It is high time that law firms brought an end to hourly rates and embraced alternative billing methods, argues Jim Diamond

It is Christmas Eve 2008 as I write this article. The papers are full of doom and gloom. The TV is broadcasting the annual disaster movies, including Titanic, and every time I see it I imagine that one day a crew member will see the iceberg, call "about ahoy" and avert the tragedy.

Well, for the last decade, I have been shouting, nay screaming, about the iceberg awaiting law firms. I have been warning the good ship Law about the dangers of defective billing systems, excessive charges and a lack of compliance to rules governing the quantification of legal costs. The biggest offenders have appeared to be City law firms.

For about a decade, City law firms have bragged about year-on-year increases in turnover and profits. As the author of a comprehensive survey on hourly rates charged by the City law firms, I have found it increasingly difficult each year to find out what they actually charge per hour.

Despite the barriers put in my way by the profession, I still managed to compile the accurate results again for 2008. And they showed that even in the midst of the credit crunch, the top rates hit £900 per hour.

During the 1980s and 1990s I worked in-house on costing for two of the top magic circle law firms. The middle to end of the 1990s really saw the bean-counters take control of billing in those firms and computer-generated systems took over.

Computer-generated billing fundamentally ignored the rules governing the quantification of legal costs. The arrogance was alarming at the time, with a 'catch us if you can' mentality becoming widespread.

In 1998, I wrote an article in the Legal 500 entitled 'Defective billing practices'. It was a simple guide to allow the buyer of legal services to check charges and outlined some of the rules, regulations and costs law that applied at the time. And it showed the sharp – and illegal – practices being used by top firms to overcharge clients.

Most of those rules and laws quoted in the article are still valid today. Consequently, the reality is that we have seen a decade of unprecedented 'illegal billing' by major City law firms.

If I am brutally honest, in-house counsel must take some of the blame for allowing legal fees to rocket in the last decade.

They have not controlled external legal expenditure partly due to lack of knowledge and partly by perpetrating a perceived wisdom that somehow people should expect to pay big fees to secure the services of City lawyers.

Over the years I have given many seminars to major in-house legal departments on how to control external legal expenditure.

I was even asked to present my views to the committee of the Commerce and Industry Group in 2004. As a result, the London branch of the C&I Group agreed that I provide its members with a free advice service on any aspect of commercial costs. Over the 12-month duration of the free service I did not receive one telephone call or email enquiry.

Ironically, during the same time period I was the only 'civilian' invited to speak at the Judges and Costs Judges Costs annual forum. So while the lawyers were doing their best to ignore the rules, the judges were starting to acquaint themselves with them.

So what can we expect for 2009? In short, the hourly rate and defective billing have to go. They will have to be replaced by a variety of budget/task-based billing systems.

Since the introduction of the Solicitors' Costs codes at the beginning of the 1990s, solicitors should have been providing costs information. In my experience, many firms that follow the practice have deliberately submitted low quotes to get the work. One client was quoted £30,000 and was billed over 10 times as much for a non-contentious matter.

Conversely, others put out outrageously high figures to make sure they are 'covering' all aspects. A client quoted over £500,000 for dealing with an appeal on quantum where the liability ran to 50% of that figure moved lawyers after being given the outrageous estimate.

The Solicitors Regulatory Authority introduced a mandatory costs code on 1 July, 2007, which included the preparation of not only budgets but also a risk assessment, taking account of the potential costs involved.

One of the fundamental concepts of the Woolf reforms was the power given to the court to request costs budgets and an ability to make costs capping orders.

In RIM v Vista [2008] Mr Justice Arnold made an order that both parties to the action provide budgets and "slammed the UK's approach to control of litigation costs as inadequate and unsatisfactory".

As a result you would expect the big question to be how are the major City law firms preparing for 2009 in relation to the changing face of legal billing? Sadly it appears they are doing little to nothing. One London firm has just made a small team of some of the most experienced in-house costs people in the City redundant.

Instead, the 'defective bills' will be sent out via the processing centre located in hotter climates – so no chance of hitting any icebergs!

A little trick I learnt some years ago was that instead of working on the budget at the beginning, imagine you are calculating it at the end and work backwards. The best approach is to backtrack through all of the potential steps to get an outline of not only a formal budget but the basis of task-based billing. For example, let us assess the risks and potential costs of a £1m commercial dispute.

The case is likely to run to, say, a full five-day trial where two lawyers will attend at gross hourly rates of £800 an hour for 10-hour days (including prep). That is £8,000 per lawyer each day, plus the barrister's fees, who is likely to be charged out at 50% higher than the lawyer's rate.

If you add expert fees and other items such as witness expenses, you are looking at trial costs alone of £150,000. And of course if you lose, you also pay the other side's costs, so the budget hits £300,000 just for the trial.

A few rule of thumb calculations could help clients keep a tighter grip on legal costs.

Jim Diamond is a specialist in advising on legal cost issues.

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