In recent years, the government has begun to look at a reform of litigation costs. They are still reviewing the processes and outcomes in relation to this, with an eye to improving the current model so that it meets modern expectations and provides a fair experience for all parties. At the time of updating this article matters appear to be on hold, but there is still a possibility that the government will impose some of the proposed changes later in 2021, according to some legal costs experts. Considering this, it’s important to understand how the proposed changes may affect your business. Our brief guide covers the potential changes that could be made and their context.
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Introduction to the reform of litigation costs
The way the courts run commercial litigation cases has changed dramatically in recent years. Further reforms are expected soon, notably in respect of the amount of costs successful parties in court cases can claim from their opponents. Issues include:
- Which side should pay?
- How are costs calculated?
- Should recoverable costs be capped or fixed in some way?
The start-up businesses and SMEs we represent can face an increased risk of needing to enter into legal disputes with suppliers or commercial partners, and the legal cost of court disputes will often be a determining factor when it comes to businesses deciding on a particular course of action. This means that the rules on legal costs and any imminent changes in the way they are calculated will have a significant impact on you, our commercial clients. The government recently sought views from the legal sector and others on its proposals to extend the situations where successful parties can recover only fixed costs at the end of a case.
What is the background to fixed cost reform?
The area of legal costs is somewhat technical, but it’s a subject matter of concern not just for us as business dispute lawyers, but for you as our clients as well. As the Justice Minister at the time the government consultation exercise was launched said:
‘One of the major concerns about embarking on litigation is…the requirement by a losing party to pay the other side’s costs. It is important that these costs are proportionate to the sums in issue. In order to ensure that ordinary people can engage in civil litigation without fear of incurring ruinous costs, where possible we must control legal costs in advance. This provides certainty and transparency for all involved.’
Back in 2017, Lord Justice Jackson, as part of a wider review into litigation costs, proposed extensive changes to the rules on these so-called fixed recoverable costs (FRC). As far as we can ascertain, the government now looks set to implement at least some of his proposals in due course.
Are fixed recoverable costs a new concept?
Fixed recoverable costs are not a new concept. Before 2017, they existed for certain types of claim, including:
- Uncontested cases
- Enforcement proceedings
- Small claims
- Road traffic claims that settled before proceedings begin
- Low-value personal injury claims
- Certain cases in the Intellectual Property Enterprise Court
- Fast track trial cases (usually these are money clams valued at between £10,000 and £25,000 and some non-money claims such as injunction applications)
What are the new proposals?
Jackson’s aim in 2017 was to establish a transparent cost structure that could enable businesses to make a clear assessment about whether a legal dispute was worth litigating. His most eye-catching suggestion was to extend the FRC approach to commercial disputes valued at up to £100,000, in some cases.
To date, the government seems agreeable to introducing Jackson’s recommendations, at least in part. In March 2019, the Ministry of Justice (the MoJ) asked for views on changes to the costs regime in commercial cases as follows, including:
- Expanding the situations where the fast track applies
- Limiting the costs that can be sought from the unsuccessful party
- Creation of a fixed cost grid for FRC for certain claims up to £100,000
- A 35% increase in fixed costs where an offer to settle is made during negotiations that is greater than what is ultimately achieved at trial
How will costs in cases up to £100,000 affect businesses during litigation?
The proposed extension of the FRC to a wider range of business disputes seems to have caused some concerns within the legal industry. There is a distinct split of opinion on what the likely impact might be.
On the one hand, there are those who think the FRC will improve access to justice for many small to medium enterprises, particularly when taking on organisations with greater financial clout than themselves. Until now, the potential exposure to an unknown level of costs has acted as a deterrent to many who otherwise would pursue legal action.
On the other hand, groups like the Commercial Litigation Association (CLA) are adamant that the government should hold off on the reforms until the long-planned modernisation of the courts is complete. The group believes only then can any new fixed cost regime be delivered efficiently. The CLA also argues that:
- The government is pursuing an agenda to fix costs for business disputes without any real evidence that a problem exists.
- General commercial litigation is being lumped in with personal injury claims that are really driving moves to strengthen the fixed cost regime.
- Many commercial disputes settle through Alternative Dispute Resolution (ADR). The government proposals don’t provide businesses in dispute with any incentive to pursue ADR and are likely to further entrench parties’ positions.
The Law Society is also guarded when it comes to the FCR proposals, saying the regime should only apply to low-cost, straightforward cases and that any fixed costs must be set at a reasonable rate and reviewed regularly.
What’s next for legal costs reform?
It remains to be seen whether the MoJ will take on board any of the objections raised to reform from groups like the CLA. However, it is intent on implementing at least a version of the Jackson proposals, including an extension of the fast track basis for litigation claims.
As these cases matter hugely to you as our clients, we will keep a close eye on how the FRC reform develops. Inevitably, the effect of the Covid-19 pandemic will have had some part to play in the delay in implementing any of the proposed reforms thus far.
Lastly, it’s important to mention that the proposals we’ve discussed won’t have any influence on what lawyers charge clients. They relate only to costs one side in litigation pays the other.