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Shady Billing: Closing the Hall of Shame

Only “fair and reasonable” fees and disbursements can be charged by lawyers to their clients. This rule is uncontroversial, and applies across the country. Nevertheless, the following billing practices are used by some Canadian firms, and not clearly forbidden by regulation:[1]

  • a retainer contract lists current hourly rates but also provides that the firm can increase those rates as much as it wants, at any point in the future without the client’s further consent
  • a retainer can also allow a firm to both charge for each hour docketed, and charge the client whatever bonus the firm decides is appropriate based on results obtained
  • a partner may perform a task personally, despite knowing that an associate or clerk within the firm with a lower hourly rate could do it just as well and just as quickly
  • disbursements create profit for some firms, because they are charged to clients at rates well in excess of cost (e.g. 25 or 50 cents per page of printing)

(Please add your own hall of shame billing practices in the comments, without naming names.)

Here, I will suggest that regulators should be much more specific about what is and is not fair and reasonable. Unethical billing undermines the reputation of all legal professionals, including the majority who abjure such practices. The ethical pitfalls of time-based billing are perhaps best known (see Woolley and  MacKenzie). However, contingency billing creates its own temptations (see e.g. Hutchinson, Farrow and Devlin & Heffernan).

A fair and reasonable legal fee isn’t necessarily a low fee or one that’s easy for the client to afford. But a fair and reasonable fee must be clearly comprehensible to the average client at the time the client retains the lawyer. It must also reflect the reasonable expectations of the client at the conclusion of the matter. A fair and reasonable fee must be consonant with legal professionals’ fiduciary obligation to not take advantage of superior knowledge to enrich themselves at clients’ expense.

The Rules we Need

Here are a few ideas for putting regulatory meat on the bones of “fair and reasonable:”

  • Every minute that a client pays for should actually have been worked on the client’s matter. Although the practice is common, from the client’s point of view rounding up all 2 minute emails to 0.1 hour dockets is hard to distinguish from a corner store rounding up $2 purchases to $5 charges. Regulation could require a one-minute billing increment, or allow increments of no more than six minutes but require tasks taking less than 3 minutes to be rounded down to 0.
  • Billable hour rates should not change during a retainer. At most, retainers lasting more than one year should entitle firms to small annual increases in the rates tied to the rate of inflation. Showing inexperienced clients a list of billable hour rates followed by small print giving the firm complete discretion to increase them is bait and switch.
  • Every decision or recommendation that costs a client money should be made with exclusive regard to the best interest of the client, and with no regard to the profitability of the firm.  Stating this explicitly in the rules would prohibit billable “churning” that produces no benefit for the client. However it would also deal with decisions that will or might provide a benefit to the client, but not a benefit likely to justify the cost. Examples include: (i) adding a second junior to a file that probably doesn’t need her, (ii) recommending that an expensive but tangential procedural motion be brought, and (iii) spending another 30 billable minutes polishing an already strong factum.
  • This “best interest of the client” rule would also apply in non-time-billed retainers. Some contingency and fixed-fee retainers entitle the firm to an increased percentage of recovery, or a new fixed fee, if a matter proceeds beyond a certain point. The prospect of an increased fee must play no role in the firm’s decisions and recommendations about whether the matter settles before such point.
  • Referrals should be made with exclusive reference to the best interest of the client, and no regard to the referral fee or other incentives available to the referring firm.
  • Disbursements charged to clients should never be a source of profit or other benefit for law firms. The word disbursement, by definition, refers to money that has actually been paid out. Charging the client an amount higher than what was actually paid out is difficult to distinguish from fraud.
  • Of course, it is not easy to calculate the cost to a firm of some disbursements (e.g. printing done in-house). For such charges, regulation should specify a tariff of permissible disbursements, set to reflect average typical costs. “Disbursement” charges to clients for fixed office costs such as internet, scanning, or local phone service should be forbidden.
  • In many provinces, Commentary in the Code says that “what is a fair and reasonable fee will depend on such factors” as “results obtained” and “whether special skill or service has been required and provided.” The Rules should stipulate that these factors do not mean that a bill can be increased beyond the amount explicitly authorized by the initial retainer. Similarly, if a retainer entitles a firm to bill for time spent but also to a success fee, the method of calculation for the success fee must be explicit.

Prohibiting billing practices that are clearly unfair and unreasonable would improve the trustworthiness of all legal professionals. It would also make legal services more affordable, at least for the unfortunate clients who are currently exposed to these practices.

An Ounce of Prevention is Better than a Pound of Cure

Retrospective fee assessment is the primary mechanism of fee regulation in Canada today. Assessors may well strike down the sort of egregious terms identified at the outset of this article, in those cases that reach them. However assessment is problematic for both firms and clients. Clients must typically complain about (or decline to pay) a bill in order to trigger the process. Assessment is unpredictable and time-consuming for both lawyer and client. Both sides would be better off with clear rules for firms to follow, and less reliance on retrospective assessment.

Reforms are being implemented by the Law Society of Ontario to protect contingency retainer clients. Many of the key ideas, including improved disclosure, more certainty, and model retainer agreements, should be adapted to protect other clients as well.

Reform should avoid foreclosing legitimate but unorthodox fee structures that are clearly understood and accepted by clients, especially sophisticated and experienced clients. However, without crossing this line, there is ample room for regulators to (i) implement a “best interests of the client rule, and (ii) explicitly prohibit unethical billing practices of the type described above.

There is a place for “principles-based or “outcomes-focused” regulation, in which the regulator avoids detailed prescription of what must and must not be done. Billing is not that place. Given the explicit conflict between the client’s interest (paying less money) and the lawyer’s interest (receiving more money), and given the information asymmetry that characterizes many lawyer-client relationships, this is a field in which regulators need to be more prescriptive.

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[1] Commentary to the Rules provides a list of factors to determine whether a given fee is fair and reasonable, but it provides no specific injunctions against these or other practices.

Comments

  1. RE: feel free to offer examples.

    Here a some to kick things off:

    Lawyers billing badly | Toronto Sun
    torontosun.com/2014/12/26/lawyers-billing…/81b92832-ea82-41d6-8f9f-a88a069a3cdc
    Dec 26, 2014 – As a result, many go without needed legal advice or represent themselves as litigants in criminal, family and civil courts. One of the biggest reasons for large lawyers’ fees is the use of hourly rates to determine them. An Ontario Court of Appeal (OCA) decision released earlier this month has exposed the …

    Padded legal fees | Toronto Sun
    torontosun.com/2014/01/31/padded-legal…/0443433a-fb1e-41ca-8a29-54d24b5b4758
    Jan 31, 2014 – Why are lawyers allowed to bill their time in increments of tenths of an hour, often with automatic rounding up to two-tenths of an hour? Fees escalate rapidly with such docketing practices and often clients have little to show for them. Why do we allow law firms to bill time for inter-office strategy discussions, …

    [PDF]What’s in YOUR Legal Bill? – FAIR Association of Victims for Accident …
    http://www.fairassociation.ca/wp-content/uploads/2015/02/Whats-in-YOUR-legal-bill2.pdf
    Feb 15, 2015 – Contesting legal fees can be a slow process BY ALAN SHANOFF, TORONTO SUN. Access to justice requires fair legal fees. That makes the right to question a lawyer’s bill and have it reviewed an essential component of access to justice. Clients have the right to have their lawyers’ bills reviewed by a court …

    Legal fees out of control? | Welland Tribune
    http://www.wellandtribune.ca/2013/02/12/legal-fees-out-of-control
    Feb 12, 2013 – There’s also a report of a proposed class action against a Toronto personal injury lawyer following a settlement of $150,000 which generated a legal bill of $110,000 ($60,000 for fees and $50,000 for expenses). In the family law world we have the recently reported case involving litigation between Leanne …

  2. I would be ecstatic if the LSO provided concrete guidance about … Oh, just about anything.

    For example, what’s a reasonable rate of interest in overdue accounts? Look on the LSO site and it tells you basically “YOU CAN’T CHARGE INTEREST except when you can, in accordance with the Rules and the Solicitor’s Act. The Rules themselves just state the same thing, rather than telling you how you can properly do so. The Act says you can, but regulations made be made to govern it – but none have been. And yet lawyers are disciplined for charging too much.

    The OMA sets *non-binding* suggested tariffs for things not covered by OHIP, and offers some guidance on how to calculate a reasonable fee for an uninsured person (the OHIP rate x some multiplier I believe). Surely LSO could offer the same?

  3. RE: “if a retainer entitles a firm to bill for time spent but also to a success fee, the method of calculation for the success fee must be explicit”

    (names deleted and link omitted in compliance with “no names” instruction)

    versus:

    [31] It is clear that Mr. Xxxx did not provide Ms. Yyyyy with any assessment as to what the premium might be. The assessment officer did find that “for outstanding success”, $50,000.00 was the appropriate amount.

    [32] That amount, to one surviving on public assistance, is a staggering premium. While it may be that Mr. Xxxx would have a reasonable expectation of a $100,000 premium, that is not the test. If he expects such a premium, he has an obligation to bring that to the attention of the client, preferably in writing. For his own reasons, as set out in his evidence, he generally does not use a written retainer. That may be honourable, but it is bad business in these circumstances.

  4. Timothy I. G. Hyde

    “Disbursements charged to clients should never be a source of profit or other benefit for law firms”.

    Noel you have opened a can of worms here. To dig themselves out of their $130M deficit LawPRO imposed a $25 transaction levy on lawyers opening a real estate file. The levy was quickly raised to $50 and is now $71. LawPRO levied its insured lawyers but most lawyers, I believe with blessing from the LSUC (LawPRO’s sole shareholder), charge the levy as a disbursement.

    The public, unwittingly and without compensation, re-capitalized LawPRO. LawPRO continues to dip into the E&Fund to keep annual premiums down.

  5. Thank you to all — these are great examples and very interesting to consider.

  6. Hi Timothy

    I offer a few clarifications to the comments in your reply.

    Transaction levies were not used to recapitalize LPIC (as it then was).

    Under the recent changes to the advertising rules, I note that the real estate transaction levy is not on the list of permitted disbursements excluded from a quoted fee (4.2–2.1). Further, where the purchase and/or mortgage is title insured, which is the case for the vast majority of real estate deals today, there is no transaction levy payable.

    The E&O fund is a special purpose fund. In the past, with the approval of convocation after posting the offer for the coming year online, monies were transferred to LAWPRO from the E&O fund as a premium contribution in some years, with the impact of reducing premiums in those years. That accords with the purpose of the E&O fund. LAWPRO has not received transfers from the E&O fund for several years.

    Dan Pinnington
    Vice President Claims Prevention and Stakeholder Relations
    LAWPRO

  7. Timothy I. G. Hyde

    Thanks for commenting Dan.

    That transaction levies were not used to re-capitalize LawPRO will come as a surprise to many who were around at the time of the Strosberg Report. What were they used for?
    Not sure what the new quote rules have to do with the last 20 years of $25, then $50 now $71 levies.
    The transaction levy is only not payable if the title insurer has agreed to your form of Release and Indemnity. LawPRO has successfully litigated its position that this imposes a duty to defend on the titleco. How long until that causes premiums to rise? How much lawyer insurance do consumers need to fund?
    Time does fly but seems to me LawPRO has helped itself to the E&O fund in the last couple of years ($5M as I recall) – I’ll go back through my Annual Reports. Perhaps you can help Dan – would those contributions from the LSUC have been structured as a shareholder loan?
    Best, Tim.

  8. Timothy I. G. Hyde

    This from LawPRO’s 2014 Annual Report:

    “Premiums from the mandatory Ontario errors and omissions (“E&O”) insurance program were $8.8 million higher than 2013 results, primarily due to a $5.0 million premium contribution from the Law Society of Upper Canada’s (“Law Society”) Errors and Omissions Fund”.

    Was easier to find than TitlePLUS revenue numbers. Tim.

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