An extended fixed recoverable costs (FRC) regime may lead to reduced income per case for solicitors but this will be balanced by quicker settlements and the chance to take on more cases, the Ministry of Justice has said.
It also predicted that firms which left the market in response to the extension of FRC would be replaced, but that small firms may struggle to compete with larger ones.
The impact assessment accompanying last week’s consultation on implementing Sir Rupert Jackson’s extended FRC blueprint estimated that it would bring at least 17,000 fast-track cases within FRC, and a further 11,000 cases worth £25,000 to £100,000.
An “overall net reduction in legal fees” was likely. “This is therefore likely to represent a cost to lawyers from reduced income per case. It may result in lawyers reducing the resource they spend on each case, as any increase in expenditure would reduce their profit margins.”
On the other hand, the MoJ said the reforms might generate “business process efficiencies in the form of reduced management costs or overheads, in order for solicitors to maintain their profit margins, and cases may be settled more quickly which means they can take on more cases”.
A further benefit would be that solicitors would no longer have to “maintain documentation required for costs assessment or spend time arguing about costs”.
More broadly, the assessment said the loser-pays model “creates an incentive for both sides to a dispute to over-invest in legal advice and may explain why the costs of litigation in the UK are among the highest in the world”.
Overall, it concluded, the reforms “should be associated with improved economic efficiency”, with fewer resources being used to achieve “equivalent outcomes”.
But the MoJ said the proposals “could make small legal firms less able to compete with larger firms that have greater economies of scale and can provide services on mass [sic] as cheaply as possible”.
The assessment was conducted on the assumption that the overall willingness of claimants to bring a claim would remain unchanged and there would be “no aggregate impact” on claimant lawyers’ willingness to take on cases.
The assessment acknowledged that some claimant lawyers might be less willing to take on cases which were relatively more expensive to process.
“It is unclear to what extent claimant lawyers might be able to identify at the outset which individual claims might be cheaper to process,” it said.
“It is also unclear whether there is a significant degree of potential variation in relation to the specific levels of liability and damages which apply to individual cases.
“However, whilst some claimant lawyers might not be willing to take on some cases, others may enter or existing providers may expand to meet demand. This is because the proposed FRC are considered to reflect the amount of work which an efficient and effective provider would undertake.”
The MoJ also assumed that claimant settlements would remain the same, but said there was a risk they could fall.
“This risk might materialise if claimant lawyers reduce the time and resource they spend on cases in response to FRC, and if as a result settlement negotiations lead to worse outcomes for claimants.
“Whether this risk materialises would depend upon the behaviour of defendants in such settlement negotiations.”
This led to another risk that there could be an increase in the number of professional negligence claims “if claimant lawyers reduce the amount of work they are able to complete on each case, as a result of FRC, and claimants are unhappy with the outcome of the case”.