Cost Recovery Clauses – Can you afford not to have one?

For the majority of businesses, the prospect of taking a defaulting client or debtor to Court is tedious. However, as many business owners and Credit Controllers will be aware, it is often far worse on lower value debt.

As costs on any case deemed “a small claim” (>£10,000) are irrecoverable at trial (even if successful), it is rarely commercially viable to proceed with legal action to recover lower value debt. With such a prospect, it may be better to ‘write off’ the debt, live and learn.

However, a little known case (called Chaplair v. Kumari [2015] EWCA Civ 798) may have changed the landscape of lower value litigation.

Chaplair v. Kumari

This case, oddly, concerned the recovery of Service Charges under a Lease. The Lease contained a common clause, known as a Section 146 clause, which allowed the Landlord to recover any costs incurred in bringing legal proceedings against his tenant. The Landlord issued, what was ultimately, a small claim.

The normal rules for Small Claims state that a successful litigant will be unable to obtain their costs (beyond certain Court fees) unless the opposition had acted unreasonably. As this ‘reasonableness’ threshold is very high, costs are often not awarded. Hence, any Judgment is likely to be swallowed up by the legal costs.

The Court of Appeal were asked to determine whether the Landlord could recover its costs of the proceedings even though the case was a small claim. In other words, did the contractual right to recover costs trump the Court’s rules on procedure.

The Court of Appeal stated that the Landlord was entitled to its costs as a result of the contractual right contained in the Lease. In other words, the Court of Appeal determined that, if a party enters into a contractual clause to pay costs, those costs should be paid. The Civil Procedure Rules do not (and cannot) extinguish a party’s contractual right to costs.

That principle is unfettered by the Civil Procedure Rules which would otherwise render those costs irrecoverable in the majority of small claim cases.

Considerations going forward…

The majority of terms and conditions continue to omit any cost recovery clause to the detriment of the prospective litigant. An immediate review of terms and conditions should be undertaken in order to clarify your recovery position and permit the greatest recovery possible.

If you have any queries or would like to discuss a cost recovery clause, please contact Gareth Raisbeck at Gareth.Raisbeck@cookco.co.uk.