“I was never ruined but twice: once when I lost a lawsuit, and once when I won one.” – Voltaire
Introduction
Lawsuits are expensive. If you are hiring a lawyer to represent you, it is important to know how much it will cost. Unfortunately, it is not always easy to comparison shop with lawyers, because they can bill in different ways. This article discusses the three main ways that lawyers bill for their services, and offers suggestions for clients to consider before entering into a retainer agreement. As you will see, each option has advantages and disadvantages for clients.
Hourly Rates
The traditional method of billing for legal services is hourly billing, where the lawyer charges the client a set hourly rate for time spent working on the file.
The main advantage of this method is that it is fair and transparent to both the lawyer and the client: assuming that the client has agreed on the hourly rate at the outset of the retainer, the lawyer is compensated only for the actual work done for the client.
Hourly rates also provide a fairly easy way for clients to compare the cost of different lawyers. As with most things in life, however, cheaper is not necessarily better. At many firms, more senior lawyers will charge higher hourly rates than junior lawyers. This is intended to reflect that they have more experience and, theoretically, will take less time to complete tasks. By this reasoning, it can actually be more cost effective to hire the more expensive lawyer.
Of course, the rates that lawyers charge may have nothing to do with their experience. Junior associates at large commercial firms are often billed out at higher rates than very experienced lawyers in smaller firms, especially outside of Toronto.
Disadvantages of Hourly Rates
There are a couple of problems with this method for clients. First, many clients (particularly in personal injury or wrongful dismissal cases) cannot afford to pay the lawyer on an ongoing basis. For many such clients, their main asset is the lawsuit itself, and they will only be in a position to pay their lawyer once they have won their case. Hourly billing will not work for those clients, unless the lawyer agrees to bill only at the end of the case.
It is hard for clients to assess whether their lawyer’s bill is reasonable
Second, most clients (including both individuals and businesses) do not have a clear sense of how much time it should take for a lawyer to complete the steps in a lawsuit. This makes it difficult for clients to budget for legal costs, and makes it very hard for clients to assess whether their lawyer’s bill is reasonable.
This problem can be exacerbated by the fact that, if billing for time spent, the lawyer’s incentive is to spend as much time as possible on tasks. This can be even worse if multiple lawyers are working on the file. This can lead to legal bills spiralling out of control.
One way to limit some of these problems is to ask the lawyer to prepare a budget, setting out their estimate of the time required to complete the various steps in the litigation, along with a timeline of when this work will need to be completed. This will give the client an idea of what to expect before the next bill arrives.
Flat or Block Fees
A second method of billing for legal services is the flat or block fee method. Under this method, the lawyer will charge a fixed, agreed upon fee for services provided. This method is commonly used by solicitors for straightforward matters, like residential real estate conveyancing or preparing wills.
In litigation matters, it is unusual for a lawyer to offer a flat fee retainer for the entire case, as it is very difficult to determine at the outset how much work will be required – will the case settle after an initial demand letter is sent, or will a trial be required? More commonly, lawyers might offer fixed or block fees for completion of various steps in the lawsuit. For example, the lawyer might agree to charge fixed fees on completion of the pleadings, documentary discovery, examinations for discovery, or trial.
The advantage of this method is that it provides certainty for both the lawyer and the client, as the fee for each stage is determined in advance. The major disadvantage is that the fee may be grossly disproportionate to the work required for the completion of each stage, particularly if there are unexpected developments. This can lead to the client significantly over- or under-paying the lawyer.
A second problem with this method is that it creates the opposite incentive of hourly billing – because the lawyer is being paid a flat fee regardless of the time spent, it is in that lawyer’s best interest to spend as little time as possible on the task. This is especially true in cases where the flat fee is too low, so that the lawyer feels that he or she is not being paid for working on the file.
The best way to limit this problem is to negotiate fair block fees in advance, with a mechanism to vary the fees if circumstances change. This is often easier for sophisticated clients with a lot of litigation experience, such as insurance companies or governments, who can assess whether a proposed fee is reasonable based on their past experience.
Contingency Fees
The final method of billing for legal services is a contingency fee agreement. A contingency fee agreement is any retainer which provides that the lawyer’s fee is contingent upon the successful completion of the case covered by the retainer.
A contingency fee agreement could calculate the lawyer’s fee using one of the methods described above (usually using higher rates to compensate the lawyer for the risk that they will not get paid), but it is much more common for the lawyer to be paid a percentage of the amount recovered in the lawsuit. If the lawsuit is unsuccessful, the lawyer does not get paid.
The main advantage of contingency fee agreements is that they allow people with legitimate claims to hire a lawyer when they could not otherwise afford one. These agreements are an important tool in ensuring access to justice. This is particularly important for those who have been severely injured. A second advantage is that, because the lawyer is paid a percentage of the total recovery, the lawyer has an incentive to seek the highest possible award. This benefits both the lawyer and the client.
From the client’s perspective, the main disadvantage of contingency fee agreements is that the lawyer might end up being paid a much higher fee than would be possible under either an hourly billing or flat fee retainer. This is particularly true in high-damages cases which settle before trial.
Contingency Fee Rates
Clients who choose to enter into contingency fee agreements should understand that there can be important differences between these agreements, which can have a significant impact on the bottom line after a successful result. Obviously, the percentage of the amount recovered is important. Currently, there is no cap on contingency fees in Ontario, although rates between 30-33% are typical in personal injury cases.
What About Costs?
Another very important consideration is who is entitled to costs. In Ontario, “costs” are money which the losing party must pay to the winning party as compensation for the expense of bringing the lawsuit. This will include an amount for legal fees and an amount for disbursements, which are expenses incurred by the lawyer or client during the lawsuit. The amount awarded for costs is over and above the amount awarded for damages.
To understand why this is important, suppose that a client settles her case for $100,000. The total amount payable, before any deductions, might look like this:
| Damages | $100,000 |
| Costs | $15,000 |
| HST on Costs | $1,950 |
| Disbursements | $10,000 |
| HST on disbursements | $1,300 |
| Subtotal | $128,250 |
Who gets to keep the costs – the lawyer or the client?
In Ontario, the default position is that the client keeps the costs. If the contingency fee agreement fixes the contingency fee at 30% of the damages, plus payment of disbursements, then the final bill will look like this:
| Damages | $100,000 |
| Costs | $15,000 |
| HST on Costs | $1,950 |
| Disbursements | $10,000 |
| HST on disbursements | $1,300 |
| Subtotal | $128,250 |
| Less Legal Fees | -$30,000 |
| Less HST on Fees | -$3,000 |
| Less Disbursements | -$10,000 |
| Less HST on Disbursements | -$1,300 |
| Total Payable to Client | $83,300 |
Ontario law allows lawyers to recover some or all of the costs as part of their fee, provided that the Court approves the contingency fee agreement. This is called a costs-plus agreement and can have a drastic impact on the client’s recovery. Take the same scenario, but assume that this is a costs-plus agreement:
| Damages | $100,000 |
| Costs | $15,000 |
| HST on Costs | $1,950 |
| Disbursements | $10,000 |
| HST on disbursements | $1,300 |
| Subtotal | $128,250 |
| Less Legal Fees | -$30,000 |
| Less HST on Fees | -$3,000 |
| Less Disbursements | -$10,000 |
| Less HST on Disbursements | -$1,300 |
| Less Costs | -$15,000 |
| Total Payable to Client | $68,300 |
If you are choosing between lawyers and comparing contingency fee agreements, it is important to understand the terms of the agreement being offered. Costs-plus agreements with lower rates may end up costing the client more. In the example above, even if the contingency rate is dropped to 20%, the client still ends up paying more under the cost-plus agreement.
Even with lower rates, costs-plus agreements may end up costing the client more
We want to be clear that there is nothing wrong or improper about contingency fee agreements in general, or costs-plus agreements in particular. Having said this, it is important that clients understand precisely what they are agreeing to, before they sign a retainer agreement. You may wish to get independent legal advice from another lawyer, who can explain the agreement to you.
Disbursements
The last thing you should think about before signing a retainer agreement is: what are the disbursements that I am going to be charged?
Disbursements are expenses that the lawyer incurs on behalf of the client during the case. They include things like court filing fees, money paid to experts, mileage costs, and so forth.
Different law firms often have very different approaches to disbursements, which again can result in significant costs for clients. Some questions to ask:
- Will I be charged for scanning? Many firms scan every document they receive. If the client is responsible for paying this cost, it could be thousands of dollars by the time the case is finished.
- Will I be charged any flat fees? Some firms charge fees for opening or closing a file. These fees can be hundreds of dollars.
- What rate will I be charged for photocopying? Lawyers charge rates ranging from $0.15 to $0.30 per page. Again, over the course of the file this can be a difference of thousands of dollars.
- What other fees will I be charged? Again, these can vary widely. We recently received an account that another law firm sent to their client, charging $50 to burn a CD!
If you are signing a contingency fee agreement, it is also important to know who is responsible for the disbursements if the case is not successful. In some agreements, the lawyer will simply write off those expenses. In others, the client is responsible for reimbursing the lawyer. Since these disbursements can be many thousands of dollars, be sure you understand what will happen if you lose your case.
Help! My Bill is Too High!
If you have received a bill from an Ontario lawyer that you think is too high, you can ask the Court to assess the account. We will discuss that process in a future article. There are strict time limits for assessing an account, so you should speak to a lawyer right away.
This blog post does not create a solicitor-client relationship. It contains legal information only and is not legal advice. In order to obtain legal advice, you must consult with a lawyer.
