You might not realise that a recent rise in civil court fees and your business’s profits could be linked, but a top solicitor explains why you’re wrong…

The Government has announced its intention to increase court fees for money claims worth more than £10,000. The court fee will be 5% of the sum claimed subject to a cap of £10,000 for claims above £250,000. Fees for claims of less than £10,000 (which represent over 90% of all money claims) will be unaffected by these proposals remaining at their current levels.

What does this increase mean for SMEs?

Calculations published by the Civil Justice Council show that a claim for £190,000 which would currently incur a court fee of £1,315 will cost £9,500, a rise of £8,185 representing a 622% increase. The figures are stark; however, it will come as some relief to know that plans to impose daily hearing fees have been scrapped. 

Senior judiciary have expressed concerns about the proposed enhanced court fees, which are expected to cause difficulties for small and medium-sized enterprises (“SMEs”) chasing late payments. In a written response to the Ministry of Justice’s consultation, the Lord Chief Justice of England and Wales, Lord Thomas, and six senior judges commented that the increased court fees will likely have a “disproportionately adverse impact on small and medium enterprises”.

The fees, which will in many cases be disproportionate to the damages ultimately recovered, will have to be paid up front in full, effectively acting as a barrier to entry to the justice system through pricing many court users out of the system. Lord Thomas recognised that the significant fees could have a detrimental effect on the parties’ ability to pay for legal representation and thus potentially jeopardise the “access to justice” premise.

The increased fees will provide an incentive for large companies to deny liability knowing that an SME or individual cannot afford the fees. For many litigants in person and SMEs the court fees form a significant proportion of the cost of the overall process. To this end it is argued that such groups are effectively being denied justice.   

The Bar Council has also echoed the judiciary’s concern stating that “Cash-flow is the life blood of small businesses and many end up having to pursue late payments and other debts through the court system. Imposing a 5% fee may well make many small businesses think twice before making that claim.”

Impact of the fee change on SMEs

The increases certainly make litigation less affordable and will have a major impact on SMEs that regularly have to issue proceedings to recover debt. The increased court fees will adversely affect the cash flow of SMEs’ and their already stretched overdrafts. Such enterprises may now have to find alternative means of obtaining justice and perhaps consider inserting arbitration clauses into new contracts.

Strategically, parties sometimes commence proceedings in an attempt to increase pressure and reach a settlement. However, in view of the steep rise in court issue fees, this tactic will not be viable. As the President of the Law Society said “Companies suffering cash flow problems as a result of unpaid invoices simply do not have money in the bank to stump up extortionate court fees.”  

The Bar Council has also raised concerns as to the attractiveness of the UK as a jurisdiction for litigation and dispute resolution once the changes are implemented. Whilst the increased court fees are unlikely to deter those litigating very high value claims,  there has been a warning that the fees will be seen, by international standards, as a high entry price to begin a commercial case”.

A benefit of the fee increases?

The Ministry of Justice’s proposals are expected to contribute an estimated £120 million per annum in additional income which it is said will be used to modernise court services over the next five years. Justice Minister, Shailesh Vara, said “If we are to protect access to justice, and all the benefits that brings, I am convinced that there is no alternative but to look to those who use the courts to contribute more towards their running costs where they can afford to do so.”   

Not over yet

As to when these changes will be implemented, the Government has indicated that they will take effect before the new court term in April 2015. It is therefore expected that the next few months will see a significant rise in the number of claims being issued as claimants seek to avoid the increased court fees. The Law Society has now set in motion  a claim for judicial review to challenge the Government’s proposals, its response to which is eagerly awaited.