• 5 min read

The fixed recoverable cost (FRC) regime: can parties contract out of the new FRC rules?

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The Fixed Recoverable Cost (FRC) regime, effective from 1 October 2023, marks a substantial change in civil litigation costs in the UK. Designed to provide clarity on recoverable costs, the new rules present challenges for businesses pursuing debt claims and disputes economically. This article examines the FRC regime, explores the possibility of contracting out of the rules, and offers guidance for businesses to navigate this new cost landscape.

What is the FRC regime?

Following the earlier cost reforms from Sir Rupert Jackson’s review in July 2017, the government have extended the reforms further from 1 October 2023.

Key changes from a commercial contract perspective include:

  • FRCs extending to all civil cases in the fast track (valued up to £25,000 with limited exceptions) and a new ‘intermediate track’ (for claims valued between £25,000 to £100,000).
  • The new rules affect (and in most cases, substantially reduce) the amount of costs a party may recover from the other side. The recoverable costs depend on the stage a claim reaches, detailed in Practice Direction 45.

The purpose of these rules is to provide greater certainty and visibility to parties on recoverable costs. However, many businesses may find it difficult to pursue debt claims cost-effectively under the FRCs. For some claims in the fast track, the limited FRCs compared to actual litigation costs may make it uneconomical to pursue a debt to trial, regardless of the claim’s strength.

Examples illustrating the impact

  • Example 1: Supplier A is owed an outstanding invoice of £25,000 by Company A, who disputes the invoice due to alleged defects with the goods. Litigation costs of running the claim to trial could exceed £40,000 plus VAT and disbursements, while FRCs could range from £6,000 to £22,000 plus VAT and disbursements depending on the complexity band assigned by the court. Such a claim might be uneconomical for Supplier A to pursue to trial.
  • Example 2: Company A is claiming £80,000 in damages from Company B for breach of contract. Recoverable FRCs for a 2-day trial could range from £30,000 plus VAT and expenses (complexity band 1), to £70,000 plus VAT and expenses (complexity band 4). Actual litigation costs could equal or exceed the claim value, leaving the successful party with significant irrecoverable costs.

These scenarios suggest an inevitable shift in how claims under £100,000 are likely to be approached and emphasise the need for early, pragmatic commercial solutions. As a result, businesses should consider contractually excluding FRCs.

Costs Recovery Pre- 1 October 2023

Before 1 October 2023, fixed costs only applied to claims under £10,000 (small claims track) and certain fast track claims related to low value personal injury. The position for small claims remains unchanged post October 2023.

In Doyle v M&D Foundations & Building Services Ltd [2022], the Court of Appeal held that the parties had expressly agreed within a settlement agreement that costs were to be assessed on the standard basis (i.e. to be determined based on a test of reasonableness and proportionate to the matter in issue), as opposed to the FRC applying, when they used the wording ‘the subject of detailed assessment, if not agreed’

Cost Recovery post 1 October 2023 – 5 April 2024

After October 2023, it was unclear if parties could continue contracting out of fixed costs, relying on the Doyle case. Part 45.1(3) of the Civil Procedure Rules (CPR) initially stated the court could only award costs ‘in an amount neither more nor less than the fixed costs.

The Position from 6 April 2024

The Civil Procedure Rule Committee published amendments to CPR 45, effective from 6 April 2024, clarifying that parties can contract out of the FRC regime if both parties expressly agree, using the revised wording below:

“…the court may only award costs in an amount that is neither more nor less than the fixed costs allowed by the applicable Section and set out in the relevant table in Practice Direction 45, unless the paying party and the receiving party have each expressly agreed that this Part should not apply.”

This aligns with what Sir Rupert Jackson originally intended in his 2017 report, for contractual entitlements to be free from procedural rules on cost recovery.(Chapter 5, paragraph 3.7), where he states:

“…the effect of CPR rule 44.5 is that in contractual costs cases the Court will make an indemnity costs order, unless the contract expressly provides otherwise. This reflects the substantive law position, as indicated by Gomba Holdings (UK) Ltd v Minories Finance Ltd [1993] Ch 171, Church Commissioners v Ibrahim [1997] EGLR 13 and Chaplair Holdings (UK) Ltd v Kumari [2015] EWCA Civ 798, that the contractual entitlement is free from the restraints imposed by procedural rules on recovery of costs and will be free from the FRC regimes suggested in this report…

..There is nothing in the rule making powers in respect of the CPR which enable the rules to exclude or override a contractual entitlement. Primary legislation would be required to alter that position. Although there has been some discussion of this issue at the seminars, the question whether the present position is satisfactory does not fall within my terms of reference. Wider policy issues are in play, such as what would be the effect on overall mortgage interest rates, if mortgagees could not provide for the contractual recovery of litigation costs. In this report, therefore, I do not address the question of contractual entitlement to costs…”

What does this mean? Implications for Contractual Costs Provisions

It remains to be seen how courts will interpret the requirement for parties to “expressly agree” to exclude FRCs. Pre-October 2023 contracts may not be drafted sufficiently to overcome the FRC regime. Going forward, contracts should specifically exclude the FRC regime to avoid its application.

Despite contractual provisions, ultimately, the Court retains discretion over costs awards. Conduct during litigation and efforts to resolve disputes can impact cost recovery. Courts have the ability to adjust costs payable by 50% if a party acts unreasonably.

What should businesses to do maximise recovery of their costs?

Businesses should review existing contracts, templates and standard terms and conditions of sale or purchase to ensure they can recover costs. The best way to do this would be to ensure such contracts and standard terms include an express right to recover legal costs and expenses over and above the FRC regime.

In our experience dealing with FRCs to date, they are encouraging early claim resolution, particularly those that are uneconomical to run to trial. Calculating the applicable FRCs is now critical in analysing claims under £100,000, heavily influencing parties approaches to litigation.

How we can help

Our Commercial Contracts team can assist with drafting new contracts and recommending variations to existing terms and conditions, to ensure the best chance of cost recovery.

Our Dispute Resolution team is experienced in helping businesses recover losses from third parties if disputes arise.

If you would like to speak with our Commercial Contracts team, please contact Louise Thompson on [email protected] or 023 8082 0486, or if you would like to speak with our Dispute Resolution team, please contact Maria Evans on [email protected] or 01202 338 580.

Disclaimer

This information is intended for general informational purposes only and does not constitute legal advice. We recommend seeking professional advice before taking any action on the information provided. If you would like to discuss your specific circumstances, please feel free to contact us on 0800 2800 421.

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