The Elephant in the Court Room

Third party payers - a warning to commercial lawyers!

The Legal Profession Acts now enacted in the majority of Australian states, have the concept of "third party payers", of which there are two types, associated and non-associated.

 

Associated third party payers are those who are not the client of the law practice, but have a direct responsibility to the law practice to pay the client's costs.  Examples are insurers, companies paying the costs of an employee or director, a father paying the costs of a child.

 

Non-associated third party payers, do not owe a responsibility to the law firm, but rather have a responsibility to the client to pay part or all of the client's legal costs.  Commonly, this liability to pay costs arises out of contractual obligation, examples being mortgages, leases, and other commercial documentation.

 

Yet it appears that the draftspersons of such documentation fail to take the provisions of the Legal Profession Acts into account when drafting the costs clauses.  This is highlighted in the decision of Boyce v McIntyre, a decision affirmed by the NSW Court of Appeal

 

The simple facts were that Boyce (law firm) was seeking to recover legal costs from McIntyre (non-assocaited third party payer) who was responsible for payment of Boyce's client's "reasonable legal costs" pursuant to the terms of a lease between client and McIntyre.

 

There was a cost agreement between Boyce and client which provided for paymet of a fixed fee of $3000, and Boyce advised McIntyre that the estimated legal fees were $3000.

 

McIntyre sought to have the fees assessed and on assessment, the cost assessor held that, as there was no cost agreement between Boyce and McIntyre, the costs should be assessed on the basis of what was "fair and reasonable" and not by reference to the provisions of the cost agreement.  This approach was affirmed both by the Costs Review Panel and by a single judge of the NSW Supreme Court. 

 

In jurisdictions where there are scales of costs (i.e. all other States and Territories other than NSW), the costs would be assessed by reference to the relevant scale of costs or remuneration order.  This is something which needs to be addressed by the draftspersons of commercial contracts.  It may be necessary to have the third party payer enter into a cost agreement with the law firm, but this then makes them an associated third party payer, with all the associated rights of a client to disclosure, to negotiate a cost agreement and to challenge costs.

 

Many clients could be substantially out of pocket due to the differential between actual costs and what would be recoverable on a fair and reasonable, or scale basis.

Perfection is an aspiration not a goal

Perfection is an aspiration not a goal - should be a standard direction for many clients to their lawyers. Yet many lawyers, particularly young lawyers would not understand what it means.  To put it another way, "you don't need a Rolls-Royce when a bicycle will do", a quote from Rio Tinto's General Counsel.

It's all about proportionality - whilst in a perfect world, you would interview every potential witness, review every document, not matter how limited the relevance, and conduct endless interlocutory applications to compel the other party to also produce every shred of evidence, it is a rare matter where this level of work is proportional to the the issues involved.

In Australia, this statement is also now the mantra of the judicial system.  Judges and other judicial administrators have recognised that the system cannot support a perfect world.  Courts do not have the resources to allow every case to be run as the "perfect" case.  Discovery is becoming so enormous, that judges must intervene and limit the categories of documents to be produced.  In the Federal Court, the "rocket docket" recognises that parties can't have unlimited time to get their acts together in compiling and examining evidence.  The combined goals of ensuring parties get a fair hearing, whilst also ensuring disputes are finalised in a speedy fashion, mean that no case will be conducted as the perfect case.

So, it's a matter of focusing on what it most important and for clients, on where there money is best spent. Unless you plan how you are going to conduct the matter, and therefore what work you will focus on, you are in danger of doing the following:

• Reinventing the wheel (a recent example - I was asked to advise on cost orders to be sought, and pointed out that I had given exactly the same advice, on the same matter, about 18 months ago)
• Chasing rabbits down burrows but not the rabbit who is the target (example - researching a point of law that is not in issue)
• Finding the weakness in the evidence or the law too close to trial and only after very considerable costs have been incurred  

Case planning and early case assessment, when undertaken which a clear understanding of what the client sees as necessary for the case, are what is required. 

Hollywood Expectations

Do your clients have Hollywood expectations?  By that I mean, they expect things to happen the way things do in the movies. 

 In the movies the following happen:

• Their lawyer only works on one matter at a time (the client's)
• The lawyer is able to find the case/witness/piece of evidence that magically results in a win for the client
• There is never a discussion about how much it is going to cost the client
• Cases are conducted with the speed of light, with major litigation getting a hearing within weeks of the proceedings being issued
• The other side is always in the wrong
• There is only black or white - nothing is ever grey

It should be pretty obvious that if your client has Hollywood expectations, then you are in trouble unless you can remove the rose coloured glasses and have the client see the real world of a legal case. 

Certainty has a Premium

A front page article in today's Australian Financial Review does not predict the death of the billable hour, but certainly shows its waning in favour.  As Telstra's Will Irving is quoted "Certainty has a premium it didn't have before the global financial crisis".

The clients I advise about alternatives to hourly billing are looking for one of two things:

• The lawyer to have some skin in the game

• Certainty of costs

With the former, there needs to be some value component in the arrangement and agreement about what triggers any value payment.  But the arrangements I see proposed by lawyers tend to be the same old hourly rates with a premium for "success".  Lawyers and clients need to be a bit more creative.  What is the value actually being delivered by the law firm?  For transactional work it may be preparing documents that are approved quickly by a regulator.  For litigation, it may be the accuracy of the initial advice on liability and quantum.  The value payment can be tied to that.

Then there is the true value billing arrangement - not tied in any way to time but solely relating to what the client perceives as the value of the lawyer's work.  The basic question is "how much would you pay me to achieve X?"

This is where there is a real problem for lawyers, as it involves dealing in intangibles - what the client wants and needs, and what their perception of value is, (a complex psychological and sociological question).  Until lawyers can break their thinking of tying value to time spent, they will never develop true value billing arrangements. 

But then we come to certainty of costs.  Generally this is achieved through some form of fixed fee billing, sometimes with a value component.  Fixed fees take work on the part of the lawyer.  The work needs to be clearly scoped.  Project management techniques and costing strategies used by other industries should be utilised to plan the matter and work out fees.  But this work has additional benefits - developing a matter plan enables both lawyer and client to see if the matter is going off track and address this quickly.  Secondly, other options and alternative approaches are often identified during the planning process and these can be explored.

But all alternatives require lawyers to take the leap of faith into the uncertain world of abandoning the hourly rate.  It takes courage, but in these uncertain financial times, clients are looking for lawyers who are prepared to be brave.