Fixed Recoverable Costs: Where are we now?

First Amendments

Before getting into the impact of FRC on litigation it is important we are all on the same page about what the FRC rules now are, particularly as the amendments were made to rather less fanfare than the implementation last October. The key parts of those amendments were as follows.

Recoverable Sums

The original level of FRC is now rather out of date, thanks to inflation. As of April 2024 they have been increased slightly across the board (3.2%) and these higher figures apply even where those from October 2023 applied before.

Are you accidentally “contracting out”?

There was some debate amongst practitioners before the April changes about whether parties could agree FRC did not apply if they wanted to (also known as “contracting out”). To clear that up CPR 45.1(1) now confirms that to be the case, stating that FRC apply to the captured cases:

“unless the paying party and the receiving party have each expressly agreed that this Part should not apply.”

However, from the ashes of one debate rises another, this time on what “expressly agreeing” actually requires. Do parties need to go as far in their agreements as saying “Part 45 does not apply” or would “costs to be assessed” be sufficient get out of FRC?

In all likelihood it will be in the receiving party’s interest to disapply FRC when they have incurred more than FRC let them recover. The particular risk, therefore, is a paying party inadvertently agreeing to pay more than FRC when there is no good reason to.

The starkest illustration of that is offers made with “costs to be assessed on a standard basis if not agreed”, which the civil litigators among us know are relatively commonplace. Given FRC do not have a standard basis (the sums are simply what the tables and Part 45 say they are), the likelihood is that if that wording is agreed the parties could be deemed to have agreed FRC do not apply. That, in turn, means the receiving party can recover costs from the paying party beyond their FRC entitlement and the paying party is going to be taking on a higher payment than may have been necessary.

As such, parties should ideally only use that wording when they want to get out of FRC and otherwise make clear what their costs intentions are before agreeing any settlement.

Counsel’s Fees

Last but not least, counsel can rest easier as it has been made clear their fees are recoverable from the other party when trial is abandoned, as follows:

• Fast Track: 75% if removed from the trial list or settled two days before and 100% if removed or settled on the day or a day before.
• Intermediate Track: 75% if removed from the trial list or settled two to five days before and 100% if removed or settled on the day or a day before.

NB: All reference to days in the section are “clear days”.

In practical terms, that means we all need to keep a close eye on pre-trial negotiations and any additional costs exposure that brings compared with the October 2023 rules.

What are we actually seeing?

How these rules are being and are best used in practice comes down to the case in question, so to help illustrate those points let us start with a hypothetical scenario.

• A claim between two parties (claimant and defendant) for negligent provision of professional services.
• The claimant has alleged that their case is worth £1,000,000 in damages.
• The defendant considers the claim is only worth £60,000 in damages and that there is no merit in the residual £940,000 because of the law on remoteness.

Ultimately the key point here is that the claimant considers it a multi-track claim (i.e. not caught by FRC) and the defendant considers it intermediate track (i.e. caught by FRC).

Searching high and low (value)

The first and perhaps most crucial point this illustrates is that it is not just claims pitched at £100,000 or less where these rules can and should influence the approach.

Taking the above example, were the defendant successful in arguing the claim is only worth £60,000 then it would fall squarely within FRC regardless of what the claimant had spent investigating.

Practically this means parties should be putting their minds to which losses have merit particularly early on:

• For the claimant, this is to avoid incurring costs beyond FRC they are less likely to recover and potentially have to pay their own solicitors from damages;
• For the defendant, this extra risk to a claimant’s damages can be used to incentivise commercial settlement if there is sufficient risk of the claim succeeding.

That is not realms apart from the way such claims were approached before FRC were expanded. What is starkly different, however, is that parties (particularly defendants) can and are able to use this new argument to make clear that there is an additional source of financial risk to unreasonably pursuing or defending a claim.

Pre-action disclosure

While always important, pre-action disclosure has become all the more so where FRC might apply and is something that can be deployed more effectively as a result.

In the above scenario, that could mean seeking pre-action disclosure from the claimant with a particular focus on the £940,000 the defendant considers irrecoverable. Given that the claimant still has to comply with the relevant protocol (i.e. narrowing the issues) they should provide that disclosure but doing so of course means incurring further legal costs that will eat into or exceed their FRC entitlement.

Because of those additional costs and the new cap on their recoverability, this has in our experience been a highly effective way of weeding out those “overshooting” claims and laying the necessary groundwork for much more reasonable and cost-effective settlements.

Paper trails

As we have explored in our previous article, value is not the be all and end all of whether FRC apply. Parties also have quite different interests in the presentation of a claim because of the new rules. Claimants are generally incentivised to make the claim appear as complex as possible to push it into the multi-track and out of FRC to maximise costs recovery. Defendants, on the other hand, are better off simplifying the claim and reducing it to as few issues as possible.

This has not yet radically changed what we are seeing about how claims and responses are presented but has made creating that paper trail all the more important.

For example, let’s presume in the scenario above the claimant sends a letter of claim with six allegations of breach. Now more than ever, the letter of response should make clear which allegations are duplicative and what the core issue(s) to be determined by the court is/are. It may, for example, be that although six allegations are raised, the court need only decided one or two factual issues to resolve them.

Should the claimant be unable to respond to that simpler narrative of the case, it will be particularly persuasive when you come to argue the case should be in the fast or intermediate track.

Settlement terms (mitigating uncertainty)

Even once those risks are factored into claims it is clear that there is still a general uncertainty about how or whether the rules will be applied given their infancy. That uncertainty in turn means parties now face potentially significant legal costs if they want to settle damages and dispute whether FRC apply.

In most scenarios one party is arguing FRC apply and another is arguing they do not. Given that risk, the practical response we have been seeing is reliance on costs-inclusive settlements to buy off the additional costs risks of a costs dispute with an uncertain outcome, both to claimant and defendant.

In our betting, however, it is likely that will all change again once the new regime for Fixed Costs Determination comes into effect (possibly in October 2024).

Unpredictability

Strategy aside, whether a claim is allocated to a track subject to FRC ultimately rests with the court.

Recent examples have shown that even where both claimant and defendant agree a claim is suitable for a FRC track the court may instead chose to deal with it outside FRC as a multi-track claim. That is something that can be mitigated against (e.g. by setting a paper trail) but will inevitably be a residual unpredictability that is with parties for some time to come while things continue to bed in.

Key takeaways…

If there is anything to keep in mind about the way the wind is currently blowing in FRC, it’s these:

• It is not just claims up to £100,000 that FRC are relevant to. Parties can and are properly raising the possibility of them applying in higher value claims with unmeritorious heads of loss which, if discounted, bring the claim under £100,000 and into the intermediate track
• Parties are quite rightly being robust in seeking pre-action disclosure when faced with a claim that looks inflated, in turn applying a new source of risk to the over-pleading party, and
• Terms of any offers are being considered that much more carefully to make sure a party does not inadvertently contract out of FRC when it is against their interest to do so

All of this said, it is still relatively early days for the expansion of FRC and those claims caught in October last year have only recently started undergoing the court’s case management.

These rules are here to stay so everyone involved in civil litigation should be keeping a close eye out as the court engages with them more and provides guidance and, of course, as they are expanded evermore (e.g. to lower value clinical negligence, intended for October 2024).

No doubt we will be revisiting this topic again later this year.