Paying for Legal Services with Time rather than Value: the Billable Hour & its Consequences for Clients

The recent Ontario Court of Appeal decision in Bank of Nova Scotia v. Diemer (2014 ONCA 851) represents a watershed in judicial forthrightness about the many disadvantages of the billable hour model.

While this case involved a receivership under the Bankruptcy and Insolvency Act (R.S.C. 1985), the reasoning and decisions are relevant to growing concerns about the use of the billable hour model in personal legal services.

The Tenacity of the Billable Hour Model

We know that many corporations have rejected external legal services on the billable hour model in favor of in-house counsel, making corporate counsel the fastest growing sector of legal services in Canada.

And know that some lawyers are beginning to explore fixed fee and flat rate models, at least for non-contentious personal legal services (for example)

Nonetheless, 85% of all the legal work done in Canada is still billed hourly, according to Richard Stock, a partner at Catalyst Consulting in Toronto (quoted in a recent paper by Ann Macaulay on the CBA website).

Why the Billable Hour is a Problem for Clients

Now in Bank of Nova Scotia v Diemer we have two judgments – one written by Justice Goodman in the Ontario Superior Court (2014 ONSC 365) and the other (for the majority) by Justice Pepall in the Ontario Court of Appeal (2014 ONCA 851) – that clearly articulate the problems with the billable hour model.

1. Clients buy time spent on itemized tasks, not results or products

“A person requiring legal advice does not set out to buy time.  Rather, the object of the exercise is to buy services.” (Pepall JJ.A. 2014 ONCA 851 at para 36) 

Buying time not services may be superficially appealing to a person without legal training who may not fully understand what their lawyer needs to do in order to help them. So, the argument goes, they can review a laundry list of tasks more easily than they can evaluate the content, efficiency and success of those tasks in achieving their goals.

But such a list is also meaningless to the client if what those tasks achieve and why they are necessary is unclear or unknown. The consequence is that what their lawyers are actually doing for them, and why, becomes more and more abstract for their clients. And, as I have written before in this blog, “just trust me” (aka the lawyer-in-charge model from The New Lawyer (2008)) no longer carries the same weight with 21^st century consumers of any professional service.

2. Value is not the same as math 

“I have concerns about the fees claimed that involve the scope of work over the course of just over two months in what appears to be a relatively straightforward receivership.  Frankly, the rates greatly exceed what I view as fair and reasonable.” (Goodman J. 2014 ONSC 365 at para 44)

Both the motions judge and the Court of Appeal were clear that the responsibility of the court in overseeing these accounts was not just that the numbers added up, but that the price charged was “fair and reasonable” in relation to the work required (citing Re Bakemates International Inc. (2002 164 O.A.C. 84 (C.A.))

This meant that the use of senior counsel (at $950 an hour) on routine matters (including attendance at unopposed motions hearings) was neither fair nor reasonable (there is a separate question about whether any professional wishing to be hired by ordinary Canadians can ever bill him or herself at $950 an hour….)

In assigning appropriate expertise for the task, there is a need for proportionality. Many of the clients I have interviewed over years of research pick up on this. They ask, is it always necessary for a qualified lawyer rather than a well-trained para-legal to complete template forms? Line up to file papers at the courthouse? And just when is it important to have a really experienced lawyer, and when would a competent well-supervised junior be perfectly adequate? Again, this is information that is not forthcoming from the laundry list of tasks submitted as billable hours.

3. The billable hour creates an inherent tension between lawyer and client interests

I do not believe that most lawyers are dishonest in their use of client resources, and I think that most try to be fair about their use of time. However the billable hours model opens up the possible of multiple misalignments between their interests in making a living, and those of their clients. For example,

• The billable hour is used to pressure articling students and associates into long days (and nights) in an effort to make their “target” billable hours (1300 a year in some large firms) (a primary function is “assessing productivity” Pepall JJA at para 37).
• The billable hour model invites gross inefficiencies, including dispersing work among a number of sometimes poorly co-ordinated moving parts, and at worst the absence of a game plan or overall direction in a single file.
• The billable hour model makes overbilling almost inevitable – not because of dishonesty but because of the relentless fractionation of each task with a minimum of 0.1 of an hour (in the Bank of Nova Scotia case, just 11 of 160 entries in the legal bill were for 0.1 or 0.2 of an hour, despite the fact that many tasks were email or phone calls) – a practice that “ …does not necessarily encourage accuracy or docketing parsimony”. (Pepall JJA at para 40).

Given These Problems, Why is the Billable Hour Still the Norm?

Despite these and other problems, the billable hour continues to dominate legal services billing in Canada. Why?

I believe that an underlying reason is the traditional adversarial-paternalistic-formalistic model of legal services. Some of these problems are rooted in archaic court processes and procedures, some in the norms of a profession struggling to adjust to change – but unfortunately each of these elements reinforces the other to sustain a legal services culture that is increasingly out-of-step with the needs of modern consumers, despite the efforts of many hardworking and dedicated lawyers.

But there are other, more specific reasons too:

• The billable hour model is central to the economic structure of the larger firms and the maintenance of its internal hierarchies (ironically, it is also the larger firms that have wider margins and are more likely to experiment with alternative billing arrangements).
• In smaller firms a lack of economic flexibility heightens the risks of uncertainty and innovation. There is little incentive for small firm lawyers to develop alternative approaches when they are not making a lot of money, are already working hard, and lack both the data and the support to try new approaches.

And then there is the stock answer given by so many lawyers to questions about their billing models. They state – and this is obviously true – that lawyers cannot predict with certainty or accuracy how much time and therefore money may be expended, especially where the matter is or is likely to become contentious. It is certainly true that lawyers often lack sufficient data to enable these predictions to be made reliably and “unit billing” depends on accurate estimates.

But like so many of the other stock answers described and criticized in this blog, these reasons are no longer enough – not smart, creative or proactive enough in our access to justice crisis. If we want to address access to justice barriers for ordinary Canadians in 2015 we need to begin to do something about the affordability of legal services. And one important component (and there are others, including who gets to do this work and what it is charged at) in changing the affordability equation is to take seriously alternatives to the billable hour.

Credible Alternatives to the Billable Hour?

Developing alternatives billing models requires a commitment to changing the underlying culture that too readily shrugs off well-known (and now judicially noted) problems with the dominance of the billable hour and its deficiencies for many clients.

Some of the alternatives increasingly discussed include:

• Making a best estimate at the outset, including Plans A, B & C and what each route might cost the client (for example, what would it cost to go to trial? Put it on the table at the outset)
• Meeting regularly – at least once a month – with a client to review the work being done, its cost to the client, and the results – and consider next steps (Plan A, B, C or something different?)
• Offering fixed fee services for discrete tasks such as filing for divorce; responding to pleadings; or appearing at a motions hearing.
• Considering blended fees – some billable hours, some fixed fee elements
• Considering unbundled legal services
• Considering a project management model that places the responsibility for assigning, monitoring and recording time on someone other than the lawyer(s) working on the file

To do any of this, lawyers need to learn to make predictions and estimates that enable both they and their clients to make good business decisions. I As Jeffrey Leon points out (also in Macaulay) “In order to really get good at developing appropriate alternative fee arrangements you have to be able to predict and estimate.”

This is hard, but it’s not impossible. Like all the aspects of change that the legal profession is facing, it will take practice and the development of new skills and tools. For example:

• Enhancements to legal education (for example, courses in the economics of legal practice).

• Far more (and better) data than most lawyers presently have access to on the costs of various tasks in different configurations.

The Client as Partner

Developing billing alternatives requires lawyers to involve the client as a planning partner, to take his financial limitations seriously, and to offer him realistic choices.

This means (regulators please take note) giving clients the opportunity to make their own bargains – to discuss in detail what their expectations will be, the limits of the lawyer’s time, and even a shared understanding of “due diligence”.

A tall order – but this will go a long way towards winning back the trust of the public. And relegating horrific stories like those of cattle farmer Daniel Diemer – and many initially represented clients in our NSRLP database – to the past.