Lawyers are discounting fees and moving away from hourly rates, but limits on them taking a share of sums recovered in a dispute may disappear

A recent survey by The Lawyer of solicitors’ hourly rates shows a drop of a third over the past year. While this is an average (not just for, say, construction work), it compares with discounts reportedly imposed on consultants by Tesco and Nakheel (Building, 9 January, 11 May). For lawyers, fee pressures owe as much to major clients’ bulk buying power as reduced demand for practice areas well-supplied pre-recession.

One law firm partner apparently said: “Firms are more concerned with cashflow than pricing”. Turnover is not just the lifeblood of the industry, but of lawyers too.

The survey highlighted increasing pressures on firms to offer alternatives to the established hourly rate. Fixed fees, while not new (and widespread in China), are now more common. It is hard to explain, other than in terms of market practice, why lawyers seem to be engaged less frequently on fixed fees than contractors and consultants. That said, fixed fees are harder to set for disputes work (where scope uncertainties are high), but even then they are possible for elements of continuing cases or entire adjudications.

For disputes there is another increasingly popular alternative. That is the conditional fee that is payable if the client obtains a defined “win” and is usually calculated as a proportion of a base fee. For example, if £200 per hour is the base rate, for a win an extra 50% may be payable (that is, £300 per hour) and for a loss 50% less may be due (£100 per hour). Uplifts of up to 100% are permitted, but the “no win, no fee” agreement is far rarer in commercial cases than it is in personal injury litigation.

A key aspect of conditional fees that makes them attractive to claimants (and also defendants) in litigation and arbitration is that, if they win, the loser (assuming it is solvent) pays the uplift (the extra £100 per hour in the above example). If they lose, their costs spend is reduced (they pay only £100 per hour). However, they may have to pay the winner’s costs, unless they are insured against that risk (for which insurance is available both before and after disputes arise). Thus their cost exposure is reduced by their opponent and their lawyers sharing their costs risk.

For transactional work where there is no loser to pay the winner’s costs or recovery of a sum, alternative pain/gain structures are available, such as a bonus payment if a project is won and a discount if it is not.

For commercial disputes, conditional fees have been permitted since 1998. However, solicitors are prohibited from charging contingency fees for court and arbitration work. Contingency fees differ from conditional fees in that while they are also payable if the client obtains a defined “win”, they are calculated as a proportion of the sum recovered. This may simply be, say, 2% of any sum recovered or a mix of say £100 per hour and 1% of any recovery.

Solicitors are prohibited from charging contingency fees for court and arbitration work. It is hard to see why. If anything, they reflect more closely a party’s success than a conditional fee

This ban produces anomalies. First, while solicitors are often instructed to run court or arbitration proceedings, non-solicitors may act on a contingency basis. Of course, expert and factual witnesses should not be paid in this way as it would give them an interest in the outcome and damage the credibility of their evidence.

Second, solicitors are permitted contingency fees in employment tribunals for which the proceedings are just like litigation. They work well. It is unclear if solicitors are allowed contingency fees in adjudications.

Third, English solicitors are allowed contingency fees in other countries, such as the US and Canada where the use of this payment system is well-established.

Fourth, whatever the controversies surrounding conditional fees, they are permitted and necessary. It is hard to see why contingency fees are not allowed as well. If anything, they reflect more closely a party’s success than a conditional fee for which the uplift is entirely payable or not depending on achieving a single result.

These anomalies should result in Lord Justice Jackson (in his soon to be published recommendations to reform our costs rules) proposing lifting the ban on contingency fees. As in Canada, the winner in litigation should be entitled to recover from the loser the contingency fee except where it exceeds what would be chargeable under a normal fee arrangement.

While many clients still want to pay on a time charge basis, it is to be hoped that a greater range of pricing options remains more regularly available after this recession. Law firms can learn from the industry’s array of pricing options, if not improve upon them.