Review of the Legal Profession Act Final Report
One possible strategy to encourage competitive practices amongst both lawyers and consumers within the existing costs framework is the publication of comparative fee information. However, there may be a danger of such fee information operating as a quasi-fee scale, creating an anti-competitive effect.
The Act creates a scheme for the independent assessment of costs. Determinations of costs by independent costs assessors may be used to resolve disputes about costs, or as a means of ensuring that only fair and reasonable costs are passed on to a third party.
The costs assessment scheme was designed to ensure that assessment was inexpensive and simple. The issues paper sought comment on the features of the scheme, as set out below:
Since the issues paper was released, amendments have been made to the Act by the Legal Profession Amendment (Costs Assessment) Act 1998 to establish panels, consisting of two costs assessors, to review the decisions of costs assessors.
Both individual costs assessors and panels must now given reasons for their decisions in accordance with regulations under the Act.
Costs Assessment and Third Parties
Third parties who have agreed to pay costs as part of contractual arrangements may not apply for costs assessments. Although there is little evidence, third party costs may contribute to market failure in classes of cases where plaintiffs are generally successful, as plaintiffs will have little incentive to contain costs, and defendants will be liable for costs even though they are not a party to disclosure.
One strategy suggested to combat the problem of third party costs is to require disclosure to third parties (such as insurers and mortgagors). However, the strategy is problematic, as it may also allow the more powerful party to intimidate the weaker party and could interfere with the lawyer-client relationship.
Another strategy to control third party costs is the reintroduction of fees scales for third party matters. However, the problems with fee scales generally, also apply to fee scales for third party matters. Fee scales may operate to reduce competition and may frequently be ineffective if consumers are not aware of them. It may be possible to develop scales which reflect market conditions, if suitable benchmarks for market prices in third party matters can be identified.
The Victorian scheme creates a general power in an independent body, the Legal Costs Committee, to set fees for certain categories of matters. If such a scheme were to be introduced in NSW, a public interest test should be applied to fixed costs.
In August 1998 the Justice Research Centre released its report, Claiming Under the Motor Accidents Scheme. The purpose of the study was to discover the factors underlying the claiming rate under the scheme and trends in legal costs in motor accidents claims. In particular, the research sought to ascertain the effect of the deregulation of legal costs on the costs of the scheme. Based on samples of files taken for 1991-92 and 1994-95 accident victims, the report found that the legal costs paid by claimants and insurers to their own solicitors did not change after the Act commenced. However, the amount of costs paid by insurers to claimants’ solicitors, (the proportion of the total costs assessed as party/party costs), had risen.
The Motor Accidents Amendment Bill 1998 includes an amendment to the Legal Profession Act 1987 to provide for regulations to be made under the Act to regulate costs in motor accidents matters.
Since April 1997, disputes involving less than $2,500 have been referred for mediation by the Legal Services Commissioner. Mediation is cheaper than assessment under the costs assessments scheme and may also be an appropriate way to resolve disputes involving amounts larger than $2,500.
Other possible strategies for reducing the cost of resolving costs disputes and increasing competition include:
The views of respondents varied widely on the reforms to the costs disclosure rules and costs assessment, ranging from those who thought that the deregulation of fees had been in general a success to others who believed that the abolition of scales had done little to enhance competition.
The Law Society was generally supportive of the deregulation of costs. It referred to the Keys Young report (a 1997 survey of solicitors, referred to in the Issues Paper) as indicating that a majority of solicitors believed that disclosure was useful in establishing good client relations but that most solicitors found it difficult or very difficult to give a client a fairly accurate assessment of the cost of a matter, except in conveyancing matters. The Law Society was of the view that it was difficult to assess whether disclosure had fostered competition in the absence of more empirical information. However, information on bands of fees could be made available to consumers to help them to ascertain market rates. The Law Society suggested that information could be obtained either through dialogue with the profession or by an independent body, such as the Justice Research Centre, and supported the latter approach. The Law Society indicated that it has commissioned its own study to be conducted in the last quarter of 1998, with the first results expected in 1999.
The Law Society supported the suggestion made in the issues paper that conditional uplift fees are used in matters such as motor accident cases, where the success rate of plaintiffs is very high, and noted that a client might find it difficult to change solicitors where a conditional fees agreement applied. The Law Society considered that there should no restrictions placed on the rights of solicitors to vary estimates because of the unforeseen circumstances which could arise when an agreement was being negotiated.
The Bar Association was of the view that disclosure had fostered the development of a market, to the extent that the consumer has a choice based on price. It pointed out that comprehensive information was freely available about barristers, from material published by the Bar Association, and from solicitors and barristers themselves. The Bar Association indicated that it was unaware that compliance with costs disclosure was low and was of the view that no restrictions should be placed on the ability of a practitioner to revise their original estimate of fees.
The ICA was less positive about the reforms to costs. It noted the absence of measures to monitor the effectiveness of the changes, but stated the view that in the absence of publicly available information about costs, competition would not be enhanced. Moreover, the ICA affirmed the suggestion in the issues paper that many consumers had little interest in containing costs because they were paid by third parties, and that large corporations had more bargaining power and so were better placed to negotiate costs agreements than consumers.
The ICA suggested that all advertising for third party matters include the hourly rates of solicitors. It agreed with the Law Society that the collection of comparative price information was important but suggested that the Legal Services Commissioner supply the information. The then acting Chief Executive Officer of the Supreme Court, Mr Ken Gabb, took a similar view about the success of disclosure and how it might be improved. Mr Gabb noted that the Costs Assessors Rules Committee had commissioned a review of data obtained from costs assessments in order to prepare information about market rates, for consideration by costs assessors.
The Office of the Protective Commissioner took a more radical view. Its position was that disclosure alone provided inadequate protection for consumers and it recommended an amendment to the Act to preclude solicitors form recovery of costs if they did not comply with disclosure. OPC was also critical of the use of conditional uplift fees, indicating that practitioners applied the uplift in cases where there was little risk of loss and that in other cases, did not appear to make a genuine assessment of risk when calculating the premium, but rather charged 25% in most cases. It recommended that the premium be payable only between solicitor and client, unless it was truly in the nature of costs, in which case it should be recoverable as between party and party.
The Law Society recommended that a panel of solicitors review costs assessments rather than a court, a recommendation which was similar to the approach taken by the Legal Profession (Costs Assessment) Act 1998.
Its view was that only experts should be appointed as costs assessors and that in general only solicitors (preferably partners), or barristers who had practised as solicitors and were aware of the charging practices of solicitors, should assess costs. The Law Society advocated the retention of a high degree of discretion for assessors because of the variable included in legal services and the rapid changes in the market. The extensive training given to costs assessors was also noted. The Law Society did not support the reintroduction of scales but did refer to event based costing as a possible alternative to time based costing.
The Law Society supported the establishment of a review panel which would be required to provide reasons in order to provide a right of appeal from assessments. The Law Society supported the mediation of small matters and stated that there was no need to include guidelines in the Act to govern these matters. The Law Society’s view was that parties should be able to elect to have informal mediation. The law Society noted that the limit of $2500 for mediation of costs matters at present is too low as these bills are often too small to be mediated.
The Law Society did not support the abolition of the costs indemnity rule because this would impair the ability of a plaintiff to receive full compensation for their injury. While the law Society noted difficulties created in third party matters for insurers, it did not see a way of avoiding this problem unless the costs indemnity rule was abandoned. It also stated that plaintiffs in these matters were conscious of costs because they were concerned about solicitor/client costs, compared with the award received.
The Bar Association supported the costs assessment scheme and suggested that the absence of complaints about the scheme probably meant that here was no significant need for improvement. There was no justification for the reintroduction of scale fees. While the costs assessment scheme might not be the best means of dealing with disputes in small matters, the Bar Association was of the view that these issues were better dealt with by the court or decision awarding costs. The Bar Association did not advocate mediation of small matters. As to procedural reform, the Bar Association believed that it should be pursued for its own ends, rather than for a collateral purpose associated with the containment of legal costs. The Bar Association rejected the revision of the costs indemnity rule and stated that it was not possible to regard alternative dispute resolution as always saving costs.
The ICA identified several real or potential problems with the cost assessment scheme. It was concerned at the limited rights of appeal from costs assessments [a problem which was addressed by the conferral of a right of review by the amendments to the Act referred to above] and that there appeared to be no information available about consistency between costs assessments. It was of the view that scales of fees should be reintroduced for third party matters for solicitors and barristers, rewarding early settlement. It noted that there were several jurisdictions in which scales applied and that they did not appear to have affected competition.
The ICA also took the view that mediation was appropriate for solicitor/client disputes, but not party/party disputes. ICA also identified as a possible flaw of costs assessment the appointment of experienced practitioners as assessors. Such an assessor might be more inclined to apply a rate they charged for their own work to every practitioner.
OPC recommended that the statutory time limit of 12 months for the parties to apply for assessment be varied to allow extensions of time to be given as a matter of discretion. OPC was of the view that the absolute limit currently applied could lead to injustice, especially for people with disabilities. OPC also stated that the 30 day period permitted for a solicitor to object to a barrister’s bill of costs was unreasonably short. Mr Gabb’s view was that costs assessment was a qualified success, and while it was clear that the scheme had assisted in solicitor/client matter, it was less successful for party/ party costs and was too costly in small matters. It supported an extension of time beyond the 12 month deadline for applications for assessment made by the Legal Services Commissioner, the Law Society Council or the Bar Council.
Mr Justice Windeyer noted the difficulties which arise for third parties, such as mortgagees, lessees and parties to other loan agreements, who are liable to pay costs charged to others by their solicitors. He recommended that the legislation require that parties to leases, mortgages and other loan agreements pay their own costs; and prohibit contracting out of this requirement. His would ensure that the liability to pay for the legal work fell on the client.
PIAC’s position on costs was that because legal practitioners enjoyed a competitive advantage over other service providers, flowing from the reservation of certain work to them, the costs of legal services should be regulated by a scale in the interests of clients. A scale was preferable to comparative fee information because this information would be retrospective while a scale would provide prospective information. PIAC also argued that all third parties who are required to pay costs, such as parties to contracts, should have access to costs assessment.
There appears to be general agreement that deregulation has been a success (with the exception of PIAC). Nevertheless, there may be a number of imperfections in the market which may warrant legislative intervention, including regulation of third party costs and the absence of accurate information about market rates. These shortcomings appear to be compounded by the unwillingness of consumers to shop around. A community education programme to inform consumers of their rights and encourage consumers to find out information before engaging a solicitor or barrister might address this problem.
However, there are significant limitations to costs disclosure which warrant further consideration and which affect the bargaining power of clients. They include the unfettered right of a solicitor or barrister to revise an estimate of costs and the ability of practitioners to make open-ended costs agreements based on hourly rates. Further, practitioners are free to make conditional costs agreements, including an uplift of up to 25%, without informing clients of the likelihood of success in a matter. In cases where success is likely, such as motor accidents matters, the provisions permitting conditional uplifts may mean the solicitors and barristers routinely receive additional fees. It is noted that the availability of conditional fees to practitioners and their clients was introduced with the goal of facilitating access to justice by impecunious clients and engendering competition within the profession. However, concern has been expressed that practitioners are free to make conditional costs agreements, including an uplift of up to 25%, without informing clients of the likelihood of success in a matter. In cases where success is likely, such as motor accidents matters, the provisions permitting conditional uplifts may mean the solicitors and barristers routinely receive additional fees.
Further, the LSC indicated in its submission that the LSC was not aware of any evidence which indicated that the availability of conditional fee agreements had reduced the cost of legal services or enhanced access to justice. Arguments against the use of contingency fees include that they may encourage unmeritorious litigation and create conflicts of interest for practitioners, and compromise the exercise of their obligations to the court and other practitioners.
In addition, the Act provides for regulations or rules to be made, with the approval of the Attorney General, setting out the circumstances in which it would not be reasonable to require disclosure to be made. A Solicitors’ Rule has been made which has the effect of exempting some matters from the disclosure requirements, such as matters where the cost is estimated to be less than $750. This has meant that in many smaller transactions, consumers are not receiving the benefits of disclosure.
Although practitioners can comply with the costs disclosure rules by giving their clients a standard costs agreement, there is limited evidence that a proportion of solicitors are not complying with the disclosure rules. Moreover, since the enactment of the Solicitors’ Rule mentioned above, it is possible that many clients are receiving little information about the obligations of practitioners or their own rights under the Act.
These issues might be addressed by changes to the scheme including a requirement for practitioners to justify any changes in an estimate in a matter and for the fairness of the revision of the estimate to be a matter to be expressly taken into account by assessors. In addition, provision of regular information about costs by the Law Society, Bar Association, or LSC, based on regular surveys of practitioners, would address the information asymmetry between consumers and practitioners as to the reasonable costs in a matter.
Aspects of the costs assessment scheme also require consideration. The Act gives no guidance as to the fair and reasonable costs which may be allowed by an assessor and there are no published documents setting out for the guidance of practitioners or clients the amounts which are likely to be allowed by assessors. It is suggested that guidelines should be regularly published by assessors in order to educate both parties to assessments, the profession and the public about the fair and reasonable costs in a matter. The guidelines would be based on the market rates which generally applied to work performed in certain kinds of matters, and could be developed for different geographical areas. The guidelines should apply especially to transactions where the client is generally a consumer, such as probate, straightforward appearances, and conveyancing. However, consideration should be given to issuing guidelines for any type of legal work. Guidelines could take the form of hourly rates, or might be based on lump sum fees.
A mechanism for setting and reviewing guideline fees could be the appointment of a panel, consisting of both solicitor and barrister members and lay members. Neither assessors, nor solicitors or barristers, would be bound by the guidelines and could vary the amount allowed in any assessment, having regard to the factors already set out in the Act, including the skills, labour and responsibility of the practitioners; the complexity, novelty or difficulty of the matter; the quality of the work done; the place where and circumstances in which the work was done; and the outcome of the matter.
Recent amendments to the Act, introduced since the release of the issues paper, will address many concerns about the review of the decisions of costs assessors.
There appears to be general agreement that mediation is a successful strategy for the resolution of disputes about costs. In view of this, it would be appropriate for the upper limit on the amount of costs in matter which can be referred for mediation, of $2000, to be raised to enable more parties to take advantage of mediation.
It appears that time based costing is widely used within the profession. However, time based costing has the potential to encourage inefficiency. In order to encourage efficiency, and to facilitate price comparison by consumers, it is suggested that solicitors and barristers should be encouraged to adopt event based costing by the Law Society and Bar Association.
12.1 Has the system for costs disclosure fostered the development of a market for legal services? Do consumers have sufficient information to shop around for legal services? Are consumers in a position to judge the quality of a practitioner?
12.2 Has the removal of scales for most categories of legal work enhanced competition within the legal profession?
12.3 Why is the rate of compliance with costs disclosure low?
12.4 What additional information could be provided to consumers to assist them in choosing appropriate legal services?
12.5 Should any restrictions be placed on the use of conditional fees involving an uplift?
If conditional fees are to be retained, whether the Act should be amended to require solicitors and barristers to provide clients with advice about the prospects of success before signing an agreement; and to provide that an uplift cannot be levied on any costs incurred after liability has been admitted.
12.7 Costs Assessment
12.8 Is the standard applied by assessors to calculating costs appropriate? Should assessors have access to, and be guided by, benchmarks for fees in some, or all, categories of matters?
12.9 Is there any justification for the re-introduction of scale fees in any matters?
12.10 Should there be any change to the limited right of appeal from an assessment which currently applies?
12.11 Does the assessment scheme meet the needs of consumers and practitioners in small matters? Is the mediation of these matters preferable? Should the Act give some guidance to mediators in the mediation process?
12.12 What is the role of procedural reform in cost containment? Should the costs indemnity rule be revised? Would the use of alternative dispute resolution contain costs?