Will the impending increase in court fees lead to more arbitration as litigation becomes less viable?

The Ministry of Justice has recently announced that - reportedly with effect from next week - issue fees for all claims above £10,000 will be calculated at 5% of the value of the claim, subject to a maximum court fee of £10,000. Claims of £200,000 or more will cost £10,000 to issue, compared with £1,315 currently. Other fees will also increase, for example the cost of issuing an application will rise to £255.

According to figures quoted in the government’s consultation paper, there were approximately 900,000 money claims issued in 2012/13, and around 18,000 of these were for claims of £200,000 or more (the majority of claims were for £5,000 or less and 98% were for less than £200,000). In addition, approximately 1,400 unspecified claims were for £200,000 or more.

Plainly, the highest level of court fees impacts on a very small proportion of claims actually issued (judging by the 2012/13 figures) but still affects a substantial number of claims. Multi-million-pound litigation will not be materially affected by these changes. However, much litigation is at the lower end of the scale where the £10,000 issue fee will bite.   

A claim for unpaid invoices of £200,000 is too big for many SMEs to easily abandon and yet, paying £10,000 just to have a claim form issued is likely to make many think twice about going down the litigation route.

How then might a monetary claim be approached without issuing court proceedings that incur that fee? What might the consequences be in practice for claims at the £200,000 level?

For some the answer might be simple: proceedings will not be issued. Larger corporates with skilled managers will use the threat of issuing but will offer reduced settlement taking account of the cost that will be incurred to help persuade a recalcitrant counterparty to settle. We might see greater use of multi-tiered contractual dispute resolution clauses.

Alternatively we may see a greater use of statutory demands. For a debt claim where there is no genuine dispute on substantial grounds, this has always been a potent threat to persuade a solvent debtor to pay up or at least to bring the issue to the top of the agenda. However, the temptation to use a statutory demand where a court might be persuaded that there are grounds for dispute could rebound on the claimant in the face of an injunction to prevent presentation of a petition.  

Not only will it have to pay the other side’s costs of the application but it will also be in a weaker negotiating position.

Where the claim is for damages or a disputed debt, we might see greater use of mediation at pre-action protocol stage. The money that would be spent on issuing court proceedings could cover the costs of mediation in a reasonably straightforward dispute over £200,000.

But what if there is a dispute that requires a binding decision? The options are essentially either litigation or arbitration. The factors borne in mind in determining which might be a better option will be familiar to most commercial litigators and include considerations of speed and flexibility of process, cost, confidentiality and enforcement. 

For international disputes, enforceability is often a potential issue and the scales tend to come down in favour of arbitration on this consideration alone. In most jurisdictions, enforcing an award is much easier than enforcing a judgment obtained from the courts here and ultimately arbitration is more cost-effective.

But it is interesting to note that for an institutional arbitration via the International Chamber of Commerce, the administrative and arbitrator’s fees (based on the average for a sole arbitrator) for commencement of an arbitration for a claim of £200,000 are around $13,150 (just over £8,600). The balance of the fees, at around $15,850 (£10,400), are payable once the terms of reference have been agreed and split with the opponent.  

For an ad hoc arbitration, an appointment by the Chartered Institute of Arbitrators costs £600. The arbitral tribunal will charge at an hourly rate but it is fair to say that £10,000 would cover tribunal fees for a substantial part of a relatively straightforward dispute over £200,000. As with court issue fees, these are all recoverable costs.

The drawback of course with arbitration is that there needs to be an agreement to arbitrate. If there is no agreement in the underlying contract, it is often not possible to reach agreement once a dispute has arisen.

However, whereas prior to the court fee increase, costs considerations might often have pointed towards litigation rather than arbitration for disputes at the £200,000 level, the increase in court fees may well now tip the scales in favour of arbitration.

Michael Frisby, dispute resolution partner, Stevens & Bolton LLP