As pointed out by Leisa Flatley, legal risk management expert and College of Law lecturer, GenAI challenges the basis by which lawyers claim fees for their professional skill and judgement.
“The very foundation of the business of law is being called into question. Efficiency gains threaten the traditional billable hour models particularly at the junior level where much of the law firm’s profits are realised,” Leisa says. “If AI tools can deliver comparable outputs in less time and therefore more cost effectively, will this result in clients’ trust and value of lawyers and their skill? At what point does the use of AI and how lawyers bill for their work become an ethical issue for the profession?”
Lawyers are currently facing an ethical conundrum of billing clients using the traditional hourly model when AI has been used to reduce the time taken to produce the output.
So, how do firms navigate this ethical dilemma to ensure compliance with the Law Council of Australia’s Australian Solicitor’s Conduct Rules (ASCR)? According to Leisa, law firms must address this fundamental question strategically, while ensuring compliance with professional, legal and ethical obligations.
“An increase in productivity and output means that firms must reassess how they charge clients for their services. This creates what is known by commentators as a ‘productivity paradox’ which means that the more efficient firms become using AI, the less they earn under traditional billing models of billing in six-minute increments,” Leisa explains.
What the regulators say
Legal profession regulators in various states across Australia have issued statements to guide lawyers in their responsible and ethical use of artificial intelligence (AI). The Law Society of New South Wales’s statement, the Legal Practice Board of Western Australia's statement, and the Victorian Legal Services Board and Commissioner's statement, have put forward a set of common principles. Queensland courts and the Queensland Law Society (QLS) have also issued guidance statements about the use of AI.
According to the Law Society of NSW, the aim of its statements is to help to protect clients from risk, ensure the technology is used for their benefit, and preserve the proper administration of justice. The QLS’s Guidance Statement No 37 specifically relates to legal costs, as outlined below.
Legal costs
Ethical Duty - Legal costs must be:
- fair and reasonable;
- disclosed if required by the Legal Profession Act 2007 (Qld); and
- calculated in accordance with the contract of retainer.
Appropriate management may include:
Client work vs practice overhead: Adopting and maintaining an AI tool in Legal Practice requires extensive due diligence and ongoing supervision. Most of this work, and any AI license fees charged on a “per user”, lump sum or annual license basis are a practice overhead that cannot be billed to a client.
Time spent prompting an AI and checking the output with respect to a specific client’s matter can be recorded and billed to that client in the usual way if charging on a time basis.
Basis of charging: If the retainer provides for remuneration on a time basis, only the time spent undertaking work which is quantifiable and attributable to the specific matter can be charged. Time based billing entries must remain accurate and may not be adjusted upwards to reflect the time that doing the work manually would usually take.
The financial benefit of time saved using an AI tool are therefore the client’s, not the firm’s, if billing on a time basis. It is a common criticism of time-based billing that it discourages investment in law practice efficiency.
Whilst there have been minimal reported cases to date, it is foreseeable that regulators such as the Legal Services Commission may see a rise in complaints against lawyers for failing to pass on a reduction in their fees where AI has been used in the delivery of their services. It is likely that regulators will see this as more than a commercial dispute between the lawyer and client. It will no doubt involve investigations into whether the lawyer has complied with their fiduciary, ethical and legal obligations including whether the lawyer acted honesty, with competence, providing clear communication and has undertaken proper and fulsome costs disclosure.
The risks of using AI in law
In the first reported case in Australia involving a lawyer using AI, a Victorian lawyer was sanctioned and had his practising certificate cancelled for using artificial intelligence in a court case which generated false citations which he failed to verify. Since this case, there have been more than 20 other reported cases in Australian courts where lawyers have been found to have used artificial intelligence in the preparation of court documents that led to those documents containing fake citations. These incidences also resulted in those lawyers being referred to state regulatory bodies.
On this basis, it is certainly feasible that investigations by regulatory authorities will determine whether the lawyer:
- Acted with candour about how the work was performed and charged
- Acted competently and diligently in the delivery of legal services
- Maintained their duty to protect client’s confidential information
- Acted in the best interests of the client
- Adequately supervised employees and agents
- Complied with their duty not to overcharge clients by ensuring that their costs are fair, reasonable and proportionate.
The recent Deloitte Australia incident is an interesting case study. Deloitte was forced to repay a portion of its fees charged due to delivering a government report that was partly generated by AI and littered with errors.
If we imagine that this was a law firm who used AI to generate and deliver legal services to a client, the result is likely to have included much more than a repayment of part of the costs of the service. It is likely to result in disciplinary action for failing to comply with a lawyer’s ethical duties and fundamentally undermining the fiduciary relationship between a lawyer and their client.
Consequences of a breach of ethical obligations:
- Employed lawyers can be found guilty of professional misconduct for what is effectively overcharging.
- Disciplinary action and possible fines for failing to disclose the basis on which costs were charged
- Breaches of legislation in relation to costs disclosure and/or misleading and deceptive conduct, breach of contract
- Bringing the profession into disrepute
- Possible negligence claims
- Loss of reputation and business including unrecovered costs
What this means is that firms need to be clear with clients about where AI has been used in the workflow.
If the firm bills for human time spent supervising, checking and exercising professional judgment over AI outputs, then charging for that human labour is ethically defensible — provided those costs were itemised, disclosed and consented to. The charge should reflect the real human input, expertise and risk mitigation performed.
If the firm bills the client an hourly rate on the basis of “lawyer time” when the work was effectively completed by GenAI and no meaningful human review or expert judgement was exercised, that runs the risk of being misleading, unreasonable and potentially unethical.
How should law firms address costs disclosure?
Firms must pivot towards offering alternative fee arrangements and becoming more transparent in their billing arrangements with clients. They need to disclose where AI has been used to generate the output and how the fees charged are justified. This requires firms to be fulsome in their explanation of where the lawyer has exercised their legal skill and expertise and their professional judgment to review and critique the AI-generated output and thus justify the value added by the lawyer.
Key considerations for transparent billing practices for firms include:
- Transparency and Disclosure – firms should detail where AI is used in the workflow i.e. drafting, research, document review and how human lawyers interacted with the AI output. Costs disclosure should explicitly address AI-usage and how the ‘value add’ was arrived at. It should also include any costs associated with the use of AI if they are being passed on to the client.
- Re-evaluate billing models – move from time-based costing to alternative billing arrangements such as flat fee billing, contingency billing arrangements (complying with legislation), outcomes-based pricing models and/or capped fee arrangements. The hours must reflect the human effort of the lawyer. Update engagement letters and costs disclosures to address AI usage.
- Identify and articulate value add to clients – if AI creates efficiencies, identify those wins for the client i.e. faster turnaround, higher turnover of files can mean higher satisfaction for some clients. However, if AI is used in the workflow, identify where and how and articulate how the human lawyer used their skill to add value to the output. This may require more detailed explanation on bills
- Appropriate supervision, internal oversight and quality assurance – firms have a responsibility to ensure adequate supervision of those lawyers employed by them. Partners and supervisors must review, validate and exercise legal judgment and discernment in their assessment of all output before it is delivered to the client. Firms should also have a thorough understanding of the scalability of their billing practices, for example, they must carefully analyse historical billing practices to understand the economics of the billing model, where leverage exists, and patterns in workflow to understand who is doing what and for what cost.
- Ethical considerations and reasonableness of fees – lawyers have ethical duties to not overcharge clients. Lawyers must be able to justify the reasonableness of fees or face complaints and possible ethical consequences. Ethical and legal costs disclosure requirements must be met in all cases. Firms should have an inbuilt dispute resolution process to address concerns such as costs disputes before they are elevated to the regulatory bodies.
- Clear communication with clients – it is imperative that firms provide clear, timely, transparent communication with clients regarding billing and how fees are charged. Understanding client’s expectations and then managing them accordingly is the best chance a firm has of avoiding a complaint or a negligence claim.
- Internal training – firms need to educate and train their lawyers about how to articulate this value-add in communication and costs disclosure to clients. This should involve exploring firm-wide policies around how to define ‘strategy, advice and critical professional legal oversight over AI generated output’.
- Reflect and adapt – firms should ensure they gather data about how AI tools affect workflow, cost of service, margin, client satisfaction and then continually refine and adapt billing practices and policies accordingly.
Look at each employee’s role and how they contribute to the delivery of the legal service. If GenAI is used in legal output, it should be transparently disclosed to the client. Law firms need to articulate how lawyers add value to the output by focusing more on strategic advice, developing innovative solutions and employing professional discernment to the client’s problem.
Alternative fee arrangements:
Firms should consider alternative fee arrangements and structures to offer clients beyond the traditional billing model. These could include:
- Fixed fee arrangements
- Capped fee
- Annual retainer
- Conditional fee arrangements
- Hybrid billing practices
How to address the ethical conundrum and remain profitable?
The answer seems to lie at the juncture of transparency in communication with clients and remaining profitable in running a business. On the one hand, if law firms are using AI to generate output and continue to inflate their prices to charge a fee as if AI had not been used (an hourly rate based on time), it is likely this would amount to excessive charging. Lawyers can only charge for the time in generating the output no matter how good that output is. On the other hand, if the law firm uses lawyers to critically examine, evaluate and refine the AI generated output, and articulates this process in detail to the client, then firms should be within their rights to charge a fee that values this expertise.
Firms need to ensure that their billing practices are transparent, reasonable and based on trust built with the client. They should share efficiency gains with clients while still charging for expertise and judgment as a value-add in their pricing models. Performing analysis on the billing practices utilised by the law practice can assist in understanding how work is classified and performed, where the efficiencies and inefficiencies lie, where leverage can be created and where value can be added which deliver a superior outcome for the client. The major risk for law firms involves implementing AI without a proper and thorough baseline analysis in order to measure the return on investment, identify inefficiencies and have a better understanding of how to leverage cost and workflow.
To manage the risk, firms should proactively embrace the change brought on by GenAI and legal tech by transforming business models that strategically align human skill, judgment and expertise with the efficiencies generated by this technology.
To remain sustainable, law firms will need to define themselves not so much by the hours worked but more by the quality and value of their output.
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