Should my Business Contract Out of Fixed Recovery Court Costs?

Businesses will want to consider whether they ought to make a change to their commercial contracts or, if a dispute has already arisen, to try to reach agreement with the other side about how the costs recovery in their dispute(s) should be decided.  This is  in light of a recent – and rather surprising – decision of the Court of Appeal that parties can change by agreement the amount of costs that the court can award the winner in a court case over up to £100,000 and so avoid the fixed sums that the courts would otherwise allow in those cases.

Changes to the court rules in 2023 introduced a specific sum that a winning party would get in applicable cases if they progressed past certain points.  It was not a cap: one gets one’s costs whether one has actually incurred costs of that amount or not.  And any sum incurred in excess of the amount is lost without any prospect of recovery.  This is known as the Fixed Recoverable Costs (FRC) regime.

The FRC regime offers the benefit of certainty.  But should litigants contract out of FRC or is it safer to stay within the regime?

In this article, we cover what the FRC regime is, how litigants can avoid its restrictions through contracting out and how this works, the advantages and disadvantages of the FRC regime, the risks involved in contracting out, why there has been recent confusion about the issue and the current state of affairs, as well as some general guidance on when contracting out might be worth considering.

Need help resolving a dispute quickly and cost-effectively? Please contact John Wiblin who will be happy to advise.

Key points for litigants to know about contracting out of Fixed Recoverable Costs

• The FRC regime places a cap on how much a successful litigant can claim towards their legal costs from the other side
• FRCs now apply to most simple claims valued at up to £100,000
• Parties can choose to ‘contract out’ of the FRC regime, either when including dispute resolution terms in contracts or when already engaged in litigation
• FRCs limit litigants’ risk by capping the amount they might have to pay if they lose their case
• However, they mean successful litigants may not be able to recover their full legal costs, leaving them out of pocket, which could put off potential litigants
• There are also concerns about whether the rates set for FRCs are based on good data
• When the FRC regime was extended in October 2023, confusion was created about whether parties still had the option to contract out of FRCs
• This confusion has now been resolved with updated rules affirming the right to contract out still exists
• While contracting out of the FRC regime means you can potentially recover more of your costs if you win your case, it also puts you at risk of having to pay more if you lose. And it removes all possibility of your being able to recover more than the fixed costs even if the other side were really difficult and made you spend more.
• Whether to contract out must be decided on a case-by-case basis, but if you are required to decide in advance, then relying on the standards cost regime may be the best choice as it can give you more flexibility over cost recovery
• Always take expert legal advice before agreeing to contract out of the Fixed Recoverable Costs regime

What is the Fixed Recoverable Costs (FRC) regime?

The FRC regime determines how much a winning party in civil litigation will get for its spend on preparing the case from the losing party. FRCs mean that litigants know in advance the maximum amount they will have to pay towards the other party’s legal costs if the other party wins.

Before October 2023, FCRs only applied to claims under the fast-track scheme where these were low-value (less than £25,000) personal injury claims related to road traffic accidents (RTAs) or claims related to employers’ liability and public liability (EL/PL).

From 1 October 2023, however, the scheme was extended to apply to all fast-track cases valued at up to £25,000 as well as most commercial claims valued at between £25,000 to £100,000 handled under a new intermediate track. A new process and FRC was also introduced for noise-induced hearing loss claims.

Is there any way for successful litigants to recover more of their costs?

Yes, but this decision has to be made in advance. There is the option to contract out of the FRC regime, either when entering a contract with another party or when litigation has begun. This means the parties would need to agree in writing not to be bound by the FRC regime and instead to rely on the standard costs regime, where court will look at the actual cost spend and assess its reasonableness.

How does contracting out of Fixed Recoverable Costs work?

In order to contract out of the FRC regime, both parties to the litigation will need to agree in writing that they do not wish to be subject to the Fixed Recoverable Costs regime. This can be done in one of two ways:

1. Where there is a contract between two parties, then contractual terms can be included specifying that a party can recover its full legal costs from the other in the event of a dispute.
2. If litigation is already ongoing between two parties, then they can simply agree in writing that the FRC regime would not apply to their dispute.

It is important to be very careful when entering into such an agreement. As the Doyle v M&D Foundations & Building Services Ltd case showed, there can be dispute over what terms related to contracting out of FRC mean and how they should be applied. It is therefore essential that these terms be drafted by an experienced legal expert and that proper advice is taken before signing.

What are the advantages of Fixed Recoverable Costs?

The key benefit of FRCs is that they can significantly limit the risk of entering into litigation by capping the amount that could be awarded in legal costs, giving more certainty over the potential losses a litigant could experience if they lose their case.

What are the disadvantages of Fixed Recoverable Costs?

The biggest disadvantage of FRCs is that they mean the winning party may not be able to recover the full cost of their legal advice and representation. As such, a successful litigant could still find themselves with significant costs to pay.

There is also the possibility that prospective claimants will be put off from pursuing legitimate claims because the likely legal costs they would be left with, even if successful, would be prohibitive.

The Law Society has also expressed a number of concerns about the recent extensions for the FRC regime, including around whether there is good enough data to set FRCs at an appropriate level.

Why has there been confusion around this issue recently?

When the FRC regime was extended, the wording of the new rules seemed to suggest that parties could no longer contract out of the scheme. Specifically, the rules stated: “the court may only award costs in an amount that is neither more nor less than the fixed costs allowed”.

This wording seemed to contradict the Court of Appeal’s ruling in the landmark case of Doyle v M&D Foundations & Building Services Ltd, that had established litigants could contract out of FRCs either before a claim was brought or once litigation had already been initiated.

So, can litigants still contract out of Fixed Recoverable costs?

The simple answer is, yes. In response to the confusion covered above, the Civil Procedures Rules Committee amended the new rules to clarify that parties could still contract out of FRCs.

These updated Civil Procedure Rules came into effect on 6 April 2024 providing certainty that parties do have the legal option of contracting out of FRCs if they agree to do so.

What are the risks of contracting out of Fixed Recoverable Costs?

When contracting out of FRCs, there is a clear risk that you are giving up the certainty of only being liable for a limited level of costs if the other side prevails in the litigation. By contracting out, you are risking the possibility of having to pay a much higher amount if your case is unsuccessful.

It is important to be realistic when agreeing to contract out of FRC that either party could end up having to pay a higher amount towards the other side’s legal costs, depending on who is successful. While being able to recover a higher percentage of your legal costs may be an attractive proposition, this has to be carefully weighed against the risk that you could be the one obligated to pay a higher percentage of the other litigant’s costs or even, more than they actually spent.

When might contracting out of Fixed Recoverable Costs be worth considering?

Whether contracting out of Fixed Recoverable Costs is likely to be a good idea or not will depend on the type of dispute that is likely to arise.  Litigants will have to make a judgement about whether the fixed costs regime or the standard costs regime can be expected to produce a better outcome. It is wise to get expert legal advice on this before deciding.

In general terms, FRCs may be beneficial for low value, relatively simple claims where the amount of legal work and, therefore, costs involved are more predictable. For more complex and unusual cases, contracting out and relying on standard rates may be the better option as it provides scope to recover the higher fees that are more likely to be accrued.

Of course, when entering into a contractual relationship with another party, it is not always obvious whether any potential future claim may be simple or more complex. In such cases, contracting out may be the better option as it will give you more flexibility. That said, once again, it is essential to seek expert legal advice before agreeing to such terms.

How Longmores can help with dispute resolution

At Longmores, our Dispute Resolution team have decades of experience supporting clients with a wide range of matters at all levels of the court system up to the Supreme Court. We take a pragmatic, flexible approach to ensure that our clients receive the best possible results in the way that best matches their circumstances and goals.

Wherever possible, we will seek an early settlement to save our clients time, money and stress, but we are always ready to robustly defend clients’ interests where court proceedings are required. Our team can provide realistic advice on cost matters, including whether contracting out of the Fixed Recoverable Costs might be to your advantage.

For expert support with any dispute resolution matters, please contact John Wiblin who will be happy to advise.

Please note, the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.