Costs, value and “near zero” marginal based charging

Why would a litigation solicitor wish, when making a retainer with a client to charge the client a fixed fee to cover all the work done in respect of the case? The instinctive reaction of most solicitors is to resist the imposition of fixed fees on recoverable costs as a concept; a reaction grounded in a belief that litigation is to be properly viewed as a bespoke activity, handcrafted by skilled artisans and by a fear that it will require them to undertake work without being properly remunerated for it.

However because much litigation can be commoditised into broad categories of claim, there has been a vast expansion of fixed fees in recent years particularly in the field of personal injury litigation; but also other areas such as intellectual property disputes.

This has demonstrably not put the legal profession out of business or precluded clients from litigating their disputes, although it has undoubtedly played a role with other reforms, in consolidating the profession and reinforcing the need for both specialism by solicitors and the need to work in limited fields in volume.

The expansion of fixed fees in the Civil Procedure Rules represents an imposition of fixed fees from the “top down” but there are now discernibly an increasing number of reasons why there are pressures to charge clients fixed fees from the “bottom up”: including both the nature of the case, and the intervention of the regulators.

This in turn will challenge the courts as to how they assess the recoverability of such charges when disputed either on a solicitor own client basis or when considering recoverability on an inter partes basis. The proposed abolition of the principle in Broadhurst v Tan [2016] EWCA Civ 94 through the reform of part 36 in fixed costs, so that if a part 36 offer is beaten, a receiving party simply receives an uplift on fixed costs, rather than indemnity costs, will hasten the demise of the hourly rate in a whole tranche of litigation.

The purpose of this article then is to consider why in cases ranging from small claims through to the most complicated of group actions, solicitors may wish to charge their own clients fixed fees rather than to charge on the traditional hourly rate basis and how they can justify those charges, not on the basis of time spent, but rather value added, to their own clients or the court on an inter partes assessment or the regulators.

But first some history. How did the hourly rate come to have such sway, so that time spent on a case by a lawyer remains the commonest yardstick in the modern practice of charging and recovering costs? It was not always so. Although awards of costs in civil proceedings can be traced back to at least the Statute of Westminster of 1275, the practice of awarding costs has varied greatly down the centuries, with Victorian courts recognising numerous scales of costs.

Even in the era of The Expense of Time which was expressly not meant to be used for calculating hourly rates used on taxations, before 1999 there were scales of fixed costs.

I would suggest that the modern dominance of the hourly rate owes a lot to the neglect in the drafting of the new Civil Procedure Rules in 1999 to a comprehensive scheme of fixed costs. This lack of attention paid to fixed costs, coupled with the coming into force of the Access to Justice Act 1999 the following year, led to an explosion in the cost of litigation. There then followed a long slow evolution of various schemes of fixed costs for various types of case in the years that followed.

The economic rationale behind a fixed fee is one that need have very little to do with time: instead a fixed fee as the remuneration set in the retainer has to be justified between solicitor and client on the basis of added value to the case. The significance of the spread of fixed costs is that they have nothing to do with time spent: fixed costs and assessed costs are conceptually different. Fixed costs are awarded whether or not they were incurred, and whether or not they represent reasonable or proportionate compensation for the effort actually expended.

I turn then to consider the first and most important of the “bottom up” pressures. In certain categories of case, a fixed value based charge to a client is the only way that a client might consider it worth instructing a solicitor to pursue the claim. Two obvious categories of case are the plethora of flight delay claims, arising from European Union legislation and claims for the misselling of PPI insurance.

In each case, a CFA Lite providing for a fixed charge or a partial waiver of fees linked to recovery is the obvious model for the retainer. As all these cases are likely to end up if litigated on the Small Claims track, there is practically no scope for an inter partes recovery of costs.

Should the government’s intended whiplash reforms, in the Civil Liability Bill ever come to pass, with a tariff of very modest awards, far below what the courts would award utilising the Judicial College guidelines, the inevitable consequence is that such claims would be allocated to the Small Claims track. I do not believe that whiplash claims will then disappear: rather they will still be litigated, but with very modest fees charged to the client and paid out of recovered damages.

The second “bottom up” factor is the use of information technology and increasingly, artificial intelligence or AI, to automate and streamline and turn into a process of mass production, the bespoke, artisan practice of litigation. This is already far advanced in the personal injury market, where claims management software routinely assigns or estimates time to mundane tasks, and the use of “units” serves to disengage time claimed, from minutes and seconds actually employed.

This is the concept of “near zero marginal cost” a phenomenon of the digital age, where it costs virtually nothing to provide additional products at minimal, or even zero costs. The music and publishing industries, providing digital downloads of identical products to millions of users are the clearest examples of how services can be provided at near zero marginal costs. There is scope despite its bespoke heritage for some litigation services to be delivered in a similar fashion.

In terms of low value claims such as flight delay claims, PPI and soon whiplash, increasing automation makes a nonsense of the notion that time claimed is a reliable indicator of reasonableness. Indeed, if the solicitor found that the actual cost to him of running a case was £25, or that only 30 minutes of grade D fee earner time represented the totality of the “touches” on a file, he might be doing himself a serious disservice by charging on a time incurred basis.

In terms of high value litigation, AI tools permitting key word searches and automation of the disclosure process, will greatly reduce the amount of fee earner time hitherto routinely spent in enormous quantities. How does a solicitor quantify and charge for the use of a software programme in the context of a multi-million pound commercial dispute? Logically, it should be by the added value given to a case.

The third and final pressure that I identify is one of regulatory concern. Although the Solicitors Regulation Authority has limited power to impose a “just price” on solicitors, that it does have such power and that it is more prepared to use it, is apparent from recent developments.

On 29th August 2017 the SRA issued a warning notice in relation to charges made in PPI claims by solicitors in the following terms:

Where you have agreed to be paid a percentage of the client’s damages that are greatly in excess of fees that would have been payable had your usual hourly rate been charged or are not proportionate to the work undertaken, it is unlikely that you would be acting in your clients interests or treating them fairly. This is particularly the case where the work carried out is limited, for example, to submitting a notice of claim and agreeing settlement. It is important that you do not exaggerate the time or effort involved in submitting a claim.

The notice continued:

A recent proposal by the Claims Management Regulator for capping claims management company (CMCs) fees charged in PPI cases, sets a costs limit of 15 percent of client damages. CMCs that become alternative business structures to avoid the capping of costs should be aware that when we are investigating any complaints regarding unreasonable fees in PPI matters, we are likely to consider anything above the 15 percent to be unreasonable, unless the work involved and the risk to the firm clearly demands a greater percentage of the damages.

It does not in my view follow that there is a requirement that hourly rates be used as a bench mark for charges in this and analogous situations. The reference to “proportionality” is apt to include reference to “added value” in my view.

So if costs charged on a “value added” basis without reference to time are challenged, either by a regretful client or a paying party in a recoverable costs assessment, how should the court approach their quantification? The court’s approach to the assessment of contentious costs is governed by rule 44.4 CPR containing the seven (now eight) pillars of wisdom.

Of these factors only one, factor (f) specifically enjoins the court to have regard to the amount of time spent on the case. In addition, there is respectable body of case law on non-contentious costs, derived from the Solicitors (Non Contentious Business) Remuneration Order 2009 and its predecessors where a value charge is the norm in areas such as probate, to allow the court to draw upon by analogy, when determining whether a contractually agreed fixed fee is reasonable.

It follows that far from being an economic disaster, fixed demonstrably justifiable value based fees may be the salvation of the profession from the “rise of the robots” and regulatory pressures in the years to come.

This article first appeared in Litigation Funding magazine in December 2017.

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