Can parties to a contract “contract-out” of Fixed Recoverable Costs?

by | May 24, 2024 | Blog Posts

fixed recoverable costs

In October 2023, legislation created new rules, establishing a regime of Fixed Recoverable Costs (FRC) for much of civil litigation. This means that although the winning party can still recover their costs from the opponent, the costs that can be recovered are now fixed. The fixed costs are determined by the value, complexity and how far the matter proceeded.

The previous rules, broadly speaking, were that parties could recover costs that were based on the work required to deal with the matter.

Before October 2023, it was not unusual for parties to commercial disputes to rely on the costs provisions and indemnities included in their contracts and leases. They expected to recover the majority of their costs if they were to succeed. However, Fixed Recoverable Costs has caused uncertainty: can parties to a commercial contract or lease “contract-out” of Fixed Recoverable Costs?

| Further changes to the rules

From 6 April 2024, the costs rules changed again.

They now state that, in cases where Fixed Recoverable Costs apply, the court can only order those fixed costs “unless the paying Party and the receiving party have each expressly agreed this Part should not apply”.

Therefore, the parties to a contract now can agree to contract out of the new FRC regime. This allows a scenario where costs, which otherwise would be caught by the new regime, can instead be recovered from an opponent on the standard basis, as used to be the case. However, the key aspect is that the agreement must be “expressly” made between the parties.

Despite the potential challenges to come, making a specific agreement to contract out will put you in the best position to be able to recover costs above and beyond the fixed costs regime.

Contracting out of the fixed costs regime

In terms of a contract or commercial lease, you are unlikely to be able to rely upon a pre-FRC costs clause. However, the solicitor advising you will be able to put together a clause that will work for the parties to both “expressly” agree to contract out. This can be done in the original contract (if you are agreeing a new lease or contract), or after the event where documents can be updated or an addendum agreement created by consent.

If you are already in a dispute, it is possible that you and your opposing party could still agree that fixed costs do not apply. If, as part of settlement negotiations, you can agree this with your opponent, your solicitors can add a specific clause to the settlement agreement.

| What will happen instead?

If the parties successfully contract-out, then, depending on the wording of the agreement, it is often the case that costs will be “assessed on the standard basis, if not agreed”. In the simplest terms, the costs recovered will be based upon the work done in reaching the settlement agreement.

As the new regime is developing and being applied to cases on an ongoing basis, we are likely to see it challenged over the next year or so in the higher courts. Any judicial decisions on such challenges will hopefully clarify the position further, and we will keep our website updated. So watch this space!

If you have any questions about Fixed Recoverable Costs, please contact our experienced costs team on 0800 988 7756.

 

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