Hourly billing 'incentivises inefficiency', says Neuberger
The end of the hourly rate is nigh and a costs council should be established urgently to review litigation billing methods, the Master of the Rolls Lord Neuberger has warned.
Lord Neuberger
Speaking at the Association of Costs Lawyers conference last week Neuberger MR reiterated his concerns that the hourly rate “leads to inefficient practices, at worst it rewards and incentivises inefficiency”. The time for change has come, he added.
“Only a costs council can provide the necessary, active, expert scrutiny of litigation costs at the macro level,” Neuberger MR said. “It remains my hope that the recommendation that a costs council should be established will be implemented, and that members of your organisation, with their particular expertise in the field of legal costs, will serve on it and advise it.”
Lord Justice Jackson recommended that a costs council be established by the Civil Justice Council (CJC) as part of his wider review of civil litigation costs (18 January 2010).
He urged the profession to adopt as a matter of urgency “value pricing rather than hourly billing”, adding that the march of ABSs into the profession would “sound the death knell of hourly billing, as it will lead to more positive and market-orientated practices”.
While fixed fees were one alternative method of billing, Neuberger added, the other alternative would be for firms to adopt contingency-based agreements, known as ‘damages-based agreements’ (DBAs), when legislation allows.
The CJC established a working party last August to work towards the implementation of Jackson LJ’s reforms (19 August 2011). Former Irwin Mitchell chairman Michael Napier, who was widely credited with helping develop the conditional fee system, is leading the group (16 November 2011).
Neuberger MR said the group would need to consider how DBAs can operate across different procedural tracks, warning that DBAs should not become a breeding ground for satellite litigation.
“Care will need to be taken to ensure that differences between the various funding mechanisms do not provide improper incentives for claims to be pursued, to the detriment of clients and the proper administration of justice, in particular procedural tracks when they ought properly to be pursued on a different track,” he said.
“Care in drafting rules, and a robust attitude by the courts, will need to ensure that this does not become a fertile ground for meretricious satellite litigation.”
It is not the first time Neuberger MR has attempted to reinvigorate the debate around the hourly rate. In December he told the Chancery Bar Association: “We should all aim to be cracking disputes as efficiently and cost-effectively as possible.”
In February, Neuberger MR slammed Irwin Mitchell over its pricing policy, which allowed it to charge six times the amount paid out to its client in a dispute (21 February 2012).
The MR said “something is out of kilter” when the firm had managed to amass costs of £75,000 when its client, plumber Adrian Simcoe, had received a £12,500 settlement for a personal injury claim.
Giving the substantive Court of Appeal judgment, Neuberger MR stated: “Unless this is an exceptional case, the fact that, without even incurring the cost of a trial, it cost the claimant nearly six times as much to pursue the claim as it was actually worth suggests that something is out of kilter in at least some parts of the civil justice system.”
His campaign against the hourly rate, however, has been met with disdain by some lawyers, who argue that the judiciary has no right to interfere with the commercial workings of a firm.
Just Costs national advocacy manager Thomas Blackburn said firms would cling on to the billing method long after Neuberger MR retires from the bench.
He commented: “Whilst the eminent Lord is correct in that solicitors and barristers are exploring alternative fee structures, such arrangements will be the exception not the norm.
“I’d remind the legal field of Lord Justice Woolf’s recommendations regarding technology playing a greater and more prominent role in proceedings. Thirteen years later, we’re still waiting for that to happen.”
A copy of the full speech can be read here.
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Readers' comments (25)
Anonymous | 16-May-2012 3:50 pm
It is absolutely ridiculous for the judiciary to be interfering with how firms operate their own commercial business. The hourly rate may not always be appropriate but sometimes it can be a more cost efficient way of billing the client, sometimes they want it to remain that way. It's their choice and bureaucrat's shouldn't be interfering with over bearing legislation.
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Anonymous | 16-May-2012 4:20 pm
@Anonymous | 16-May-2012 3:50 pm
I absolutely agree. The legal market is competitive enough if clients think they are getting screwed over by hourly billing then they have the choice to change to another firm. Similarly, if one firm switches over to value-based fees and clients flock to them then other firms will have to follow if they are losing work. It is a commercial choice not a judicial one.
Also, while hourly billing perhaps "leads to inefficient practices, at worst it rewards and incentivises inefficiency" fixed fee work can be just as perverse, incentivising cutting-corners - but then again I don't think the MR has been on an all-inclusive holiday before...
The only thing I would add to this is that in the PI and Criminal Law context there is more of a justification, as typically clients only need their lawyers once and having a clear "it will cost £x" could be quite beneficial for making comparisons.
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Mr Clementi | 16-May-2012 4:30 pm
@Anonymous | 16-May-2012 3:50 pm
I take the point about 'forcing' firms to drop hourly bills. But, perhaps instead the courts and/or Government, and/or SRA, should make it mandatory that all clients are offered the 'option' of fixed fees should they want to be billed that way.
One could argue that it is a key part of UK consumer rights for a client to be allowed to be billed the way they wish for professional services, and that billing systems should not be dictated by law firms as this distorts the market, hurts freedom of choice and as everyone now agrees is rarely in the interests of the client.
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Anonymous | 16-May-2012 4:50 pm
Agree with all the above. It does not incentivise anything. It is a way of charging for services. How did Neuberger charge for his services ? Oh sorry, forgot, he got that cockney barrow boy in the clerks room to do that grubby work for him. You're a bright fellow Neuberger, but stick to the finer points of landlord and tenant in your Ivory Tower. And then back to the mansion paid for with over-sized brief fees.
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ultimate warrior | 16-May-2012 5:22 pm
@Mr Clementi | 16-May-2012 4:30 pm
What utter tosh. In what other commercial enterprise are clients/customers given a choice (as a matter of course) as to how they pay their bills. Very few. Why should law firms be any different?
As some posters above have pointed out, there are plenty of firms to choose from and if you don’t like how one firm bills then move to one that you find works for you.
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Anonymous | 17-May-2012 8:19 am
Don't you just love it when the judiciary (mostly ex barristers) criticize hourly rates when their careers at the bar earned them huge fees based on grotesquely high, guess what, hourly rates!
As a mere litigation solicitor, I'm supposed to be able to either guess how much a case is going to cost at the outset and offer a fixed fee (the risk being all mine) or have to work under some contingency arrangement again at my risk.
Yet the silence on the withdrawal of legal aid that pays solicitors, often at less than 50% of their expense of time, and after a lengthy delay, by the same judiciary is silent. I think I'll look for a different job. "Was that a Big Mac and regular fries, sir?"
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Anonymous | 17-May-2012 8:29 am
So what is the threat from ABSs? For example the accounting profession is still largely hourly rate based. If you are saying hourly rate based is out then you are saying that ABS with accountants are out as their business model would change.
Fair fees are about fair splitting of risk and reward on a project whose scope and outcome is uncertain. In some cases there is scope for outcome based alternatives. In others hourly based, possibly with a volume discount, is appropriate. Fixed fee only works where there is certainty on the project scope at the outset.
Oh I'm an accountant. Same issues. Different profession.
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Mr Clementi | 17-May-2012 9:21 am
@ultimate warrior | 16-May-2012 5:22 pm
Thanks for that forthright opinion Mr Warrior....let me make sure I never use your law firm.
And the profession wonders why clients are increasingly dubious about the way they are treated.
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Anonymous | 17-May-2012 9:23 am
Sorry, why is this news? This story was in The Telegraph over a week ago.
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Hourly Ray | 17-May-2012 10:41 am
This story is juxtaposed next to one which discusses Mr. Grabiner's '3K an hour fee'. Oh, the irony!
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