Fixed recoverable costs in commercial litigation: a blessing or a curse for businesses?

As a business, if you find yourself either pursuing or defending Court proceedings, a primary concern is likely to be how much the litigation will cost in terms of remedies such as damages and legal fees. Parties are particularly keen to ensure that legal costs are proportionate to the sums in dispute.

The Ministry of Justice has sought to meet these concerns by introducing Fixed Recoverable Costs (“FRCs”) to most commercial claims with a value of £25,000 to £100,000 which are issued on or after 1 October 2023. For relevant claims, this means that the amount of legal costs that can be recovered from an opponent by the successful party are fixed by law and only in limited circumstances can the Court deviate from these prescribed limits.

The FRC amounts are largely pre-determined by allocation of the case to a band of complexity; there are four bands of increasing complexity, each offering greater FRC amounts. The question of allocation to a track and assignment to a complexity band will therefore be of great significance for parties given that this will dictate the amount of costs recoverable (and payable) at the end of the case. The parties' views on allocation and assignment will be important but, ultimately, this will be for the court to decide.

All of this is a change to the commercial litigation status quo. At present, an award of costs is always at the Court’s discretion, save in very limited circumstances. There is little certainty over future cost recoverability at the outset of litigation. A common order as to costs is for the losing party to pay the winning party’s “reasonable” costs, the level of which is to be agreed between the parties or, failing any agreement, assessed by the Court. A cost assessment process can be contentious and therefore costly in itself. For a £25,000 to £100,000 claim, it is easy to see how legal costs can quickly become disproportionate to the sum in dispute. The extension of FRCs to commercial claims is intended to bring certainty to this process.

What does this all mean in practice?

• Expect changes to how parties (and their lawyers) approach strategy and tactics before and after a claim is issued.

Given the increase in the amount of costs which are recoverable post-issue, we expect more claims falling within the FRC regime to be issued at Court more swiftly, potentially curtailing the pre-action protocol process and missing opportunities to settle pre-action. Agreeing on a track and complexity band will become a real hotspot for disputes and potential satellite litigation, as parties will each have their own cost recovery agenda which will need to be balanced against the overriding objective of dealing with claims justly and at proportionate cost. Finally, the changes to the rules regarding Part 36 offers and the potential cost consequences of not accepting an offer will make Part 36 offers an even more tactical step.

• Pre-action costs may become recoverable even if the claim is never issued.

This could be a major change, which could be either a great bonus or a significant risk point for parties, depending on which side you are on. Whilst the guidance if not clear, it is possible that the draft FRC rules make the cost of engaging in pre-action correspondence recoverable from the losing party, meaning that sending letters or emails concerning a dispute, even if there is no intention of issuing proceedings, can expose a party to an adverse cost liability.

• More certainty over cost exposure in commercial litigation (ultimately).

For resilient businesses, maintaining robust budgets and creating certainty over expenditure is paramount. Whilst there will be teething problems, the FRC regime should ultimately remove the guesswork from forecasting legal spend and exposure to adverse costs in mid-value commercial litigation.

• But… expect uncertainty in the short term.

The new rules are still only in draft form. Even when the rules are made final, it is expected that much of the detail, interpretation and practical application will be left to the Courts (and therefore litigants) to iron out, meaning that lawyers and their clients will bear the burden of putting the new regime in to practice. It will really be a case of “watch this space”.

What should I do about FRC now?

• Review the claims on your desk, whether issued or not, and be prepared.

If you deal with commercial claims, conduct an audit of all actual or potential claims on your desk and consider what impact the FRC regime may have. Whilst there are certain specific exemptions, a safe assumption is that any commercial claim with a value between £25,000 and £100,000 could be caught by the FRC regime. For example, some claims should be issued before 1 October 2023 to avoid the FRC regime and benefit from potentially higher cost recovery. With most Courts still facing a significant backlog in issuing claims, this exercise should be undertaken now, as the relevant date is when the claim is issued, not when it is filed at Court. The last working day for claims to be issued before the FRC regime kicks in therefore is 29 September 2023.

• Think twice before commencing pre-action correspondence or rejecting a Part 36 offer.

The changes to the rules mean that engaging in pre-action correspondence or rejecting a Part 36 offer during a dispute could have significant cost consequences. These are risk areas which those conducting mid-value litigation, or even those sending out non-protocol-compliant demand letters at an early stage, must consider carefully.

• If you are handling claims in-house, consider mitigating risk by engaging a specialist external legal partner.

Specialist legal partners can help businesses navigate through these changes, and potentially handle commercial litigation with more certainty over cost than ever before. We expect to see an increase in law firms offering more innovative pricing to clients with claims falling within the FRC regime.

Stephanie Reeves, a Senior Associate in our Commercial Dispute Resolution Team, comments:

“Costs exposure is currently a major barrier to businesses litigating mid-value commercial claims. The extension of FRCs in commercial claims will shake up costs recovery and should ultimately create certainty over costs, contributing to robust budgeting processes and increased business resilience.

“All indications suggest that the FRC regime will likely be further extended to apply to commercial claims valued up to £250,000 in the not too distant future, so it is imperative for businesses handling commercial claims of this size to be aware of the changes and take practical steps now.””