Major legal costs shake-up fast approaching

The general principle applied by the courts at the conclusion of litigation that “costs follow the event”, or, in other words, that the loser must pay the winner’s costs, is widely familiar. Even though there have been various inroads into this maxim, it has remained the starting point for most cost discussions regarding substantial court claims. The current regime Civil claims heard by the courts in England and Wales broadly fall into three categories, known as tracks: 1. The small claims track is reserved for claims generally under £10,000 in value and where no expert evidence is required. Legal costs are generally unrecoverable, therefore; it is expected that the parties will not use lawyers or, if they do, they must pay their own legal cost themselves, even if they win. 2. The fast track is for claims generally between £10,000 and £25,000 in value and which can be heard in one day. The trial judge will assess costs in a fast-track case in a “summary”, or rough and ready manner, at the end of the trial. While the winner should expect to be awarded their costs, it is usual for there to be a shortfall between the actual costs incurred and those awarded by the court. 3. The multi-track applies to more complex claims, including generally all claims of more than £25,000 in value. The past decade has seen the introduction of costs budgeting in the multi-track, requiring the parties to prepare detailed budgets at the preliminary case management stage, to be agreed between the parties, or approved or amended by a judge. There is the expectation that the budgeted costs will not be exceeded, and trial judges will generally not assess costs. Typically, the judge will order an interim payment to be made, with a detailed assessment being made later by a specialist costs judge, if the parties cannot reach an agreement on what will be paid. Fixed recoverable costs A significant change is coming on 1 October 2023, when the Civil Procedure (Amendment No 2) Rules 2023 come into force. This will amend the Civil Procedure Rules 1998 to apply fixed recoverable costs to the fast track and to a new intermediate track, which will cover many cases currently allocated to the multi-track. FRCs have already applied for several years in most personal injury claims for up to £25,000. The intention of FRCs is to remove the requirement for costs budgeting from many cases to which those rules currently apply and to simplify the assessment of costs, by reference to fixed costs tariffs, depending on both the complexity of the claim and the stage it has proceeded to. FRCs will generally apply to all civil claims where proceedings are issued on or after 1 October 2023, with some exceptions, such as personal injury claims. Fast-track claims will be assigned to one of four bands, which will ascend in order of complexity. Band 1 will be disputes with the lowest complexity and will have lower FRCs, while band 4 will include the most complex cases and have greater FRCs. Any existing fast-track claims will be assigned to one of the new bands. Intermediate-track claims, which will be the simpler cases currently allocated to the multi-track, valued at between £25,000 and £100,000, will also be assigned to one of four bands, also divided by their perceived complexity, with corresponding FRCs applicable for each stage of the claim. The parties are encouraged to agree the appropriate band at an early case management stage. However, the claim can be assigned to a different band if the court decides it appropriate. FRCs will generally not apply to claims valued at more than £100,000, which will continue to be allocated to the multi-track and will remain subject to costs budgeting. Application to property disputes The government had initially wished to extend FRCs to all civil claims. However, it has now been confirmed that FRCs will not apply to housing claims for two more years after October 2023. The exemption from FRCs applies to claims for possession, disrepair or unlawful eviction relating to residential property. The exemption covers “mixed-use” premises – for instance, where licensed premises with ancillary living accommodation are let under a single tenancy. Therefore, while there are limited specific exceptions for some property-related claims, many real estate disputes will be dramatically impacted by the new limits on the successful party’s ability to recover its legal costs from its opponent. Commercial landlord and tenant claims between £10,000 and £100,000 will, therefore, fall within the new rules, and all property court claims are currently likely to be covered from October 2025. Property and building disputes valued at up to £25,000 should generally be allocated to fast-track band 4; however, there is less certainty regarding which of the four bands property and building disputes will be allocated to under the new intermediate track. Potential effects of FRCs In the short term, there is inevitably a rush by claimants whose proceedings are likely to be allocated to either the fast or intermediate tracks to issue their claims before 1 October and avoid the effect of FRCs on their ability to recover costs from their opponents. One positive result is the removal of costs budgeting from cases valued at up to £100,000, which should save parties costs and time. The costs budgeting process adds a layer of complexity and expense, for which it has been criticised, and which is harder to justify for claims of this size. The issue is that the FRCs are not generous and potentially significantly lower than the actual costs a party may have to pay for legal advice. For example, FRCs for the least complex fast-track cases are limited to £2,100. It remains to be seen what the effect of FRCs will be on the dynamics of litigation. Confident claimants may issue proceedings more quickly, to increase the level of FRCs they will be entitled to recover. Conversely, FRCs may promote earlier settlement if the parties are concerned that pursuing litigation (regardless of its merits) will result in a shortfall between the costs they will incur as against the FRCs. Lawyers are unlikely to be prepared to limit their fees to FRCs. This is likely to reduce the net return to winning claimants, or leave successful defendants, potentially forced to fight unmeritorious claims, substantially out of pocket. Inevitably, this will favour wealthier parties who are unconcerned about costs recovery, and potentially significantly increase the number of litigants in person. FRCs will not apply to disputes determined outside the court process altogether – for instance, by arbitration, expert determination, mediation or other forms of alternative dispute resolution. If FRCs would apply to a dispute if litigated, any settlement negotiations will, of course, take account of the new cost risks. A contractual ADR process, such as a rent review arbitration, would fall outside the regime, so it may be worth reconsidering the extent to which ADR is expressly applied. The “best practice” recommendation, in the RICS professional statement Service charges in commercial property, is for new leases to provide for ADR. This recommendation has not to date been widely followed. As many such disputes are likely to fall under the new rules, those negotiating leases should consider a provision for mandatory third-party surveyor determination, which may resolve service charge disputes quickly and could allow experts more flexibility regarding costs than the CPR. Will fixed recoverable costs affect a contractual entitlement to costs? What about cases where landlords bring claims to enforce the covenants of a lease which includes the typical clause requiring the tenant to pay the landlord’s costs of enforcing any breach? While the new rules make no provision for this scenario, the courts have previously accepted the principle that the successful party may have a contractual entitlement to costs from their opponent which exceeds the costs recoverable under a fixed costs regime imposed by the Civil Procedure Rules. In Doyle v M&D Foundations & Building Services [2022] EWCA Civ 927, the Court of Appeal said: “The rules do not make provision for the parties to contract out of the fixed costs regime, but it is recognised that there is no bar on them doing so.” In any event, the general position remains that a party can sue to recover costs due under a contract, including a lease. However, unsuccessful tenants are likely to argue that the effect of fixed recoverable costs is to limit the costs they are contractually liable to pay, particularly where the costs covenant refers to reasonable and/or proper costs rather than providing an express indemnity. Simon Hartley is a partner and Peter Hall is a legal director in the property litigation department at Weightmans Photo © Anthony/Pexels