Extending fixed recoverable costs (FRCs) should make legal costs ‘more certain and predictable’ and ‘encourage early settlement’. So predicted the Ministry of Justice in its final impact assessment, before proceeding to introduce a radical extension of FRCs for most civil claims worth up to £100,000, together with a shiny new ‘intermediate track’, in October 2023. So has this bold move delivered on these promises? Worryingly, feedback so far suggests it has done precisely the opposite: creating uncertainty over costs and disincentivising parties from settling very early.
On 31 October last year, the MoJ and Civil Procedure Rule Committee opened an ‘interim implementation stocktake’ to examine how the FRC extension is working. It closed early this month, allowing just seven working weeks to respond. On the one hand, it is encouraging that the MoJ is seeking feedback on the extended FRC regime. The trouble is that it is being sought too early.
It is only two years since the reforms came in, so a huge number of FRC claims have not yet concluded or even reached allocation stage – especially given the state of court backlogs. Personal injury claims are particularly unlikely to have got very far, given that extended FRCs only apply where the underlying incident (rather than the issue of proceedings) took place on or after 1 October 2023. As both the Law Society and the Association of Costs Lawyers pointed out in their responses to the stocktake, a fuller consultation will be needed in a year or two when proper, detailed evidence will be available.
Despite the reforms still being in nappies, however, some problems are already emerging. The biggest disappointment is their failure to deliver on what is supposed to be the number one benefit of fixed costs: certainty.
In practice, lawyers still do not know at an early enough stage what costs they will be awarded. The criteria for allocating a case to a particular track and band are too complex and confusing, with allocation decisions not made until after significant work has already been conducted, and a concerning level of judicial inconsistency as to how to apply the rules.
The lack of flexibility for moving between bands is also causing problems. The Law Society cites the example of a firm that won a commercial case involving an allegation of fraud against the defendant. The claimant company’s lawyers argued that the case belonged in the multi-track because it was complex and met the criterion of being likely to last more than three days at trial. The court preferred the defendant’s arguments and allocated it to the intermediate track, where fixed costs apply. At trial, the claimant won, with the hearing lasting more than three days. Yet when the claimant’s lawyers applied for the case to be reallocated to the multi-track, the judge was ‘sympathetic’ but declined to make the switch because there were no ‘exceptional reasons’ to do so, as required under the rules.
This meant the claimant was limited to fixed costs, creating a significant gap between the actual costs incurred by the firm and the sum that could be recovered from the losing defendant. Instead of this shortfall being paid by the defendant that had been proved to be in the wrong, the burden would either fall on the successful claimant, through a deduction in its damages, or be borne by the law firm itself. The Law Society said this case was a ‘clear example’ of how the misallocation of cases at the outset can lead to costs being awarded that are disproportionately low. It said the court should be able to reallocate cases as it sees fit, without the need for ‘exceptional’ reasons.
It is not just the rules relating to track and band allocation that are causing problems, but also the way these are being interpreted, with judges confessing they have received no guidance on how to apply them. Lawyers also expressed concern over the quality of directions coming through the damages claims portal, which are often wrong, with cases not allocated to the right track. In one case, incorrect directions were received through the portal just nine minutes after the directions questionnaire was submitted, raising questions about whether decisions are automated.
Another issue is the disproportionately low level of fixed fees on offer for cases that settle pre-issue. As these do not cover the actual cost of work done, lawyers are incentivised not to settle until a later stage, where the fixed costs available are more proportionate. This means the new regime is actually discouraging very early settlement.
It is clear from the initial feedback that the extended FRC regime is far from perfect. A full picture is yet to emerge, however. Any gaps in evidence at this stage should not be taken to show that the FRC extension is working. Crucially, this early stocktake must not become a means of avoiding a more detailed, fairer assessment once more cases have actually travelled through the regime, when the full extent of any problems truly emerges.
Rachel Rothwell is editor of Gazette sister magazine Litigation Funding, the essential guide to finance and costs
For subscription details, tel: 020 8049 3890, or visit Litigation Funding
1 Reader's comment