When did you last hear anyone say that their lawyers had been undercharging? Most likely, never. Until very recently the same answer applied to another rhetorical question: when did you last hear a High Court judge label a major law firm’s estimate of costs as ‘highly unrealistic’ or refer to the ‘vast discrepancy’ between that firm’s estimate and the amount billed? But this is the situation in which Dechert now finds itself in a dispute over a £16.3m legal bill arising from a fraud investigation into a mining company.
That clients pay a high price when using preeminent commercial law firms is axiomatic. What they expect in return is high quality advice. In this equation, clients choose their lawyers based on an assumption of quality, believing that they will be rewarded with value and the proportionate satisfaction that it creates. For the most part, this formula works. From the extensive data included in the Legal Week Best Legal Advisers 2017 (BLA), a report which I recently wrote, most commercial clients are satisfied.
The BLA canvassed the views of 761 global general counsel and senior in-house counsel in multinational companies: an impressive 77% of them believe that they are getting good value for money from their lawyers. For the minority who think otherwise, value routinely becomes a problem when the cost/quality equation becomes unbalanced. At worst, there is occasionally a sense of being deliberately overcharged.
The issue of inflated billing by commercial law firms has a long history. Following the collapse of Robert Maxwell’s media empire in 1992, New York firm Milbank Tweed Hadley & McCloy was involved in protracted US insolvency proceedings relating to Maxwell Communication Corp. One of the firm’s bills, exceeding $500,000, was struck out by a Manhattan judge when it was revealed that photocopying work was being billed at the same hourly rate as attorneys.
Since then, there have been intermittent examples of comparable billing practices at other major law firms being made public on both sides of the Atlantic. Two recent British examples, both reported in February 2017, stand out.
Asons, a six-lawyer firm based in Bolton, was required to reimburse £113,000 (£40,000 in legal costs and £73,000 in damages and interest) to AXA Insurance. The firm admitted in court that it had ‘falsely and systematically’ overcharged after exaggerating the qualifications and experience of its legal staff. Bills sent to AXA between September 2013 and December 2014 were artificially higher in 65 personal injury cases.
But this pales into insignificance compared to overcharging by Philadelphia-based Dechert: with 27 offices, 950 lawyers, and gross revenues of $890m, it is the 42nd largest in the world by gross revenue. Last year, the average profit share paid to each of its 143 equity partners (124 men; 19 women) was $2.55m. Interviewed by Legal Week, Dechert’s CEO Henry Nassau said that, even with Brexit, the greatest revenue growth in 2016 was in the London office. Here, according to Nasssau, Dechert’s internal investigations practice experienced a “huge uptick” thanks to a particular client.
This was the same London office that was severely reprimanded for overcharging by Master Rowley, a High Court costs judge. In dispute was the firm’s £16.3m bill for nearly two years’ work on behalf of former FTSE 100 mining giant, Eurasian Natural Resources Corporation (ENRC). Referring to the bill, which ENRC argued had resulted from ‘systematic and gross overcharging’, Rowley concluded that Dechert’s cost estimates were ‘considerably awry on every occasion.’
He added that they were based on ‘highly unrealistic’ assumptions and there was a ‘vast discrepancy’ between the initial estimates given by Dechert to ENRC and its final bill. His judgment further revealed that DLA Piper, the firm originally hired by ENRC to advise on an internal corruption probe, had estimated that its fees for the same work would total £350,000-£400,000 plus VAT and disbursements.
ENRC had hired Dechert in 2011 following a criminal investigation by the Serious Fraud Office (SFO), which alleged that ENRC may have committed fraud in some of its international operations. Dechert’s mandate was to undertake a self-reporting process of the company’s finances relating to the SFO investigation. The firm’s final bill exceeded £16.3m (excl VAT), of which £11.6m was invoiced between July 2012 and April 2013.
Master Rowley’s ruling confirmed that assessment proceedings can now be brought in relation to the £11.6m figure. His decision also enables the company’s lawyers, Signature Litigation, to sue Dechert for the recovery of all relevant costs.
So what normally happens to lawyers who significantly and deliberately overcharge their clients? As the regulatory body for all solicitors in England and Wales, the Solicitors Regulation Authority (SRA) deals with errant solicitors who do just that – if there is no adjustment made in the case of genuine error.
The SRA invariably prosecutes them in front of the Solicitors Disciplinary Tribunal (SDT), an independent statutory tribunal which adjudicates upon alleged breaches of the rules and regulations applicable to solicitors and their firms. Roughly 90% of the cases dealt with by the Tribunal are brought by the SRA; the remainder are commenced by members of the public. Last year, three lawyers stood out after being struck off the roll of practising solicitors because of significant overcharging.
The first was Edgar Stephen George Thomas, a sole practitioner in Wales who charged one client 50 times the original estimate of £2,000 and another £100,000 in probate fees about which he could ‘recall no detail at all’. The SDT described Thomas as having ‘blatantly abused his position of trust in the most despicable way.’ The second was Premji Naran Patel, a sole practitioner at Alliance Solicitors, struck off for ‘deliberate, calculated and repeated’ dishonesty – including overcharging a client £58,739 plus VAT, five times the cost of the work done.
The final miscreant was Charles Rhodes of Rotherham firm Gichard & Co, which was closed by the SDT. Acting as an executor of a deceased man’s estate, Rhodes had claimed costs of £170,250. After verifying this amount with the firm’s cashier, the SDT discovered that he had in fact charged £437,125. In another case, he billed £37,906 in costs from an estate worth £83,000. After admitting to the SDT that it was ‘hard to escape’ the conclusion that his conduct was dishonest, and that he wanted to avoid the beneficiary discovering that he had overcharged, Rhodes was also struck off.
Of more than 30 solicitors struck off in the last decade for significant overcharging, perhaps the most prominent was a former Bircham Dyson Bell partner, William Pencharz, who also misused client funds and made false expense claims of nearly £2m. In 2010, Bircham reported their suspicions to the SRA and then refunded £2,005,000 plus £175,000 interest to clients with provision for a further £795,000 which might also have to be refunded.
A common feature in the cases of Patel, Pencharz, Rhodes and Thomas, and indeed of most other reported examples, is that they were rogue operators, lone wolves who took it upon themselves wilfully to overcharge: in each case it was the deliberate, calculated and repeated dishonesty of one man.
The remarkable aspect of the Dechert case, which according to ENRC involved ‘systematic and gross overcharging’ and whose estimates, according to Master Rowley, were ‘considerably awry on every occasion’, is that it involves a major law firm where multiple lawyers were involved in the process. In fact, four core Dechert partners were engaged on the project, including Miriam Gonzalez, wife of the former deputy prime minister, Nick Clegg.
On any view, the overcharging of a big international client by a major international law firm to the tune of several million pounds cannot be an oversight or a mistake. Indeed, that was not their argument in court. Accordingly, the outcome of subsequent assessment proceedings in relation to the ENRC bill will be important not just for Dechert, but the entire legal profession. Watch this space.
Dominic Carman is a journalist, writer and legal commentator