As different law firms offer different methods of charging clients for legal services rendered, it is important to understand the differences between the methods offered when choosing which law firm to engage.

Traditionally, the three most common billing models are:

• “time-based” billing;
• “fixed fee” billing; and
• “contingent fee” (e.g., “no win, no fee”) billing.

“Capped fee” billing also can be used as a variation of “time-based” billing (although it tends to be underutilised by the majority of law firms).

The purpose of this article is to briefly explain these billing models with reference to their respective advantages and disadvantages, and to identify the best billing model for commercial litigation work from the client’s point of view.

Time-Based Billing

Under the traditional time-based model, law firms charge for the time a lawyer spends carrying out work for a particular client based on the lawyer’s hourly rate.

Usually, each hour is subdivided into units of time (10 x 6-minute units being the most common), so that the client is charged for each unit worked at the solicitor’s specified hourly rate. For example, if work is billed at 6-minute intervals at an hourly rate of $500 per hour, then as each unit will amount to $50 per unit, the charge for 13 minutes of work would be $150.00.

Prior to carrying out work under a time-based model, lawyers provide an estimate of cost of the work to be done, although the estimate is usually not binding. They are then required to provide clients with an updated estimate once it seems likely that the original estimate may be exceeded. If the cost of the work exceeds the estimate, then the client will usually be required to pay the invoiced amount. But if the cost of the work falls below the estimated amount (for example the matter is resolved early), then (in contrast to fixed-fee billing), the client will benefit from the reduction as they are only be required to pay for the work done.

Time-based billing is most appropriate where the future scope of work is unpredictable, such as in the case of most contested litigation This is because it provides the flexibility necessary for the solicitor to expand or contract the work as necessary to provide responsive legal services as the matter unfolds and the work required is changed by the conduct of the parties. This flexibility and ability to adapt to unpredictable and changing circumstances as they unfold in an adversarial setting can have a critical impact upon the success or otherwise of a party’s resolution of a dispute should extra work be required to deal effectively with some aspect of the opponent’s material, or conduct of the proceeding, or as new threats or opportunities arise.

The main disadvantage of time-based billing that it can provide the client with much uncertainty regarding the future legal costs of a matter – particularly if it later turns out that more work was required to be done than first estimated, in which case the fees charged are likely to exceed the initial estimate given.

Time-based billing has also been criticised on the basis that lawyers get “rewarded” for being inefficient (i.e., being paid to take longer on items of work) and that unscrupulous lawyers can artificially inflate their invoices by claiming more time spent on work than was actually spent.

When used ethically and competently however, time-based billing ensures fair pay for fair work while providing the flexibility to adapt to unpredictable changing circumstances.

Fixed-Fee Billing

Fixed-fee billing involves a law firm quoting a fixed fee amount for specified legal work to be carried out. The firm is then bound to charge the amount quoted for the work regardless of the time spent (or not spent) carrying it out.

Fixed-fee billing may be structured in different ways, such as in the form of a total “lump sum” price for the total work to be performed, or in stages where a fixed amount is quoted for only the next stage up front, and then further quotes are provided progressively for each next stage as each previous stage is completed.

The main advantage of fixed-fee billing for clients is said to be that it provides them with certainty regarding the future cost of the work (at least for the next stage quoted). In theory, this allows clients to know their costs exposure up front. In practice however, this may not necessarily be the case.

Fixed-fee billing is most appropriate where the amount of work needed to be carried out is predictable and can be standardised. Common examples may include conveyancing work and drafting standardised commercial agreements such as lease agreements and finance agreements. However, fixed-fee billing is least appropriate where the scope and content of future work is unpredictable and subject to substantial variation.

Some litigation firms claim to be innovative by implimenting a fixed-fee billing model, however fixed-fee billing has several disadvantages for contested litigation work from the client's point of view which tend not to be mentioned by those promoting it.

Firstly, unlike time-based billing, the lawyer is not required to disclose to the client or to the Court how much time was actually spent carrying out the work. As standardisation often allows reuse of previously created documents, lawyers are entitled to charge clients a premium for recycled work which required little time or effort at all to reuse, and a client paying "full freight" is none the wiser. In contrast, under a time-based billing model, the time spent on work is disclosed to the client, and any time efficiency savings are automatically passed onto the client for their benefit.

Secondly, this can then have a significant flow-on effect on the operational effectiveness of the services being provided.  By its nature, fixed fee arrangements rely on standardisation of work output in order to maximise profitability. Recycling of work under a fixed fee arrangement can generate increased profit margins on items of work, which in turn provides a strong incentive to standardise work output on all cases. While standardisation of work where appropriate can lead to greater efficiencies, fixed-fee billing can slao provide a strong disincentive for the lawyer to properly consider any inconsistent, unique or presently unknown aspects of the case, which may take the lawyer outside of the standardised work output usually provided under the fixed fee quote given, or which may otherwise reduce or remove the profitability of the work quoted. This may lead to a reduction in operational flexibility, responsiveness and foresight, placing their clients in a disadvantaged position against a firm like Law Force whose services focus on effectiveness over standardisation of form.

Thirdly, because fixed-fee work involves some variation in the amount of time spent by the solicitor on particular jobs, firms often pad their fixed fee quotes accross all jobs with a layer of extra provision to cover any loss of profitability on paticulare jobs where more work was required to be done than expected. This tends to push up fees accross the board for most clients, by fixing the amount payable at that higher amount even if less work than expected had to be carried out for a particular client. In contrast, under a time-based model, clients only pay for the time spent on their matter.

Fourthly, in the case of providing progressive staged fixed-fee quotes being provided as the litigation unfolds, since the fixed fee amount is not tied to the time spent on work, any decrease in profit from an earlier stage can simply be added into the quoted fixed-fee amount of a later stages without the client's knowledge.

Fifthly, depending on how the fixed-fee quote is structured, should an event occur which prematurely meets the work’s end state (for example settlement of a dispute) without the need to complete the work, the client may nevertheless be required to pay the whole amount of the quote as if all the services had been provided.

Accordingly, while the fixed-fee model tends to be an appropriate and practical model for predictable, standardised work where a price can be fixed with confidence, it may lack flexibility and transparency compared to the time-based billing model in respect of complex commercial litigation disputes and may in fact limit the law firm’s ability to win disputes of that nature.

Condition (“No Win, No Fee”) Billing

Conditional client agreements (such as “No win, no fee” client agreements) are where the law firm agrees to only receive payment of its legal fees upon the happening of a condition - usually a “successful outcome” of the claim.

The meaning of “successful outcome” will depend upon how it is defined in the client agreement. Further, law firms are allowed to add up to an additional 25% "uplift fee" on top of the incurred legal fees to be charged as compensation for  the risk being carried by the legal firm of not being paid. This means that a client under a “no win, no fee” client agreement may be likely to pay a higher fees overall than under a time-based or fixed fee client agreement.

If the conditional costs agreement is for a personal injury claim, then the law firm is only entitled to recover maximum fees of half the amount to which the client is entitled under a judgement or settlement (after deducting the total amount of disbursements for which the client is liable).

Where the time spent by the law firm in acting for their client is conditional upon the success of the claim, the client usually remains liable for payment of the firm’s out of pocket expenses incurred in furtherance of the claim, such as court filing fees and the costs of expert reports and barristers’ fees.

Further, with few exceptions it is the client who carries the risk of having to pay their opponent’s legal costs if ordered to do so, for example, because the claim was unsuccessful.

To protect the law firm’s investment of unpaid work and time in the proceeding, “no win, no fee” type client agreements tend to include clauses which lock the client into retaining their services and following their advice. These can significantly reduce the client’s control over the way the litigation is carried out, particularly if only limited options are provided by the law firm so as to protect its own interests against the client.

Further, because the client is not having to make regular payments for the lawyer’s fees as the matter progresses under a “no win, no fee” arrangement, the client can become less sensitive to the accumulation of ballooning legal fees being recorded by the law firm, and to the accumulating risk of an opponent’s legal costs in response should the client be ultimately unsuccessful.

“No win, no fee” type client agreements are most appropriate where there is a predicable and secure pool of money available to fund any claim payout and costs, and where confidence in a successful outcome is high, such as in personal injury cases where the injuries can be proved and the other party is an insurer. Client's need to carefully monitor the progress of the matter as it proceeds and in particular the amount of costs accruing in the background.

Conditional client agreements are common in personal injury cases, and also between solicitor and trustee or liquidator in bankruptcy and insolvency recovery litigation, particularly where there is an ongoing solicitor-client relationship.

“No win, no fee” type fee arrangements are least suited where prospects of success are unpredictable or poor, and where the availability of assets to be recovered is uncertain or unlikely.

An Alternative: “Capped-Fee” billing

Each of the above models have their advantages and disadvantages. Overall, a time-based model provides the most transparency and flexibility when it comes to litigation involving potential variation regarding the scope of services to be provided as the dispute unfolds and evolves.

“Capped-fee” billing is where the client is charged fees under a time-based model for time spent on legal work, but a quoted cap amount is stated above which fees are either not charged, or are charged at a significantly reduced rate. Caps usually does not apply to disbursements.

As with time-based billing, the client is provided with an estimate for the likely future costs of the work, and the client is only charged for the time spent on items of billable work. The estimate is not binding, meaning that the legal fees for the work carried out may ultimately be less than, or exceed, the estimate given. However, by applying a cap on the fees, the client is given certainty that even if the estimate is exceeded, the fees changed will  not exceed the stated cap. An alternate variation is where any fees exceeding the cap are charged at a greatly reduced rate.

The “capped fee” billing model therefore provides the flexibility and transparency of time-based billing while overcoming the greatest shortfalls of that model; namely, that time-based billing transfers all the risk of variation of costs onto the client, leaving the client uncertain as to how much they may ultimately be charged for the work being carried out.

The “capped fee” billing model also provides the certainty of the fixed-fee billing model, while overcoming two of its greatest shortfalls: that a client may be forced to pay the entire fixed fee amount for a lesser amount of work, and that there is little or no transparency regarding how much time was actually spent carrying out the work.

Conclusion

The three most common billing models (“time-based” billing; “fixed-fee” billing; and “contingent-fee” billing) each have their strengths and weaknesses.

In recent years, some law firms have attempted to differentiate themselves by promoting a fixed-fee billing structure as being a more appropriate billing model for commercial litigation disputes. However any model relying on standardisation as its basis is going to be poorly adapted to being flexible in a dynamically changing litigation dispute.  Such law firms may nevertheless ensure that their profit margins are maintained since, because fixed-fee billing lacks the transparency and accountability provided by time-based billing, fees can be adjusted without reference to fixed fee rates in subsequent fixed-fee quoted amounts, therefore largely invalidating claims of providing certainty in legal costs over time.

Time-based billing provides the most transparency and accountably and can be further enhanced by the application of a cap to the estimate provided over which it is agreed that fees are either not charged or are charged at a greatly reduced amount.

Law Force primarily uses time-based billing and also provides capped-billing where appropriate.

Talk to Law Force about how we charge our fees and achieve the best possible outcomes for our clients.

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