The battle between fixed recoverable costs and contractual rights to costs continues

Changes to the Civil Procedure Rules brought the majority of claims issued after 1 October 2023 and valued at less than £100,000 within the scope of the Fixed Recoverable Costs (FRC). If a claim is subject to FRC, the successful party will be restricted to recovering a fixed amount of legal costs from the opponent, the quantum of which will depend on the value of the claim, the stage at which the litigation completes, and the complexity band assigned by the Court.

We published an article in October 2023 considering how the new Fixed Recoverable Costs regime might affect those who already have a contractual entitlement for the recovery of costs.  This might be relevant to leases, mortgages, finance agreements, or to anyone contracting on terms of business that provide for the defaulting party to pay costs.

Can parties contract out of FRC by including a provision within their contracts entitling them to recover costs in a different manner?

Historically, the Court has been reluctant to disapply a contractual liability for costs unless there was specific reason. The Civil Procedure Rules (CPR) reflect that position.

CPR 44.5 states that “where the court assesses… costs which are payable by the paying party to the receiving party under the terms of a contract, the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which… (a) have been reasonably incurred; and (b) are reasonable in amount…and the court will assess them accordingly”

This is confirmed by the intention of Lord Justice Jackson that the FRC would not apply to contractual claims for costs. He said:

“A contractual entitlement [to costs] is free from the restraints imposed by the procedural rules on recovery of costs and will be free from the FRC regimes suggested in this report. The court will enforce the contractual right, subject to its equitable power to disallow unreasonable expenses. There is nothing in the rule making powers in respect of the CPR, which enables the rules to exclude or override a contractual entitlement. Primary legislation would be required to alter that position”.

At the time of writing our previous article, our view was that given that the CPR had not changed, a contractual liability for costs should prevail over the FRC. We concluded that, given the Courts retained ultimate discretion, and because of policy issues to seek to uphold FRC, it was impossible to predict with any certainty.

Statutory Changes

Since our previous article, Statutory Instrument 106(L.3) 2024 (“the SI”) made various amendments to the CPR including CPR 45.1 (which sets out the scope and applicability of fixed costs provisions).

The SI amended CPR 45.1(3b) by inserting the following wording (in bold):

“subject to rule 44.5 and to the application of any rule in those Sections or this Section by which costs are to be allowed, disallowed, increased or reduced, 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, unless the paying party and the receiving party have each expressly agreed that this Part should not apply.”

The SI is welcome in confirming that it should remain possible for parties to contract out of FRC, although we still await confirmation of this from the Courts.  The words “subject to rule 44.5” may have been included to indicate that the court will continue to give effect to the general principle that the court will have regard to any contractual entitlement to costs.

What should parties now do if they want to contract out of FRC?

The new wording brings into question whether parties need to expressly and specifically exclude Part 45 from applying, rather than just including a general term that the receiving party has a contractual entitlement to recover costs from the paying party.

For a belt and braces approach, you should consider drafting / amending contracts which includes a contractual entitlement to costs to specifically exclude the provisions of Part 45 so that the contract is not caught by the FRC. This would certainly be the cautious approach until we have further guidance from the Court.  The risk of detriment caused to the receiving party if its recoverable costs were capped by FRC needs to be balanced against the cost of negotiating and amending contracts in this way.