Businesses at risk of "overcompensation culture" under new legal rules

28 Mar, 2013

Businesses across the country are at risk of overcompensating in settlements because of new rules, which come in next week, which penalise them for not offering enough, warns Manches. 

The new legal rules, which come into force on Monday (April 1), mean that if a business does not offer enough money to settle a claim and the claimant goes on to secure the same or better judgment in court, the business is at risk of paying an additional penalty of up to £75000. 

Manches warns that businesses, desperate to avoid penalties, risk offering too much to settle. 

Alex Fox (pictured), Head of Litigation at Manches says: “At a time when businesses need a helping hand, these new rules back them into a corner. In many cases, businesses will bypass court and have to heavily discount valid legal claims to avoid the risk of substantial future penalties, and the increased costs that the new regime is likely to introduce.  It is likely businesses will settle over and above what the claimant actually should receive.  This isn’t just about the individual making a claim against a giant corporation. Medium sized businesses in particular will feel the hit of overpaying in a settlement or paying penalties if the case goes further and the business loses. Even in the case of large corporations, multiple over settlements will prove costly.”

Manches says the changes, known collectively as the Jackson reforms, have an additional sting in their tails for businesses. There will be a significant front loading of costs, as parties will need to have the claim ready at the start. Failing to do this will mean that the ability to recover costs is significantly limited. For example, if a party fails to submit a detailed case plan and budget at the outset, the new rules say that the successful party cannot recover any of their costs from the other side, save for the nominal court issue fee. This draconian penalty simply ramps up the costs of litigation further. 

Alex Fox says: “The much criticised Contingency Fee Arrangements (CFA’s) are being reformed so that a successful party can no longer recover a success fee from the other side. However, is it a case of us jumping out of the frying pan and into the fire? The Government, from 1 April, is allowing the much derided US model of contingency fee arrangements to be used. As a result, be aware that some lawyers may seek to recover up to 50% of the compensation payment awarded to a successful claimant. Litigants should be cautious of the new arrangements and seek balanced commercial advice before entering into them. The risks are too high.”

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