National firm Irwin Mitchell is challenging the Legal Aid Board's (LAB) policy of refusing to fund mediation, after £1,500 costs for a successful mediation were disallowed.
The challenge was heard on Sunday by a three-member Costs Appeals Committee - the LAB's highest appeal body.
It is being supported by both the Law Society and the Alternative Dispute Resolution Group, who are providing funds for the appeal.
Irwin Mitchell's appeal stems from a case it took over involving a dispute between a partner in an accountancy practice and his former firm.
The firm brought it to conclusion using mediation. But its £1,500 costs for preparing and attending the mediation were disallowed by the local board.
This decision was also upheld by the area committee, and that has given rise to this week's hearing.
Andrew Lockley, Irwin Mitchell's head of professional services, said mediation had produced a settlement which would otherwise have been unachievable and ultimately saved the legal aid fund money.
He said: "This appeal is a move to establish that the LAB has misinterpreted the law, and that is an obstacle to the spread of the use of mediation." Lockley said his firm is prepared to take the appeal as far as a judicial review.
The LAB issued a statement which said: "The present case which gave rise to Irwin Mitchell's appeal is the purely legal question about the interpretation of the existing Legal Aid Act...We are pleased to have this opportunity to clarify this important point."