Fixed Recoverable Costs – extension to the regime

From 1 October 2023, commercial claims of up to £100,000 will be subject to a new fixed costs regime. The amount of recoverable costs (costs which are recovered usually by a winning party from the losing party) will 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 gave much greater certainty and visibility of the legal costs that are recoverable. Under English law, the system is one where the ‘loser pays’ – this remains the case and the changes impact only on how much is payable. However, it is worth noting that in most cases where fixed costs apply, the successful party may face a shortfall in the amount of costs that they can recover from their opponent compared to the actual costs that have been incurred by their legal representatives. 

The reforms mean that there will now be 4 tracks in litigation, the small claims track, the fast track, a new intermediate track and the multitrack. Fixed Recoverable Costs will apply to all claims (with limited exceptions) on the fast and intermediate tracks. The multi-track remains available for cases valued at >£100,000 or more complex matters. The proposed changes are extensive. The purpose of this article is to highlight only the main changes and to consider the implications of the same.

What are Fixed Recoverable Costs (FRC)?

FRC are the amount of legal costs that can be recovered by the winning party at different stages of litigation, from pre-issue to final trial. They are costs that are awarded regardless of the amount of work that has been carried out by the party’s lawyers. At present FRCs only apply to cases with damages worth up to £25,000, but from 1 October 2023, FRCs will apply to cases worth up to £100,000. The general position remains that very limited/no costs recovery is made for claims on the small claims track (£10,000 or under).

What cases are affected?

Claims for monetary relief for up to a maximum of £100,000 (excluding interest) are subject to the new regime including professional negligence claims, property disputes, defended debt claims and business disputes. 

Are all commercial cases affected?

Yes, although more complex claims, of any value, can be allocated to the multi-track.

What track will cases be allocated to?

Cases <£10,000 will be allocated to the Small Claims Track.

Cases £10,000 - £25,000 will be allocated to the Fast Track

Cases £25,000 - £100,000 will be allocated to the Intermediate Track

Case >£100,000 will be allocated to the Multi-track (where FRC does not apply)

It should be noted that the new rules will not apply to cases allocated to the fast track or the immediate track when the court orders otherwise. This means that the court retains the discretion to reallocate more complex cases valued at <£100,000 to the multitrack, so that complex cases will not be inappropriately dealt with under the extended FRC regime.

Banding within the Fast and Intermediate Tracks

All cases within the Fast Track and Intermediate Track will be assigned a complexity band which will determine how much FRCs are recoverable. The higher the band the more recoverable. There are different complexity bands in both the Fast and Intermediate Tracks. 

In the Fast track, there are 4 complexity bands - band one is for simpler cases, and band four for more complex cases, for example:

• Defended debt claims are Band 

• Money claims are Band 3

• Property and building disputes, professional negligence claims and complex Fast Track claims are Band 4

There are also four bands applicable to the Intermediate Track: 

• Band 1: will cover the simplest claims where there is only one issue e.g. defended debt claims and where the trial will likely take no more than one day;

• Band 2: is the “normal” band for intermediate cases, where there is more than one issue in dispute including both liability and quantum disputes with more complex claims falling into Band 3;

• Band 3: is the “normal” band for complex intermediate cases that do not fall within Band 2; and

• Band 4: covers the most complex intermediate cases, where trial is likely to last three days and there are serious issues of fact and law on breach, causation and quantum.

The amount of FRC will be calculated by reference to which band the claim falls into.  There are detailed tables setting out the sums recoverable at various stages from pre-action through to trial. 

The parties may agree which complexity band is to apply, but ultimately it is the court which determines the band to which the claim will be assigned.

Factors relevant to assignment 

The following factors will be considered when assigning a case to a complexity band within a track:

• the nature of the claim

• the amount of money in dispute

• the complexity of the legal issues involved

• the number of parties involved; and 

• the likely length of the litigation process.

Worked examples

1. Straightforward claim for £50,000, is defended and proceeds to a trial. It is allocated to the Intermediate Track and to Band 1.  The maximum recoverable costs is £25,860.

2. A complex claim for £100,000 is defended and proceeds to a trial. It is allocated to the Intermediate Track and to Band 4. The maximum recoverable costs is £71,580.

3. A slightly complex claim for £70,000 is defended but settles after disclosure. It is allocated to the Intermediate track and to Band 2. The maximum recoverable costs is £24,200.

Procedure on the Intermediate Track

Cases allocated to the Intermediate Track will follow an expedited procedure:

• Statements of Case to be no longer than 10 pages;

• Witness statements limited to 30 pages;

• Only one expert witness per party (two, if reasonably required and proportionate), with each expert report limited to 20 pages (excluding photographs etc);

• Oral evidence to be time-limited and directed to the matters identified at the Case Management Conference; and

• All applications to be made at the CMC, so far as possible.

Part 36 offers

Changes are also proposed to Part 36 CPR which are designed to make Part 36 offers more attractive and to encourage settlement before trial. There are increased financial incentives – the amount a party can recover if they accept a Part 36 offer will be increased. Under the current rules, a party can recover their costs up to the amount of their Part 36 offer plus an additional 10%. The proposed changes to CPR 36 include that an additional 35% be awarded where the claimant obtains judgement against the defendant which is at least as advantageous to the claimant as their Part 36 offer. This means that if a claimant makes a Part 36 offer and the defendant does not accept it and the claimant wins at trial, the claimant will be entitled to recover the costs from the defendant (at the FRC rates) plus an additional 35%. The clear purpose of this is to encourage defendants to accept Part 36 offers. Defendants will not benefit from the new 35% additional amount to be awarded.

In addition, Part 45.13 CPR provides that the Court can penalise unreasonable behaviour by parties - where a party has acted unreasonably the court has the power to reduce the fixed costs payable by 50% or have the FRC uplifted by 50%. Hopefully this will act as a good deterrent and encourage better behaviour between the parties. There is also an exceptional circumstances provision (CPR Part 45.9) so that if a receiving party can show that there have been exceptional circumstances to depart from the FRC regime, then at the Court’s discretion additional sums can be approved.

Will the changes increase predictability?

One of the main aims of the proposed changes Is to increase the predictability for all parties involved in litigation as to the amount of legal costs that will be paid or payable. But will the changes actually give effect to this? To some extent that is debateable:

• The court has retained the ability to reallocate more complex cases to the multitrack, removing them from the scope of the FRC regime.

• It is likely that the issue of which band of complexity a case should be assigned to will be a source of contention between the parties particularly in relation to which claims will fall within complexity band 4 as this band attracts the highest amount of FRC on the Intermediate Track. Little guidance has been given as to when a case will be particularly ‘complex’ for the purposes of allocating to band 4. If agreement cannot be reached the court may be required to hold a hearing to determine the complexity bound of the case and this will inevitably lead to additional cost underlay and the litigation. 

• The changes may lead to parties taking unreasonable steps to delay or obstruct the progress of the claim in the hope that the other party will give up or make a settlement offer.

• The court has retained the ability to award additional costs if it finds that a party has acted unreasonably in the litigation. This will be a discretionary matter and determined by the court on a case-by-case basis.

• The potential for satellite litigation at least until the rules bed in is great.

Commentary

The main advantage of the proposed  FRC changes are that each litigating party will have a much better idea of what costs they may recover (or have to pay) their opponent if they win/lose their claim (subject to the exercise of the discretion of the Court). This predictability will play an important role in the decision whether to pursue/defend a claim, which is significantly different from the current position where costs are unknown until the end of the litigation. But that is not the full picture, the FRC changes do not affect the amount a party has to pay its own lawyers which is subject to separate agreement between them. 

As stated above, the FRC regime applies to pre-action costs so, for a more complex claim valued at £70,000, the pre-action costs will be limited to £13,600. Commercial parties will need to consider whether this in fact covers their actual costs incurred or whether there is likely to be a shortfall which will eat into their damages and may wish to consider issuing cases prior to 1st October 2023 in order to avoid the new fixed costs regime generally, provided all pre-action protocol requirements are satisfied.

For further information on this topic, please contact Moya Clifford.