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So much for the rule of law – Ted Greeno on court fees and undermining the City

Quinn Emanuel Urquhart & Sullivan disputes veteran Ted Greeno (pictured) argues that a self-defeating stance on hiking court fees will undermine London.

In their piece entitled ‘Strangling the golden goose‘ last month, Nigel Boardman, James Shirbin and Andrew Blake of Slaughter and May bemoaned the cost of commercial litigation in England and suggested London’s pre-eminence as a dispute resolution centre might be under threat as a result. In making this argument, they drew upon a report from the World Bank which compared the cost and ease of doing business in 189 countries around the world.

One of the activities assessed was enforcing contracts and, for this purpose, the report compares and scores the cost, time and procedures involved in enforcing a claim under a sale of goods contract around the world. The UK is ranked in 36th place, suggesting our courts are relatively uncompetitive.

While the authors are right to draw attention to this survey, they are wrong in my view to suggest it has any direct relevance to London’s status as a centre for international litigation. As they acknowledge, the World Bank’s analysis is based on a hypothetical low-to-mid-value claim rather than the type of substantial commercial cases for which the UK, and London in particular, competes internationally. In fact the report’s analysis assumes a claim value of £52,000, a contested trial requiring expert evidence as to the quality of the goods and then a lengthy enforcement process. For such a case, it estimates that the total costs (including court fees and professional costs) would be £20,800.

The UK’s ranking of 36th, puts it some 31 places behind Belarus, 24 places behind Russia and four places behind Kazakhstan. However, this does not make the courts of these countries more attractive places to litigate international disputes.

In truth, the utility of studies such as this is limited, not least because more cases settle in some jurisdictions than others (before all the costs are incurred) and they do not measure the quality of justice. Thus, while it may be cheaper and quicker to pursue a claim through to the enforcement of a judgment in Kazakhstan, the outcome might be sufficiently unpredictable that neither party wants to settle or even abide by the ruling. In other places, however, such as the UK, settlement of the claim may be a more attractive option. So the actual time and cost incurred in resolving a claim may not be reflected in the data produced by the World Bank.

But that does not mean that all is rosy in the UK’s garden. Far from it. Changes are imminent which will affect the cost of pursuing such claims in the UK. And while they might not affect the sort of international cases which London seeks to attract in the short term, these changes are likely to have a long-term damaging effect on London’s position.

From 1 April the cost of issuing proceedings for a money claim of £10,000 or more will go up to 5% of the value of the claim. For now, at least the fee will be capped at £10,000. Accordingly, the issue fee for all claims of £200,000 or more will be £10,000. What this means for a claim such as the World Bank survey contemplated is an increase in the fee from £910 to £2,600. That is an increase of 285%; and overall court costs as assessed in the report would go up from 3.7% to 7% of the overall value of the claim. For a claim of £200,000 or more, the issue fee will go up from £1,515 to £10,000, an increase of 660%.

The effect this will have on the ability of small-to-medium size businesses to pursue claims is obvious. Many will not be prepared to commit the cash flow required to pay such a large sum upfront to pursue a claim against a party intent on not paying or unable to pay. Of course, it is often the issuing of proceedings, demonstrating a resolve to pursue a claim, that brings about a settlement. But the cost of taking that initial step is going to increase very significantly. And the cash required could be tied up for some time (more than 14 months according to the World Bank survey).

In his final report on how to promote access to justice at proportionate cost, Lord Justice Jackson said ‘the current cost of court fees is too high and the current policy of full cost pricing is wrong in principle’. For some years now successive governments have maintained that the civil courts should be self-funding. However, under new legislation, the government will now levy ‘enhanced fees’ at a level which exceeds the cost of providing the court service and accordingly raise revenue from parties to limitation. This revenue is intended to be used to fund the family courts.

This policy is fundamentally inconsistent with access to justice and the rule of law. Requiring litigants to pay for the court system attributes no value to the role of the courts in enforcing the rule of law for the benefit of society as a whole. If the court system is inaccessible, private rights become valueless and will be increasingly disregarded. Taking it to its logical conclusion, if no-one can afford to enforce their rights in the courts, there will be no rule of law and no free society. The economy would break down and foreign investment would dry up. Making court users not only pay for the cost of the courts they use but an amount on top to subsidise the family courts is like making road users pay for the entire cost of the road system, even though everyone benefits from it, and some of the cost of the railways as well.

Seen in that light, it is surprising that the Ministry of Justice (MoJ) seeks to justify its fee increases by reference to the rule of law and on the grounds that they are necessary in order to preserve our ‘strong tradition of access to justice’. And it is a cause for concern that such ironic lip service should be paid to the rule of law in the year that we celebrate the 800th anniversary of Magna Carta.

Not only is the policy flawed in principle but it is questionable as to whether it will achieve its aim in practice. The impact assessment assumes that the increase in court fees will not affect the volume of proceedings in the courts but there appears to have been little investigation or research around this. If the experience of the employment tribunals is anything to go by, however, it would seem an unsafe assumption. Following the introduction of significantly higher fees in June 2013, the HMCTS Quarterly Statistics Report for April to June 2014 recorded that claims in these tribunals had fallen by 70%.

The hike in court fees for money claims is also likely to affect the volume of cases (and therefore access to justice). There will inevitably be a drop in the number of claims issued and the revenues generated are unlikely to reach the levels predicted by the MoJ. This is likely to lead the MoJ to increase the £10,000 cap within a fairly short time in order to meet its budgetary targets.

At the same time, where possession used to be 9/10 of the law it will become 19/20. Recovering debts will become that much more difficult and, for many businesses which are tight on cash, too expensive. Thus, although the MoJ argues the fee increases are necessary because ‘The government has made economic recovery our first priority’, they are more likely to damage the recovery because they will depress business. Indeed, they are likely to put some enterprises out of business because they cannot afford the double hit to cash flow which will result from the reduced threat of litigation enjoyed by unscrupulous debtors and the high upfront cash sum required to be paid to the court in order to enforce payment.

The reality is that court fees are a new tax on ‘doing business’. However, they are an unfair tax because they will have to be paid only by those unfortunate enough to have to use the court system and they will be applied to meet the costs of courts which they do not use.

It is difficult to believe such a policy would have been pursued were it understood that it will lead ultimately to business failures as well as less revenue being generated by court fees. However, while the government’s impact assessment of the increase in court fees recognises that it will increase working capital costs for businesses, no attempt has been made to quantify that cost. This decision not to consider arguably the most significant impact on the wider economy of exponential increases in court fees inevitably poses the question of whether the policy has been properly thought through from all angles.

Those who have been following the consultation process which preceded the hiking of court fees will know that a considerably higher fee was contemplated for commercial cases. However, the Lord Chancellor’s powers to increase fees to levels above those necessary to cover the cost of providing the court service are constrained in the legislation by a requirement that he have regard to the effect of such increases on the competitive position of the English courts internationally.

Initially, the MoJ relied on very limited research to support an argument that the competitive position would not be damaged. After criticism, however, more extensive research was commissioned from the British Institute of International and Comparative Law (BIICL). Their survey reported that about two thirds of respondents were concerned that enhanced fees would damage London’s competitive position as an international centre for litigation.

In its response in January, the MoJ concluded that its proposals will not affect the competitive position of the London courts because, it said, litigants choose London because it is good value for money and are not concerned about court fees. However, this response does not address all of the reasons for concern which were raised by respondents to BIICL’s survey. In particular, because court fees have been converted into taxation, unrestrained by any reference to the costs of providing the court service for a particular case, it is inevitable that they will increase over time.

Even at £10,000, the court fee for issuing proceedings is considerably greater than the fee payable anywhere else in the world. That gives our competitors an advantage. And they will also be able to say that in England, unlike anywhere else, there is a tax on litigation which can be increased without reference to cost at any time, depending on the priorities of the government of the day.

Enhanced fees have been introduced on the grounds of economic expediency. However, they are the thin end of the wedge and there is a real risk that they will damage the economy as well as London’s pre-eminence as an international venue for litigation. The golden goose may not have been strangled, but it is going to lose some of its shine.

Ted Greeno is a partner in the London office of Quinn Emanuel Urquhart & Sullivan and chair of the firm’s energy litigation practice.