Any party that has engaged solicitors to handle a commercial dispute will recall how the magnitude of the legal costs on each side and the risk of having to pay them all, very quickly begins to influence strategy and negotiation. This one factor can become every bit as weighty in decision-making as the principal issues in the case and the commercial party’s objectives.
In England and Wales, our costs rules – particularly the general principle that costs should ‘follow the event’, meaning that the winner in litigation will generally recover their legal costs from the loser – form a crucial part of the litigation landscape. Costs awards and their amount are ultimately subject to the court’s discretion and assessment and therefore do not go completely unchecked, but given the very wide bounds of discretion, it is impossible to quantify the potential exposure in advance. But is that about to change?
That costs should follow the event appears set to stay, for the time being anyway. However, the seemingly limitless liability for costs run up by the counterparty could, it seems, be on borrowed time.
What are fixed and capped costs?
When speaking of fixed or capped costs, firstly, it is important to appreciate that we are talking about “recoverable costs” or the amount of costs that a successful party can recover from a losing party. It is also important to differentiate between fixed costs and capped costs; capped costs recovery still relies on the practice of evidencing time actually spent and then limits recovery to a set figure. A party’s costs of conducting its own claim or defence are not fixed or capped as between the party and its solicitor, and there are no proposals to change this.
If fixed costs apply, a successful party can only recover the prescribed fixed costs and will sensibly be wary of incurring costs that it will not recover even if it wins. Parties will want to factor this risk into decision-making regarding both the instigation of claims, and their settlement.
It is envisaged that for certain cases, fixed costs will be introduced alongside a streamlining of procedure, brought to bear by the implementation of procedural rule changes. Ultimately, it is thought that this two-pronged approach will have the effect of reducing the costs parties pay to run smaller cases. It will also make possible financial outcomes easier to predict.
How does this change the current position?
Historically, a successful party awarded their costs nearly always suffered a shortfall. This is because successful parties generally recover agreed or assessed costs, not actual costs.
Prior to the introduction of costs budgeting (explained below), as a rule of thumb, a recovery shortfall of approximately one-third was expected. The assessment process undertaken by the court, invoking a number of well-established principles and resolving doubt in favour of the paying party, typically gave rise to this relatively large tranche of ‘irrecoverable cost’.
The introduction of costs budgeting in 2013 has certainly made the outcome more predictable. Since then, most litigating parties have been compelled to file costs budgets at a relatively early stage of the proceedings. The budgets are ultimately approved by the court and well-advised parties should not generally expect to recover costs that exceed their approved costs budget. The budget has become the benchmark and the ‘typical recovery’ of two-thirds has disappeared. Whilst this has introduced greater certainty and control over recoverable costs, the budget is prepared after the parties are already committed to seeing out court proceedings and have incurred the not inconsiderable costs of serving their statements of case and attending a case management conference. The parties are not armed with this information in advance.
The budgeting process is not without its detractors. The process has of itself added a considerable layer of cost. Budgets have to be carefully prepared in light of every foreseeable possibility, exchanged with the opposing party, and negotiated and agreed if possible.
Fixed costs are not entirely new; they are already in place for very limited categories of smaller claims proceeding in either the small claims or fast track. Commercial litigants might also have come across similar in the Intellectual Property Enterprise Court (the IPEC). The IPEC is a specialist part of the High Court that determines intellectual property disputes and operates a capped costs regime.
Through the much wider introduction of fixed or capped costs, the Government strives to further curtail a potential liability that has historically been very much at large from the outset, and drive litigation costs down to a level that is proportionate to the sum claimed in each case.
What are the proposals?
Sir Rupert Jackson has strongly advocated fixed costs for a number of years. In 2014, he advocated their eventual introduction for claims worth up to £250,000. However, in his Review of Litigation Costs: Supplemental Report Fixed Recoverable Costs published in July 2017 he draws back, recommending fixed costs for all cases in the fast track (up to £25,000 in value) and the introduction of a new ‘intermediate track’ with four ‘complexity bands’ and a streamlined procedure, for cases worth between £25,000 and £100,000.
He proposes that the level of fixed costs be calculated in accordance with a fairly complex grid, directing the addition of a fixed sum to a particular percentage of the damages claimed or recovered (which varies across the four complexity bands), in order to calculate the level of fixed costs for different stages of the proceedings, Band 1 being the least complex, Band 4 being the most complex.
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For higher-value cases, worth between £100,000 and £250,000, Sir Rupert Jackson recommends a capped costs regime and proposes a Capped Costs Pilot, recommending that if successful, it become available more widely.
Following the report, a voluntary 2-year capped pilot scheme was indeed run in the Business and Property Courts in Leeds, Manchester and London Circuit Commercial Court from January 2019. Claims worth up to £250,000 were eligible. Costs recoverable from the losing party were capped by reference to the stages in the proceedings resulting in an overall cap of £80,000 excluding VAT. By the time the pilot came to an end in January 2021, only three claims are thought to have been tried within its remit. The Civil Procedure Rule Committee reflected that it had not “captured the imagination” of court users.
On 6 September 2021, the Ministry of Justice responded to the 2019 Consultation paper that followed Sir Rupert Jackson’s 2017 Review, endorsing fixed recoverable costs (“FRC”), but only for claims worth up to £100,000. Quoting from the Government response:
“Following Sir Rupert’s recommendation, the Government believes that a simplified scheme of costs, such as FRC, has the advantages of (i) reducing actual costs (through a simpler procedure); (ii) ensuring that costs are proportionate; and (iii) controlling costs in advance, which promotes both certainty and discipline and encourages earlier settlement. In principle, then, this is what our new FRC schemes seek to deliver, and in doing so, they will enhance access to justice.”
However, the recommendations are not to be implemented unaltered. The Government opted to expand the fast track to cases up to £100,000 and introduce the four complexity bands into the fast track, but NOT introduce a new intermediate track. It is proposed that the figures proposed by Sir Rupert Jackson be uprated for inflation in line with the Services Producer Price Inflation (SPPI).
Steps towards implementation
Progress towards implementation has been very slow. The Minutes of the Civil Procedure Rules Committee dated 13 May 2022 recorded: “the intention is for the rules to be approved by the CPRC at/by the December 2022 meeting, so that the FRC reforms are implemented in April 2023.”
Will fixed costs by introduced in 2023?
Fixed costs for most claims worth up to £100,000 certainly appear to be coming next year. Some commentators anticipate that the coming fixed costs regime will be extended to cover cases up to a value of £250,000, possibly within 5 years.
How will the changes we expect next year influence litigant behaviour? As far as smaller claims are concerned, how litigation is typically conducted will have to change. The recoverable costs will be fixed at a level such that recovery is broadly proportionate to the sums claimed. The new procedural rules will streamline the litigation process as it applies to these cases, limiting the amount of work that can sensibly be undertaken, restricting the length of statements of case, the number of witnesses, the length of trials and in the majority of cases confining applications to the case management conference or ‘on paper’ determination.
The fixed costs rules and procedural changes together will force lawyers to strongly recommend that only proportionate steps are taken at proportionate cost (including greater use of cheaper, junior lawyers). It is likely to forcibly instil a new discipline in both lawyers and clients. If clients wish to adopt an “at any cost” approach to their battles regardless, they are likely to be left out of pocket at the end of the day. To the extent that the costs incurred exceed the fixed recoverable costs, they will remain the burden of the successful party.
If you would like to discuss a commercial dispute, please contact Rebecca Tinham.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.