Even the best-run businesses can find themselves embroiled in litigation from time to time.
1 October 2023 saw the largest change to litigation procedure in England and Wales since the Civil Procedure Rules (CPR) were introduced in 1999.
Civil court claims for over £10,000 and up to £100,000 will now be governed by new fixed cost recovery rules, which determine how much the winner can recover from the loser, for all cases issued on or after 1 October. There are no transitional arrangements other than for personal injury and other health damage claims, which are not relevant to this article.
The recovery of costs will be determined according to two tables of figures. The amount recoverable will depend on a number of factors including the “track” to which the case is allocated; the complexity of the claim, the stage reached before the matter is concluded (e.g. by settlement or trial) and the amount of the claim to some extent.
This is very different from the old rules.
A civil claim issued before the end of September, once defended, is allocated to one of three “tracks”:
However only “reasonable and proportionate” costs will generally be allowed. In the multi-track there is a process of “costs budgeting” that takes place during the case.
In most cases costs are assessed on the “standard basis” which is less generous to the recipient than the “indemnity basis”.
Instead of three tracks there are now four:
Cases in the fast and intermediate tracks will also be assigned to a complexity band.
A number of factors were formerly relevant to the amount of assessed costs, which in the fast track and the new intermediate track will no longer be relevant. These include:
Certain claims in which the main remedy sought is not financial (such as an injunction, or possession of a property) may be allocated to the fast track or intermediate track and the new rules will apply as if they were financial claims. Those in the multi-track will not be affected.
In some commercial contracts (such as guarantees, mortgages or leases), the parties will often agree that where one of them (e.g. the guarantor) is in default they will give the other party a full indemnity for their costs.
Will such a clause enable the party not in default to seek costs on the indemnity basis despite the introduction of the new rules? The answer is probably yes! However the new Part 45 of the CPR strangely refers to the court only being able to award “neither more nor less than the fixed costs”.
This could be taken to mean that parties are no longer entitled to agree a different outcome, but most commentators believe this provision has been included to stop parties to ongoing litigation from agreeing to a separate outcome e.g. in a consent order. It therefore seems highly likely that parties remain free to contract out before the event.
These are the meat of the new rules. The fast track is dealt with in table 12 and the intermediate track in table 14.
A case will be allocated by the judge to one of four complexity bands. In claims involving businesses, the guidance is somewhat limited although some guidance appears within Part 26 of the CPR. The band to which the case is assigned is going to be highly important. The parties can informally agree on a complexity band between themselves but the final decision rests with the court.
Much of the detail remains to be determined in practice.
However, most often, the winner of a case (including one that is settled on favourable terms) will recover less by way of costs than before, especially in lower value or less complex cases.
The new rules only determine how much the winner of the case can recover from the loser – not the amount they will have to pay their own solicitors.
Under the old rules, in a typical case worth over £25,000, the usual rule of thumb was that the winner can expect to recover somewhere 60% to 80% of their own costs.
That will now completely change and the amount recoverable will be determined in accordance with the tables, irrespective of how much the winning party has to pay the lawyers.
The rules have been promoted as encouraging parties to pursue claims (increasing access to justice) because of the certainty they will bring.
There may be some truth in this although for every winner there is likely to be a loser. Also court fees have increased steeply in the last 10 years or so.
It is likely that “fixed recoverable costs” will eventually apply to all claims valued at up to £250,000.
Any party faced with bringing or defending a court claim for over £10,000 and up to £100,000 is advised to take legal advice as early as possible, in all such cases but especially where the amount in dispute is at the lower end of that bracket.
As Andrew notes, unfortunately litigation or other legal expenses are costs that many small business’ are likely to face at some point. Whilst litigation expenses are generally regarded as legitimate expenses for tax purposes if incurred as part of a company or business’s normal trading activities this actually a complex area and there are numerous reasons why a deduction may be denied for legal and professional expenses. For example, an expense may be regarded as attributable to capital; it may be regarded as not wholly and exclusively for business purposes; or it may be seen as an application of profits already earned rather than as an expense in calculating those profits. Should you require any help with this or any aspect of corporation tax deductibility for professional expenses please do get in touch and we would be happy to assist.
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