ALRC submission to the New South Wales Legal Fees Review Panel (17 December 2004)
1. The Australian Law Reform Commission (ALRC) makes the following submission to the New South Wales Legal Fees Review Panel in response to the Panel’s Discussion Paper Lawyer’s Costs and the Time Billing which was released in November 2004.
The ALRC’s Managing Justice report
2. In 2000, following a comprehensive four-year inquiry, the ALRC published its landmark report Managing Justice: A Review of the Federal Civil Justice System.[1] The ALRC had been asked to consider the advantages and disadvantages of the existing federal civil justice system, and examined areas having an impact upon the system such as procedure, case management, professional and judicial education, practice standards, alternative dispute resolution, and legal costs. Despite documenting numerous concerns about the system—including issues of fees and costs—the ALRC suggested that there was no ‘crisis’ in civil justice, and the flaws are reparable.
3. The ALRC’s recommendations in the Managing Justice report were focused on the federal civil justice system. However, the general thrust of the recommendations is relevant to the states and territories. Strategies for eliminating excessive legal costs must involve government, courts, tribunals and practitioners—there is no single, simple answer. While the ALRC’s recommendations in relation to legal costs were not intended to be a complete solution, implementation would assist to control and manage legal costs. Some of the recommendations which the ALRC believes are relevant to the Panel’s review are set out below.
Event based fees
4. The High Court, Federal Court and Family Court each have fee scales prescribed in regulations. The present scales for these courts (which continue to be similar to those considered by the ALRC in its Managing Justice report) are item based, with fees set for particular services, eg, photocopying charges, and in some cases set out hourly or daily rates. The scales have been criticised as badly structured; creating uncertainty about the amount a successful litigant will recover; promoting litigation (rather than settling or controlling expenditure); and rewarding outmoded work practices.
5. The ALRC did not consider abolition of fee scales in the federal jurisdiction (as occurred in NSW in 1994). Instead the ALRC saw benefit in implementing fixed, event based scales, such as those proposed by Professor Williams in his 1998 review of legal fees in federal jurisdiction.[2] While the particular amounts included in the Williams report proposals were criticised as being inadequate and unreflective of regional variations in charging practices, the ALRC generally supported (with adjustments) the move to a scale based on events rather than time as promoting certainty and predictability of costs.[3] The proposed fees allowed proportionately higher costs for work done in the early stages of litigation, with recoverable costs decreasing as the case continues in order to encourage early settlement.
6. The Federal Magistrates Court , which was established after completion of the ALRC’s Managing Justice report, has adopted fee scales that are largely event based. The ALRC has not had an opportunity to conduct research about how well these fee scales have operated in practice.
7. The ALRC considers that many of the arguments raised in criticism of time-based billing are similar to the arguments surrounding item based fee scales. The ALRC supports the criticisms of hourly billing raised in Part 3 of the Panel’s Discussion Paper and encourages reforms that will place greater emphasis on value billing. Event-based fees would provide a greater certainty about costs for clients, and also enhance the development of practice techniques based on quality and efficiency rather than the time spent on a matter. The ALRC also noted that greater certainty about fees could facilitate the development of a market for legal expenses insurance in Australia , as in parts of Europe .
Contingency Fees
8. The Panel’s Discussion Paper looks at contingency fees and percentage fees as possible alternative methods of billing. The ALRC looked at these briefly in the Managing Justice report. The ALRC supported the extension of litigation lending and contingency schemes in federal jurisdiction provided such schemes are carefully controlled to protect consumers and the administration of justice.[4] The ALRC did not support the introduction of contingency fees based on a percentage of the outcome in any matters.
Cost Disclosure
9. The Panel’s Discussion Paper raises the issue of cost disclosure mechanisms. The ALRC found that appropriate cost disclosure can assist with settlement providing clear evidence of the risk of litigation.[5] While most jurisdictions have practice rules or laws which require lawyers to inform clients of potential costs, and the basis of calculating those costs, the ALRC favoured mandatory costs disclosure as exists in NSW. The ALRC made the recommendation that all States and Territories should enact similar legislation to harmonise the requirements for solicitors and barristers to disclose actual, expected or charged fees, along with the following additional requirements:
-
solicitors and barristers must advise their lay and professional clients from time to time, and not less than once every six months, of costs incurred to date and provide an estimate of the future cost of resolving the settlement; and
-
nondisclosure of estimated costs should constitute grounds to cancel or rescind the agreement and a finding of professional misconduct.[6]
Professional Conduct and Reasonable Costs
10. The ALRC considered there would be significant value in professional associations setting criteria relevant to determining whether a fee is ‘reasonable’ and invoking sanctions for breach.[7] In response to the ALRC proposal, the Law Council of Australia submitted that it is implicit in legal professional legislation and professional conduct rules that legal practitioners should charge fees which are reasonable in the circumstances. However, the ALRC considered that clear inclusion of a requirement and guidance in practice rules would be symbolically important in confirming the profession’s concern and responsibility in this area. The American Bar Association model rule on reasonable fees was seen as an appropriate guide in drafting such a practice rule for Australian conditions.[8]
6. The ALRC recommended that such a practice rule should explicitly state that charging unreasonable fees could constitute unsatisfactory professional conduct and gross overcharging could constitute professional misconduct.[9]
Consumer Information on Legal Costs
11. The ALRC found that the application of competition policy is one way of reducing private legal costs, but that it is essential that consumers be able to make informed choices about their spending on legal services.
The lack of consumer information on the costs of legal services is a major factor inhibiting downward pressure on legal fees, and thus retarding access to justice. Consumers informed about the range of legal services available and the likely charges and time commitments are in a better position to negotiate fee agreements and make informed choices about legal advisors.
This type of information is already available to institutional consumers of legal services such as government departments and agencies, insurance companies and other large corporations who are repeat players. It assists them to compare, assess and negotiate fees, and to drive hard and effective bargains with lawyers. Major repeat purchasers of legal services are also in a position to seek tenders for legal work, or to establish their own inhouse legal offices.
The information available to consumers of legal services is asymmetric. Due to disclosure requirements, people may have better, early information from their solicitor on how much their matter will cost, but little additional information to compare this with or to place it into a meaningful context.[10]
12. The ALRC therefore made a number of recommendations aimed at enhancing consumer awareness of reasonable legal costs. These included:
-
Designating a body to assume responsibility for providing independent advice and information to consumers on consumer issues relation to the provision of legal services.[11] While the Office of the Legal Services Commissioner documents emerging issues relating to the provision of legal services and draws them to the attention of government and professional bodies, provision of advice and information directly to consumers on costs issues is a separate function that is not presently delivered.
-
Publication by legal professional associations and legal services commissioners of the range of charge rates for lawyers in different specialities, firm sizes (including for firms situated in the central business districts, and suburban and regional areas) and fees charged by barristers of varying experience.[12] The ALRC was told that such information is already collected by the legal professional associations.
13. The ALRC noted that these types of recommendations may raise concerns about price collusion. However, the ALRC considered this is not a problem in the legal services market as this kind of information on legal costs is already available but is restricted to institutional or informed consumers. The aim of the recommendations is to better inform uneducated consumers.
[1] This report is available online at <www.alrc.gov.au>.
[2] P Williams et al, Report of the Review of Scales of Legal Professional Fees in Federal Jurisdictions (1998) Attorney-General’s Department.
[3] Australian Law Reform Commission, Managing Justice: A Review of the Federal Civil Justice System, ALRC 89 (2000), [4.87]–[4.99].
[4] Managing Justice report, [5.21]–[5.26].
[5] Managing Justice report, [4.24]–[4.37].
[6] Managing Justice report, Rec 26.
[7] Managing Justice report, [4.38]–[4.50].
[8] See American Bar Association, Annotated Model Rules of Professional Conduct (3rd ed) (1996), r 1.5. This rule is set out in the Managing Justice report at [4.48].
[9] Managing Justice report, Rec 27.
[10] Managing Justice report, [4.65]–[4.67] (footnotes omitted).
[11] Managing Justice report, Rec 29.
[12] Managing Justice report, Rec 30.