Recovering an unpaid invoice is no longer simply a case of proving that money is owed. Since the extension of Fixed Recoverable Costs (FRC) in October 2023, many businesses are finding that even when they successfully win a court claim, there is a gap between the legal costs recovered against what they have spent pursuing it.
As a result, businesses considering legal action need to think not only about whether they are likely to win, but also whether pursuing the claim makes commercial sense.
The Challenge: Winning a Claim Does Not Mean Recovering All Your Costs
Under the FRC regime, the amount of legal costs that a successful party can recover from their opponent is fixed in advance for many claims worth up to £100,000. These fixed amounts are determined by factors such as the value of the claim, the complexity of the case and the stage the litigation reaches.
However, these fixed amounts do not limit what a business may need to pay its own solicitors. This creates a potential gap between:
- What a business spends on legal fees; and
- What it can recover from the losing party.
For example, a business could successfully obtain judgment for an outstanding invoice but still be left out of pocket because the recoverable costs fall short of its actual legal expenditure.
Small Claims Present Additional Obstacles
Businesses pursuing lower-value debts may face an even greater challenge.
Claims allocated to the Small Claims Track, typically those worth £10,000 or less, generally allow only very limited recovery of legal costs. In most cases, a successful claimant can recover court fees and certain fixed expenses, but not the majority of their solicitors’ fees.
This means that legal action may not always be the most cost-effective option, even where the debt itself is undisputed.
Uncertainty Around Recovering Additional Debt Recovery Costs
Many businesses are aware that the Late Payment of Commercial Debts (Interest) Act 1998 can help creditors recover compensation and certain debt recovery costs when commercial invoices are paid late.
The Act provides fixed compensation of:
- £40 for debts under £1,000;
- £70 for debts between £1,000 and £10,000; and
- £100 for debts over £10,000.
It can also, in some circumstances, allow creditors to recover additional reasonable recovery costs that exceed those fixed amounts.
However, there is currently uncertainty about how these rights interact with the new FRC regime. The courts have not yet provided definitive guidance on whether businesses can use the Act to recover legal costs beyond the fixed sums allowed under the FRC rules.
That uncertainty can make it difficult for businesses to predict how much of their expenditure they may ultimately recover.
Potential Solutions
While the extension of Fixed Recoverable Costs has created new challenges, there are still steps businesses can take to improve their position.
1. Review whether the Late Payment Act applies
Where a claim relates to an unpaid commercial debt, the Late Payment Act may provide an additional route to recovering some debt recovery costs.
Before relying on these provisions, businesses should carefully consider:
- Whether the legislation applies to the contract;
- Whether statutory interest has become payable; and
- Whether any claimed recovery costs are reasonable.
Although the interaction with FRC remains uncertain, the Act may still strengthen a creditor’s position when seeking repayment.
2. Include effective costs clauses in contracts
One of the most effective ways to improve costs recovery may be through carefully drafted contractual provisions.
A well-drafted costs indemnity clause can provide a contractual right to recover certain legal costs incurred when enforcing payment obligations. In some situations, contractual wording may also support an argument that the parties intended the standard FRC regime not to apply.
However, success will always depend on the specific wording of the clause and the circumstances of the dispute. General wording may not be enough.
For businesses that regularly provide goods or services on credit terms, reviewing standard contracts could help improve future recovery prospects.
3. Assess the claim commercially before taking action
Before commencing litigation, businesses should consider more than simply whether they are legally right.
A sensible assessment should include:
- The strength of the evidence;
- The likely legal costs;
- The amount that may actually be recoverable;
- The likelihood of the debtor defending the claim;
- Whether the debtor can pay any judgment obtained; and
- The costs of enforcement if payment is not made voluntarily.
Taking these factors into account helps ensure that legal action remains commercially worthwhile.
4. Consider settlement or mediation
In some cases, an early negotiated settlement or mediation can produce a better overall outcome than pursuing court proceedings to trial.
Even where a business has a strong claim, reducing legal expenditure can sometimes increase the net amount ultimately recovered.
A Recent Reminder of the Importance of Contractual Rights
The case of Chaplair Ltd v Kumari highlighted that contractual costs provisions can, in some circumstances, allow parties to recover costs that would not ordinarily be available under standard court rules. However, the case pre-dates the expanded FRC regime and does not automatically mean every contractual indemnity will override the current rules. Each clause must be considered on its own wording and facts.
Key Takeaways
The expansion of Fixed Recoverable Costs has increased the importance of costs planning in commercial disputes. Businesses can no longer assume that winning a claim will result in recovery of legal fees incurred.
When considering debt recovery action, businesses should:
- Understand how the FRC regime may affect costs recovery;
- Consider whether the Late Payment Act may assist;
- Review contractual costs provisions carefully;
- Assess the commercial merits of litigation; and
- Explore settlement opportunities where appropriate.
Frequently Asked Questions
Can I recover all my legal costs when pursuing an unpaid invoice?
Not necessarily. Recovery may be limited by the Fixed Recoverable Costs regime, although contractual indemnities and statutory rights under the Late Payment Act could help reduce the shortfall between costs incurred and costs awarded.
Does the Late Payment Act allow recovery beyond Fixed Recoverable Costs?
The position remains uncertain and there is currently limited judicial guidance on the interaction between the Act and the Fixed Recoverable Costs regime.
Can an indemnity clause override Fixed Recoverable Costs?
Potentially. The court rules allow parties to agree that the rules on fixed costs should not apply, although the wording of the clause and the court’s discretion remain important.
How Our Dispute Resolution Team Can Help
Herrington Carmichael’s Dispute Resolution team assists businesses with commercial debt claims and contested proceedings. Our debt recovery lawyers can help assess the evidence, contractual costs provisions and available recovery routes, alongside the commercial implications of litigation or settlement.
If your business is pursuing an unpaid invoice, facing a disputed debt or considering reliance on a costs indemnity, speak to our team about the contract and correspondence. Get in contact and we can discuss the issues in dispute, likely costs exposure and proportionate next steps before further expenditure is incurred.
