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

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 21st century consumers of any professional service.

  1. 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.

  1. 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.

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Comments (4)

  • Dear Julie: Diary of a Self-Represented Litigant | The National Self-Represented Litigants Project

    […] This week’s guest blogger is an anonymous SRL who wrote me the following message this last week. Their story is typical of the messages we receive on a daily basis at NSRLP. As just a small slice of life as a SRL, this story encapsulates many of the systemic challenges faced by SRLs – even those with legal training – in seeking to access the justice system. It also harkens back to our discussion of the deficiencies of the billable hour model a few weeks ago… […]

    January 27, 2015 at 2:08 pm
  • Rob Harvie

    Quick reply Julie – I have looked into the issue of fixed-fee service – which, to be effective, would require lawyers to have much greater knowledge of what they’re actually doing than they currently have. However, in fairness, much of the A2J efforts of our government, our Law Societies, and our Academia are also suffering a dearth of information about what it is that lawyers actually do and why.

    How much does it cost to run a trial?

    How could that be made more efficient?

    What is the average number of interlocutory applications on any given file?

    How long does a discovery take?

    How much research is required and how much is too much?

    How do you, as a lawyer, balance the need to be economically efficient for the client and the need to “cover your ass” by always erring on the side of “doing more” than doing less?

    Looking into “project management” and a process review strategy called “Six Sigma” which is now slowly finding it’s way into the profession offers answers to improving the ability of lawyers to more fully understand, and therefore more reasonably fix the price of their services. It requires a concerted effort to analyze your practice, and to work in a deliberate way to find the optimal level of efficiency in delivering service. Once you have a complete understanding of what your input costs and time requirements are – only then can you then begin to effectively approach pricing strategies which are more than loss leaders” (see Co-Operative Legal Services in the U.K.) and actually represent long-term, permanent practice modes.

    That’s the good news. It’s possible.

    Now the bad news.

    Lawyers, particularly family lawyers where A2J needs are most acute, are largely burned out and running their practice on “hamster wheels”. As I have commented before, family lawyers, legal aid criminal lawyers and lawyers working on areas of need of low or modest income parties are amongst the lowest paid in the profession and dealing with areas of work where the emotional strains are at their highest.

    The Law Society of Alberta has been collecting data on lawyers leaving the practice – and we are finding that some 40% of lawyers leave private practice to pursue either “in house” work, or non-lawyer work within the first six years of their call.

    So – imagine the remaining family lawyers having the ability to spend the significant amount of non-billable time to:

    a) effectively analyze their practice to be able to put together something more than a “guess” as to what the fixed costs would be for various services required in a litigation stream;

    b) work to go beyond examining what it “has” cost in the past – to then analyze where they could improve on their efficiency to determine what it “should” cost in the future.

    All while running at a dizzying pace on the hamster-wheel of a family litigation practice – and, by the way, while answering ever higher expectations of regulatory obligations by their Law Society, and trying to keep up with the almost daily changes in “established” jurisprudence.

    I think you see the problem.

    What I, personally, would love to see is a collaborative effort to undertake the creation of a fixed fee family law litigation process – utilizing the sort of Six Sigma analysis to help design optimal levels of efficiency benefitting both lawyer and client – where much of the heavy-lifting (analysis) is done by an outside source (University?) in cooperation with a few practitioners allowing them to keep making a living while they work with the study.

    That might then lead to a paper or maybe a book on “How to run the perfect family litigation practice” – including everything from what software to use and how to use it, what staff to hire and how to best utilize them, optimal efficiency for legal research (contract out, do it yourself, trained paralegal?), etc…

    Personally – I think the study and results would actually be a great win/win – lawyers who are more efficient, wasting less time, so earning more potentially while doing less – at the same time, reducing client cost and reducing the great unknown of “hourly billing”.

    The problem, however, it while the wheel needs to be re-invented, looking to over-worked, unhappy, burned out lawyers to re-create it is likely not going to happen any time soon.

    February 4, 2015 at 5:44 pm
  • jkinwood

    Absolutely a superb article on a nasty topic. No one, not even me, is worth $950 an hour. The public is voting by representing themselves because so many lawyers charge insane prices.
    Will things change? They have to. The hourly system is absurd. LSUC suggested fees are ludicrous. I recently dealt with a lawyer who was called 8 years ago and was charging the 8 years experience rate. The problem? She was not practicing law. She was a full time housewife who to quote her “helped out sometimes” in her husbands one man law office.
    The court threw out her costs submissions

    January 28, 2016 at 8:07 pm

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