The Law Society has been advocating for a review of the obsolete solicitors’ hourly rates for party and party taxation in civil proceedings (“SHRs”) which were last revised in 1997, more than 18 years ago.
In March 2013, the Law Society produced an independent consultancy report (“2013 Report”) on the appropriateness of the SHRs by reference to the prevailing market rates and the level of adjustments that should be made to reflect changes in the market conditions since 1997. In response, the Judiciary set up a Working Party on Review of SHRs in 2014, adopting a two-stage approach in its review – first to consider the methodology to be used for the review and then to calculate the SHRs based on the approved methodology.
In the Judiciary Administration’s April 2015 paper to the Panel on Administration of Justice and Legal Services of the Legislative Council, the Judiciary raised a number of considerations in relation to the setting of SHRs. They include, among others, access to justice, impact on small law firms and impact on legal aid. While all of these may be relevant in a general sense when setting SHRs, they should not be the primary determining factors.
Amidst all these review exercises, it is important that we do not lose sight that the SHRs are set for the purpose of taxation of costs on a party and party basis.
At the conclusion of a court case, the court will normally award costs to the winning party. “Taxation of costs” by a taxing master will be required if the litigating parties cannot reach agreement on the quantum of costs. Solicitors’ costs are one of the main components in taxation.
The core purpose of taxation is to give effect to the rule that costs follow the event. The proper approach for setting SHRs must be driven by this core purpose of taxation.
Hong Kong prides itself in having a robust, efficient and fair legal system. Public confidence in the legal system is built through various factors, including, importantly, an expectation that there is an effective mechanism to recover reasonable costs on the success of a meritorious claim.
However, with the obsolete SHRs still in place, the recoverability gap of legal costs, ie, the difference between what a successful litigant has actually paid to his lawyer, and what he can recover from the other party under a costs order becomes wider and wider. If the problem is not solved urgently, the gap resulting from the growing divergence between the SHRs and the market rates will effectively penalise those who have faith in our legal system and choose to initiate proceedings here, by awarding them with an “empty costs order”.
If this “empty costs order” anomaly becomes the norm, people will be discouraged to exercise their rights to seek justice by initiating court proceedings and eventually forced to settle with the counterparty on unfavourable terms even if they have a strong case. This would result in a denial of access to justice to individuals and corporations of different economic capacities.
In considering access to justice as a factor for adjusting SHRs, the issue of recoverability should be the main focus, since SHRs are after all a method to give effect to the recovery of costs by the successful litigant.
As explained in the 2013 Report, SHRs should be adjusted to better reflect normal average hourly rates charged by law firms in the market today.
The legal service market has undergone a lot of changes since 1997. The increasing competition from other providers in the market, the growing demand for quality and specialised legal services resulting from intensifying regulatory changes in different sectors, and the rising labour costs and overheads all operate to shape the cost of the legal services. The market thus already operates efficiently to reflect the costs of production with an appropriate margin to encourage participation in the market. The SHRs should be set as close to the actual prevailing average market rates as possible without seeking to use arbitrary ways to adjust SHRs downwards.