Fixed Recoverable Costs: Is contracting-out the right move for your business?

In 2021 the Ministry of Justice set out how it proposed to extend the application of Fixed Recoverable Costs (FRC) regime in dispute resolution.

On 1 October 2023 those proposals were brought into effect with the creation of the Intermediate track and a new Practice Direction 45 to the Civil Procedure Rules.

The effect being that, with the exception of a few complex cases, the majority of civil litigation cases of £100k or less will be captured under the new extended FRC regime.

Although two willing parties may expressly agree to contract out of FRC, it is important to consider whether contracting out of the FRC regime actually achieves the right commercial outcome for your business.

Joe Creasor, solicitor in the Company Commercial team at Wake Smith looks at the details.

This article covers:

• What are Fixed Recoverable Costs?
• Can you contract out of the regime?  
• Is contracting out right for you?
• Your next move?

What are Fixed Recoverable Costs?

Fixed Recoverable Costs form part of the Civil Procedure Rules and are pre-determined costs or a mechanism for calculating costs in respect of the majority of civil litigation claims listed with a value of £100,000 or less and issued on or after 1 October 2023.

Costs will be assessed and awarded based on the stage of litigation. While this provides a level of certainty for parties it can also give rise to ‘successful’ parties losing out due to not being able to fully recover their costs from the other side.

The Intermediate Track is a new track in the civil court system and deals with claims valued between £25,000 and £100,000. The court at its sole discretion, however, may transfer a claim valued at less than £100,000 based on complexity to the Multi Track and in such instances those cases will fall outside the FRC regime.

Can you contract-out of the FRC regime?

Before 1 October 2023 it was established law that freedom of contract would prevail, and it was possible to contract out of any fixed cost rules and frequently businesses would do so by expressly excluding the existing FRC in their standard terms of business.

However, the rigid wording of the new Part 45 of the Civil Procedure Rules led to concerns that the new rules would prevent parties from contracting out of the extended FRC regime.

In an attempt to clarify the position, on 6 April 2024, amendments were introduced pursuant to the Civil Procedure (Amendment) Rules 2024 inserting the words: “unless the paying party and the receiving party have each expressly agreed that this Part should not apply”. This additional wording suggests that after initial pushback the Ministry of Justice has recognised the need for parties to have the freedom of contract and the ability, once again for businesses, to contract out of the FRC regime.

Is contracting-out right for you?

It is important to consider all of the facts and implications before you seek to contract-out of the FRC regime.

Although, if you are successful in litigation you will want to recover as much of your costs as possible, success is not always guaranteed.

If you are unsuccessful either in your own claim or a claim is brought against you, it is important to realise that the FRC regime may be beneficial in limiting your liability and exposure to the other sides costs.

From reviewing market trends, it appears that there is an aptitude for businesses to exclude the FRC regime in their standard terms and conditions, however this has not yet been judicially tested and any attempts may yet face pushback from the courts in their interpretation of the rules.

It is also important to consider whether such contracting out may fall foul of unfair contract terms legislation if simply contained in standard terms of business and once again this has not been judicially tested.

Due to these changes being in their infancy, it is also crucial to recognise the desire to contract out has not yet been judicially tested and any attempt to contract out may be seen as an unfair contract term, if not drafted correctly.

Your next move?

If contracting out of the FRC regime is something you have considered or are being advised to do, we would recommend you speak with one of our solicitors who can discuss the benefits and risk of such an action as applicable to your business.

For further information please contact Joe Creasor at Wake Smith Solicitors on 0114 224 2188 or email [email protected]

Find out more about our Company Commercial law services

Published 04/06/2024