Market forces in setting hourly rates

Lord Justice Jackson's Preliminary Report on civil costs raises a number of concerns about whether any proper market forces operate in relation to lawyers’ hourly rates in personal injury claims:

"For the claimant personal injury market in particular, where the majority of work is conducted under conditional fee agreements, the chargeable hourly rate recoverable in costs assessments will usually provide the benchmark for the chargeable hourly rate to the client (in respect of base costs). Claimant solicitors in this sector tend to offer 'no win no fee' arrangements under which they seek to ensure that clients recover 100% of their damages with no deductions for costs. This necessarily has the effect of removing market forces that would otherwise apply from the sector. Solicitors’ charges are dictated by the level of costs recovered from the losing defendant rather than the lay client."

Further:

"Insurers consider that the hourly rates being paid to claimant solicitors are too high. There is a substantial discrepancy between the hourly rates of claimant solicitors and the hourly rates of defendant solicitors."

He also reported the views of the Association of Law Costs Draftsmen in relation to CFA funded claims: "There is no control over hourly rates in a situation where the clients are indifferent to the rates charged".

This is to be contrasted with a recent report in The Times:

“The ‘magic circle’ has lost some of its power: average hourly rates for London’s top commercial lawyers fell by a third last year as law firms offered substantial discounts after competition intensified in the downturn.”

This shows the impact that market forces, when available, can exert even in the field of legal costs.

It will be interesting to see what recommendations the Advisory Committee on Civil Costs makes in relation to increasing (or decreasing) the Guideline Hourly Rates in 2010.  When announcing the figures for 2009 they made clear that a more thorough review of the way rates were calculated was necessary and they hoped to have looked at these issues by 2010.  Combined with the publication of Jackson LJ’s final report, 2010 looks to be an interesting year for the legal costs world.