Opinion and Commentary

Making a case for legal billing reform

In his opinion piece for InDaily, Morry Bailes talks about legal billing reform.

Making a case for legal billing reform

The way lawyers charge clients hasn’t changed much in decades, is complex and AI has now entered the mix. Morry Bailes takes some time to explore the hourly rate.

In spite of occasional public discussion, commentary from judges as they evaluate the conduct of parties and lawyers, and a prediction here and there about its changing and evolving nature, legal billing has not fundamentally changed since about the mid-20th century.

The most recent headline on the subject was courtesy of Minter Ellison CEO Virginia Briggs, who questioned whether ChatGPT would have an effect on the billable hour. The proposition advanced by Briggs, correctly so, was one of value and whether hourly billing necessarily reflects value. Far from ChatGPT being the only catalyst, the question of how to best and most fairly bill clients has been around for decades. Naturally, the existence of AI is a prompt to once more address the age old conundrum. Here are some thoughts.

A good starting point is an explainer as to how lawyers can and do charge, because there is more than one way. Let’s start with the hourly rate. This usually involves the notorious six minute (or less) unit of value. An hourly rate is agreed with a client, and time is billed in six minute or less units. Wait you say, that may amount to more than the agreed hourly rate being charged. Although that is a possibility, the reality is that lawyers are ethically bound by common law principles to only bill what is ‘fair and reasonable’, so we ethically should not overcharge, or we risk trouble arising from the neglect of our ethical obligations.

Moreover, what typically happens is in fact the reverse. Most lawyers charge less – and sometimes substantially less – than the hours they are actually engaged on client work. The reasons for this are practical and psychological. It is difficult to ‘capture’ and record everything that is done in a day. Some lawyers are better at it than others, and it is habit-forming, but it is also not nearly as easy as it sounds.

Additionally there is a perpetual fear of being accused of overcharging. Combine that with an empathy for one’s clients, and the typical personality type of  many lawyers, which is to problem solve and help a client, it turns out that in spite of an unfortunate and misplaced reputation as being voracious billers, most lawyers ironically undercharge. I know, I have managed lawyers for over three decades, and trying to run a profitable private law firm is a constant challenge.

The one stark problem with basing legal billing on an hourly basis however, is that it can directly reward inefficiency. Any charge based on time may have less to do with the hourly rate that is struck, and more to do with the number of hours a piece of legal work takes. A client may be financially better off paying a higher hourly rate if they perceive real value. At the heart of what Briggs said was how to best capture the value proposition for clients and how to bill that.

To avoid the scourge of the hourly charge, an alternative is to charge ‘on scale’. The ‘scale’ is a reference to the applicable scale of costs that a court will allow a party involved in litigation to recover from another party, if successful, or charge a client if a lawyer chooses to bill at the scale rate. Some lawyers content themselves with simply charging on that basis, which is usually a combination of task and time billing. It still loosely estimates a legal job on a time basis, and then equates a value.

It can also take into account how difficult a task is. Does it require legal skill, or is it a more mundane task? Although that billing approach may have superficial appeal to a client, such a system has changed little for over a century, and is opaque at best, unless you are intimately familiar with the costing system. It can also lead to being charged more than on an agreed hourly basis, though that is not necessarily the case. Its weakness for a client is that if a scale item cost is fixed, but that item takes less time than if the service was based on an hourly rate, more may be paid in fees for less in input.

The last method that is commonly used by lawyers to charge clients is on a fixed price model, either for one-off transactional work, such as the drafting of a property lease, or fixed price event billing. As to the latter, it can be very attractive to clients to have absolute surety about exactly what will be charged for each stage of a legal process. Equally, the downside is that if your event is fairly ‘vanilla’ and straightforward, what you pay may be to another client’s advantage if their equivalent event is complex and drawn out. It is a model that can have the effect of socialising cost between clients. As to one-off transactions like wills, leases, contracts and so on, they are often dealt with by way of fixed costs agreements between lawyer and client. Once again, if the transaction is simple and straightforward, might it have cost less if billed on an hourly basis?

As a profession we are endlessly frustrated that in spite of occasional pontifications by judges about how we bill, we are prevented from doing what would seem to be the most obvious way to reflect value, bill based on outcome or result, or as a percentage of a job. Take architects, whose services I use. On a commercial job it’s pretty predictable. An architect will charge at or around 4% of the price of the build. It’s perfectly transparent, it is clearly understood and it seems fair. It is everything that the current complexity of legal billing is not.

In the law, for reasons of public policy, lawyers are largely prevented from charging on result – particularly in areas like criminal law, and family law. The concern is that result based billing (such as is often seen in the U.S.) will drive unethical behaviour. And maybe it will. However outside of the class action domain, lawyers have little flexibility in how we are able to bill. And as demonstrated, no one of the current methods of billing is without its flaws.

Lawyers lives are governed by highly prescriptive costs disclosure requirements set out in The Legal Practitioner’s Act and Regulations, common law principles about how we may bill, monitored by the courts, and the ever present fear that owing to a complaint made by a client to the Legal Profession Conduct Practitioner, who is a quasi regulator of the profession, we may have our billing methods and conduct examined in detail. Not that we should be afraid of that. But it becomes quite clear on occasions that a minority of clients utilise the complaint mechanism to avoid paying bills. It is why the hourly rate as a billing methodology is likely loathed more by lawyers than their clients.

Back to ChatGPT, and the value proposition comments by Briggs, why pay a lawyer if the answer can be readily plucked from the ‘mind’ of an AI? That question will ultimately be decided by a client. However, to borrow the old proverb, ‘A man who is his own lawyer has a fool for a client’. I can only say as a lawyer who from time to time needs legal services in areas I don’t practice in, I most certainly would not choose to use ChatGPT!

The potential problems are many. First, not only is Australian law completely different to, say, law in other Commonwealth countries, such as England and Wales, Scotland, Canada, Singapore and so forth, but each state in Australia may have very different laws applying to the same set of facts, as well as different time limits, different (and often subtly different) offences, and even different causes of action. How a layperson is to work out if the AI generated ‘advice’ is jurisdiction-specific is the first very big hurdle. If that obstacle can be overcome, and assuming the ‘advice’ is actually applicable to the jurisdiction, the accuracy of ChatGPT is, well, questionable to say the least. The law requires precision in a way that ChatGPT is unlikely to bring without professional assistance. At least in its present infancy.

It was to that end that Virginia Briggs made some remarks about how clients may perceive value in having ‘advice’ proffered by AI – interpreted by lawyers, for a fee of course. I’m uncertain whether we will ultimately get there. It is true that predictive AI has been used for some time by in-house and corporate counsel at some corporations, to help evaluate if a piece of litigation is worth pursuing, if on the published track record of such actions it is more likely to be won than lost. It is also the case with the medical profession that GPs have been clarifying for patients what they have discovered and diagnosed themselves by using ‘Dr Google’.

At this stage of the game, however, it is more likely that if a client comes to a lawyer bearing the ChatGPT answer to a legal problem or task, they may find themselves persuaded to just engage the lawyer to do the job anyway. Particularly from a litigious point of view, just how successfully AI will lead a self-represented litigant through a court case remains to be seen. One can only feel for the long-suffering judges who will be regaled by submissions produced by ChatGPT and read by humans.

So far as billing clients is concerned however, the increase in AI generated technology and its interaction with the law, and where that may leave lawyer and client, remains unclear. As a sceptic, I very much doubt AI will help clients much. Who it may help are lawyers, who will in turn pass the benefit through to clients in potential cost reduction, as we have done with technology developments over the many centuries the profession has offered its services. Meantime, a little like people buying and using DIY Wills kits, lawyers’ attitudes to clients relying on AI for legal advice will be, I suspect, to wait around to collect the pieces and fix the fallout and residual problems once a client has stuffed their matter up. Often at a far greater cost to a client or client estate than the service would have cost had a lawyer been engaged from the outset.

The ultimate thrust of what Briggs said, however, was less about the impact of AI and more about how to deliver value billing to a client, which also rewards the lawyer. Five or 10 minutes’ advice from a smart tax lawyer might save bucket loads of money. As a client you may be very happy to pay for far more than five or 10 minutes of time. As a lawyer only charging for five or 10 minutes, when the result is game changing for a client, may be unfair, and may lead the lawyer to not offer such uneconomic services in the first place, to the detriment of clients.

It leads to a conclusion that our current billing practices, driven by old rules and regulations, is no longer entirely fit for purpose. The ‘baby may not need to be thrown out with the bath water’ to achieve an outcome that gives the legal profession greater flexibility in its capacity to bill for value, to the advantage of its clients, and deal with the potential ‘black swan’ of AI and its interaction with the law, to boot.

There will be rascals in every profession and in every industry, but the overwhelming majority of lawyers take their role in the administration of justice very seriously, wish to see the best outcome achieved for their client, but make a fair living as well. Value is a two-way proposition. The rules must therefore change to take us and our clients through the 21st century, and beyond.