Reasonableness of Hourly Rates
How do Solicitors calculate their hourly rates? What factors are taken into account? What amounts to their profit and what is required to cover the costs of running the case? These and many other questions arise when considering the reasonableness of hourly rates.
Before the introduction of the CPR, which came into force in 1999, Solicitor’s hourly rates were calculated using what was referred to as the A & B factors. Factor A represented the costs of completing the work and factor B was the profit element. Factor B would vary depending on the nature, value and complexity of the matter. The Court agreed that it was reasonable for the charging rates to include a profit element of 50% in a routine non-complex matter. In other words, two thirds of the hourly rate claimed represented the cost of completing the work and one third represented the profit element. Looking at how the rates were previously calculated and working from the Band 1 guideline rate, we can see that, for example if factor A allowed by the County Court is £145 per hour, a 50% enhancement on the rate would give £217 per hour. If factor A is £107, a 50% enhancement on the rate would give £161 per hour.
The guideline rates set by the Court were used as a basis when establishing factor A of the hourly rates claimed. However, following various changes over time, the guideline rates are only used by Judges as a starting point for Summary Assessments and are broad approximations only. The guideline rates were not intended to apply to Detailed Assessment. This principle is further explained in the case of Holliday v E.C Realisations Ltd (2008).
Further, the RPI should also be taken into account. Since the CPR was introduced in 1999, the RPI has increased by 4.8% in 2010, 4.8% in 2011, 3.1% in 2012, 2.7% in 2013 and 1.6% in 2014. Accordingly, Solicitor’s overheads have increased. Hence, to base factor A on guideline rates introduced in 2010, which exclude any changes in RPI, would not be a correct representation of the actual costs involved of running the case.
It was previously seen as reasonable for non-exceptional cases to start at 50% factor B. That figure could increase above 50% to reflect factors including the complexity of the case but to justify a B Factor of 100% there must be some combination of factors which mean that the case approaches the exceptional.
In Johnson -v- Read Corrugated Cases Limited  a mark-up of 75% was allowed. Mr. Justice Evans commented the following:
“I approach the assessment on the following basis. I am advised that the range for normal i.e., none exceptional cases starts at 50%, which the Cost Judge regarded, rightly in my view, as an appropriate figure for run of the mill cases. The figure increases above 50% so as to reflect the number of possible factors…… but only a small percentage of accident cases results in an allowance over 70%. To justify a figure of 100% or even on closely approaching 100% there must be some factor or combination of factors which means the cases approaches the exceptional. A figure above 100% would seem to be appropriate only when the individual case or cases of the particular kind can properly be regarded as exceptional and such cases will be rare.”
In Loveday -v- Renton (No. 2)  a mark-up of 125% was allowed. However, this was a major test case where the trial lasted for 65 days. Only a few matters will attract a mark-up of this amount.
Since the introduction of the CPR, such approach is no longer appropriate. However, some costs draftsmen are still comparing the hourly rates claimed, in particular in high value cases, with the old method in order to establish the profit element factor B. Such approach is incorrect and should not be practiced. The Courts allow rates based on factors listed in CPR 44.4(3), otherwise known as the 7 Pillars of Wisdom, and the rates are not split into A & B factors:
(3) The court will also have regard to –
(a) the conduct of all the parties, including in particular -
conduct before, as well as during, the proceedings; and
the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;
(b) the amount or value of any money or property involved;
(c) the importance of the matter to all the parties;
(d) the particular complexity of the matter or the difficulty or novelty of the questions raised;
(e) the skill, effort, specialised knowledge and responsibility involved;
(f) the time spent on the case;
(g) the place where and the circumstances in which work or any part of it was done; and
(h) the receiving party’s last approved or agreed budget.(new addition to the old rules)
These 7 factors had a significant impact when calculating the B component of the chargeable rate and are still widely used when considering proportionality and hourly rates. Following the Jackson reforms, an additional ‘pillar' has been added, (h), and we now have 8 pillars.
This is further emphasised in the case of Higgs v Camden & Islington Health Authority 2003 where the Court indicated that for difficult and complex matters which were run by specialists in that area, the rate of £300 per hour was reasonable. This related to work done between 1999 and 2001, where the claim settled for £3.5million.
Ultimately, hourly rates are not split into A and B factors any more and are based on elements provided in CPR 44.4(3) and any attempt by paying parties to consider, or ask the Court to consider, rates on this basis is incorrect.