2nd October 2023
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.
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:
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.
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:
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.
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:
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:
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.
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.
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