Why SME clients are under threat

If you are a small-business owner, then you are probably not all that impressed with the changes that have been happening to the legal system since April 2013.

Perhaps you look back fondly to the pre-Jackson era, when if one of your suppliers was in breach of contract, or you had a customer who was refusing to pay up, you had a reasonable chance of being able to do something about it.

The litigation might have been expensive, but if you had a strong case, you could probably find a lawyer who would act for you under a conditional fee agreement, in return for a success fee that they would recoup from your opponent if you won. Likewise, you could not afford the risk of running the case without after-the-event (ATE) insurance, but if you won the insurer would be knocking on your opponent’s door for the cost of the premium, not yours.

All this meant that claims that were not for vast sums of money - but that were extremely important for the owner of smaller businesses - were financially viable to bring. A claim for £30,000, for example.

But then the government decided to take action to address a problem that was really about personal injury, but affected all civil claims. It took away recoverability of the success fee and ATE premium, which instead must effectively be paid for out of the claimant’s compensation. Suddenly, it became an awful lot harder to find a law firm that can act – because the numbers no longer work. By the time the success and ATE premium are paid for, there won’t be enough left in the pot.

Then you have that other aspect of the Jackson reforms, proportionality – and I recently wrote about the confusion surrounding the new rule. But the other difficulty with proportionality is that when the damages at stake are relatively small, the ‘proportionate’ level of legal costs is very low indeed – too low to actually bring the claim.

We have the new proportionality rule, but what we don’t have is the fixed costs in the fast-track that were supposed to be the cure for this problem. These have only been introduced in personal injury.

Judges have repeatedly highlighted the burning need for fixed costs elsewhere in the fast track, and indeed for smaller claims in the multi-track – and Lord Neuberger called for both at a speech to Manchester Law Society only last month. He lamented the fact that, outside of PI, fast-track fixed costs have still not been implemented more than four years after Sir Rupert recommended it. But these warnings are falling on deaf ears.

Government will nod its head vociferously in agreement with the need for fast-track fixed costs, but shows no sign whatsoever of doing anything about it.

These problems have been going on for a while, but now developments in the past few weeks will make matters even worse. I am talking, of course, about the shocking new fees being levied for use of our civil courts.

The fees will impact all court users, and make it harder for everyone to enforce their rights, not just SMEs. Personally, I disagree quite fundamentally with the idea that the cost of using our courts should fall squarely on the shoulders of the individuals unfortunate enough to have had their rights infringed.

We all benefit from an accessible court system, even if we never actually have to use it. That is why people normally pay their bills – because they know there will be enforceable legal action if they don’t.

But to return to the small-business owner, as the lord chief justice pointed out in the senior judges’ response to the court fee proposals, these new fees are going to have a ‘disproportionate impact’ on SMEs. At 5% of the claim value for claims above £10,000 (up to a maximum fee of £10,000) - which is an upfront cost to be paid long before any compensation will be received in the event of success - the government has just dumped yet another pile of bricks on its ever-rising barrier to justice.

And let’s not forget the consequences of all this. We need to make sure that when a small business supplies goods to a well-financed Plc, it can enforce payment if it needs to; when it develops a product, it can protect its intellectual property rights from being stolen. Why? It is not just about being fair to the little guy in his battle against Goliath-style corporates. It is also vital for the future of the UK’s economy.

The small businesses of today are the big corporates - and the big employers - of tomorrow. But only if we give them the tools to stand up for themselves through the courts when they need to.

Rachel Rothwell is editor of Litigation Funding magazine