Corporate Focus - February 2010

Right to Recover, Even in Small Claims?

The recent economic down-turn has seen an increase in the number of debtors defaulting on repayments. Businesses found it hard to readily obtain credit elsewhere and looked to enforce their debts.

Generally speaking, enforcing a debt of under £5,000 would require obtaining a judgment in the small claims court. However, this has not always proved cost-effective given that, traditionally, legal costs are not recoverable in the small claims court (or only a fraction will be awarded).

Businesses have therefore tended to write off a smaller debt to avoid incurring any further costs which they are unlikely to recover.

However, a recent High Court decision has given some hope to businesses who find themselves in this position.

In Robert Shaw v Nine Regions Limited the High Court was asked to consider the reasonableness of a clause under the Unfair Terms in Consumer Contracts Regulations 1999. The clause sought to entitle the lender to recover its litigation costs, whatever the size of the claim.

It was contested that the clause was unfair; further it was claimed the clause was irrelevant as the claim was being brought in the small claims court and only limited costs could be recovered.

The court held that the term in question was both valid and fair, and awarded the lender costs of the litigation both in the High Court and the County Court.

This case highlights the fact that although it is unusual for such costs to be awarded in a small claims case, there will be a better chance of success where the right to recover is included as a specific term in the contract.

Including a clause such as this within your standard terms and conditions may improve the chance of recovering litigation costs, even in the small claims court. This certainly makes the option of pursuing debtors more attractive, and perhaps more viable in terms of costs.

If you would like some more information on this clause please contact Danni Bensley, Solicitor in our Corporate team, on 020 7822 1983 or danni.bensley@weightmans.com