From 1 October 2023, new rules have been introduced that affect the amount of legal costs that a winner can recover from a loser in civil litigation in the courts of England and Wales. These changes affect (with certain exceptions) civil claims worth up to £100,000.
The purpose of this note is to provide a high-level summary of those changes as they apply to civil court cases (excluding personal injury/medical negligence cases). It provides an overview of the present system and then looks at how this will change and highlights some key implications for parties to litigation.
Present position
It has been a long-established principle in English/Welsh civil court proceedings that generally a loser will be ordered to pay the winner’s legal costs of the case. Over the years, various exceptions and modifications to this general rule have been introduced, including the following:
- Very limited recoverable costs in the Small Claims Court: Money claims below £10,000 are usually dealt with in the Small Claims Court, where only the court issue fee, a very small fixed amount of costs and potentially some limited witness expenses and expert fees (if relevant) are recoverable. This means that both parties, if they instruct a solicitor to represent them, will not recover their solicitor’s costs from the other side if they win, which is why, for costs/benefit reasons, parties in the Small Claims Court are often not represented by solicitors.
- Fixed Trial Costs in Fast Track cases: Money claims between £10,000 and £25,000, where the trial lasts no more than 1 day and oral expert evidence is limited to 1 expert per party in any one field of expertise (with a maximum of 2 fields of expertise), are usually dealt with in the court’s Fast Track. The “loser pays the winner’s costs” applies, but with some recoverable legal costs in the case fixed by the court rules (e.g. trial costs). As a result of these fixed recoverable costs, a winner will usually suffer a shortfall between the costs they have paid to their solicitor and barrister and the costs that they recover from the other party.
- Fixed recoverable costs in Intellectual Property Enterprise Court (IPEC) cases: The “loser pays the winner’s costs” general rule applies in Intellectual Property claims of £10,001-£500,000 heard in the IPEC however there are fixed recoverable costs for each stage of proceedings and an overall cap of £60,000 total recoverable costs. There is also an IPEC Small Claims
Court for intellectual property claims under £10,000 where the losing party is likely to be ordered to pay very little or none of the winning party’s costs.
- Costs consequences of settlement offers: A party who decides not to accept a settlement offer made by the other party, but who then fails to do better than that offer at trial may be ordered to pay the other side’s costs incurred after the rejected offer (except in the Small Claims Court). If the rejected settlement offer complies with Civil Procedure Rule Part 36, there are other potentially adverse financial consequences. This means a winner, who may ordinarily expect to be awarded their costs, may in fact have to pay some or all of the other side’s costs if they have failed to do better at trial than an offer which they have rejected. This ‘cost risk’ is designed to promote early settlement.
- Qualified One-Way Costs Shifting (QOCS): In claims involving personal injuries, QOCS may apply to protect a losing claimant from having to pay the legal costs of the winning defendant (but not vice versa). This is intended to promote access to justice, by reducing costs-risks for those unfortunate enough to suffer an injury who seek compensation.
- Unreasonable Conduct: If a party has conducted itself unreasonably in the proceedings (i.e. where there is no reasonable explanation for their conduct), the court has a discretion to penalise it in costs; for example, by disallowing some or all of its costs, and/or ordering it pay the other side’s costs.
Once the court has ordered one party to pay the other party’s legal costs, the actual amount to be paid is assessed by the court either summarily at the end of the trial or through a separate detailed assessment process after the trial. Costs are awarded on one of two bases: the “standard” basis (being the usual basis) and, exceptionally, the “indemnity” basis (which will usually result in a higher recovery %). Under neither basis will a receiving party likely recover 100% of the costs it has incurred.
There may be a limit on the amount of costs that are recoverable under this process: for example, if the court approved a party’s costs budget for the case at the Case Management hearing in a Multi-track case, the total recoverable costs may be limited to the approved budget total unless the court otherwise allows.
The key “costs-risks” for litigants in the current system are, therefore, that:
- A party to civil litigation, whether claimant or defendant, is exposed to the risk that if they are unsuccessful, they will be ordered to pay the legal costs of the winning party. Whilst some of the recoverable legal costs may be fixed in Fast Track claims or limited depending on the type of claim, in Multi-Track cases this costs risk can be large, sometimes exceeding the amount in dispute; and
- A successful party to civil litigation is unlikely to recover 100% of the legal costs they have incurred in the case, leaving them with a shortfall which they will have to bear.
These risks present a potential barrier to accessing justice for, in particular, individuals and SMEs, whether they are the claimant or the defendant to a dispute, who do not have either existing legal expenses insurance cover or sufficient financial resources to fund their own legal costs and to cover the cost-risk of losing. In some cases, a claimant may be able secure a full or partial “no-win, no-fee” arrangement or a damages-based fee agreement with their solicitor or, in certain cases, litigation costs funding from a specialist funder, which pays their legal costs in return for a share of the upside on a win. They may also be able to purchase an ‘after-the-event’ insurance policy to cover the costs-risk of losing. Defendants, however, usually struggle to secure these arrangements.
Changes for cases issued after 1 October 2023
Whilst the basic principle that a loser will be ordered to pay the winner’s costs remains, the key change is that for claims with a value of up to £100,000, a winning party will now only be able to recover from the losing party fixed amounts of costs, which are specified in advance in the relevant court rules. These new rules will apply to most commercial disputes, including professional negligence claims, debt claims, property disputes, and business disputes, although judicial review and CPR Part 8 claims, among others, will not be subject to them.
On the one hand, this potentially limits a party’s costs risk of losing by allowing them to predict with greater certainty how much they might have to pay to the other side if they lose. It also allows them to predict with greater certainty how much they may be able to recover from the other side if they win.
On the other hand, the general perception is that the fixed costs levels are set at a low level, which is likely to mean that a winning party will suffer a greater shortfall between the legal costs it has incurred and the legal costs it can recover. In turn, this may present a financial barrier to access to justice or may encourage more robust conduct in litigation by wealthy parties who know that their downside is fixed.
It sounds a simple change, but it is not. The new rules are complicated, create some material uncertainties for parties and their legal representatives and are predicted to result in increased “satellite litigation”.
In basic outline:
- The Small Claims Court remains for cases up to £10,000. As before, recoverable costs (if any) are very limited.
- The Fast Track remains for cases worth between £10,000 and £25,000. However, now when a case is allocated to the Fast Track, it will be allocated to one of 4 complexity bands, with Band 1 for the least complex case (e.g. a debt claim) and Band 4 for the most complex case. Each complexity band has a menu of fixed recoverable costs for each stage in the case. As you would expect, the less complex the case, the less the amount of cost you are able to recover for any given stage of the case.
- A new Intermediate Track is introduced for claims worth between £25,000 and £100,000, where the trial is not expected to last longer than 3 days, oral expert evidence is likely to be limited to two experts per party, and the claim is brought by one claimant against either one or two defendants or is brought by two claimants against one defendant. If a claim is for a remedy other than for money, it is unlikely to be allocated to this track unless the court considers it to be in the interests of justice. The court also has the power to allocate more complex claims to the Multi-Track if it does not consider the Intermediate Track to be appropriate. Like the Fast Track, the Intermediate Track too has 4 complexity bands, with Band 1 for the simplest cases and Band 4 for the most complex. Again, each complexity band has a menu of fixed recoverable costs for each of the 15 specified stages of the case, with the more complex cases attracting higher recoverable costs.
- The Multi-Track remains for cases worth over £100,000 or cases that do not fall within the Fast or Intermediate Tracks. There are no complexity bands or fixed recoverable costs for these cases, but the current costs-budgeting process may apply.
Most of the fixed recoverable costs are expressed in a specific sum of money. However, some of them are expressed as a percentage of the value of the damages awarded (for example, £x + an amount equivalent to 40% of the damages + £y per extra defendant). Where a claim seeks a remedy other than damages, the new rules give an assigned value to that claim for the purpose of determining the applicable fixed recoverable costs amount.
There are other specific features that may apply; for example:
- there is a London weighting of +12.5% on the fixed recoverable costs;
- litigants in person can potentially recover no more than two thirds of the applicable fixed recoverable costs;
- where a witness’ or party’s vulnerability has required additional work resulting in a claim for costs at least 20% more than the amount of fixed recoverable costs, the court may assess the costs in a greater amount.
- in more complex cases (Band 4 cases in the Fast Track and all Bands in the Intermediate Track) a party may be entitled to an extra allowance for the purposes of obtaining specialist advice
The court will retain a discretion to award an amount of costs exceeding the fixed amount (excluding disbursements) in exceptional circumstances. The court also has a power to punish a party for unreasonable behaviour (conduct for which there is no reasonable explanation) by disallowing up to 50% of the fixed recoverable amount.
It also affects settlement. In particular, where a claimant makes a CPR Part 36 settlement offer, which is not accepted, and goes on to win, they will be entitled to a 35% additional amount of costs, in addition to the fixed recoverable costs, from their offer to the trial. Defendants do not benefit from this uplift if they make an offer. This “cost risk” is designed to place pressure on defendants to settle.
Key implications of the changes
A key intended benefit of this change is that both the claimant and the defendant should have better visibility at the outset of and during a case as to their potential costs risks – how much they will recover from the other side if they win; how much they will have to pay the other side if they lose – which will better inform their decision making, particularly in the context of settlement.
That said, the complexity bands are themselves complex. A key consideration for a party and their legal advisors at the outset of a case is therefore to ascertain to which complexity band their Fast or Intermediate Track case is likely to be assigned, as this will affect the potential level of fixed recoverable costs that they might recover if they win or pay if they lose. The parties can agree this but it is the court that makes the ultimate decision at the case management stage taking into account factors like the value and complexity of the case and the remedies sought. This creates a level of uncertainty for litigants at the outset.
It is also likely to lead to tactical considerations: claimants may seek to position their case so as to give it the best chance of falling outside or in a higher complexity band, whereas defendants may try to persuade the court to allocate the case to a less-complex band to reduce their costs risk. Careful thought will also need to be given to cases where there are multiple claimants or defendants who are separately represented.
But perhaps the most important implication is that successful litigants are likely to suffer a significant shortfall between the costs they incur and the fixed costs they can recover. Whilst this “shortfall” has been a feature of litigation to date, given the levels of fixed recoverable costs under the new rules, the level of shortfall could well be higher. This will affect a party’s “net outcome” from the litigation and will be relevant to their decision making.
One final observation: whilst the court positively encourages parties to litigation to pursue Alternative Dispute Resolution (ADR) processes, such as mediation, and has the power to punish a party who unreasonably refuses ADR, the amounts of fixed recoverable costs for ADR in the Intermediate Track are low and will almost certainly result in a significant shortfall, particularly in the context of mediations. Will this encourage less mediations and more direct but limited settlement negotiations?
The new tables of fixed recoverable costs (table 12 for the Fast Track and table 14 for the Intermediate Track) can be found on the Ministry of Justice’s website.
The Thrings Commercial Dispute Resolution team has an outstanding track record in achieving success in court, also offering expertise in mediation, pre-action work, settlement negotiations and arbitration to deliver commercially focused solutions to minimise disruption to your business. Contact us to find out more.
