The art of maximising value – creating alternative fee arrangements
The debate on the value (or otherwise) of the hourly rate has raged for a number of years. Many lawyers appreciate the need not only to add value to the case but also to be seen to be adding value for money. The perception of the lawyer billing limitless legal fees, billed by the hour is one that private practice lawyers have to battle often. It is important, however, that if that is indeed the client’s fear, clients understand that there are compromises to be made and alternatives to be discussed. Some may be more appropriate than others for certain cases or issues, but a fruitful and positive discussion on value (as well as cost) is the key to coming up with the best arrangement to suit both parties. The key to mastering the art of alternative fee arrangements is to know your case.
Lump sum fee arrangements
A lump sum offers certainty in terms of maximum costs exposure for a client, but is it always value for money? Possibly not. In lump sum arrangements, lawyers bear a significant risk of unforeseen events or a change in circumstances. As a result, they would seek to reduce their exposure by trying to factor in these risks into the price. Therefore while a lump sum fee arrangement does have its merits, clients may well end up paying more, rather than less.
When best to use these? For a specific task, such as a ship arrest or a document review.
Tip: If a lump sum fee arrangement is your chosen alternative fee structure, ask your law firm about its experience in that area. Bear in mind that less experience may mean that the law firm is building an element of contingency into its fees due to unknown or unforeseen circumstances. This rule of thumb applies to transactional as well as contentious work. While the drafting of an agreement or series of agreements does not have the unpredictable nature of a litigation, if the law firm does not regularly produce such work then you may find yourself paying more.
Tip: For litigious matters, agreeing lump sums for different stages (also called a fixed fee menu) may be more palatable for all involved. You will obtain a feel for how the case will run and maintain control over the costs, and lawyers retain a degree of comfort from the segmented nature of the lump sum, resulting in leaner fees overall.
Capped fee arrangements
Also popular with clients are capped fee arrangements. These share some of the characteristics of a lump sum fee arrangement. However the fundamental difference is that should the cap not be reached then the lawyer is only paid for the work done. On the other hand, if the cap is reached, the lawyer cannot bill beyond that cap, if that is what has been agreed. In capped fee arrangements the lawyer therefor takes all of the risk. Accordingly capped fee arrangements are usually subject to a set of assumptions (e.g. only three rounds of negotiations on a particular document). Should that matter extend beyond those assumptions then further fees would be chargeable. It is of the utmost importance that the parties agree those assumptions clearly so that everyone knows where they stand. Communication between the lawyer and the client throughout the process is absolutely key in these scenarios.
When best to use these? For a task such as an investigation where the outcome (and therefore its value to the client) is as yet unknown, or when costs need to be prioritised over the end result.
Tip: Capped fees can be straightforward or nuanced. The choice is ultimately that of the client and the firm. An example of this is a “cap and collar” arrangement. This is less complicated than it sounds. A capped fee is agreed together with a target fee. If the actual fees at the end of the case are less than the target fee, the lawyer pays back an agreed percentage of the savings to the client. Whereas if the actual fees exceed the target fee, the client is given an agreed percentage discount on the overrun. There is also normally a total cap on fees.
We have often seen reactions from clients as regards retainers along the lines of “we don’t have enough legal work to merit such an arrangement”. A retainer is a volume based agreement and so the agreed volume can be any amount, even as little as, 5-10 hours per month. Law firms welcome retainers because like any other commercial organisation, they value a regular income stream and it gives the private practice lawyer an opportunity to understand their client’s business. Consequently retainers can offer clients extremely good value for money because they will reflect the clients’ as well as the lawyers’ best estimate of the work likely to be done. With a retainer sketched out and the cost subsequently already built into the budget, clients can pick up the phone anytime to bounce an idea or query off the retained lawyers without having to worry about the resultant charge. Strong relationships between individuals can also grow out of such fee arrangements.
When best to use these? When clients do not have an in-house legal team and/or clients find that they would benefit from regular second/legal opinions, such as during frequent contract drafting and negotiations.
Tip: If you choose to enter into a retainer, make sure that the type of work to be done is clearly defined in order to safeguard against a situation whereby the law firm may consider the nature of the work to be outside of the agreed scope and thus subject to its’ usual hourly rates. Once again, open communication between client and law firm is absolutely key.
Tip: Make sure the retainer deals with fee arrangements in the event of a sudden change in anticipated workload. This is in order to avoid exposure, once again, to usual hourly rates. For example, if the retainer envisages 10 hours’ work by the law firm per month and 20 hours’ work per month is actually performed then the agreed cost of such an overrun can be included to the retainer agreement in advance.
There are plenty of other alternative fee arrangements available, or more complex versions of the ones mentioned above. So don’t be reluctant to consider any of them, and don’t be afraid to use your imagination - you never know, you may well end up creating a masterpiece.
This article was co-written by Alexandra Bailey.