The FRC regime will drive claimants to litigation and to prolong settlement rather than seeking to resolve claims pre-litigation.
Watch this space: fixed recoverable costs are coming
On 28 March 2019, the government launched a consultation on the extension of fixed recoverable costs (FRCs) in cases worth up to £100,000. The consultation sought views on a number of recommendations made by Sir Rupert Jackson in his ‘Review of Civil Litigation Costs: Supplemental Report Fixed Recoverable Costs’ published in July 2017, with the government aiming to take forward most of his recommendations.
In a long-awaited update, the Ministry of Justice announced on 6 September 2021 that the proposals to extend FRCs will indeed be introduced.
The case for extending fixed recoverable costs remains strong: uncertainty of costs hinders access to justice, while certainty of costs set at a proportionate and fair level enhances it.
Lord Wolfson of Tredegar QC (6 September 2021)
Summary of the government’s response
- FRCs will be introduced in the fast track for most civil cases worth up to £25,000 and there will be four bands of complexity:
- Band 1: RTA non-PI and credit hire.
- Band 2: RTA PI (within the Pre-Action Protocol) and holiday sickness claims.
- Band 3: RTA PI (outside the Pre-Action Protocol), employers’ liability accident, public liability, tracked possession claims, housing disrepair, other money claims.
- Band 4: Employers’ liability disease claims (not including noise-induced hearing loss) and the most complex fast track claims.
- An unsuccessful band challenge will incur a costs liability of £150.
- The fast track will be extended (rather than the creation of a new separate intermediate track as originally thought) to include ‘intermediate’ cases valued between £25,000 and £100,000, with the four bands proposed by Lord Justice Jackson to be retained as follows:
- Band 1: the simplest claims that are just over the current fast track limit, where there is only one issue and the trial will likely take up to one day, e.g. debt claims.
- Band 2: will be the ‘normal’ band for intermediate cases, with more complex claims falling into Band 3.
- Band 3: will be the ‘normal’ band for those complex intermediate cases.
- Band 4: the most complex claims, with claims such as business disputes and ELD claims where the trial is likely to last three days and there are serious issues of fact/law to be considered.
- An unsuccessful band challenge will incur a costs liability of £300, although this will be kept under review.
- Cases involving mesothelioma/asbestos, clinical negligence, actions against the police, child sexual abuse, and intellectual property will be excluded from the extended fast track at this stage.
In terms of the banding for ‘intermediate’ cases, the government states:
We do not propose to be more prescriptive in allocation criteria for intermediate cases beyond those proposed by Sir Rupert… We maintain that it will be the role of judges to exercise their discretion and ensure that intermediate cases are appropriately allocated…
The government envisages the FRC regime as a way of controlling costs in advance by prescribing the amount of money that can be recovered by the winning party at set stages of the claim. In support, the new rules will include a greater emphasis on penalising delays in the resolution of cases: the government will implement an uplift of 35% of FRC where Part 36 offers are beaten, and further, there will also be a 50% uplift on fixed costs where a party has engaged in ‘unreasonable behaviour’.
Recap: Kennedys response to the 2019 consultation
We remain of the opinion that the extension of fixed recoverable costs as a means to stop inflated litigation costs and improve access to justice, is a positive step. However, the proposals in 2019 gave us some cause for concern.
In our response to the consultation, we raised access to justice as a key concern, as a significant number of the changes proposed sought to penalise defendants and encourage them to settle, seemingly irrespective of the merits of a claim. We also identified some unintended consequences which would flow from the 2019 proposal, namely:
Driving litigation not settlement
Damages increased outside of expected inflation
There is an ongoing trend to include ‘add-on’ heads of loss or exaggerated claims, as costs are linked to damages.
Lowering the cost of litigation removes vital vetting processes, currently provided by regulated claimants, to help weed out unmeritorious claims. In their place, claims management companies (CMCs) will move in and continue their claims farming behaviours. The FCA now regulate CMCs, but we are mindful that CMCs are effective in navigating new obstacles and we would like to see other related companies, such as credit hire and rehabilitation companies brought under the FCA remit.
Limited information provided by the claimant
Making it difficult for defendants to efficiently review liability and quantum.
Shift of practice focus
Cost pressures created by the reforms may cause claimant firms to seek more lucrative revenue streams, including claims that fall outside a less profitable, FRC regime. Examples include abuse claims, catastrophic injury and clinical negligence claims, where inexperienced claimant lawyers hinder the process and extend life cycle and costs.
Are another opportunity to derail the FRC regime and for claimant firms to increase profits by the ‘adding on’ of ‘disbursements’, where they have a clear financial interest.
We explained that ultimately the 2019 proposal as drafted, would lead to disputes over band allocation, resulting in a waste of court resources in resolving such disputes, delaying resolution of matters, encouraging bad behaviours and a missed opportunity to increase litigation efficiency. With the low penalty to be applied to these types of applications, we are of the view that both parties are likely to take the risk as there is more to gain than lose.
As such, we provided an alternative solution; all cases of a particular type should be allocated to one band. This removes an opportunity to game the system and any disincentive to fighting unmeritorious claims. Our proposal was as follows:
- All RTA property damage only, including credit hire – Band 1
- All RTA PI – Band 2
- All Package holiday sickness – Band 2
- All EL/PL/disease – Band 3
- All housing disrepair and property disputes – Band 3
- All construction cases – Band 4
- All professional negligence – Band 4
Reactions so far: what does this mean for insurers and compensators?
We remain of the opinion that extending fixed recoverable costs in civil cases is a positive step. It will provide certainty over costs, and hopefully a move closer towards proportionality. That being said, the initial view seems to be that there will be areas within the rules which will be left for the judiciary to decide and as such, we are likely to see an increase in test litigation during the early days.
There remains the risk that claimants will pursue unmeritorious claims and prolong litigation unnecessarily as there are less formidable cost consequences of doing so. This will inevitably lead to an increase in defence costs.
Additionally, risks around exaggerated claims in order to push cases out of the fixed costs regime entirely is of concern, which also makes accurately reserving the true claim value very difficult for defendants.
In principle we welcome the new rules on a 50% uplift on fixed costs where one party has engaged in ‘unreasonable behaviour’. One of the benefits of FRC is the certainty it provides all parties however, without prescriptive rules, there is a risk of satellite litigation and poor behaviours taking advantage of the lack of clarity. Further, adding additional costs makes it harder to predict cost exposure and is somewhat counterintuitive to the FRC regime.
It will be interesting to see how the Bands are defined. For example, public liability cases will fall within the new Band 3 however, will claims involving property damage such as damage to underground services (to which a public liability insurance policy would respond), be included in this Band? These claims do not fit within the typical slip/trip or highway type case.
What can we learn from the past?
With the move to fixed recoverable costs for claims valued between 25,000 to £100,000, it is anticipated that claimant behaviour may also change. Looking to the lessons learned from the initial introduction of FRC in the fast track, the concerns include:
- Less communication from claimants
- Limited or no disclosure at the early stages and therefore, limiting offers of rehabilitation
- More of a process driven model and less engagement by claimants prior to litigation, resulting in a risk that the value of these claims and reserves could increase significantly when issued, putting defendants at a disadvantage.
Noise-induced hearing loss claims
Noise-induced hearing loss (NIHL) claims within the fast track will be subject to a distinct process and FRC. This was recommended by both Sir Rupert Jackson in his 2017 report and the Civil Justice Council’s working group.
The government has confirmed that “certain mandatory actions to be taken by both claimants and defendants in letters of claim and response, as well as the proposed accompaniments to letters of claim,” will apply. Further, in terms of introducing standard directions, the government confirmed that this will be a matter for an industry working group “with consideration being given to examples adopted by district judges in the county court as an initial starting point”.
This is welcome news for insurers. Greater clarity from the claimant as to the claim being pursued allows a defendant an earlier decision on liability. Furthermore, we anticipate a saving of at least 50% on the claimant’s current NIHL costs.
The government will now submit draft rules for deliberation by the Civil Procedure Rules Committee.
We do not yet have a date for when the new FRCs will come into force but given the scale of the changes, we anticipate that they may well be introduced in stages. We will, of course, continue to monitor developments.