Does litigation pay? Why it’s important to bear the costs recovery rules in mind.

When involved in a dispute with another party, it can be tempting to jump straight to the threat of issuing legal proceedings. There are, however, two reasons why it is advisable to take a step back, and consider alternative avenues of dispute resolution before issuing a claim in the Courts.

The first is the legal obligation set out in the Civil Procedure Rules (CPR). The CPR places an obligation on parties, in the Practice Direction ‘Pre-Action Conduct and Protocols’ (PDPACP), to ‘consider whether negotiation or some other form of Alternative Dispute Resolution (ADR) might enable them to settle their dispute without commencing proceedings.’

The PDPACP provides example of the types of ADR parties may wish to use, including mediation, arbitration, early neutral evaluation and Ombudsmen schemes. The PDPACP also states that ‘parties may be required by the Court to provide evidence that ADR has been considered. A party’s silence in response to an invitation to participate or a refusal to participate in ADR might be considered unreasonable by the Court and could lead to the Court ordering that party to pay additional Court costs.’

Assuming you have considered ADR, a second reason why you may wish to think twice before issuing proceedings is the cost recovery rules. These rules address the extent to which a party involved in a Court case can recover its costs from the opponent or, as the case may be, the extent to which a party must pay the successful party’s costs.

What are the costs in litigation?

The important point to note is that each party to a Court case will have to pay its own lawyers’ costs, disbursements and expenses as the case goes along, on the terms agreed with their legal team. There are limited exceptions for individuals who are eligible for Legal Aid support.

This means that, before issuing proceedings, you should be sure that you or your business has the financial resources in place, to minimise the chance of obstacles arising later down the line. Your lawyer should work with you at the outset to identify the costs you may incur at each stage of litigation, in order for you to be fully equipped to make an informed decision of the merits of proceeding.

Who pays the costs in litigation?

The default position is that the losing party is liable to pay the winning party’s costs. There are two main exceptions to this, being small claims (those with a value of less than £10,000), or where the claim is subject to fixed recoverable costs (please note an extension of the fixed recoverable costs (FRC) regime to cover a revised fast track, and the introduction of a new intermediate track for simpler cases valued up to £100,000 in damages, is currently due to be implemented on 1 October 2023).

However, it is important to note that it is extremely rare that a losing party would be ordered to pay 100% of the winning party’s costs. The Court  has a broad discretion in deciding what costs order to make, including both whether a party is entitled to recover its costs from its opponent and, if so, how much of its costs it may recover. Litigants who are successful at trial can typically expect to receive an order for the loser to pay their costs on the ‘standard basis’, which might equate to somewhere around 60%-70% of the costs incurred, but this is only an average.

In certain circumstances costs might be awarded on the ’indemnity basis’, such as where the losing party has conducted itself in a manner justifying penalisation, i.e. unreasonable conduct, obstructing genuine offers of settlement, or unreasonably refusing to engage in ADR. An award on the indemnity basis will usually result in an order for recovery of about 80%-90% of the successful party’s costs.

Whilst there are no hard and fast rules as to the factors that the judge will take into account when making their costs order, the following factors serve as a useful guide to the considerations that will be made where there is no prior agreement between the parties concerning costs:

• Which Court the claim is proceeding in, i.e. the County Court or High Court;
• Whether a costs ‘capping’ or costs management order has previously been made in the case and, if so, whether these have been exceeded;
• Whether a party has refused to enter into constructive negotiations or other forms of ADR;
• Whether the winning party has won on all, or only part of its case;
• The reasonableness of each party in issuing or defending the claim, including the manner in which they have participated in the Court process and whether either party has exaggerated any part of its claim or defence;
• Whether each party’s lawyers charged reasonable hourly rates; and
• Whether the costs incurred by each party have been reasonably incurred and were necessary, taking into account all relevant circumstances including the legal issues, value, complexity and length of the case.

The position might also be differed if the parties have provided for the recovery of legal costs in a contract, for example in an indemnity clause where one party undertakes to indemnify the other in respect of its legal costs. However, whilst such clauses attempt to provide an amount of recoverable costs up-front, they have been challenged in the Courts before, with judges stepping in to apply rules of contractual interpretation where ambiguity arises.

What happens if your litigation is unsuccessful?

An unsuccessful party, whether losing their case either in whole or in part, is generally ordered to pay a proportion of the winning party’s costs. The costs the losing party is liable to pay will be calculated with reference to the factors set out above.

It is important to note that the costs you are ordered to pay may include the winning party’s:

• Legal fees, disbursements and expenses;
• In some circumstances, ‘in-house’ expenses incurred at the outset of the dispute; and
• Costs arising from obtaining litigation funding.

This is why it is so important to be sure before issuing proceedings that you have considered all relevant alternative methods of resolving your dispute because, if you do lose, you will be liable for your own costs, your opponent’s costs, and any damages awarded against you by the Court.

How can you mitigate your financial exposure when it comes to litigation?

There are a range of options to mitigate your financial risk when funding disputes. We have written about some of the options here: https://www.ts-p.co.uk/insights/faq-dispute-resolution/

Ultimately, our advice to clients is to always seek advice early so that the full range of litigation funding options can be explored, if these are appropriate to your circumstances.