Alternative business structures may well herald the demise of hourly billing as legal practice becomes even more competitive, the Master of the Rolls has predicted.
The introduction of contingency fees, the reform of conditional fee agreements (CFAs), the economic crisis and greater role of the Internet in legal services will also play important roles, Lord Neuberger said.
Addressing the Association of Costs Lawyers annual costs conference on Friday, he strongly attacked the concept of hourly billing, which he said “at best leads to inefficient practices, at worst it rewards and incentivises inefficiency”, and “fails to reward the diligent, the efficient and the able”.
Hourly billing “crucially confuses cost with value”, Lord Neuberger continued, saying that an approach to litigation costs based on value pricing is urgently needed. “Rather than treating time as the commodity which is being sold, we should be adopting an approach where skill and experience are the commodities which are sold.”
He said the ABS business model may “sound the death knell of hourly billing, as it will lead to more positive and market-orientated practices”. The present financial constraint on clients and the development of legal price comparison websites will also help drive innovation. The availability of contingency fees – known as damages-based agreements (DBAs) – from next April will play a role too, he said.
“In the new virtual market place, it seems to me that there will be an inevitable, often irresistible, pressure on lawyers to offer client-friendly fee structures and fee agreements. The argument which posits that it is not in a solicitor’s interest to offer a DBA where a CFA is otherwise available may well founder on the ever more transparent and competitive market place, which should encourage rival firms to offer DBAs, perhaps incorporating fixed-fee agreements.
“That is for the simple reason that such arrangements are more client-friendly, and, at least in a more perfect market, should secure the work, and should therefore see legal fees driven down.”
However, this does not have to be bad for lawyers, Lord Neuberger argued. “If litigation is cheaper, elementary economics suggests that there will be more of it. Rather than charging high in a few cases, and driving away those with valid claims from the courts, lawyers should be able to charge realistic fees, and encourage many more clients to instruct them to fight their case.”
He also used his speech to call for the government to accept Lord Justice Jackson’s recommendation for the creation of a costs council, which would “provide the necessary, active, expert scrutiny of litigation costs at the macro level… One big push every ten years or so to meet a crisis is neither a proper nor a sensible way to deal with the problem of litigation costs”.
He warned that if the Jackson reforms fail, the likely consequence is that policymakers will turn to either the American system of no costs-shifting or German-style fixed fees for all litigation.