Secret talks about an issue at the very heart of our system of justice have now reached a critical stage. Next week, Lord Carter of Coles is due to unveil his blueprint for the future of legal aid in England and Wales.

The Whitehall trouble-shooter has spent the past year in negotiations with the Law Society and the Bar Council, trying to reach agreement on how to divide the ?2.1 billion legal aid budget more wisely.

But with only days to go, the Lord Chancellor tells me that no deal has yet been reached. "Negotiations, I suspect, will be difficult," he says, "and may well be intense over the next few days." What if they can't agree? "We would then have to make our own decisions on structure and price, which we would then have to consult about, in a different atmosphere."

When Lord Falconer says "consult", he presumably means "impose".

"That, I'm afraid, is the right word," he replies. By law, there would have to be consultation. But Lord Falconer's ultimatum to the lawyers this weekend is a stark one: do a deal with Lord Carter or have one imposed on you.

"What they can get by agreement may be very different from what you describe as an imposed basis," he tells me. "I am very strongly urging the parties in discussion with Carter to take the historic opportunity that now exists to find a way forward in relation to what is a very difficult problem - the problem of finite resources."

It is not just a question of arguing over how much lawyers should be paid for a particular piece of work, he explains. The negotiations involve introducing new structures - doing all the cases generated by a particular police station or court, for example - in exchange for a fixed fee.

So does Lord Falconer know what these structures will be? "We have been very closely involved in the process," he says. "We know very well what the broad parameters are.

"We know that this is a proposal for a managed transition from the current arrangements for buying legal services to ones which are much more driven by markets."

The problem, he explains, is to ensure that finite resources are allocated to ensure that criminal cases are dealt with fairly but efficiently, while allowing more money for family and civil work.

Spending on family cases has got to increase because, he says, there has been a "very significant increase" in the number of public-law children cases - children being taken into care.

If Lord Falconer is so closely involved with the negotiations, he presumably knows how close the parties are to a deal.

"I don't know if there is going to be an agreement," he says. "It is not certain what will happen."

But Lord Carter has less than a week left, I remind Lord Falconer. "Over the years, Patrick has pulled off fantastic results in a whole range of areas. Quite often, it's the deadlines that produce the results."

Lord Carter's drive for efficiency will inevitably mean concentrating work in the hands of larger firms of solicitors, with smaller practices having to merge or close down.

A group of ethnic-minority lawyers chaired by Oba Nsugbe, QC, said yesterday that this would have a disproportionate effect on law firms owned by, and catering for, minority communities. These firms tended to be newly established, and would therefore fall foul of Lord Carter's plans to allocate contracts to firms with a track record and a proven capacity for expansion.

Expanding on the theme in this month's Counsel magazine, Imran Khan and Michael Mansfield, QC, say Lord Carter's suggestion that small firms should merge "demonstrates the historical amnesia, common to many in our society, which attempts to deracinate a race-drenched process". If diversity is not a core value of the proposals they must be unanimously and unambiguously opposed, the two lawyers add.

"We don't believe there will be a significant diminution in the ability of BME [black and ethnic-minority] lawyers to serve BME communities," Lord Falconer says. "The provision of services must be able to accommodate lawyers from ethnic groups being able to serve communities from that ethnic group."

There would be no fewer minority lawyers under the Carter plans, but the critical thing was to ensure that they were in the right place.

And what of sparsely populated areas where market forces might produce ''advice deserts''?

"You need a system that drives efficiency, in the sense that there should be financial gains to be had by solicitors and barristers if they are efficient in what they do," the Lord Chancellor says.

"But, equally, I recognise that there are some places - for example rural areas, or in some communities where extra effort may be required - where if you have a proper market-basis those things might cost more. Our system needs to recognise that."

Last month, Vera Baird, Lord Falconer's junior minister told me that Lord Carter "is only recommending and we are going to be consulting on what he recommends".

By law, there must be a period of consultation and the Lord Chancellor must keep an open mind until that period is over. But his message is that the time for talking ends next week.

If there is a deal, new pay rates can be introduced in the autumn while the system is restructured. If not, lawyers will have to wait a little longer for their pay rise and the changes will be introduced anyway.

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