Contracting out of fixed recoverable costs

Contracting out of fixed recoverable costs

With effect from 1 October 2023, commercial claims of up to £100,000 have been subject to a new fixed costs regime (FRC) (CPR 45). The amount of recoverable costs (costs which are recovered usually by a winning party from the losing party) no longer depend upon the work carried out by lawyers but the stage at which the case is finally resolved (trial or settlement) plus a percentage of the claim value. The rationale behind the wide-ranging changes is that the parties (winner and loser) should have much greater certainty and visibility of the legal costs that are recoverable.

Before 1 October 2023, FRCs applied only to fast-track cases and contracting out was permitted either before a dispute arose or during ongoing litigation, as confirmed by the Court of Appeal in Doyle v. M&D Foundations & Building Services Limited [2022] EWCA Civ 927. In that case, which was subject to the previous FRC regime, the parties had settled the case by way of a Consent Order including the provision: “such costs to be the subject of detailed assessment if not agreed”. The Court of Appeal interpreted this as meaning costs were to be assessed on the standard basis and not subject to the FRC regime. The reference to “subject to detailed assessment” was considered to be wholly inconsistent with the costs being subject to FRC. The parties were therefore treated as having contracted out of FRC.

However, the original drafting of the Civil Procedure Rules (CPR) implementing the new FRC regime ignored the Doyle decision and provided:

CPR 45.1 (3) “the court may only award costs in an amount that is neither more nor less than the fixed costs”.

This wording gave rise to the argument that the parties may no longer be able to contract out of the fixed costs as is usual in many contracts such as mortgages, leasing and finance agreements. This issue is therefore of significant interest to many commercial parties including banks, building societies and Asset Based Lenders.  

The first amendments to CPR 45 have now been approved and released by the Civil Procedure Rule Committee and are effective as of 6 April 2024 and these include a provision addressing the above issue by including the additional wording in CPR 45.1 (3) “unless the paying party and the receiving party have each expressly agreed this Part should not apply”.

Although there has been some further criticism of the inclusion of the word “expressly”, it is expected that the change will be interpreted as allowing parties to contract out of the FRC regime as previously. That was certainly the intention behind the changes with Lord Justice Jackson’s report from July 2017 which led to the implementation of the new FRC regime actually stating:

“A contractual entitlement [to costs] is free from the restraints imposed by the procedural rules on recovery of costs and will be free from the FRC regimes suggested in this report. The court will enforce the contractual right, subject to its equitable power to disallow unreasonable expenses. There is nothing in the rule making powers in respect of the CPR, which enables the rules to exclude or override a contractual entitlement. Primary legislation would be required to alter that position”.

We await the first reported decision on the issue but sincerely hope that common sense and freedom of contract will win the day and that whether the fast-track or intermediate track applies, consenting parties are permitted to contract out of the FRC regime either prior to any dispute arising or during ongoing litigation.

For further information on this topic please contact Sharon Williamson. 

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