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The Parity between Fixed Costs, Contractual Costs and The Small Claims Track – Just how Fixed is Fixed?

It probably comes as no surprise to small business owners trading throughout the UK that business debt, particularly Small Medium Enterprise (‘SME’) business debt, is at an unprecedented level.

Statistics from the Registry Trust, who administer all of the Judgments, Orders and Fines in England and Wales on behalf of the Ministry of Justice, show that in the last financial quarter of 2018 the total number of County Court Judgment’s registered against businesses in England and Wales rose by 27% compared to the same financial quarter in 2017, to a total figure of 93,534[1]. The average sum of these Judgment Orders was £3,737.00; a rise of 25% when compared with the same financial quarter in 2017[2].

What does this mean for the average SME? In essence, we are living in an era where prudent businesses must remain ever cautious as to who they conduct business with. Unfortunately, in a time where SME’s must remain ever astute as to their own cash flow, the likelihood that recourse to recover sums owing through the medium of the Courts is inescapable; the figures speak for themselves. Given the value of the average business debt that the Court is required to adjudicate upon, it is more likely than not that the dispute in question will be allocated to the Small Claims Track. This, in turn, presents its own issues.

The Fixed Costs Regime

Part 27 of the Civil Procedure Rules (the ‘CPR’) sets out at rule 27.14 that:-

“(2) The court may not order a party to pay a sum to another party in respect of that other party’s costs, fees and expenses, including those relating to an appeal, except –

(a) the fixed costs attributable to issuing the claim”

For the sake of this article, assuming the amount sought is the average sum set out above [£1,164.00], regardless of whether as business has legal representation, or is advancing a claim without the assistance of lawyers, the sums they stand to recover from the paying party are as follows: (1) costs of issuing the claim – £80.00; (2) Court issue fee (if issued online) – £185.00; and (3) if judgment is obtained by default of an acknowledgment of service – £22.00.

Whilst the Small Claims Track was designed to facilitate access to justice for unrepresented parties, with the complexities of legal procedure, SME’s who are owed money are still turning to legal representatives to navigate the complexities of the litigation process.

Here arises the problem; an SME is legitimately owed money, but potentially stands to lose more money as a result of the restrictions imposed by the fixed costs regime formal legal advice is sought.

Whilst many legal representatives in today’s economic climate are recognising the importance of fixed cost retainers, or damage based agreements where a percentage of the monies recovered is retained by the legal representative, the innocent party in the equation is still left to foot the shortfall from a costs perspective.

How Fixed is Fixed?

To answer this question, it is first necessary to consider the leading authority in this area Chaplair Limited v Kumari[3], which was handed down by the Court of Appeal; thereby affirming the previous decision of the same Court in Church Commissioners v Ibrahim[4].

The principals laid down in the case of Chaplair, whilst concerning a dispute arising out of the terms of a lease, have made clear that the entitlement to recovery costs beyond those captured by the remit of the fixed costs regime remains intact for any dispute which is premised on a contractual document.

In Chaplair, Lord Justice Arden (with whom Lord Justice Patten and Lord Justice Clarke agreed) considered part 44.5 of the CPR contextually against a contractual (in the case of Chaplair, by way of a lease) agreement between the parties that stated that the Defendant would:

pay… all costs charges and expenses (including legal costs and fees payable to a surveyor) which may be incurred by the Landlord in or in contemplation of any proceedings…”[5]

The terms of the agreement went further and set out that the Defendant agreed to:

“At all times hereafter to indemnify the Landlord from and against all actions proceedings costs losses expenses claims and demands arising out of any failure… to observe or perform any of its obligations.” [6]

Lord Justice Arden found that, irrespective of the costs limitations of the Small Claims Track set out in part 27.14 of the CPR, part 44.5 of the CPR permits the Court, where costs are payable under the terms of a contract, to award: “costs which are payable by the paying party to the receiving party under the terms of a contract…” [CPR r.44.5(1)].

Perhaps the key point of the judgment of Lord Justice Arden is found at paragraph 37 of his judgment: “Because Chaplair had a right to all its costs [under the terms of a contractual document], it was not restricted to the fixed costs which can be awarded under the CPR in a case on SCT [Small Claims Track].” [7]

What does this all mean for Businesses?

The inescapable conclusion from the guidance laid down in Chaplair is, in the right circumstances, businesses are not limited by fixed costs. This makes advancing a claim with the assistance of legal representation a far more financially realistic and attractive option.

It goes without saying that the best people to assist businesses’ in negotiating the Court realm remain legal representatives such as Solicitors or Barristers via the direct access route. The support that a commercially astute firm can provide to a business is immense; not only in terms of alleviating already high workloads, but also ensuring that the best possible case is put before the Court.

All of the above being said, the benefit to businesses of having an appropriately drafted set of Terms and Conditions upon which the commercial engagements are based is absolutely paramount. Without the same, the restrictions of the fixed costs regime within the Small Claims Track loom overhead. In reality, given the statistics referred to at the beginning of this article, the question is not one of ‘if’ but ‘when’ a dispute of a relatively modest value of money outstanding will arise.

An analogy can be drawn between a well drafted set of Terms and Conditions and standard car insurance policies; the objective is that the same will never be required in anguish. However, if the need should ever arise, the potential adverse risks of not being afforded the benefits far eclipse the modest initial cost of obtaining such protection.

Atherton Godfrey LLP would be delighted to assist any businesses that remain commercially astute in the present economic climate in terms of both Dispute Resolution and Corporate and Commercial contracts.

 

 

 

[1] The Registry Trust Limited, ‘Public Statistics December 2018’

[2] The Registry Trust Limited, ‘Public Statistics December 2018’

[3] Chaplair Limited v Kumari [2015] EWCA Civ 798

[4] Church Commissioners v Ibrahim ​[1997] 1 EGLR 13

[5] Chaplair Limited v Kumari [2015] EWCA Civ 798, [6], LJ Arden

[6] Chaplair Limited v Kumari [2015] EWCA Civ 798, [6], LJ Arden

[7] Chaplair Limited v Kumari [2015] EWCA Civ 798, [37], LJ Arden

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