The Death of Hourly Rates?

Posted by Michelle Barron on 23rd August, 2016 in Opinion and categorised in .

Many years ago former Circuit Judge Michael Cook pointed out in his excellent practitioners handbook Cook on Costs that the hourly rates system rewards the inefficient solicitor and penalises the efficient. Despite that very logical view, it continues to be one of the factors by which the reasonableness - or otherwise - of solicitors’ costs are judged. However, things may be changing.

The Costs Budgeting rules 2016

In Yeo v Times Newspapers (2015) EWCH (QB) 209 Mr Justice Warby said that “In a case involving costs that run to six or even seven figures in total it is in my judgment appropriate to have regard not only to the factors listed in CPR 44.3(5) but also to the hours and rates”.  However, an amendment to the Costs Budgeting rules in April 2016 confirmed what we know a lot of judges were already saying – that hourly rates don’t fall to be considered. Paragraph 7.10 to the new Practice Direction 3E states:

“The making of a costs management order under rule 3.15 concerns the totals allowed for each phase of the budget. It is not the role of the court in the cost management hearing to fix or approve the hourly rates claimed in the budget. The underlying detail in the budget for each phase used by the party to calculate the totals claimed is provided for reference purposes only to assist the court in fixing a budget.”

The problem of pricing

At Burcher Jennings we have a broad knowledge of the multiple options possible in pricing legal work, and as clients (both business and private) become more sophisticated, we’ve noticed a trend towards exploring the possibility of offering something other than an open ended retainer based on an hourly rate becomes more attractive. Nowadays even the smallest high street firms are likely to offer a combination of hourly rate retainers, fixed fees and Conditional Fee Agreements as a minimum.

While larger firms can offer a more sophisticated selection of offers, even they continue to rely on hourly rates. Because – although there is plenty of scope to present legal costs in different and innovative ways – even the more sophisticated options tend still to be tied to hourly rates, as they provide an element by which it’s possible to ultimately measure the time a task takes, and its consequent value.

It is unfortunate and unhelpful that the hourly billing conversation is always cast in binary terms - either it is a good thing and should be retained or it is awful and should be ditched. The correct approach in our view is for practitioners to be possessed of a wide range of pricing strategies that they are capable of articulating to clients and invite clients to make a choice as to which one they prefer on a particular matter.

There are at least 20 different pricing strategies that practitioners could learn ranging from headline hourly rates, blended hourly rates, tiered hourly rates, fixed fees, portfolio fees, retainers (limited or otherwise), cap and collar fees, price segmentation and versioning to name a few. There is no reason at all why hourly rates should not continue to form part of that ‘menu’. The problem is that at the present time, few practitioners have the ability to engage in that kind of multifaceted pricing conversation with their clients.

Costs in the litigation context

Obviously, there is a big difference between a retainer from client to solicitor, and the recovery of costs between the parties. While the client may be keen on a particular method of charging, how does the losing party in litigation judge the reasonableness of the cost that charging method has incurred? Maybe this is a skill that will be learned by the judiciary, hand in hand with the ability that judges are presumably acquiring in assessing whether a particular fixed sum for a budget phase is reasonable given the amount of work envisaged.

As retainers become more sophisticated, so must the ability of the solicitor’s accounts team to bill the client correctly, and that of the costs draftsman to reflect the retainer correctly in the way a between the parties bill is drawn. For example, if the Damage Based Agreements Regulations are changed (and they are currently under review), how does a retainer that provides for payment by way of taking a share of the damages fit with a bill of costs seeking payment by the other side for x hours at y hourly rate? On the face of it, provided the indemnity principle is not breached, anything goes.

Regrettably, this is another example of the legislation and regulatory regime lagging behind commercial reality. ‘The market’ now requires law firms to bring a much more sophisticated, innovative, transparent, risk sharing approach to the pricing of legal services. Firms are slowly responding to these demands and expectations with pricing arrangements that are a departure from historical norms.

However, the regulatory regime and the attitude (and pricing skill set) of the judiciary remain firmly rooted in the historical approach to both pricing and costs. That is to say, the arbitrary allocation of an hourly rate based on an arbitrary number of years in practice, predicated on the assumption that all lawyers of the same level of experience are equally capable and competent. Pricing strategies and tactics that represent any kind of departure from the traditional hourly billing methodology need a regulatory regime and a judiciary that is properly trained and can engage with these new approaches.

Absent a coherent approach, it will remain the proverbial ‘buggers muddle’.

Publishing average prices

All of the above makes the recommendation by the Legal Services Consumer Panel to the Legal Services Board that “regulatory intervention” is needed to force firms to publish their average prices less than sensible. Richard Burcher has written on the difference between data and information in this context, highlighting that publishing prices would simply be the release of data, without any attempt to turn the data into functional information or to provide context. His article, Data v Information: Dangerous Drivel From The Legal Services Consumer Panel, concludes that “The LSCP has a solution (and a very poor one at that) looking for a non-existent problem. It is at best ill conceived and at worst, downright dangerous and counter-productive.”

The real question is what “price” is being called on to be published? If it’s the hourly rate, I believe the time for taking this step has come and gone.

This article has been written by Darrel Lumby who is a Costs Lawyer with over 20 years’ experience in costs, dealing with a wide and varied range of cases, including Court of Protection and high value and complex Personal Injury, Clinical Negligence and Commercial Litigation. He has also been instructed in high profile and sensitive Actions against the Police and Civil Liberty Claims. His experience and knowledge has led him to be instructed in cases where costs exceed £1m.