If your business is counting the costs of unpaid invoices, we have the solutions. Forward this article to your finance department – they’ll thank you for it!

One of the most common types of commercial dispute we see arises out of one party’s failure to pay another party’s invoice. Indeed, many clients come to us with anywhere from one or two to hundreds of unpaid invoices that they would like us to try and recover from their clients and customers. Usually, an initial letter from our debt recovery specialists results in full payment, but on the rare occasion that it does not, it’s usually necessary to issue a County Court claim.

Once a claim has been issued, the general rule is that the loser pays the winner’s legal costs, but for claims under £10,000 (known as ‘small claims’) under the fixed costs rules in Part 45 of the Civil Procedure Rules there are very strict – and very low – limits on how much of the winner’s costs can actually be recovered from the loser, despite the fact that the legal fees involved with taking a small claim to trial can be several thousands of pounds. This means a large proportion of the costs spent on legal fees cannot be recovered.

Unfortunately for many businesses, the majority of their unpaid invoices are below this £10,000 threshold, so if a customer refuses to comply with a solicitor’s letter demanding payment of the unpaid invoice, the business will have to decide to either pursue a claim via their lawyers knowing that the fixed costs rules will mean most of their legal fees will not be recoverable, have a go at representing themselves in a claim which can be a time consuming and challenging endeavour, or write the debt off entirely, effectively letting their customer off the hook and negatively impacting on profits.

However, the fixed costs rules do not apply where the contract between the parties allows a party to recover all of their legal costs in the event of a breach of that contract. There is a body of case law which shows that even in small claims a contractual entitlement to recover legal costs from the opponent takes priority over the fixed costs rules.

Most commonly, contractual provisions for legal costs appear in contracts like residential leases, share purchase agreements, and mortgage agreements, and for decades they have been providing safety to those whose claims would otherwise be caught by the fixed costs rules. The good news for businesses is that there is nothing to prevent them from protecting themselves by including these terms in commercial contracts with their customers. That way, no matter how big or small the invoice, if a customer breaches the contract by failing to pay on time and in full, businesses can instruct their lawyers to pursue their debts, safe in the knowledge that the debtor should also be picking up the bill for the legal fees.

There are a couple of things businesses should look out for first:

  1. The clauses have to be worded carefully to ensure they capture all the scenarios in which the business might be entitled to ask for their legal costs, and to make sure they are not so onerous that they get caught by the Unfair Contract Terms Act 1977;
  2. For contractual terms to be enforceable they must have been explicitly agreed by both parties before the contract begins. They cannot be introduced by stealth (for example hidden away on a website) or brought in after the contract was agreed.

This post was written by Darwin Gray. They are an exhibitor on the FranchiseShow247 Business & Professional Services floor. You can visit their FranchiseShow247 exhibition stand here.