Fixed price quotes for advising on transactions: when do they make sense?

In the last couple of weeks, IP Draughts has been helping a high-tech company to obtain some further investment (a few hundred thousand pounds).  We were asked to cap our fees at £5,000 on the basis that the investor’s lawyers were agreeing to the same cap and were using some “standard” documents for the transaction.

The documents have now been agreed and, much to our surprise, the total billable time on this matter is likely to be within the cap.  Past experience suggests that, more often than not, capping fees is a mug’s game for the lawyers concerned, as too many aspects that can increase costs are outside an individual lawyer’s control.  We have seen transactions where one or both parties or their lawyers took an inflexible stance or a “Rolls Royce” approach to negotiating every clause at great length, where the negotiations stopped and restarted several times, and where the parties’ expectations were too far apart.  We have also seen parties who worked out their priorities and negotiating positions in “real time”, rather than planning ahead.  We have seen parties who wanted to be educated about the significance of every clause.  All of these features tend to increase the amount of legal costs.

So, what was different on this occasion, which kept the legal costs under control?  Several aspects, including:

  1. The investor’s lawyer had agreed to cap his fees at £5,000.  We have recently seen transactions where the investor’s legal fees have been more than 10 times this amount, for investment in an early-stage technology-based company.  In our view these amounts are disproportionate, and inevitably lead to greater legal costs on the part of the company’s lawyers.  The investors need to take charge, simplify and standardise their expectations, and instruct their lawyers not to take every point that presents a potential risk.  Only if this is done can the lawyer be confident about keeping legal spend to a minimum.  The investors also need to choose the right lawyers.  Using a leading, blue-chip firm for an investment of anything less than, say, £10 million, is almost certain to be wasteful of legal costs.
  2. The transaction used template agreements.  Of course, this is no guarantee that the contents of the templates will be acceptable to the company and existing shareholders.  As might be predicted, the draft agreements in the present case did include some distinctive provisions that reflected this particular investor’s priorities.  In most areas, though, the documents were relatively straightforward and this made it easier for us to point out those areas where we felt the investor was taking a different approach.
  3. Our client was experienced and willing to take decisions. Once we had pointed out an issue to our client, he had the necessary skills and experience to take a view on whether the issue was one he wanted to pursue and how he wanted to pursue it.  This saved a great deal of our time, which might otherwise have been spent in (a) explaining numerous points in detail to our client, and (b) if the client wished to pursue them, negotiating them line-by-line with the other party.  It also helped in this case that our client and the investor had a good relationship and were able to discuss points in a reasoned and reasonable way.

Would we do it again?  Perhaps.  Before doing so, we would want to assess whether the parties, their lawyers, their documentation and their approach to negotiations were all aligned with a low-cost, efficient approach.

5 Comments

Filed under General Commercial

5 responses to “Fixed price quotes for advising on transactions: when do they make sense?

  1. Clients across the board do think legal costs are too high. Alternative fee arrangements are being driven by budget constraints and in part clients being ever more interested (as they should) in the value added. I’m a patent attorney and so the service costs structures we have traditionally worked which are more complex than straight hourly rate based billing.

    In my experience clients do like fixed prices for budgeting mainly; they are not trying to get the lawyers costs down, just under control and within budget. I have been in enough in-house roles to know that budgets are budgets and having external service providers using the piece of string approach to pricing is not helpful!

    I see no logical reason why the cost of legal services should always be increasing with hourly rates rising year after year. Just like every other industry the legal services industry needs to step up on efficiency and look at more innovative services and methods of delivery at lowest possible costs. I know many think the cost pressure for Alternative fee arrangements is simply being driven by the recession and cost constraints. It’s not in my view. Clients are starting to say hold-on the logic for a 10% rise in my legal costs is what? Profit per partner!

    In deciding to offer a fixed price you just need to take a view on certainty. As Mark A indicates if the client is aligned, the other party is aligned and their lawyers are aligned then the risks are low……for everyone.

    Just proposing a minor editorial amendment to Mark A’s blog: “Using a leading, blue-chip firm for an investment of anything, is almost certain to be wasteful of legal costs.”

    Using a “Rolls Royce” to get from A to B has nothing to do with the certainty of completing the journey no matter how long and everything to do with vanity.

  2. Vance Koven

    I don’t know if Mark Robinson was displaying genuine or feigned cynicism when he said that the purpose of fixed fee pricing was to make lawyers charge less, but any client with exposure to other forms of professional services engagements should realize (sorry, realise) that fixed fee pricing is generally well padded to offset uncertainty from the provider’s standpoint.

    The real and proper function of fixed fee pricing is to provide certainty from the client’s end. From a transactional lawyer’s perspective it is, as Mark A. says, unsettling to come up with a fixed-price scenario in a situation that is not inherently fixed and repetitive. A software engineer, for example, has mostly only himself to consult in pricing a project that has been scoped. He’s playing golf, while transactional lawyers are playing tennis. We can provide fixed prices for projects where we act largely unilaterally, like setting up a business entity, but as MA noted the ebb and flow of negotiations are largely beyond our control. To deal with this particular concern, the software engineer provides an escape hatch in the change-order process. Maybe we lawyers should do the same.

  3. It is great when you have a transaction where what you would charge on an hourly rate fits within the cap (everyone’s a winner!).
    However, the real intention behind capping fees is to make lawyers charge less and earn less. This raises a number of issues about managing law firm costs such as buildings and staff salaries. It also challenges the expectations of commercial lawyers as to the levels of profit they can and are entitled to make.
    Even low value transactions can require a lot of time from experienced lawyers as they simply won’t fit into standard documents. So either it is accepted that these transactions are done badly or the lawyers have to accept receiving less than they would normally expect.
    It will be interesting to see whether the current recession brings about the seismic shift in the profession that has been heralded for over 20 years. The magic circle firms are currently cutting partners in order to keep up their profits, but once you have de-equitised what’s next?

    • Mark, from my perspective there’s nothing wrong with competitive pressure, or with clients having an understandable desire for certainty about their financial exposure to legal costs. But it takes two to strike a deal. I have been asked many times over the years to agree fixed fees, and in most cases I have refused for transactional work, in view of the uncertainties mentioned in my blog article.
      In my experience, clients are much less price sensitive than they think they are. Too often, they use a blue-chip firm because they want the comfort factor of a brand name, even though they may end up paying twice as much as if they were canny shoppers and used someone with appropriate skills from a small firm. Being a canny shopper for legal services requires a considerable amount of skill and knowledge, which not all clients have.

  4. Good discussion. I generally am in favor of fixed fee arrangements whenever the economics and personalities are “mature” enough as you explain. It’s definitely unreasonable for a client to ask for a fixed fee and then carry the situation on forever and ask millions of questions. I think that if the client and attorney get to know each other very well and discuss exactly what will be required to complete the transaction ahead of time (including anticipated # of rounds of back and forth), that will make a fixed fee arrangement much more successful.

    I’m also wondering about the slight incentive and logistical differences between “capped fees” and fully “fixed fees.”

    I’m working on a project called Ridacto (http://www.ridacto.com) that aims to help attorneys and professionals create better legal contracts through artificial intelligence techniques. It’s definitely suitable for people who want quality contracts produced in an efficient manner, especially under fixed fee arrangements.

    I really appreciate your sharing your thoughts and advice!

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