackray, Murphy & Aldridge JJ).
¹⁴Kasiopoulos & Garapiperis [2012] FamCAFC 85 (Coleman, Thackray & Stevenson JJ).
¹⁵Bazzi-Cirino & Cirino [2014] FamCA 920.