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Billing By The Hour - Is There A Better Way?

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Wanted! A guru to fix the hourly fee bugbear for lawyers - and their clients

When Auckland QC Jim Farmer said recently that High Court methods of handling cases was exacerbated by flat hourly fees, helping to shut the commercial community out of the legal system, he reopened an argument about legal fees and specifically whether there is a better way for lawyers to charge fees apart from the hourly fee.

Farmer's comments, at the New Zealand Bar Association and Legal Research Foundation's Litigation in Crisis conference, was endorsed by Chapman Tripp litigator Jack Hodder who spoke about the mainstream civil system being "profoundly flawed" offering "depressingly little value to any litigant."

The lawyers discussed the system's procedural rules that required matters like discovery that required potentially highly significant extra work for little return.

Farmer was quoted in the NBR saying: "We (the profession) are undercharging major commercial cases and we are grossly overcharging cases of a smaller amount."

The result? Businesses were deserting the courts for alternative dispute resolution outcomes.

However, the hourly billing issue is one with which many corporate counsel might take issue, given the recent survey of 125 corporate and government organisations that spent over $1 billion on legal fees. Over charged?

Certainly the corporate lawyers often think so. Legal costs are one of their chief concerns. However, apart from the dollar charges, corporate lawyers are also concerned about the way costs are communicated, along with reporting of the all-too-frequent overruns.

The ACLA/CLANZ Legal Department Benchmarking Report 2008 shows that when asked for fee estimates, law firms were consistently on or below budget just 2 per cent of the time. Only a third of the corporates surveyed reported that firms met their budget more than half the time.

But the key area of concern is the hourly billing. Only 3 per cent of general counsel surveyed considered billing by the hour to be the best basis upon which to price legal services.

The question is: what should replace - or supplement - it? Nearly 40 per cent of those surveyed considered hourly billing to be "not very appropriate" or as "rewarding inefficiency and providing no incentive for success", or "not at all appropriate" and "totally outmoded."

Certainly internationally, nowithstanding all the talk of flat fees, contingent fees and success fees, most corporate lawyers (between 90 per cent and 100 per cent) still bill by the hour.

Creative use of contingency fees, for instance, can create efficiencies in even the most high-level corporate situation. If a law firm helps avoid litigation, then a reduced hourly rate with a bonus for the litigation outcome can work effectively.

If your legal job involves large but repetitive tasks, then a flat-fee approach, also known as project billing may be appropriate.

Ron Pol, from legal consultancy Team Factors and one of the authors of the Benchmarking reports says there is an opportunity for New Zealand to take the lead in fixing this issue in a manner that could create considerable kudos for the client who brough it about.

"The issue is not confined to this country. if proactive lawyers work with the clients least satisfied with hourly billing and arrive at a workable alternative, countless other clients would clearly be keen to learn more, here and overseas.

"Finding a good alternative is not easy. People have tried before, and nothing’s yet taken hold on sufficient scale to break the billable hour stranglehold. But when it does, and it really is only a matter of time, the client who brought it about would become an overnight business guru, and the law firm’s name would become synonymous with the new methodology replacing the infamy of hourly rate billing."

A big challenge. Are lawyers and their clients up to it?

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