Incentives under hourly rate fee structure

Considering all types of law, paying an hourly rate for time spent is the most common way for clients to pay lawyers and indeed many lawyers will refuse to work under other types of fee arrangements.

 

If payment is to be by the hour, most lawyers will require advance payment (called a “retainer”) that is then held in a bank account by the lawyer and as work is done on the file the lawyer draws money from that account to pay for the work done. When the money runs out, the client will generally be required to replenish the retainer before the lawyer does further work on the file.

 

There is no doubt that being paid on an hourly basis gives lawyers a financial incentive to prolong litigation and complicate matters.

 

Contracts for so much an hour can lead to work expanding to fill the time available to do it in.

(Usipuik v. Jensen, Mitchell & Co., 1986 CanLII 753 at para. 27 (BCSC)).

 

In one case in which a client applied for review of the bill of a lawyer who was paid on an hourly fee basis (see paragraph 5), the court said the following:

 

In the end I think Mr. Cosburn [the lawyer] constructed a fairly complex castle on a foundation of sand, and that the Blatzes [the clients] tried to point that out to him.

(Blatz v. Cosburn and Associates, 2011 BCSC 670 at para. 7).

 

The court in Blatz v. Cosburn and Associates, 2011 BCSC 670 reduced the account of the lawyer to 1/6 of the amount originally billed to the client.

 

In another case the court criticized a lawyer for spending more time than was appropriate in the circumstances

 

Ultimately, at the end of the day, one has to wonder why it was necessary to spend the amount of time shown in the time sheets for these services. There surely is no need to proceed on the basis that no stone should be left unturned or case unread, no matter how minor a case in the areas of commercial leases or special costs.

(Josephson Angus Barristers v. 662470 B.C. Ltd., 2011 BCSC 749 at para. 47).

 

While lawyers owe fiduciary duties to act in their client’s best interest and provide honest and neutral advice on the merits of the client’s case, clients paying lawyers by the hour should keep in mind that even if the lawyer actually believes the optimistic advice being given about the merits of client’s claim (in the case of a plaintiff) or defence (in the case of a defendant) there will be no personal financial consequence to the lawyer if that claim or defence fails. Indeed, if the client takes the advice that the claim or defence is strong and proceeds to trial on that basis the only thing that is certain (litigation outcomes are never certain!) is that the lawyer will work more hours and be paid more.

 

It is important to again emphasize that it is not being said that lawyers paid on an hourly rate basis will necessarily act on the financial incentive to encourage clients to prolong litigation, but it is worth being aware of the existence of that incentive. The key point being made is that lawyers being paid by the hour regardless of results are specifically not “putting their money where their mouth is”

 

Although there is a financial incentive for lawyers being paid by the hour to be optimistic on their client’s case, it is worth noting that there are other incentives that may motivate lawyers being paid by the hour to give candid, or even pessimistic, advice. A key motivator for any lawyer giving advice is that they do not want to be wrong. An outcome that is contrary to advice given by a lawyer results in the client being dissatisfied and contributes to the lawyer gaining a reputation for giving bad advice. Indeed, some lawyers may even be somewhat pessimistic in their estimates of the client’s chance of success for fear of the ultimate result being worse than expected and then having the client complain that the advice was bad. It is also true that some lawyers, especially good ones, may be far too busy to exaggerate the strength of claims or defences in the hope that the clients will proceed further through litigation, and will have other files to work on when any particular file settles.

 

The foregoing indicates that there may be a balance of forces that lead to a lawyer having an overall incentive to give candid and neutral advice but client’s paying by the hour should keep in mind that their lawyers will not suffer financial consequences of the claim or defence failing, and indeed make more money the further the claim proceeds through litigation.

 

 

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