LAWYERS AND BILLABLE HOURS

What is wrong with this exactly?

You read everywhere that law firms (lawyers, advocates, attorneys) have to change. Lawyers are too conservative. They hold on to the past and are anything but innovative. As the economic climate deteriorates the call for change becomes increasingly stronger.

The system of “hourly rate billing” in particular has to take the rap. Lawyers are reproached for billing hours with a fork, not working efficiently and being too expensive. The system apparently has the wrong incentives, partly because it is difficult to check the actual number of hours spent efficiently.

Anyone who becomes aware of this criticism can only conclude that lawyers who carry out their activities on an hourly basis are distrusted. However, apart from a few cases, it is not that lawyers are accused of abuse but that they apply a billing system that does not enforce efficient working and that takes too little into account the fact that whatever is billed by the lawyer, are costs for his client. And as the economic climate deteriorates, clients are becoming more cost conscious.

No client wants to pay too much for the legal services he needs. In other words: there must be an acceptable proportion for the client between the costs on the one hand and the (quality of the) service provided on the other. In short: value for money.

For clients, whether they are natural persons or commercial organizations, uncertainty with regard to the final amount payable is a difficult point. When a client engages his lawyer to bring a legal action for him, he would like to know whether this is going to cost him $10,000, $100,000 or $500,000.

Every relationship between a client and his lawyer is based on trust. Considered from the client’s point of view it is important that he trusts his chosen lawyer to deal with his case in the best possible way. The question is obviously what the best way is, what it costs and what the alternatives are. It is important that this is discussed seriously on commencement of the assignment. Partly due to the costs aspect a client could opt for a sub-optimal alternative.

Let me give you an example. Say that a client has a claim on two companies jointly. One company is established in the country where the client and his lawyer reside but that company will probably never be able to pay more than 50% of the claim. The other company is established in a country where levying execution of a foreign judgment is difficult and expensive but that company would be able to pay 100% of the claim. In such a case the lawyer has to inform his client clearly in this respect and discuss with him whether, also from a cost perspective, it makes sense to start legal action against that second company as well.

In addition, the client should know where he stands with regard to his costs, if only approximately. It is not enough for the lawyer to mention his hourly rate with the motto “you’ll know what this costs when it’s over“. There are various possibilities for applying cost control and cost mitigation.

If a case would lend itself to it, the lawyer could give an estimate of the total costs. A case can also be split up for instance into advice with regard to litigation chances, a legal action in first instance, etc. An estimate can then be given for each phase.

A maximum amount to be agreed also comes to mind. The lawyer makes an estimate of the costs and gives for instance a range of these costs. A cap could then be agreed. It is also possible to agree a fixed fee: the number of hours that the lawyer then spends on the case is irrelevant. There can be an upside as well as a downside to a fixed fee. The advantage for the client is that he knows immediately what amount he must pay and this can be included in his budget.

For the lawyer a fixed fee can have the additional advantage that the client is not put off by his hourly rate: with a fixed fee the hourly rate is not relevant. After all, the person buying a car does not wonder either what part of the purchase price consists of the labor costs of the workers, what part of cost of materials, what part of transport costs, what the profit margin is, etc. Because if you like the car and price, you just pay the purchase price.

Insofar as this is allowed in his country, the lawyer can also work on the basis of a success fee. ‘No cure no pay‘ comes to mind. And other solutions can be devised. For most of the clients it is in any event important that from the commencement of the relationship they know, insofar as this is possible, where they stand with regard to the bills of the lawyer.

Moreover, the lawyer can be expected to continue to keep an eye on the costs and to contact the client if those costs threaten to exceed what has been agreed or become higher than the client could reasonably expect. In this respect the lawyer is expected to have a proactive attitude. This type of discussion should not merely take place after the costs have been incurred or after the bill is sent. Clients don’t like surprises.

The system of “hourly rates billing” does not fit with these times if it means that the client must wait and see what he has to pay in the end. On commencement of a case the lawyer and his client must make clear arrangements about what they can expect from each other. The lawyer has a duty to inform his client as well as possible and also to lay this down in writing. In the end it is the client who has to determine whether the price which he (probably) will have to pay is in a reasonable proportion to the services offered. So ultimately it is not the lawyers but the market that determines the way in which lawyers can bill their clients.

Karel Frielink
Attorney (Lawyer) / Partner

(16 December 2013)
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