By Gerhard Buchner

Clause 35 of the Legal Practice Bill (the Bill) will lead to the close scrutiny of the charging of legal fees by attorneys and advocates, as well as the criteria used for calculating them by the professions and officialdom.

Anxiety was expressed in this regard by a number of prominent members of the advocates’ and attorneys’ professions in the August issue of De Rebus in the article ‘The LPB, costs and fees scrutinised at LSNP workshop’ (2014 (Aug) DR 6).

The party-and-party tariffs prescribed by the Minister for litigious matters, have always been viewed with great scepticism by most members of the attorneys’ profession. Where the tariffs fall short, the short-fall is simply made up by charging attorney-and-client fees.

Everyone will probably agree that tariffs have very little to do with the reality of running a legal practice and the actual costs of rendering a legal service to the client.

Ironically, it is also true, as is pointed out in the article, that the more incompetent an attorney may be the bigger the bill of costs he or she can possibly produce.

The question may therefore be asked: Is there a more practical basis for the calculating or costing of legal services?

In my opinion there is.

Some years ago American clients began to question hourly billing rates charged by their attorneys. This resulted in the appearance of the so-called ‘value billing or alternative fee arrangements – AFA’s’ as an alternative method for charging legal fees instead of hourly rates.

The charging of hourly rates is problematic in that a client, more often than not, has no idea what the service will cost at the taking of instructions. To quote CP Fourie in the above-mentioned article: ‘Would you engage the services of someone who cannot tell you what something is going to cost you because they do not know how long it will take? You too would be afraid, because you do not know what it will cost you.’ In my opinion nothing has damaged the image of the legal profession more than this.

‘Value billing’ is an attempt to calculate the cost of the service to the client in advance and to give the client, at the time of the taking of instructions, a fairly accurate estimate of the costs of the service to be rendered subject to certain conditions.

But how can the costs of the service be calculated in advance to be able to present a client with a fairly accurate estimate of what the charges will be?

The first step is to calculate the number of possible billable hours per annum as follows:

• From the 365 days in the year, deduct the number of days representing all weekends and public holidays. This leaves the number of working days during the year.
• Thereafter, deduct a further number of working days to provide for annual leave, namely, 15 working days (three weeks holiday) or as many days leave as you wish to take.
• Deduct a further five working days to provide for absence from work due to possible illness.

One should then have approximately 240 working days for the year. This is the figure used for the calculations in this example.

It is estimated that the average number of billable hours an attorney can achieve during a normal working day is approximately five hours on average. This means of the 240 working days referred to above, a fee earner will have an average of 1 200 billable hours per annum.

The next step is to calculate an administration contribution per fee earner as follows:

It is important to remember that in this context a ‘fee earner’ is also any staff member that deals directly with the clients of the firm, and debits his or her own fees for work done. A litigation professional assistant (PA) or conveyancing paralegal are examples.

To illustrate how the administration contribution per fee earner is calculated, I will use an example of a firm with only two fee earners, which could be a partner and a litigation PA. The calculation is as follows:

• Prepare an expense budget for the firm covering a 12-month period. It must include all the usual expenses such as office rent, leases on equipment, stationery, library, auditors, telephone costs etcetera, including all staff salaries plus a monthly salary for the partner.
• From the total expenses, deduct the total of all the salaries that have been budgeted for (the expense budget without salaries).
• To this balance, after deduction of all salaries including those for the partner, add back the salaries of all the staff that provide services in common to all the fee earners, such as kitchen staff and cleaners, the bookkeeper, the receptionist, the messenger, filing clerks – if there is central filing – a driver or whoever else.
• The total of these expenses which have been added together must now be divided by the number of fee earners, in this instance, two. You now have a figure representing the fee earners’ share of the annual expenses, namely, the fee earners’ annual budgeted administration contribution.

The next step is to calculate the fee earners’ break-even hourly rate as follows:

• To the fee earners’ annual administration contribution, as calculated above, must now be added the annually budgeted salaries peculiar to that fee earner’s department (cost centre). For example, the PA may have two secretaries working for him or her exclusively and the department may have its own filing clerk that is dedicated to work for that department only. The PA’s own annual budgeted salary plus those of the dedicated staff are now added to his or her administration contribution. The same is done in respect of each other fee earner, in our example, the partner.
• Each of the fee earner totals, administration contribution plus salaries of dedicated staff as set out above, is now divided by 1 200, being the number of estimated annual billable hours calculated.
• The figure that has thus been calculated is, therefore, an estimate of what the fee earner should earn per hour during the course of the year to pay his or her own salary and to cover the expenses allocated to his or her department. This is referred to as the fee earner’s break-even hourly rate.

A monthly fee target for the fee earner based on the value of the number of billable hours for his or her department during the month can now easily be calculated. It is done by multiplying the total break-even hourly rate for one day (five hours) by 20 (working days per month) to provide the monthly fee target for the fee earner. This represents the minimum amount of fees that the fee earner has to write and collect monthly to pay his or her own way in the firm.

Alternative fee arrangements or value billing

Although the break-even hourly rate is a hypothetical calculation, it does give the firm some basis for the charging of fees instead of doing it on unrealistic government tariffs or attorney-and-client fee estimates based on totally subjective criteria.

When the break-even hourly rate, as calculated above, is used to bill, it will cover only the break-even costs of the practising fee earner, but it does not provide for any profit.

It is easy to add a profit margin to this hourly rate by increasing it percentage wise, namely, by adding 50% or 100% or whatever is decided on.

A different rate could be calculated for any particular instruction, depending on its complexity and the client’s willingness and ability to pay, as long as the break-even hourly rate is used as the basis for doing the calculation.

These calculations must then be used to enter into a fee agreement with the client in respect of the particular service to be rendered by the attorney.

For the successful implementation of value billing it is very necessary that a fairly accurate estimate is made at the outset of the number of hours that would be needed to complete a matter on behalf of a client. This is not as difficult as it may first appear.

To estimate the average number of hours needed to finalise an undefended divorce action would be fairly easy if one has experience of this type of matter. (A fee agreed with counsel beforehand must always form part of the fee estimate.) The same could apply to the costing of a defended litigation matter. Once you have experience of such matters, a projected time allocation for the different stages of the trial, should not be all that difficult to estimate.

Using an appropriate hourly rate that you have decided on you should be able to calculate an estimated fee for the client to agree to for every stage of the litigation. Remember also to get your counsel to agree on an estimate of his or her fees so that provision can be made for this in your estimate to the client. Below is an example of an architect’s pre-estimated bill which was rendered to a client as part of a fee arrangement at the time of the engagement of his services.

‘We have broken the services down into the seven architectural stages of work. These are as follows:

• Stage 1: Measuring up existing. R 7 750 for delivery of as-built plans.
• Stage 2: Sketch design. R 9 500 on approval of concept.
• Stage 3: Design development. R 10 750 for detailed design drawings.
• Stage 4: Municipal submission. R 21 560 (for submission to council).
• Stage 5: Municipal approval. R 7190.
• Stage 6: Supervision of construction.

A base fee R 2 000 per month for one visit per week.

• Stage 7: Collect the builder’s guarantees. Close the contract.

Note: Any additional services will be charged at R 250 per hour.

Disbursements: Travel charged at R 4,50 per km. Printing is cost + 10%’.

Once you have counsel also co-operating with you by giving a fee estimate for the various stages of the matter, it would be a fairly simple matter to calculate an upfront fee estimate to present to your client. This fee estimate must be set out clearly in your engagement letter which must be presented to your client at or shortly after the initial stage of the taking of instructions.

There are two aspects regarding this procedure that you should be very attentive to:

• The fees you mention in your letter of engagement should always be an estimate and not a quotation. If you quote a fee and the client accepts, you are bound by it. A fee estimate must always be conditional on the right of revision should unforeseen complications arise during the course of the matter. This could be caused by unforeseen complications that will result in much more time having to be spent on the matter than originally estimated. There is always a possibility that something unforeseen can happen during the course of litigation. Your client must not be under any illusion about this. You must incorporate a clearly worded ‘escape clause’ in your engagement letter and your client’s attention must be drawn to this during the taking of your initial instructions*.
• You must debit fees for every stage of the case as soon as the stage has been completed.

Where you have difficulty in obtaining payment from your client you must advise your client in writing that no further work will be undertaken in respect of the matter, until such time as you have received payment. This condition must also be clearly set out in your engagement letter and must be explained to the client at the initial consultation.

You must also ensure that your client accepts the terms and conditions set forth in your initial engagement letter by requesting a written confirmatory reply to it.

Although this method of agreeing fees with your client up front can be criticised, it should be more advantageous than a complete thumb suck based on a number of subjective criteria.

The only possible way of making the civil courts more accessible to the general public, in my opinion, would be to introduce a contingency fee system akin to the American system as is propagated by CP Fourie in the De Rebus article, but subject to certain legislative constraints.

• See 2014 (Sept) DR 24 for more information on engagement letters.

Gerhard Buchner BA LLB (Stellenbosch) is an attorney at Gerhard Buchner Attorney in Johannesburg.

This article was first published in De Rebus in 2014 (Oct) DR 40.