Business contracts form an integral part of the operations of any business. They provide a clear framework for the responsibilities, obligations, and expectations of the parties concerned. Among the various clauses included in these contracts, legal costs clauses can play an important role.
Many businesses will be involved in costly legal proceedings at some point in their lifespan, whether it be simply pursuing payment of outstanding invoices, or in relation to some other breach of contract. The costs associated with such proceedings can be significant, and so it makes sense to take any steps which your business can in order to maximise your chances of recovering your costs. One such simple, yet potentially highly effective step, is to include a clause within your terms of business which makes the other party liable to pay your reasonable legal costs associated with any claims which you are required to make under the contract.
This is particularly valuable given the Court rules relating to costs recovery for “Small Claims”, which are claims that are fairly straightforward and have a value of less than £10,000. Such claims represent a majority of the claims in the Court system at any one time, and also represent a majority of cases that go to trial.
In such cases, the ability to recover any legal costs incurred is severely restricted. The general rule is that no costs are recovered by either party – and so a business can find itself the winner, but without any ability to get its costs paid by the loser. This can result in a “black hole”, where the claim value gets eaten away by the costs incurred in getting the claim won.
However, there are a few limited exceptions to this rule. One of them is where there is a term in the contract between the parties providing for the recovery of legal costs.
In these circumstances the Court will not generally interfere with the contractual terms agreed between the parties. In other words, a simple contractual clause covering the recovery of legal costs could be worth thousands of pounds to your business in this situation.
This point is so significant, that it has been argued all the way to the Court of Appeal. In the case of Chaplair Ltd v Kumari [2015] EWCA Civ 798, the Court of Appeal confirmed that where there is a contractual clause between the parties which provides for costs to be recovered, the fact that the case has been allocated to the “Small Claims Track” does not preclude recovery of costs pursuant to that contract.
In other words, where a successful party in a Small Claim has a suitably worded costs recovery clause in its contract, it can obtain an order for payment of the costs associated with that claim notwithstanding that the Court rules would otherwise effectively prevent this.
Simon Thomas, Partner in Wilkes’ Commercial Dispute Resolution Department,
comments:-
“The case of Chaplair Ltd v Kumari [2015] EWCA Civ 798 ,amongst others, illustrates that while the small claims track aims to limit cost recovery, courts will respect and enforce clear contractual clauses on costs. There is really no reason why a business should not have such a clause in its contracts, given the potential benefits that it might bring in this sort of situation.”
The Commercial Dispute Resolution team at Wilkes deal with costs recovery issues on a regular basis and can advise and assist you at all stages of the process. For more information on this topic or to discuss a commercial dispute generally, please contact Simon Thomas on 0121 233 433 or by email at [email protected].
