The importance of taking care over fee estimates
By Richard Burcher, Validatum
A recent Legal Complaints Review Office (LCRO) decision, BP v YF (LCRO 142/2010, 24 March 2011, Owen Vaughan) provides a salutary reminder of the importance of taking care with the preparation of cost estimates and the importance of continuing to manage the client’s cost expectations throughout the life of the file.
BP was convicted of indecent assault in 2002. One of the outcomes of that conviction was that the instructor and passenger endorsements on his driver’s licence were revoked and he lost his livelihood by reason of the fact that he was unable to be employed as a bus or taxi driver or operate his driving instructor’s business. Since then, he had endeavoured to have these endorsements reinstated so that he could recommence earning a living. An application for reinstatement in 2005 had failed, as had an appeal in 2006.
In 2008, BP instructed YF (the practitioner) to act on his behalf to again apply for reinstatement. In a letter dated 21 August 2008, the practitioner advised BP (the client) of the intention of LTNZ to decline the application and advised him of his right of appeal to the High Court. In that letter he noted: “We estimate that our likely costs for preparation of evidence and submissions, and appearing on your behalf to present your appeal, are likely to be in the region of $4,000 to $5,000” (noted at  of BP v YF).
The client instructed the practitioner to proceed with the appeal. The appeal was lodged on 10 September 2008, and, in early 2009, an outcome was negotiated with LTNZ whereby both instructor and passenger endorsements were reinstated. The outcome achieved for the client was therefore completely successful.
The practitioner had rendered accounts for the work carried out as follows (in each case, the figures are the fee only, exclusive of GST and disbursements):
|30 Jul 08
|13 Jan 09
|12 Feb 09
|23 Feb 09
This was significantly in excess of the “$4,000 to $5,000” estimate provided by the practitioner on 21 August 2008, resulting in the client complaining to the New Zealand Law Society Complaints Service.
The Standards Committee decision
The cost assessor reviewed the various factors as provided in rule 9.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (Client Care Rules) to be taken into account to establish a fair and reasonable fee. Of these, he determined that some weighting should be given to the result achieved by the practitioner, which was a very satisfactory outcome for the client, given that his reinstatement application had been declined and other practitioners had been unable to achieve this result.
Having regard to all of the factors and, giving some weighting to the result achieved, the costs assessor came to the view that the estimate of $4,000 to $5,000 was inadequate and that a reasonable fee for the entire proceedings would be in the range of $11,000 to $12,000. This resulted in an overall reduction to between 61 per cent and 70 per cent of the fees rendered. No weighting was given by the costs assessor to the existence of the estimate.
As a result, the practitioner’s conduct was found to constitute unsatisfactory conduct and the following orders were made:
- the practitioner was censured;
- the practitioner was ordered to reduce his fees to $12,842.25 plus GST and disbursements, as recorded in the determination;
- the practitioner was ordered to pay the sum of $500 to the New Zealand Law Society in respect of the costs and expenses of and incidental to the inquiry.
The Committee determined to take no further action in respect of the complaint that the practitioner’s accounts exceeded his estimate, citing as the reasons:
- Various file notes relating to the level of the costs and discussions with the client about them, and the possibility of recovery of costs if the appeal was successful.
- The client’s limited means did not mean that the practitioner should have to reduce his costs.
- It was important to the client to have the endorsements to his licence reinstated and this was achieved by the practitioner.
- In all the circumstances, no further action was either necessary or appropriate.
The application for review
The client applied to the LCRO for a review of the decision to take no further action in respect of the estimate for costs. He argued that he should be entitled to rely on the estimate provided and denied being advised in any clear way of the escalation of costs beyond the estimate.
To recap, the bills rendered totalled $17,782.50 plus GST and disbursements, and the result of the Standards Committee decision was that the fees were reduced to $12,842.50 plus GST and disbursements – a reduction of some 28 per cent.
Escalation of costs
The practitioner argued that he advised the client on at least two occasions that costs had been or were going to exceed the estimate. The practitioner asserted that he first raised the issue of a possible increase in costs less than two weeks after the estimate was provided. The file note which recorded the content of that phone conversation referred to the possible need for further evidence.
The practitioner asserted that he raised the matter of costs again several weeks later, when he stated that costs were escalating, and that, from the information he then had, it seemed that costs could be in the order of $12,000 plus GST. The client disputed the practitioner’s evidence on this aspect.
The overall picture that emerged was that the estimate of $4,000 to $5,000 was “so inaccurate that it was irrelevant” (at ). The total fees rendered by the practitioner of $17,782.50 were some three to four times the amount of the estimate. The question to be decided was: who should bear the consequences of that? And would the answer to this change if the client had been warned of the escalation in costs as the practitioner says he was?
In an earlier LCRO decision, Milnathort v Rhayader (LCRO 140/09), the LCRO noted that an estimate must be provided with care. That decision discussed the case of K M Young Ltd v Cosgrove  NZLR 967, and noted “that the party giving the estimate is the expert in the services to be provided and may be expected to be relied upon by the lay person” (at  of BP v YF).
At  of Milnathort, the LCRO stated:
“A lawyer who gives an estimate must therefore do so with care. It is not appropriate for a lawyer to give an estimate to a client where the lawyer knows (or ought reasonably to know) that it is likely that the fee will be greater than the estimate in the client’s particular circumstances. An estimate should be the amount which work of the nature contemplated in the particular circumstances of the client is likely to cost.”
And at :
“It is also relevant that a client will rely on an estimate in retaining a lawyer and it often will not be feasible to cease instructing a lawyer if the estimate increases. A client must be able to reasonably rely on an estimate provided.”
This statement is consistent with the observations of the Court of Appeal in Kirk v Vallant Hooker & Partners  2 NZLR 156 at , where Justice McGechan, delivering the judgment of the Court, stated: “Clients reasonably can expect that they can place faith in estimates”.
The LCRO noted in BP v YF at - that the requirement for a client to be able to rely upon estimates was also discussed in a decision of the Queen’s Bench (Wong v Vizards   Costs LR 46), with Justice Toulson stating at page 49 of that decision that:
“In considering whether a reasonable amount for the work done should exceed what the fee-payer had been led to believe was a worst case assessment, regard should be had to any explanation for divergence. In this case, it has not been suggested that there was any unexpected development between November 1993 and the date of the trial. No satisfactory explanation has been given why the solicitors should be entitled to profit costs exceeding the amount put forward to Mr Wong as their worst case assessment, especially when the trial for which they had allowed ten days was completed in less than eight days.”
The Judge went on to say:
“The question is whether it is reasonable that Mr Wong should have to pay more than twice what he had been led to expect on a worst case basis, without any explanation as to why there should have been such a disparity. I do not think that it is.”
He then noted that:
“Mr Wong has just cause for complaint if, after seeking a reliable estimate from his solicitors as to his potential costs exposure before deciding to take the matter to trial, he should then be required to pay a far greater amount without further warning or a proper explanation for the difference.”
In the present situation, nothing occurred which would have caused a cost overrun. In addition, the cost escalation notified to the client was not notified in writing, and the verbal notifications asserted by the practitioner were disputed by the client.
The LCRO held at  that, in summary, therefore, the situation was as follows:
- There was an estimate provided that even when given was inadequate.
- The practitioner asserted that within two weeks he advised the client that this assessment was going to be exceeded by up to two and a half times.
- The client disputed that he was advised of this.
- That the estimate was going to be exceeded would have been clear to the client when the first interim bill was rendered.
- Nothing out of the ordinary occurred compared to what could have been expected at the time the estimate was given.
- Did the client have a choice?
The LCRO concluded that in all the circumstances, it was unreasonable that the client alone should carry all of the consequences arising from this set of circumstances (at ). The LCRO then turned his mind to the question of how to take consideration of these factors into account.
Justice McGechan at  in Kirk v Vallant Hooker & Partners stated that: “Bluntly, on the question of over-runs beyond estimate the appellant was given ‘Hobson’s Choice’. That is not a choice which should prove conclusive against him.”
A strict approach would be to apply the estimate. However, it must be recognised that estimates are not quotes and some variation is permissible.
It was also reasonable that some weight should be given to the fact that the practitioner was completely successful in achieving the outcome desired by the client. A fair and reasonable fee on this basis, assessed by the costs assessor was a fee of between $11,000 and $12,000.
In all of the circumstances, and in carrying out something of a balancing act, the LCRO concluded that the practitioner’s fees should be reduced to $10,000 for all of the work carried out by the practitioner. This figure was arrived at by starting with the figure of $11,000 - $12,000, which the costs assessor considered represented a fair and reasonable fee; an assessment that acknowledged a weighting for success, but which gave no weight to the estimate.
The LCRO commented that while it is tempting to adopt the position that the practitioner alone should bear the consequences of the $7,000 difference between the practitioner’s high-end estimate of $5,000 and the cost assessor’s high-end of $12,000, it must be recognised that an estimate is not a quote, and the client received services to a value considerably in excess of the estimate.
Therefore, the LCRO shared equally the consequences of the inaccurate estimate to reach a figure of $8,500. In other words, the practitioner was credited with $3,500 being half the difference between the practitioner’s high-end estimate of $5,000 and the cost assessor’s high-end of $12,000.
The LCRO then added the sum of $1,500 to take account of the fact that the client was either advised by the practitioner of the cost escalation, or that he raised no objections when it would have been clear to him by the time he received the first interim bill. The result was an acknowledgement by the LCRO that the practitioner had not been properly remunerated for a job which had been well done, and which resulted in absolute success for the client.
However, this case highlights the need for as much care as possible to be taken by practitioners when providing estimates. Rule 9.4 of the Client Care Rules obliges a lawyer to provide an estimate of fees if required, and to inform the client promptly if it becomes apparent that the fee estimate is likely to be exceeded. This rule reflects the consumer protection objectives of the Lawyers and Conveyancers Act 2006 as set out in section 3(1)(b). If the requirement to provide estimates is not reinforced by a requirement to have care when doing so, and an obligation to adhere to them as closely as possible (unless circumstances develop which alter the basis on which the estimate is given, and those circumstances are communicated to the client), then those objectives will be undermined.
- Rule 9.4 of the Client Care Rules obliges a lawyer to provide an estimate of fees if requested.
- Rule 9.1(j) of the Client Care Rules provides that: “The factors to be taken into account in determining the reasonableness of a fee in respect of any service provided by a lawyer to a client include … any quote or estimate of fees given by the lawyer”.
- Practitioners have an obligation to take all reasonable care in the assessment of the original estimate.
- Practitioners have an obligation to inform the client in writing of any anticipated material departure from the estimate and the reasons for doing so.
- Fees that materially exceed the estimate where the increase is attributable in whole or in part to circumstances which the practitioner knew or ought reasonably to have anticipated may result in the practitioner having to ‘wear’ some or potentially all of the additional cost.
- Irrespective of the regulatory obligations and increasing client pressure regarding the provision of estimates, many legal practices are moving towards the voluntary provision of estimates and fixed prices for strategic reasons. Therefore, practitioners need to obtain essential project management and pricing skills, training and tools to confidently and profitably engage in this.
- Providing estimates and fixed prices can be very beneficial for both the practitioner and the client provided the process is handled correctly.
Richard Burcher is a senior practitioner and managing director of Validatum™ Limited, a legal practice consultancy devoted exclusively to assisting barristers, sole practitioners, and law firms to more profitably and effectively price their work.
NZLawyer extra, edition 32, 19 August 2011