The extension of FRCs: a guide to “contracting out”

As we have extensively covered in recent articles, fixed recoverable costs (“FRCs”) already applied in low-value personal injury RTA and EL/PL cases, but from 1 October 2023, were extended to cover most civil cases valued up to £100,000.

FRCs are set amounts that the winning party in civil litigation is entitled to recover from the losing party at different stages of the litigation process, from pre-issue to trial.

From 1 October 2023:

• FRCs extend to almost all civil cases in the fast track (cases valued up to £25,000 in damages that will last no longer than a day, note there are exceptions such as housing disrepair claims);
• There is a new intermediate track for simpler cases valued between £25,000 and £100,000 in damages; and
• a new process and FRCs are available for noise-induced hearing loss claims.

Claims allocated to the fast track or intermediate track are now assigned to a specific complexity band, ranging from 1 to 4. The parties can seek to agree a complexity band but the court retains discretion to assign a claim as it sees fit. The complexity band will determine the level of FRCs, by reference to various tables set out in Practice Direction 45 of the Civil Procedure Rules (“CPR”).

The FRCs applicable (in line with the assigned complexity band) will depend on the stage at which a claim is settled/discontinued, or whether it proceeds to trial (subject to any appropriate uplifts or reductions).

Previous rules/ case law

As above, prior to 1 October 2023, FRCs only applied to low value personal injury cases RTA and EL/PL cases. This meant that the any winning party could only expect to recover its costs from the losing party up to the maximum level of the fixed costs provisions of the relevant protocols.

However, in the case of Doyle -v- M&D Foundations & Building Services Limited [2022] EWCA CIV 927 (“the Doyle case”), the Court of Appeal found that it was possible for parties to “contract out” of fixed costs. Here, the parties had reached a free-standing settlement agreement, which included a simple and well-understood provision that the appellant would pay costs subject to detailed assessment, on the standard basis, if not agreed. It was held, on that basis, that the parties had contracted out of fixed costs.

Contracting out

Historically, there were two different ways that parties could contract out of fixed costs:

1. Firstly, before any dispute arose. A party could include appropriate terms in its contract to allow for the recovery of its full legal costs from the losing party in the event of a dispute. An example might be a mortgage lender. A mortgage may, as is standard in most mortgages, include terms which allow the lender to recover its costs in enforcing the terms of the mortgage, should a borrower default.
2. The other is by the parties once litigation is underway, where parties could, by mutual agreement, agree that the claim is not subject to the FRCs (as in the Doyle case).

The effect of the extension of FRCs

Importantly, the new rules implemented as part of the extension of FRCs resulted in the apparent reversal of the Doyle case, as can be seen from the current wording of CPR 45.1 (3) (b), which confirms that, where FRCs apply and the court orders that a party is entitled to costs, “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."

This rule change, on the face of it, appeared to prevent fully consenting represented parties, once in litigation, to contract out of FRCs.

Recent developments

Despite implementation on 1 October 2023, the FRC regime remains subject to consultation. In addition to the consultation, the Association of Personal Injury Lawyers (“APIL”) issued judicial review proceedings against the Lord Chancellor, challenging several aspects of the FRC reform, including but not limited to the apparent reversal of the Doyle case, without consultation, on the basis that this would be a radical infringement of freedom of contract.

However, in a recent reported conference held by the Civil Procedure Rules Committee (“CPRC”) on 3 November 2023, it was agreed that CPR 45.1 (3) (b), as referenced above, should be amended to incorporate the wording “unless the paying party and receiving party have each expressly agreed that this Part should not apply”, reflecting the Court of Appeal Judgment in the Doyle case.

It is expected that the new rules will be amended to reflect this decision, clarifying the recent uncertainty regarding the parties’ ability, by agreement, to contract out of FRCs in proceedings.

Consideration points

For parties caught up in a legal dispute, understanding the potential costs risk is key.

In claims subject to FRCs, a party, when making settlement offers, must carefully consider the costs position, in particular whether it wishes to seek to agree to contract out of FRCs (agreeing terms that provide for costs in excess of the FRCs) or if they should apply. In the latter case, it is important that a party does not then unwittingly contract out of FRCs. There is already case law on this point. It is crucial that a party refers to the correct part of CPR 36 on which it intends to rely, avoiding using terminology such as “standard basis costs” and “reasonable costs to be assessed by way of detailed assessment”.

When entering new agreements or reviewing existing contractual terms, parties may wish to agree to “contract out” of the FRCs in order to pre-empt the costs position in any future disputes and allow a larger portion of costs to be recoverable. A potential defendant to a claim (and their indemnifying insurer, if any) may resist such attempts as a lower level of recoverable costs could act as a significant deterrent to issuing a claim at all. For example, a claimant may have significantly less of an appetite to issue a claim should only a limited portion of its costs be recoverable. Yet, if it is apparent that that a claim will be issued regardless, it may well be in both parties’ interests to ensure that whichever party is successful, a larger portion of its costs will be recoverable.

It is open to parties to agree contractual mechanisms which seek to increase costs recovery beyond the scope of the FRCs. Being mindful of costs considerations in the event of a dispute and making appropriate provision for cost recovery in contractual agreements, prior to the commencement of any dispute, should be of critical importance. Parties may also want to consider including mandatory ADR clauses, including arbitration clauses, to avoid litigation, where possible.

Weightmans can provide advice throughout the litigation process with regard to the risks and benefits of the FRCs and “contracting out”, achieving the best possible outcome for our clients. We can also review and update, if necessary, contractual agreements to ensure that they are fit for purpose, should a future dispute arise.