Costs: conflict, complexity, certainty and risk

There’s a couple of stories in today’s press which act as reminders of the ethical and commercial pitfalls which await lawyers who get their handling of costs wrong.  In the Law Society Gazette there is a report of a decision by Mr Justice Cranston (former Solicitor General and prior that a commercial law professor).  According to the Gazette’s report a firm that did not comply with the terms in its retainer letter and standard terms of business, and inform the client in writing that a costs estimate would be exceeded was guilty of a repudiatory breach of contract.  The Gazette gives the facts as follows:

[Mr.] Minkin had instructed the firm to represent him in relation to an occupation and non-molestation order obtained without notice by his wife, from whom he had separated. CKFT gave Minkin a cost estimate of £3,000 plus VAT, and he paid £2,000 on account.

The firm then sent the client a retainer headed ‘Non-Molestation and Occupation Order’, with no other indication of what it was undertaking to do, and stating that its overall costs and expenses would be £3,500, plus VAT.

The retainer also said the firm would update Minkin in writing if it appeared that the cost estimate may be exceeded. After the first hearing, the firm sent Minkin a bill for £5,462.50.

When he questioned it, CKFT said the increase was largely a result of extra work, because his wife had unexpectedly rented out the matrimonial home.

Minkin said he could not pay the fees until he had a costs order against his wife. After further correspondence, the firm said it could not continue to act because of the outstanding payments.

A partner for the firm in question is reported as commenting:

The judgments to date are extraordinary and will, if allowed to stand, be seriously detrimental to the profession.

It must be the case that solicitors are, and should be, entitled to suspend services to clients who, without objectively reasonable justification, refuse to pay bills and payments on account which are contractually due and payable.’

Richard Clarke, who represented Mr. Minkin, said:

While the decision turned on the facts of the case, it is a timely reminder that solicitors must ensure any termination of representation is done within the rules.

Although the decision may seem harsh, lawyers write the contract, are trained in the law and have to accept the consequences if they get it wrong.’

For me the case is quite a stark reminder of the different ways in which lawyers and clients see the issue of costs.  I led a couple of studies where we interviewed lawyers and clients about costs (comparing perceptions of contingency fees and hourly fees in particular, see here).  Lawyers saw hourly fees as providing certainty to clients because clients ‘knew how the bill was calculated’.  What they really meant was the client knew the hourly rate (or rates) applicable and that that would be multiplied by the number of hours spent on their case.  The clients we interviewed saw it quite differently: they struggled to remember hourly rates but could remember the estimates of overall costs.  If they could remember hourly rates at all they did not know what work was chargable (or not) or how much time they should expect to be spent on their case.  This tells us, of course, what we already know: the hourly rate is a very poor signal of cost.  It is also probably a relatively weak control on overall cost.  Clients are interested in, and can probably only deal meaningfully with,  the bottom line.  A client presented with a costs estimate should have that cost estimate updated before extra costs are incurred: otherwise, what is it there for?

I have not read the case but it is a little surprising that the firm in this case should claim a contractual right to costs where they have exceeded prior cost estimates without informing (let alone getting the consent of) their clients.  It would be a strange world where a bill constituted an updated estimate of costs.  Costs estimates are a crucial tool in rendering costs intelligble and meaningful to clients and I would say the courts are right to be robust in dealing with firms who exceed them without authority.

The complexities provided by costs agreements are fertile ground for the exploitation of clients.  The inherent conflict between a lawyer’s interest and their client’s interest has to be managed with great care.  Neil Rose’s story in the Guardian about miners compensation complaints is a reminder of the reputational damage done to lawyers when complexity is used to shift cost back on unwitting consumers.  A contract about costs is partly a contract about risk: whether and how the lawyer can shift costs of cases back onto clients is  a vexed topic.  By shifting some costs back to clients lawyers reduce their costs, increase profitabilty and may be able to take some cases that they would not otherwise be able to.  I am a little sceptical about the strength of the last justification and am certain that complexity creates opportunities for opportunism and, on occasion, exploitation of clients.  It is mainly on efficiency grounds, though, that I would like to see regulation require legal fee arrangements to be as simple as possible.  This would minimise the situations where lawyers can shift costs back onto clients and to make the price of legal services as transparent as possible.  It should improve competition.  It is an approach not without problems but it is one which at least makes it more likely that a consumer can purchase legal services with a clear idea of what they going to be charged and, if they are inclined to do so, to shop around.  As I have argued elsewhere complex fee arrangements (something the Jackson reforms may now make inevitable) simply baffle consumers and lead to their exploitation.  When dealing with lay clients, they also usually shift the risk on those least able to bear it.  Mistakenly, I believe, the professions rely on the idea that informed consent can protect the client against unethical fee arrangements.  Would that it were so, but there is no evidence that informed consent works.  It may be that lawyers fail to advise fully on their own fees or clients fail to understand those agreements, but – whatever the cause – we do have a fairly good idea that they do not understand their fee agreements.  Simplicity can help rectify that problem.

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