Costs Guidebook A Solicitor s Guide to Costing

Transcription

1 Costs Guidebook A Solicitor s Guide to Costing Fourth Edition Revised July 2006 to incoporate, in Chapter 8 only, changes required by the Legal Profession Amendment Act 2006

2 Costs Guidebook A Solicitor s Guide to Costing Fourth Edition Revised July 2006 to incoporate, in Chapter 8 only, changes required by the Legal Profession Amendment Act 2006 The Law Society of New South Wales ACN Phillip Street Sydney NSW 2000 DX 362 Sydney Tel (02) Fax (02)

3 Contents 5 Foreword CHAPTER 1 6 Managing the engagement with the client Initiating the engagement Altering the engagement Terminating the engagement CHAPTER 2 12 Setting costs in a deregulated environment Introduction The process of setting charge out rates Some suggestions for packaging of costs Debtor control CHAPTER 3 21 Costs guidelines Important note Guidelines 22 Personal injury claims under $100, Workers compensation 23 Probate 24 Motor accidents costs CHAPTER 4 25 Disclosure requirements and costs assessments 25 Costs - The scheme of the Act 26 Disclosure 26 To whom must disclosure be made? 27 What information must be disclosed to clients? 28 Personal injury damages matters: Legal Profession Act s When is disclosure not required to be made? 29 Consequences of failure to disclose 30 Two types of costs agreements 31 Uplift fees 32 Costs agreements generally 32 Can disclosure and a costs agreement be in the same document? 34 Billing 34 Costs fixed by regulation Part The costs assessment scheme generally 36 Assessment of solicitor/client costs 37 Assessment of Party/Party Costs 38 Costs Assessors 40 Recovery of Costs of Costs Assessment 40 Review Panels 41 Appeals 41 Administration of the Costs Assessment Scheme

4 CHAPTER 5 43 Goods & Services Tax 43 Law Practice and own client 43 Disbursements 44 GST and leases 44 GST on fixed costs 44 Party/party costs 45 GST on workers compensation CHAPTER 6 48 Maximum Costs in Personal Injury Matters and Reasonable Prospects of Success in Litigation 50 Reasonable prospects of success CHAPTER 7 51 Motor Accidents and Workers Compensation Claims 51 Motor accidents 51 (1) Claims under the Motor Accidents Act (2) Motor Accidents Compensation Act 1999 (MACA) 53 Contracting out of the scale 55 Workers compensation 55 Statutory compensation claims 55 Claims made prior to 1 January Claims made from 1 January Assessment of costs 60 Work injury damages claims 62 Contracting out of the scale 63 Restrictions on awarding party/party costs 63 Assessment of costs CHAPTER 8 65 Precedents and Instructions 65 Forms Costs Assessments after 1 October 2005

5 FOREWORD We take pleasure in providing to the profession the Fourth edition of the popular Costs Guidebook. This edition was necessitated by the extensive reforms to costs disclosure and allied matters introduced by the Legal Profession Act 2004 which came into effect on 1 October Uniform legislation has been introduced in Victoria and Queensland, and the other States and Territories will soon follow. We wish to thank Ms Michelle Castle for providing the initial draft which has been further extensively revised by the Costs Working Group. The chapters have also been rearranged so as to provide a logical sequence. The precedents have been collected together and placed in a separate chapter -chapter 8. The Costs Working Group of the Law Society is responsible for the current revised edition of the Costs Guidebook. Members of the Committee are: Mr Raja Balachandran, Ms Maxine Evers, Mr David Ehrlich, Mrs Valerie Higinbotham, Mr Alan McMurran, and Mr Terry Stern. The contribution of each of these Committee members is sincerely appreciated. We also thank Ms Pam Hall for her ready and willing assistance in typing the numerous drafts of the revision. The Fourth edition is available and can be viewed at, or downloaded from, the Law Society's website. The advantage of an on-line edition is that it can be revised as and when legislative changes are made or judicial decisions clarify the law. Due to the paucity of judicial decisions in this area of the law practitioners may find the Costs Guidebook of assistance when arguing appropriate costs orders before a Court or Tribunal. June McPhie President Law Society of New South Wales Gordon Salier Chairman Costs Working Group Costs Assessors Rule Committee April, TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 5

6 CHAPTER 1 Managing the engagement with the client 1.1. Initiating the engagement The importance of communication A solicitor entering into an engagement with a client triggers a range of rights and responsibilities for both parties which, once embraced, may be difficult to alter or terminate. Merely completing a costs agreement or supplying a written costs disclosure may comply with the Legal Profession Act 2004 (the Act), however there should also be clear and plain language communication with the client. The purpose of this chapter is to encourage practitioners to review their engagement management, client communication and risk management procedures. In this sense, engagement has a far wider meaning than a solicitor s retainer. The term points to the range of responsibilities referred to above, for both parties. It focuses on the process of providing the service, rather than the legal product itself. It is primarily the solicitor s responsibility to manage this engagement process. Carefully and sensibly implemented, the requirements under the Act provide an opportunity to improve dramatically the standard of practices and the level of solicitors professionalism and to significantly reduce complaints and claims. The cornerstone of this improvement is a high level of ongoing communication with clients. The retainer is a two-way communication: what the solicitor will do for the client, what the solicitor expects from the client, what the client can expect from the solicitor, how long the matter is likely to take and what the work is likely to cost and how conduct of the matter will be communicated to the client. The disclosure documents and costs agreements provisions impose considerable change for many practitioners, in the way they set up the client engagement, manage client expectations throughout the matter and vary or close the engagement and communicate this information in a manner that can be easily understood by the client. The requirements of s309 of the Act also place the onus on solicitors to hone their skills in estimating the value of their professional work. The former reliance on scales has disappeared in most areas of practice. Solicitors have no alternative except to develop appropriate and financially sound bases for charging, and to make disclosure, and in some cases make ongoing disclosure, as provided for by the Act. The first step Difficulties arise when practitioners do not manage properly the engagement from the outset. Properly managing an engagement does not necessarily mean immediately signing a costs agreement or providing a written disclosure. It might for instance, mean refusing the work, not because of any lack of technical competence, but because accepting the engagement is not appropriate for the firm at the time. These issues should be checked: Is the matter suitable, given the workload in the firm and on the practitioner? Can the practitioner spend the time required to undertake the matter and also manage proper communication with the client? Is the client committed to the task, especially as to what will be required of the client, and to mutually acceptable terms of engagement, including payment? Does the firm or the practitioner have the technical expertise and resources to undertake the matter? 6 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

7 Does the matter or the client pose any risk to the firm or the practitioner? To take one example, would accepting instructions give rise to a conflict of interest? Can the practitioner or the firm meet the client s objectives and expectations? There are situations in which it is reasonable and prudent to decline to undertake work for a client. It seems unnecessary to say that if a practitioner is unable to handle a matter, it is far better to refer the client to another practitioner, rather than risking the possibility of a matter being handled badly. However, an analysis of LawCover claims indicates that an inability to decline work may be quite common. Check the Revised Professional Conduct and Practice Rules which are available on the Law Society s website, on accepting work. If you decide to decline a matter, explain to the client why you have made that decision. A client who is told that the firm cannot take on a particular matter (because of, for example, existing work pressures, or a possible conflict, or because it is outside the firm s expertise) may well recognise the logic in what you say and be happy to return for subsequent work. At the beginning, think about the end The genesis of many complaints or claims is at the start of an engagement. The Society finds that many complaints arise from misunderstandings which could have been easily resolved by solicitors giving adequate information to clients at an early stage in, or during, a matter. Examples of common problems, many of which could be prevented by keeping the client properly informed, include the following situations, where the client: Misunderstands what is going to happen in the matter, and has unreal and/or unjustified expectations. Feels that the solicitor is not readily available to speak to the client or is not advising the client of progress at reasonable intervals. Does not know why there is a delay. Feels shunted about the firm from one solicitor to another. Is not given adequate information about costs. Is not informed that he or she may be entitled to legal aid. Does not understand what has happened to money given to the solicitor and does not understand the solicitor s bill or statement of account. Feels there is a long delay in recovering costs from the other party. Does not understand why some of his or her solicitor s costs must be paid by them and not the other side, when the case has been won. Does not know that a barrister has been briefed and objects to paying the barrister s fee. These are common complaints where lack of communication is often the problem. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 7

8 Who is the client? Initial communication may involve establishing who the client is, particularly when acting for a business entity rather than an individual or individuals. It is essential that the costs agreement or disclosure document includes the correct client. Your attention is drawn to the Married Persons (Equality of Status) Act 1997 which became operational on 1 March Under the provisions of the Act spouses have legal capacity as if they were not married. When acting for both spouses in any transaction it is advisable to make it clear in writing, preferably in the costs agreement or disclosure document, that for all purposes of the solicitor s retainer: (1) each spouse is considered the agent for the other for the purposes of giving instructions binding on both; (2) if a conflict of interest arises at any time between the spouses the solicitor will terminate the retainer and the parties will be liable to pay the costs incurred by the solicitor up to that time. Unrealistic expectations A client s expectations of the legal system need to be realistic. If they are not, the client will be dissatisfied and a complaint or a claim will follow. The only way for a client s expectations to be understood is for the practitioner to take the time to determine what the client s expectations are. Practitioners should be sure that the client does not have an inflated idea of the firm s ability to make some event occur or to win a case. Properly communicating what is possible, is an important step in allowing the client to make an informed decision to proceed with a matter. Having decided to undertake the matter, the arrangements should be documented. Why should I go to the trouble of documenting the terms of the engagement? The use of a retainer agreement, either in one of the precedents suggested later, or in some other practical form that complies with the Act, is sound professional practice, and good business sense. Disclosure of costs is also a requirement under the Act. As noted previously, although disclosure is mandatory (save in specific circumstances: see When is Disclosure Not Required to be Made ), a law practice may enter into a costs agreement: s 322 LPA. However, if the practitioner wishes to contract out of any relevant scale imposed, there are additional legislative requirements in respect of Motor Accident, Work Injury Damages and Civil Liability matters that make it mandatory to enter into a costs agreement complying with Division 3 of the Act, as well as give Division 2 disclosure. These areas of practice also require additional disclosure as noted at Chapters 7 & 6. Failure to comply with these requirements will mean any agreement to contract out of the regulated costs ( scales ), in these matters will be unenforceable and the regulated costs will apply. An agreement distinguishes the legal issues from the management of the matter, and ensures that there is a shared understanding between solicitor and client about objectives, scope, timing and costs. Importantly, it should also identify how and when variation and completion of the engagement will occur. In situations where the practitioner has assessed that a potential client may cause a problem, the agreement can appropriately document the communications between the solicitor and the client which lead up to the acceptance of the engagement. 8 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

9 Solicitors who customarily use retainer agreements report a definite increase in client satisfaction with matters generally. This is often described as customer comfort and obviously has tremendous potential for improving the client base, and the overall goodwill value, of any practice. The use of an agreement can also be a useful management tool for the practice, in that it can provide a reference plan for review of progress and supervision by partners of those matters handled by employed solicitors. Probably the greatest advantage of an agreement is that it can serve to prevent problems before they arise. If it can be used as an early warning device by either the client or the solicitor, so that if a matter is not progressing according to plan, or a substantial increase in costs appears likely, this can be recognised at an early stage and remedial action, such as a review of the costs estimate, or a revision of the scope of the instructions, can be carried out. Clients expectations are seldom static. Risk management must be considered. Written agreements define the arrangements as they were agreed by both parties at the outset of the matter. They provide a reminder to clients to seek changes to the terms of engagement when necessary, and to define what was told to the client when the practitioner was retained. Without a written document, it is difficult to defend a complaint or a claim. Variation and termination Clients should be made aware at the outset of a matter, of the circumstances in which the engagement may be varied or terminated. These should be expressed in the retainer, together with a clear statement that the client will be liable for the solicitor s costs in those circumstances. This is a necessary part of communicating what the solicitor requires of the client. It is also useful in understanding the client s commitment to the matter. Variations and termination (where necessary) should be accompanied by appropriate communication from the practitioner. The Revised Professional Conduct and Practice Rules deal with some of the issues which can arise when a retainer is varied or terminated-for example, the giving of appropriate notice and the retention of documents. It is important that, at the start of a matter, the client understands that he or she will be required to assist the practitioner to help the client. Practitioners should consider the following potential causes for termination, where express provision should be made for the client to pay costs up to the date of termination: the client fails to pay any fee or other monies requested by the solicitor in accordance with the agreement; the client fails to provide the solicitor with proper instructions (including information) as requested by the solicitor within any reasonable time specified; the client refuses to accept, contrary to the solicitor s advice, an offer of settlement which the solicitor considers reasonable; a conflict of interest arises or is discovered which prejudices due performance by the solicitor of his or her obligations to the client; the client requires the solicitor to conduct the matter in an improper or unreasonable manner; the client gives the solicitor misleading information relating to the matter; the client fails to co-operate with the solicitor or to appear for any medical or other expert examination or fails to attend a court hearing without good reason. the client changes representation, or decides to act as a litigant in person - this is particularly important in conditional costs agreements. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 9

10 1.2 Altering the engagement Legal matters frequently change as they progress. The Act requires that any increase in estimated costs is to be disclosed as soon as practicable after the practitioner becomes aware of the increase. It is crucial that the on-going communication suggested in the previous section be able to handle any variation in a matter which would change the client s expectations or understanding of the work which will be done. It is important to pause and re-address the matters which were raised by both the client and the solicitor when the work commenced. When a matter changes its scope or character, the client should be informed of the changes and the impact of those changes on fees and costs. Practitioners should watch for situations where the matter undergoes a subtle but definite change, to the point of being an entirely new engagement. For instance, a failed mediation which leads to litigation or a contract settlement leading to rescission. Professional obligations and risk management issues must be kept in mind. Hurried, undocumented and uncommunicated changes could easily turn into a contested bill of costs, a complaint or a claim on LawCover. 1.3 Terminating the engagement Termination of an engagement requires that the practitioner establish a clear and reasonable basis for no longer acting in a matter, and for making it clear that the practitioner has ceased to act. The grounds on which a practitioner might withdraw from a matter, should be communicated at the outset. The communication should also indicate what the solicitor considers would be the normal completion of the matter. Risk management issues arise when a practitioner seeks to withdraw from a matter before it is concluded. Practitioners are advised to read the Revised Professional Conduct Rules and in litigation matters, be aware of the relevant Court rules which have specific notice and documentary requirements in this regard. It is important for practitioners to recognise and react to signals which indicate that the practitioner should disengage. These might include: a client refusing to take advice given; a client failing to answer letters; the matter becoming beyond the competence of the practitioner or firm; the practitioner s position being compromised by a conflict of interest. When situations of this sort occur, it is important to communicate with the client and discuss options. Disengagement also requires writing. If the client believed that more work was to be done, a letter from the practitioner closing the matter and enclosing a final bill would rectify this misunderstanding. Even where the client merely sees the solicitor for a brief consultation, it may be appropriate for the solicitor to write to the client making sure that nothing more is expected by the client. Summary Entering into an engagement with a client triggers responsibilities and rights for both parties. These should be documented as soon as possible, to ensure that the parties understand what is required of them. The establishment of appropriate documentation should be undertaken immediately. 10 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

11 Further information Practitioners are becoming increasingly aware of risk management issues. The Risk Management Education Program conducted by LawCover has helped to bring engagement issues into sharp focus, and practitioners are encouraged to use the opportunity offered by RMEP and similar facilities to develop their skills and knowledge in this area. Further information is available from LawCover. The Ethics Committee of the Law Society is available to consider general ethical issues and concerns relating to the practice of Law and the Professional Conduct and Practice Rules. The Committee consists of ethics officer of the Society and members of the profession who are committed to upholding high ethical standards within the profession. Further information is available from the Ethics Section of the Law Society see 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 11

12 CHAPTER 2 Setting costs in a deregulated environment Preamble: If you do not have the requisite accounting skills or expertise, it is important to consult with your own accountant for independent advice as to the costs of your business and the basic accounting principles to consider when reviewing your profitability and likely expenses. 2.1 Introduction Apart from the mandatory disclosure requirements under the Legal Profession Act (see Chapter 4), fees and charges are deregulated in all areas of practice save for those remaining regulated costs in areas such as Workers Compensation, certain personal injury actions under the MAA legislation, certain Probate fees and some litigation matters. These are referred to at (insert page details). There is however always the right of clients to ask for an assessment of any bill and the obligation of assessors to apply a fair and reasonable test in determining what charges should apply (see Bouras v Grandelis [2005] NSWCA 463]. It is therefore most important for practitioners to price their fees effectively, correctly budget for revenue and expenses and control debtors so that they comply with the estimates given and their own disclosure. The attention of practitioners is drawn to the fact that if charges are to be levied on a minimum unit of time basis, this should be made clear to the client in the disclosure document or costs agreement. If this has not been done the authorities suggest that the practitioner will only be able to charge for the actual time spent. Estimates provided may need to be amended during stages of work being performed and so as to meet the practitioner s on-going obligation to disclose, as the work develops. Clients have 60 days after the bill is given to apply for assessment, even if paid s.350(4). So checking compliance with estimates given and disclosed billing procedures is essential. 2.2 The process of setting charge out rates (This section is published with the kind permission of the FMRC Legal, Armidale). 1. Costing and Pricing Your Legal Services Knowing the cost of production for each fee earner in the practice is an essential component of determining how you set your fees. This applies equally to hourly rates and fixed fee matters. If your practice operates with a profit motive, you need to know what your cost of production is and add an appropriate profit margin. The components of the cost of production are: staff salaries (support and fee earners); the non-salary overheads of the practice; 12 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

13 notional salary of the principals in the practice. Representing this graphically: $150 $130 Profit Staff salaries Non-salary Overheads Principals notional salaries The benchmarks in Section 7 indicate that the average profit margin of a legal practice after notional salaries of principals are included is between 10 15%. This example shows the cost of production for a blended chargeable hour in the practice is $130, and the firm sells its time at a blended rate of $150. Based on the above example there are two implications for the practice: 1. To generate the desired profit, the firm must charge and recover $150 for every chargeable hour it produces. 2. The cost of producing fixed fee work will be entirely dependent on the time it takes to conduct the matter. For example, if it takes 5 hours to complete a conveyance it will cost the practice $650 (5 hrs x $130). If the firm were to take 10 hours to complete the conveyance it would cost $1,300. The above example is based on a firm-wide cost of production, however cost of production attaches itself to an individual, not an activity. When determining the cost of production in the practice it is appropriate that the fee earners absorb all of the practice costs (their own salaries, support staff salaries and non-salary overheads). Some people will have a higher cost of production than others by virtue of their higher salaries, or their longer working hours (full-time vs part-time). The following pages provide a methodology for calculating the cost of production for each fee earner in your practice. This information can be used for setting fixed fee work as well as being a tool for determining individual fee budgets. Example Practice (i) Step 1 Determine fees required to return a profit and to breakeven. Retail Breakeven Profit $300,000 Salaries $450,000* $450,000* Overheads $300,000 $300,000 Principal salary $200,000 $200,000 Total Fees Required $1,250,000 1 $950, TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 13

14 Notes: Profit: Insert the amount of profit you wish to earn in excess of notional salaries paid to principals *Salaries: Include salaries for all employees (support and fee earners) in the practice. For the above example: Solicitor salaries: $150,000, Paralegal salaries: $30,000, Support staff salaries: $270,000. Total employee salaries: $450,000. Overheads: Total non-salary overheads Principals salary: Provide a notional salary for all equity principals in the practice (ii) Step 2 Determine Base Cost of Chargeable Hours Fee earners only Do not include support A Salary ($) B Work. Hours C = A/B Cost per WH D Chg Hours E = CxD Cost Chg Hrs Partner 100,000 2, ,200 60,000 Partner 100,000 2, ,200 60,000 Solicitor 60,000 1, ,100 36,667 Solicitor 50,000 1, ,100 30,556 Solicitor 40,000 1, ,100 27,500 Paralegal 30,000 1, ,000 20,000 Base Cost Chargeable 234,722 Hours (3) Notes: Fee earners: list the fee earners only Salary: salary of the particular fee earner Working hours: this is the annual hours spent at work. Multiply the hours per day by number of days per week by 46 weeks of the year. Eg, 9 hours x 5 days x 46 weeks = 2,070 hours Cost per working hour: Divide column A by column B (salary divided by working hours) Chargeable hours: Budgeted annual chargeable hours. Calculate as per working hours above. Eg: 5.5 hours x 5 days x 46 weeks = 1,265 hours Cost per chargeable hour: Multiply column C by column D Base cost of chargeable hours: Sum all of column E Step 3 Determine the Overhead Factor (OHF) Retail Breakeven Fees Required $1,250,000 (1) $950,000 (2) Base Cost of Chargeable Hours $234,722 (3) $234,722 (3) Overhead Factor (OHF) 5.33 (1/3) 4.05 (2/3) 14 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

15 Notes: Fees required: as per calculated fees for retail and breakeven in Step 1. Note the references to items 1 & 2. Base cost of chargeable hours: as calculated in Step 2 at item 3. Overhead factor: divide fees required (1 & 2) by the base cost of chargeable hours (3). (iii) Step 4 Determine Rates and Budgets Charge Rates Fees budget Fee earners only Column C x Column C x Column D x Column D x OHF OHF rate rate Partner R t il $266 B k $202 R t il $319,527 B k $242,840 Partner $266 $202 $319,527 $242,840 Solicitor $178 $135 $195,266 $148,402 Solicitor $148 $112 $162,722 $123,669 Solicitor $133 $101 $146,450 $111,302 Paralegal $107 $81 $106,509 $80,947 $1,250,000 $950,000 Notes: Charge Rates: For each fee earner multiply their result in column C at Step 2 by the retail or breakeven overhead factor calculated at Step 3. The retail rate will show the rate that needs to be charged at the number of budgeted chargeable hours (column D, Step 2) to generate the desired total practice income. The breakeven rate is the cost of production for each fee earner. Fees Budget: For each fee earner, multiply their result in column D at Step 2 by the retail or breakeven charge rates you have just calculated. This will provide an indicator of the fees to be generated by each fee earner. Your Practice (iv) Step 1 Determine fees required to return a profit and to breakeven. Retail Breakeven Profit $ Salaries $ $ Overheads $ $ Principal salary $ $ Total Fees Required $ (1 $ (2) 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 15

16 Notes: Profit: Insert the amount of profit you wish to earn in excess of notional salaries paid to principals Salaries: Include salaries for all employees (support and fee earners) in the practice Overheads: Total non-salary overheads Principals salary: Provide a notional salary for all equity principals in the practice (v) Step 2 Determine Base Cost of Chargeable Hours Fee earners only Do not include support A Salary ($) B Work. Hours C = A/B Cost per WH D Chg Hours E = CxD Cost Chg Hrs Base Cost of Chargeable Hours (3) Notes: Fee earners: list the fee earners only Salary: salary of the particular fee earner Working hours: this is the annual hours spent at work. Multiply the hours per day by number of days per week by 46 weeks of the year. Eg, 9 hours x 5 days x 46 weeks = 2,070 hours Cost per working hour: Divide column A by column B (salary divided by working hours) Chargeable hours: Budgeted annual chargeable hours. Calculate as per working hours above. Eg: 5.5 hours x 5 days x 46 weeks = 1,265 hours Cost per chargeable hour: Multiply column C by column D Base cost of chargeable hours: Sum all of column E Step 3 Determine the Overhead Factor (OHF) Retail Breakeven Fees Required $ (1) $ (2) Base Cost of Chargeable Hours $ (3) $ (3) Overhead Factor (OHF) $ (1/3) $ (2/3) 16 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

17 Notes: Fees required: as per calculated fees for retail and breakeven in Step 1. Note the references to items 1 & 2. Base cost of chargeable hours: as calculated in Step 2 at item 3. Overhead factor: divide fees required (1 & 2) by the base cost of chargeable hours (3). (vi) Step 4 Determine Rates and Budgets Fee earners Charge Rates Column C x Column C x OHF OHF R t il B k Fees budget Column D x Column D x rate rate R t il B k Notes: Charge Rates: For each fee earner multiply their result in column C at Step 2 by the retail or breakeven overhead factor calculated at Step 3. The retail rate will show the rate that needs to be charged at the number of budgeted chargeable hours (column D, Step 2) to generate the desired total practice income. The breakeven rate is the cost of production for each fee earner. Fees Budget: For each fee earner multiply their result in column D at Step 2 by the retail or breakeven charge rates you have just calculated. This will provide an indicator of the fees to be generated by each fee earner. (The above information is provided by courtesy of FMRC) Some final words on expenses Meeting the total expenses of running the firm and producing the required profit requires that targets for the variables we have described are always met. If the firm has little cash reserves, an adverse movement in expenses, charge out rates, chargeable hours or fee earners could destroy it. It is dangerous to set targets at the start of a period and then not review performance on a regular basis. These variables must be watched closely and any adverse movement countered very quickly. If you do not already regularly review the performance of your firm, you should seek assistance immediately. In a deregulated environment, where the margin between hourly expense rates and charge out rates will be under pressure, there is little room for error and a real need for measurement of performance. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 17

18 2.3 Some suggestions for packaging of costs The billable hour is under increasing attack in less regulated markets. To know and understand the hourly expense and charge out rate of each fee earner is crucial management information. However, merely charging by the hour is not necessarily the best way to charge costs to a client. The charge out rate is only one of the factors which will determine what a client is ultimately charged for a matter. For instance, the time spent in completing a matter may be excessive or the total costs may be excessive in relation to the value of the matter referred by the client. The charge ultimately made to the client is a matter of discretion and will depend on the circumstances of the retainer. The statutory scales endeavoured to find a common price for certain work, regardless of the attributes of firms or particular matters. They packaged these prices in a number of ways. It is essential that you determine how you should best package your fees for marketing to your client group. Some common alternatives are described below. A. Hourly rate Definition: A fee charged for every hour worked by a firm in relation to a matter. The charge out rate might be for practitioners only and include all overheads and support staff or rates might be established for every person who works on the matter, including clerks and paralegals. Discounts might be offered to high volume or regular clients. It is important to ensure that only actual time spent is charged having regard to the work done. The unit of time should be small enough to record actual time spent accurately. Suitable for: Seldom totally suitable for clients, unless they have a longstanding and close relationship with the firm. With this proviso, suitable for firms in matters where the extent of work required is unknown at the outset of the retainer (eg complex litigation). Advantages: for firms: complete recovery of expenses with a profit margin for all work performed. Disadvantages: Possibility of disputes over the number of hours worked. Focus on charging rather than value for the client. May breed inefficiency. May lead to perception that a legal service is not value for money. B. Fixed fees Definition: Standard fee for common, defined services. May be collected in a lump sum in transactional matters upfront or upon completion. Suitable for: any matter where the steps in the transaction are well understood by the solicitor (eg some criminal defense or PI litigation) or where the transaction consists of standard steps (eg conveyancing, incorporation, wills). Consequently useful where the firm specialises and is able to estimate the work involved in a type of matter with some certainty. Advantages: High level of consumer acceptance. Low potential for client disputes if the fee and the service to be provided are adequately communicated. Defined profitability for the firm for each service. Rewards efficiency. Disadvantages: Reduced profitability for firm if the service subsequently becomes complex or is not fulfilled efficiently by the firm. 18 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

19 C. Project rate Definition: Similar to a fixed fee, but an agreed fee for a particular service. Fee established and agreed on each occasion. May be more suitable for commercial work. Suitable for: any matter where the steps and work are able to be defined at the outset of the matter (eg drafting contracts). Advantages: See fixed fee. Disadvantages: See fixed fee, but more dangerous because the definition of the work is less certain. D. Hourly rate with cap Definition: As for hourly rates, but with the client and practitioner agreeing to a maximum total bill Suitable for: As with hourly rate, but where the work required is capable of being estimated with some certainty. Requires a careful definition and disclosure of what work is to be done so that any additional work, outside of the original brief, can be charged for. Advantages: Client costs disputes less likely than with a straight hourly rate. Rewards efficiency. Disadvantages: Requirement that the firm estimates the maximum work required or builds in a margin for uncertainty. Any inefficiency reduces profit. E. Blended hourly rate Definition: A uniform hourly rate averaged amongst the staff associated with a project, depending on the time each is likely to be involved. Suitable for: See hourly rate. Advantages: Some possible marketing perception advantages and simplification of billing. Disadvantages: See hourly rate. Also overall quality of work could be affected if assigned to less qualified staff, without senior supervision. Decreased profitability if senior staff required for longer than estimated. F. Conditional fees Definition: A fixed fee, established at the start of a matter, payable only on successful completion which must be defined. The Legal Profession Act specifies the basis on which conditional arrangements are permitted. It is not permitted in claims for damages, criminal proceedings or family law proceedings. It should be remembered that the maximum premium the practitioner can charge is 25% on the professional costs otherwise billable see s 324 of the Legal Profession Act. It is important to define clearly in the costs agreement what will be regarded as success for the purpose of the conditional costs agreement and also to decide and agree with the client whether disbursements are to be paid by the client, even if fees are not to be charged. Suitable for: Litigation, certain insurance matters. Advantages: For client: no win, no payment to client s own solicitor. Allows deserving cases to be heard, with less risk for the client. For practitioner: develops business which might not otherwise have been generated. Results are rewarded. Disadvantages: No certainty of income or recovery of expenses in a case. Practitioner bears a proportion of the risk. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 19

20 2.4 Debtor control Remember you cannot claim interest on your outstanding unpaid fees and disbursements unless: 1. Your disclosure document or costs agreement provides for the charging of interest, and 2. your bill refers to the right to charge interest and the rate of interest. With the introduction of GST it is vital that practitioners introduce an effective mechanism of debtor control. Possible ways to achieve this include: (a) Billing quickly after the work has been done (b) Billing on an interim basis (eg monthly) rather than at the end of the transaction (c) Obtaining money in advance on account of disbursements and counsel s fees (d) Quickly taking steps to apply for assessment of costs/or issuing debt recovery proceedings if bills remain unpaid for an unacceptable period of time. 20 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

21 CHAPTER 3 Costs guidelines 3.1 Important note The following are guidelines only. Practitioners and clients, or prospective clients are free (subject to statutory limitations) to negotiate fees on any basis whatsoever, including bases which are not at all related to the following guidelines. Persons consulting these guidelines should understand that they have not been the subject of any authorisation or approval by the ACCC, the Trade Practices Tribunal or the Legal Profession Advisory Council. 3.2 Guidelines General matters Except as expressly provided by the LPA 2004 costs are deregulated in NSW. Areas where costs are expressly regulated are discussed below in The Legal Profession Reform Act 1993 provided for the abolition of the Legal Fees and Costs Board. Once the legislation was proclaimed, all legal costs were deregulated for legal work undertaken within the jurisdiction of New South Wales, except for specific types of legal work covered by regulations and statutory limitations (see below). In setting fees, practitioners now need to have regard to their own practices, and to prevailing market conditions, to determine pricing for their legal products and services. Practitioners should have regard to the cost of delivery and to the value of the work being done, and should be aware that under current legislation costs assessors will only be bound by what they determine to be reasonable costs and expenses. What is reasonable may well vary according to the opinion and experience of individual costs assessors. In determining a fair and reasonable amount of costs in law practice/client assessments a costs assessor must take into account the matters prescribed by s363(1) of the Act and may take into account the matters prescribed by s363(2) of the Act. It is the practice of costs assessors in law practice/client assessments to call for the law practice s file(s). Practitioners should have regard to these factors when setting their fees, and in management of all files, given that clients are now more likely to seek assessment than in times past. A complete file record will most certainly help in any assessment process. Pro Bono Work and Payment of Costs Conditional on Successful Result Party/party costs (if awarded) are by way of indemnity to the party entitled to the order as to their payment. If the party entitled to the order was never under any circumstances liable to pay to that party s solicitor costs in any event then as no costs have been incurred by that party, that party is unable to recover costs on a party/party basis even pursuant to any award. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 21

22 It would therefore seem a solicitor should, when acting on either of the bases referred to under this particular heading, provide a disclosure document to preserve entitlement to party/party costs. It should be borne in mind that if a solicitor has agreed to accept the retainer from the client on the basis that he will not charge, he cannot recover costs from any party required to indemnity the client in respect of as a result of litigation. Party/party costs are by way of indemnity of costs incurred and if no costs have been incurred by the solicitor then there are no costs to recover Regulated costs At the time of preparation of this edition of the Costs Guidebook, the following costs are regulated by legislation. These costs are: Personal injuries claims under $100,000; Motor Accident costs; Costs outside New South Wales jurisdiction (eg Commonwealth Courts and Tribunals); It is possible to contract out of the regulated costs for the above matters. Workers Compensation Costs; Probate costs; Costs of obtaining default judgments and enforcement of judgments; Notaries fees; Costs in the Victim s Compensation Tribunal; Victim s Compensation (Victim s Support & Rehabilitation Act 1996) costs. Professional costs in relation to the above matters are limited to the regulated costs. Personal injury claims under $100,000 Division 9 of the Legal Profession Act 2004 provides that if the amount recovered on a claim for personal injury damages does not exceed $100,000 costs for legal services are fixed as follows: in the case of legal services provided to a plaintiff maximum costs are fixed at 20% of the amount recovered or $10,000, whichever is greater; in the case of a defendant maximum costs are fixed at 20% of the amount sought to be recovered by the plaintiff or $10,000, whichever is greater; an additional amount of 15% or $7,500 (whichever is greater), in circumstances where, in the District Court, a matter is referred to arbitration and an order is then made for a full or partial rehearing: s 338A(2), or where the District Court decision is the subject of appeal: s338a(3). These amounts are cumulative, so where both circumstances occur, the additional amount can be claimed twice, ie, once for each circumstance. It is possible to contract out of the fixed costs on a solicitor/client basis, but only by complying with s339 LPA and cl. 116 of the LPR. 22 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

23 Workers compensation Workers Compensation costs are regulated under s329 LPA and clause 113 LPR. For claims made from 1 January 2002, costs are regulated under the Workers Compensation Regulation This Regulation covers both work injury damages claims and statutory compensation claims. These costs are event based with lump sum allowances (see clause 84 and Schedule 6 of the Workers Compensation Regulation 2003). They will be dealt with by a Registrar of the Compensation Commission for both solicitor/client and party/party assessments. Any outstanding claims made before 1 January 2002 will also be dealt with by the Commission as the Workers Compensation Court ceased operations from 31 December GST may be added to the costs recoverable (see Chapter 5 on GST) It is not possible to contract out (except in work injury damages claims) and disclosure must still be made under Part 11 of the Legal Profession Act. Probate Section 329 LPA and cl 114 LPR regulate costs for Probate matters. Schedule 4 of the LPR 2005 provides the scale of costs for the obtaining of probate or letters of administration. GST may be added to these costs. It is not possible to contract out and disclosure must still be made under Part 3.2 of the Legal Profession Act The costs of providing legal services in the administration of estates has not been regulated, though the power to do so exists in s 329(1)(e). Default judgments and enforcement of judgments Section 329 LPA and clause 112 LPR regulate costs for obtaining default judgments and the enforcement of judgments. The scales of costs are contained in Schedule 2 of the LPR GST may be added to these costs. Public Notaries Fees are set by the Society of Notaries in accordance with s12 of the Public Notaries Act, GST may be added to the fees. Jurisdictions outside New South Wales Professional costs remain regulated in Commonwealth courts and tribunals. These courts include the: High Court of Australia; Federal Court of Australia; Family Court of Australia; Federal Magistrate s Court (in part); AAT. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 23

24 On a solicitor/client basis it is possible to contract out of the scales of costs set by the rules for each of the above courts. Disclosure must be made under Part 3.2 of the Legal Profession Act 2004 for the High Court and the federal courts, with the exception of the Family Court. Chapter 19 of the Family Court Rules 2004 governs costs agreements in Family Court matters. Accordingly, the precedent Disclosure Forms and Costs Agreements in Chapter 8 are not suitable for matters in the Family Court. Motor accidents costs Costs are deregulated for accidents which occurred prior to 4 October For accidents which occur after 5 October 1999 costs are regulated by s149 and s150 of the Motor Accidents Compensation Act 1999 and regulations made thereunder, namely, the Motor Accidents Compensation Regulation The scale is based on banding and allows lump sum costs based on the stage the matter has reached. This scale is applicable to both solicitor/client and party/party costs excepting complex claims which are exempt under s92 of the Motor Accidents Compensation Act GST may be added to the costs allowed. It is possible to contract out of the scale but it is necessary to comply with the express requirements of the MACR 2005 and the LPA Victim s Compensation Tribunal The Victims Support and Rehabilitation Rule 1997 sets the scale of costs to be applied for professional costs. GST may be added to the fees. Disbursements are additional to the professional costs with a maximum amount payable. 24 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK 4TH ED, REVISED JULY 2006 l

25 CHAPTER 4 Disclosure requirements and costs assessments Since the first edition of the Costs Guidebook was published in 1994, there have been many changes to the law governing solicitors costs in NSW. This, the fourth edition, was necessitated by the enactment of the Legal Profession Act 2004, which commenced on 1 October The Legal Profession Act 2004 was the result of the National Legal Profession Model Laws Project, which, from 1994 onwards, examined the regulation of the legal profession in Australia with a view to the creation of a national regulatory scheme for all Australian jurisdictions. Costs - The scheme of the Act Prior to 1994, the law governing solicitors costs in NSW had remained substantively unchanged for almost 100 years. The enactment of the Legal Profession Reform Act 1993, which amended the Legal Profession Act 1987, and commenced operation on 1 July 1994, brought about substantial changes to the law in NSW governing solicitor s costs. It: introduced the concept of disclosure of costs; abolished the Legal Fees and Costs Board and deregulated costs in most jurisdictions (though maintaining them in workers compensation matters, and re-introducing them in probate matters and in certain debt recovery proceedings in the Supreme, District and Local Courts); changed the law in relation to costs agreements, and introduced conditional costs agreements, abolished the system of taxation of costs, replacing it with assessment of costs by costs assessors appointed by the Chief Justice of NSW; Distinguished between applications for assessment of a bill of costs (practitioner/client) and assessment of costs payable pursuant to an order of a Court or Tribunal (Party/Party). In the next ten years, there were many changes, some substantial, that impacted upon legal costs. The changes included: the reduction of regulated costs in workers compensation matters in 1996; the enactment of the Motor Accidents Compensation Act 1999 and the various costs regulations made under the Act; the abolition of the Compensation Court and the establishment of the Compensation Commission and the re-regulation of costs under that scheme; the introduction of GST and consequent amendments to legislation and practice; the enactment of the Civil Liability Act 2002 and the consequent introduction of maximum costs in personal injuries damages matters in awards of $100,000 and less; changes to the costs assessment system, such as the introduction of the requirement for assessors to give reasons and the introduction of the costs assessment review process; case law interpreting the Act. 4TH ED, REVISED JULY 2006 THE LAW SOCIETY OF NEW SOUTH WALES COSTS GUIDEBOOK l 25