Are Cancellation Fees a Penalty?

By Anthony J H Morris QC

At the Bar Association’s recent Sunshine Coast conference, I am told that one or more of the participants started a particular hare running with the proposition that cancellation fees charged by barristers constitute a penalty, and are therefore unenforceable. If what I am told is true – and I cannot be certain, as I did not attend the conference – it suggests a certain degree of credulity amongst our profession that this hare was not jugged before it gained traction.

Any misunderstanding may perhaps be attributed to use of the expression “cancellation fee”, which possibly implies that the fee is payable only in the event of a default by the client, in that the client cancels the barrister’s engagement or retainer. Indeed, there may be occasions when the liability to pay a so-called cancellation fee happens to coincide with a default by the client in respect of his or her obligations under the retainer agreement. But that is quite different from a fee which is payable by reason of the client’s default. And, in the great majority of cases, the liability to pay a so-called cancellation fee arises without any default on the part of the client.

What is a “cancellation fee”?

The true nature of a cancellation fee is best understood by remembering that a barrister has only one thing to sell, namely his or her time. The level of remuneration may depend on the application of the barrister’s knowledge, skill and expertise during the time made available to a client. But if the barrister is not applying his or her time on behalf of a specific client – as is the case while I am writing this article – the barrister is not making money.

In this sense, barristers are in a different position from most other professions and trades. Even the solicitors’ branch of the profession – which constitutes our nearest analogue – can make money by charging a mark-up on the salaries paid to employees, whether qualified solicitors or unqualified clerks or “paralegals”, in respect of time made available (and work performed) by them; and, in addition, there are profits to be made from photocopying or scanning documents, conducting searches, and other purely clerical functions. A solicitor can therefore be lying on a beach in Acapulco, yet still be generating an income – something which a barrister decidedly cannot do.

Perhaps a closer analogy can be found with “the world’s oldest profession” – a profession with which ours is often ungenerously compared. Although I cannot speak from personal experience, I envisage that, if one were to engage such a professional for (say) an hour, one could not hope to receive a refund if the transaction is finalised more expeditiously than was contemplated. Similarly, if I hire a rental car for a week – and the car is duly made available for my exclusive use and benefit for the agreed period of 7 days – I would not expect any abatement of the rental fee because I chose to drive the car for only 4 of the 7 days, or indeed if I chose not to drive the car at all.

Likewise, when a barrister is asked to commit his or her time exclusively for the benefit of a particular client – such as by accepting a brief to appear on particular dates – the arrangement is generally to this effect: I agree to hold myself available, exclusively for your benefit, on your agreement to pay for the time which I have set aside, regardless of whether you ultimately utilise my services or not. Describing this as a “cancellation fee” is misleading, because the fee is not payable only in the event that the retainer is cancelled: it is payable in any event.

Fee payable in any event

This brings such an arrangement clearly within the second category of circumstances identified by Gibbs CJ in O’Dea v. Allstates Leasing System (WA) Pty Ltd, (1983) 152 CLR 359, as circumstances in which “the rules which distinguish between a penalty and liquidated damages are simply not relevant”. That is where the party claiming payment is “suing for the consideration payable under the contract, and … not seeking to recover a sum payable in the event of a breach by [the other party] of their contractual obligations, so that the question whether the amount payable was a genuine pre-estimate of damage [does] not arise”. As His Honour observed:

The second class of case arises where the parties have stipulated that a sum shall become payable on a certain event which, although brought about by the party required to make the payment, does not involve a breach of contract. It has been held that where there is a contract for the payment of a certain sum in a certain event, and that event has happened, the sum is payable and no question of penalty versus liquidated damages arises: In re Apex Supply Co. [1942] Ch 108, at p 119; Alder v. Moore [1961] 2 QB 57, at p 65 . Difficulties have arisen in the application of this principle to contracts of hire purchase which provide that in the event of termination a sum representing all or part of unpaid instalments will be paid by the hirer to the owner. There was some controversy as to the position when the owner’s right to terminate the contract and receive payment arose on the happening of any of a number of events, some of which were breaches and some of which were not, but it has now been settled in England that in such a case where the agreement is terminated by reason of a breach committed by the hirer, the sum payable will be a penalty unless it is a genuine pre-estimate of the loss suffered by the owner by reason of the breach: Cooden Engineering Co. Ltd. v. Stanford [1953] 1 QB 86; Campbell Discount Co. Ltd. v. Bridge [1962] AC 600; Financings Ltd. v. Baldock [1963] 2 QB 104. I respectfully agree with that conclusion. If, however, the agreement is terminated by the hirer himself, e.g. because he is unable to keep up his payments, it has been held that the question whether the sum payable is liquidated damages or a penalty does not arise, since what has occurred is that the hirer has exercised his option to put an end to the contract on paying a certain sum, and the sum for which he has made himself liable must be paid: Associated Distributors Ltd. v. Hall [1938] 2 KB 83.

A related though discrete principle is reflected in the fact that a barrister entitled to be paid a cancellation fee is not obliged to seek out alternative work in order to mitigate damages. The principle of mitigation applies only where one is claiming damages for breach of a contract; not where one is claiming money payable under the contract. As Lord Hodson said in White and Carter (Councils) Ltd v McGregor, [1962] 2 AC 413:

It is trite that equity will not rewrite an improvident contract where there is no disability oh either side. There is no duty laid upon a party to a subsisting contract to vary it at the behest of the other party so as to deprive himself of the benefit given to him by the contract. To hold otherwise would be to introduce a novel equitable doctrine that a party was not to be held to his contract unless the court in a given instance thought it reasonable so to do. In this case it would make an action for debt a claim for a discretionary remedy.

It is true that many barristers (myself included) commonly remit all or part of a cancellation fee if other remunerative work becomes available. And I would urge this as a wise course to adopt, not because it is mandated by the law relating to penalties or an obligation to mitigate damages, but simply as a matter of common fairness; and also as a way to promote good professional relations with the client and – more significantly – the instructing solicitor.

Genuine Pre-estimate of Damage

For completeness, it may be added that, even if a so-called cancellation fee did not fall within the category of cases to which “the rules which distinguish between a penalty and liquidated damages are simply not relevant”, one could not readily conclude that such an arrangement is anything other than a “genuine pre-estimate of damage”.

Unlike the chattels which were the subject of leases in cases like IAC (Leasing) Ltd v Humphrey, (1972) 126 CLR 131, O’Dea v. Allstates Leasing (supra.), AMEV-UDC Finance Ltd v Austin, (1986) 162 CLR 170, and Esanda Finance Corporation Ltd v Plessnig, (1989) 166 CLR 131, when a contract to hire a barrister is prematurely terminated, the barrister’s services cannot be offered to the highest bidder in an open marketplace.

There are many more barristers in Queensland than there are courts and tribunals sitting in this State, and a barrister who has set time aside for one client’s matter cannot necessarily expect that the time set aside can be put to other remunerative use. The practical reality is that time committed for a trial is, more often than not, time wasted.

Drafting Suggestions

That said, if a cancellation fee were ever to be challenged on the basis that it constitutes an unlawful penalty – a challenge which, for the reasons previously mentioned, I would consider doomed to fail – it would certainly help to attract the protection afforded to a stipulated payment which can be characterized as a “genuine pre-estimate of damage”. It is therefore a wise precaution, albeit one which in my opinion is not necessary, to structure the relevant provisions of one’s retainer agreement in a way which enhances the prospect of attracting such a characterization.

(1) First, it may be preferable to avoid the expression “cancellation fee”; an expression which, as already stated, is apt to cause confusion. I suggest the expression “commitment fee”: a fee which the client commits to paying when the barrister makes a commitment of time.

(2) Secondly, a common hallmark identified in the case-law, as placing a stipulated payment in the category of a penalty rather than liquidated damages, is if the same amount is payable regardless of the seriousness of the breach. As Walsh J said in IAC (Leasing) Ltd v Humphrey, (1972) 126 CLR at p.141:

The fact that those provisions could operate upon breaches varying greatly in their seriousness and in their likely consequences might suggest a conclusion that the imposition of such a liability as a consequence of a breach, followed by a termination of the contract, could not be a genuine pre-estimate of damage. Such a conclusion might be warranted if the lessor might regain the possession and the right of disposal of the equipment when only a small part of the term of the lease had gone by and might do this in consequence of a minor breach, which would really have little damaging effect upon the value of the equipment, and if the lessor might thus receive in those events a large profit not related to any damage which had actually been suffered.

For this reason, it may be prudent to adopt a “sliding scale” of commitment fees, depending on the length of notice given for any cancellation. As an example, my own standard form of retainer agreement provides that:

If the amount of time set aside is more than 1 day, the payment to which I am entitled shall be reduced according to the following provisions:

• If I am given not less than 28 days’ notice to cancel the time which has been set aside, the maximum cancellation fee shall be … for 10% of the time which has been set aside, or for 1 day, whichever is the greater.
• If I am given less than 28 days’ but not less than 14 days’ notice to cancel the time which has been set aside, the maximum cancellation fee shall be … for 25% of the time which has been set aside, or for 3 days, whichever is the greater.
• If I am given less than 14 days’ but not less than 7 days’ notice to cancel the time which has been set aside, the maximum cancellation fee shall be … for 50% of the time which has been set aside, or for 5 days, whichever is the greater.
• If I am given less than 7 days’ notice to cancel the time which has been set aside, no reduction shall apply.

(3) Thirdly, another prophylactic against a finding that a commitment fee constitutes an unlawful penalty may be a provision for abatement of the whole or part of the fee if other work becomes available, and especially if the other work is provided by the same instructing solicitor. As I have said, it is the practice of many barristers to remit all or part of a cancellation fee in such circumstances. And if that is what you intend to do in the event that other work becomes available, it makes sense to provide expressly for that contingency, so as to preserve the right to be paid a full commitment fee on occasions when other work does not become available.

(4) Fourthly, and although it may be “so obvious that it goes without saying”, the retainer agreement should expressly provide that the commitment fee is not payable if the barrister withdraws from the case, whether as a result of becoming “jammed”, or though ill-health, or because a situation of personal conflict comes to the barrister’s attention, or for any reason which is solely attributable to the barrister.

I emphasise, however, that these drafting suggestions are put forward only as added protection against a possible finding that a cancellation fee constitutes an unlawful penalty. Though one can never predict how the law may develop in years to come, I am firmly of the view that, as the law presently stands, such a finding could not be sustained.

Anthony J H Morris QC