As a matter of principal, there can be few things more frustrating in business than when a contractual wrong can’t be put right because it will leave the “wronged” party even more out of pocket. The good news is that this is now about to change as new case law has opened an avenue for business to recover costs in the Small Claims Track.

Historically, businesses have often been deterred from taking disputes worth less than £5,000 to Court as the legal costs incurred regularly outweigh any financial gain. However, a recent judgement indicates that it may now be possible for the successful party to reclaim its costs if the initial contract includes provision for the recovery of legal costs in case of a dispute.

The case of Robert Shaw v Nine Regions Limited resulted in the successful party, a finance company, being awarded its legal costs following an appeal. In the first instance, the Court refused to allow the successful party its legal costs (as per the small claim rules which provide for recovery of only very limited costs). However, in the appeal that followed, it was argued that the finance company had a contractual right to legal costs as per the terms of the loan agreement between the parties. The agreement entitled the creditor to its “reasonable expenses and any legal costs” incurred in enforcing the agreement.

The Court of Appeal ruled that it was entirely reasonable and caused no imbalance to the parties’ rights and obligations and therefore awarded the defendant its costs. This is really positive news for SMEs and an opportunity to ensure businesses are not left out of pocket in the event of a contracted party failing to uphold their side of the agreement.

Critically however, businesses aren’t immediately protected as there does need to be a provision within the contract for the recovery of costs in taking or defending legal action. Better still, when drawing up contracts, it would be prudent to consider including a term providing for recovery of legal costs, even if only as a matter of principle.

For further information on points from this article please contact Sarika Sandhu