Are guideline hourly rates misguided?

The Civil Justice Council (CJC)’s final report on guideline hourly rates (GHR) was published on 30 July 2021. The Master of the Rolls subsequently accepted the CJC’s recommendations and requested they be implemented. It is expected the revised guide to the summary assessment of costs will be in use as of 1 October 2021.

The former GHR

Before the introduction of the new rates, the GHR were last fixed in 2010, although there was a review in 2014 which resulted in no changes being made. The practical usefulness of the GHR has therefore declined as the gap between them and real retainer rates has steadily grown.

A fundamental idea underpinning the GHR regime has been that a firm’s geographical location should have a direct bearing on the applicable guideline hourly rate, and therefore an impact on potential cost recoverability. However, this approach is coming under increasing scrutiny.

The importance of geography

In its final report, the CJC acknowledged higher London rates have historically reflected higher overheads. This has underpinned the weighting of rates by geographic location; the fact that the economic reality of a firm’s overheads should be taken into consideration when deciding the applicable guideline rate.

But is it still the case in 2021, in a post-covid 19 world, that the geographic location of a firm’s offices is a main driver of overheads, and something that should have such a bearing on the applicable guideline rate?

Since 2010, when the GHR were last fixed, legal firms have increasingly sold and delivered services online. In addition, firms now regularly make use of ‘virtual offices’, in order to have a presence – and a meeting venue – in a prestigious or convenient location, without the cost of maintaining a full office there.

More recently, and in particular in the wake of covid-19, firms have increasingly adopted remote and flexible working practices. Court reforms and new ways of working have also been introduced to respond to the challenges brought about by the pandemic.

In this increasingly digital world, with reduced office attendance and physical contact, it is reasonable to question whether the GHR should still be concerned with the geographic location of fee earners.

A subject for future review

That the location of fee-earners should be irrelevant and geographical areas abolished is an argument that was made CJC during the consultation period. However, the CJC’s response is simply that these arguments cannot be properly assessed at this time. The CJC proposed that a further working group be convened in the next few years to consider the effectiveness of the present recommendations and whether there should be any “evidence-based amendments to geographical areas”.

A common theme that runs through the CJC’s reports is that a future review will be necessary to consider the evidence based on geographical location, particularly within London. Further, the CJC recognises that the impact of changes in working practices due to remote working and court reforms will need to be assessed at the same time.

The London bands

Notwithstanding the lack of any broad assessment as to whether geographical location should be abandoned as a determining feature of the applicable guideline rates, the CJC has recognised that in some cases other considerations should be given more weight. In particular, London 1 is being redefined in accordance with the nature of the work being undertaken by centrally based London firms, rather than being the default band of firms located in the City.

The type of work that will now attract London 1 rates is defined as “very heavy commercial and corporate work”, which is itself a subjective term, although one that may be easier to identify in practice. The London 2 band is now reserved for all other work carried out by firms located either in the city or the area formerly covered by London 2.

The CJC acknowledged that this isolated qualification of the significance of geographical location is a reflection of the actual practice of costs judges and practitioners, rather than part of a concerted movement away from the significance of postcodes. But the fact this is only an isolated treatment, reserved for London, has drawn criticism that it creates an unfair advantage for London firms – for example because regional clients will need to instruct London-based firms to maximise cost recovery.

Indeed, one of firms that responded to the CJC during the consultation period argued that the methodology adopted suited London firms generally, and was at odds with the government’s policy of seeking competitiveness across all regions. That firm went on to say that it will need to give serious consideration to transferring part of its operations to London for no reason other than the GHR.

A possible alternative

It was argued during the consultation that work type, rather than fee-earner location, would be a better guide for hourly rates. If such an approach was adopted, clients may be more inclined to instruct firms with lower hourly rates to undertake less specialist work. This might increase opportunities for regional firms with a lower cost base. In that scenario, maintaining a London presence, with higher overheads resulting from expensive office space and higher salaries, would be harder for firms not undertaking a high proportion of specialist work.

If work type was adopted as the determining feature of the applicable guideline rate, then it is unlikely that vague designations such as “very heavy commercial and corporate work” would suffice. Instead, there would need to be a much more detailed analysis and delineation of the types of cases undertaken by firms.

As a further alternative, one can conceive of a hybrid approach, with increased focus on type of work, but with loose geographical bands being maintained as a means of covering anything falling outside of the defined ‘types’ of work.

Conclusion

The CJC has itself recommend that the GHR, and the underlying methodology, should be subject to a further review in the near future. Such a review should consider how the GHR might be further revised in light of new remote working practices and court reforms.

For the time being, however, the CJC has made an effort to update the GHR so that they are more useful in practice. For those that are unsatisfied with this approach, it is important to remember that the GHR are only guideline rates, primarily intended to provide a starting point for summary assessment purposes. Parties are free to make submissions as to why the GHR should be followed or departed from, and costs judges have the discretion to award different rates.

It is also important to remember that the GHR now operate in a different environment than they did in 2010. Over the last decade, there have been a number of important developments with regards to litigation costs, including the increased use of cost budgeting and the implementation of fixed cost regimes. As such, the scope of the GHR has potentially reduced since 2010.

In any event, there remain important questions to answer regarding the continued relevance of geographic location for determining applicable guideline rates. If there is going to be a departure from the current approach, serious thought will need to be given to a practical alternative that reflect the shifting ways in which legal services are being delivered.

Ricky Cella is a senior associate at Russell Cooke russell-cooke.co.uk