It isn’t necessary to read Bleak House, centred on the infamous Jarndyce v Jarndyce inheritance dispute which dragged on for many generations devouring the entire estate, to understand the problem that is the costs of litigation. The author’s view of the chancery court system is withering: “Suffer any wrong that can be done you rather than come here!” This article aims to provide a simple overview of the issue and of new rules aimed at resolving it.

The problem

A more recent, real-life, example is the case of Court v Van Dijk, a dispute over who should pay for work carried out on a common private drain. Damages of £4,227.88 plus interest were awarded to the claimants. Unfortunately – for everyone as it turns out – that judgment was set aside by the Court of Appeal, after which the total costs of the dispute reached £310,000, seventy times the value of the initial award. Both parties ended up far worse off than they would have been if either had simply swallowed their pride and paid for the drain repairs at the outset instead of…pouring their money down it. Farcically, the case became impossible to settle because of costs, each side fighting for a win for reasons which no longer concerned the drain itself.

It is not difficult to see why people and businesses of moderate means are put off litigation as a means of resolving disputes. However compelling it may seem, a claim may not succeed in court. Failure typically results in having to pay the opponent’s costs. That might be a risk worth running, but to risk having to pay both your own and the other side’s costs, in aggregate a sum potentially several times the value of the claim in the event of losing, turns the mental SWOT analysis all potential litigants should undertake before proceeding into something more closely resembling a game of Russian roulette where around half the barrels contain a bullet.

Conditional fee agreements and ‘after the event’ insurance policies mean that, broadly, the wealthy or the impecunious are in the best positions and larger claims make the risks more worthwhile than smaller ones, where the irrecoverable ATE insurance premium and CFA success fee can wipe out the winnings leaving only a pyrrhic victory in their wake.

So what is the answer?

Court fees have increased dramatically over recent years as the Ministry of Justice seeks to make the courts self-financing. However, they are usually recoverable in full, if you win.

Control of what your own solicitor can charge you is largely in place. Your solicitor must provide detailed costs advice and estimates in advance, update them as matters proceed and broadly invoice within them. You can have your solicitor’s costs assessed at the conclusion of the claim if they seem excessive.

But what about the other side’s costs, those you will have to pay if you lose? This is the big uncertainty and therefore the one area where introducing clarity would help potential litigants to decide whether to take the risk and to litigate, or not.

Some such clarity has now been introduced by new rules which came into force on 1 October 2023 in respect of most claims of between £25,000 and £100,000. There are a number of other requirements – the claim must involve no more than 3 parties and an anticipated trial of no more than 3 days – but the vast majority of claims falling in this value bracket will be allocated to the new ‘intermediate track’ leaving only the more complex, higher value ones outside it.

Complexity bands

Such claims will have four complexity bands and a case must be assigned to one of them. Unsurprisingly, this means that simple debt claims will be in band 1 and complex professional negligence or business dispute claims will be in band 4. The parties are encouraged to seek to agree the band, failing which the court will assign the case. The bands are not defined in an “overly prescriptive” way, so there is likely to be room for disagreement…

Fixed recoverable costs

…which there will be, because a matrix, interacting the complexity bands with the stage the claim has reached, will determine the level of fixed recoverable costs allowed to the victor. So, the higher the band of claim and the later settlement is reached (there are 15 ‘stages’ in total) the higher the costs payable by the loser to the winner. The matrix can be viewed here.

So, for example, a complex (band 4) claim which settles after the exchange of witness statements (S5) will produce a costs entitlement to the winner of [£20,000 + 18% of the claim] + VAT + disbursements.

What is the purpose of the changes?

Claims worth between £25,000 and £100,000 are neither small claims where legal costs are generally irrecoverable, nor generally large complex matters where costs have to be assessed by reference to the work required to progress them. The clear intention of the reform is to ensure three things in respect of the costs of such claims: a general reduction in their level, certainty as to their amount and an overall simplification of the process. So gone are costs budgets in advance of trial, costs assessments afterwards and the so-called ‘indemnity principle’ – capping costs recovery from the other side to what the case had cost you to progress. It is now simply a question of picking the column (the correct band) and reading down to the ‘stage’ where a case settles, to produce the costs liability (net of VAT and court fees). More generally, in a wide range of civil claims, it is hoped that the reforms will enhance access to justice by reducing costs and risk, thus allowing for more informed decision-making throughout the litigation process.

Will it work?

The new rules are complex and will take time to bed in. It is clear that the new banding and loose terminology are likely to lead to disputes, at least initially.

One possible side-effect will be a move away from hourly rates charged by solicitors to their clients towards fixed fees for the relevant stages of the claim. Importantly, solicitors will not be prevented from charging more than the sum recoverable from the other side but client pressure and market forces are likely to limit the ability to greatly exceed the band amounts in all but the most factually or legally complex disputes. Solicitors will need to be clear from the outset that this might happen and how big the bite into the winnings will be.

So far, this is better for clients than for solicitors. The legal profession has not traditionally been at the forefront of professional efficiency drives and it is probable that less efficient firms, unable to cut their reliance on support staff and determined to retain the hourly rate basis of charging, will not be able to operate profitably within the new rules, with obvious consequences.

On a more positive note, firms like Seddons – which are ready to embrace the changes – will have opportunities to both provide a quality service to clients and thrive. Certainly, litigation will need to be conducted more efficiently than the hourly rate system of charging encourages it to be, with evidence tailored far more closely to what is actually needed to prove (or defeat) the claim. This, however, is what we at Seddons have been doing for years.

Anecdotal evidence suggests a probable increase in the number of claims brought under the fixed costs regime. It is an economic truism that as costs fall, demand rises and with far fewer costly and time-consuming costs-related disputes, there will be capacity to take on other claims.

Likewise, with the financial risks of losing reined in, the disincentive to go to trial will be greatly reduced. Trials will lose some of their bite. The proportion of cases currently settling pre-trial – around 95% – may well fall quite substantially.

So, for clients, the new system is likely to be overwhelmingly positive.