Harrison Drury’s Jack Stephenson explains how companies can use terms and conditions to protect themselves and increase the chances of recovering the cost of chasing bad debt.
Unfortunately, bad debts are a serious problem for many businesses. If this is an issue for you and your business, as you may be aware, when debts are below a certain level (£10,000), generally the courts do not allow for recovery of legal costs.
In many situations, this could mean that it is not commercially viable for you to recover bad debts. One potential way of dealing with this is to ensure that your terms and conditions and commercial contracts are robust when it comes to recovery of costs.
In particular, a clause which allows for recoverability of legal costs could be of benefit to your business.
What is the legal position on recoverability of legal costs?
As outlined above, when a debt claim is worth less than £10,000 it is usually allocated to the small claims track. On the small claims track, the legal costs that a party is entitled to recover are limited, even if that party is successful.
For a debt claim worth more than £10,000, there is usually more scope for a successful party to recover its legal costs.
The effect of a robust contractual term allowing recoverability of legal costs
The general position is that a court will consider a contractual term allowing for recoverability of legal costs when assessing whether costs are payable.
Therefore, if your terms and conditions or contracts contain a clause stating that you are entitled to recover your legal costs in the event of default, there may be more scope to recover the same in the event action is taken against the debtor.
There is conflicting case law on this point when it comes to claims allocated to the small claims track. However, there is authority to suggest that while a contractual provision regarding costs does not bind the court, in many cases it may exercise its discretion to give effect to the contract.
Although the defendant may be able to challenge a contractual right to costs if they are unreasonably incurred or unreasonable in amount, having such a clause could be a useful tool when it comes to negotiating early settlement and encouraging your debtors to pay on time.
We would therefore suggest that your terms and conditions and commercial contracts include provisions such as:
- Clear performance dates confirming when the parties are to comply with their obligations under the contract and when fees should be paid.
- A clause that allows for recovery of legal costs.
Harrison Drury solicitors has a team of experienced corporate and commercial lawyers able to advise on all aspects of commercial contracts. If you require advice regarding your contracts or terms and conditions, please contact Jack Stephenson on 01772 258 321.