Can you contract out of Fixed Recoverable Costs? Since the expansion of the FRC regime in October 2023, this has become a key question for in-house teams and disputes lawyers. We consider how businesses can draft contracts to try and avoid the costs shortfall of FRC and how likely such attempts are to succeed.
Fixed Recoverable Costs vs Freedom of Contract
What is the Fixed Recoverable Costs regime?
Fixed Recoverable Costs (FRC) set the amount of legal costs a winning party can recover from the losing party in litigation. FRC now apply to most claims valued at less than £100,000 issued on or after 1 October 2023. The amount a winning party can recover will depend on the stage reached before settlement or judgment, the value of the claim, and the complexity of the case. The actual costs incurred are disregarded.
The main advantage of FRC is the predictability the regime offers on costs exposure and recoverable costs. However, a winning party subject to FRC risks an even greater shortfall in recoverable costs compared to the actual costs they incur.
How can you protect your business?
In-house lawyers must carefully consider if their contracts give the business the best chance of mitigating against the costs shortfall of FRC. One option is to add an arbitration clause to avoid litigation altogether. Many organisations include a contractual indemnity clause in their T&Cs, seeking to ensure their costs entitlement is free from the restraints imposed by procedural rules. But the extent to which parties can "contract out" of FRC lacks the certainty promised by the regime. In the past, courts have generally given effect to contractual agreements in relation to payment of costs. Where a party has contractually agreed to pay "reasonable costs", this has been interpreted as requiring the more generous indemnity basis of assessment, rather than the standard basis. There is limited authority on how much discretion the courts will have to give effect to contractual freedom in the framework of FRC. In 2022, the Court of Appeal allowed the claimant to contract out of fixed costs in circumstances where the defendant had agreed to pay the claimant's costs on a more advantageous basis in a settlement agreement (Doyle v M&D Foundations & Building Services Ltd). Will this approach survive the recent changes to the regime?
There are concerns that FRC rules now override contractual entitlement to costs. When this matter was raised by the House of Commons Justice Committee, the MoJ's vague reply was that the issue was complex and they were considering the way forward. In August 2023, the Association of Personal Injury Lawyers issued judicial review proceedings challenging the "apparent reversal" of Doyle without consultation. Most recently, the minutes of the Civil Procedure Rule Committee meeting on 5 October 2023 confirmed that the Costs Sub-Committee is considering the wording of CPR 45.1(3), which appears to restrict parties to fixed costs.
Businesses would still be well-advised to consider including an entitlement to costs in their contracts to give themselves the best chance of avoiding the costs shortfall of FRC. The precise wording must be carefully considered to give the best chance of protection against the background of uncertainty.
In the meantime, we await clarification from the courts or from the MoJ:
What happens when freedom of contract meets fixed recoverable costs?
To discuss how to mitigate the risk of losing out under the FRC regime, please get in touch with one of our specialists.
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