CONTRACTUAL COSTS CLAUSES PERMIT FULL RECOVERY OF COSTS WHETHER OR NOT A FIXED COSTS REGIME APPLIES

With the impending introduction of the Intermediate Track ushering in the much broader fixed costs regime for most money claims of up to £100,000.00 – a firm grasp on contractual costs is more important than ever.

Gomba Holdings (U.K.) Ltd. and Ors v Minories Finance Ltd. and Ors (No. 2) [1993] CH 171 is the leading case on the correct interpretation of ss.51(1) of the Senior Courts Act 1981 and contractual costs clauses. ss.51(1) relevantly provides: “the costs of and incidental to all proceedings…shall be in thediscretion of the court.”

The ratio in Gomba was that:

“(i) An order for the payment of costs of proceedings by one party to another party is always a discretionary order under section 51 of the Act of 1981.

(ii) Where there is a contractual right to the costs, the discretion should ordinarily be exercised so as to reflect that contractual right.”

Examples of when the discretion is not to be exercised in favour of a contractual term tend to be self-explanatory, examples include:

  1. Costs which are unreasonable (or as we shall see later, in some cases, disproportionate);
  2. In perhaps the most unsurprising outcome known to law, an unsuccessful party is unlikely to be able to obtain their costs;
  3. Serious misconduct.
How does this apply to proceedings caught by a fixed costs regime?

In Church Commissioners v Ibrahim [1997] EGLR 13 the Court held that a contractual clause within a lease gave a Landlord a right to recover costs, notwithstanding the then applicable fixed costs regime. While the CPR has now been introduced, Ibrahim remains good law.

More recently, the Court of Appeal, in Chaplair Limited and Kumari [2015] EWCA Civ 798 held that a contractual costs clause also trumps CPR 27.14 and Part 45. This claim related to unpaid rent and service charges. It appears that it initially started in the county court, was transferred to the (as it then was) leasehold valuation tribunal and then re-transferred back to the county court to deal with the question of costs and certain other matters. In any event the claim, by agreement, was allocated to the small claims track. The District Judge thought that CPR 27.14 was binding and refused to award more than fixed costs. The Circuit Judge disagreed and ordered Ms Kumari to pay costs. The Court of Appeal, approved of Gomba and Ibrahim and upheld the Circuit Judge’s ruling. The basic principle is perhaps best exemplified by Roch LJ in Ibrahim:

“The successful litigant’s contractual rights to recover the costs of any proceedings to enforce his primary contractual rights is a highly relevant factor when it comes to making a costs order. He is not, in my view, to be deprived of his contractual rights to costs where he has claimed them unless there is good reason to do so and that applies both to the making of a costs order in his favour and to the extent that costs are to be paid to him.”

This principle of ‘contractual right’ to costs will apply in the same way to the fast track and the new intermediate track, which we now know is being resurrected following the publication of the most recent Civil Procedure Rules Committee (“CPRC”) minutes in October 2022. 

The basis of assessment for contractual costs

The starting point is CPR r.44.5 which states:

“(1) Subject to paragraphs (2)…where the court assesses (whether by summary or detailed assessment) costs which are payable by the paying party to the receiving party under the terms of a contract, the costs payable under those terms are, unless the contract expressly provides otherwise, to be presumed to be costs which –

(a) have been reasonably incurred; and

(b) are reasonable in amount,

and the court will assess them accordingly.

(2) The presumptions in paragraph (1) are rebuttable.”

In other words, where there is a contractual term for costs, unless the contract expressly provides otherwise, the costs are presumed to be reasonably incurred and reasonable in amount.

However, this is merely a provision which proscribes how a Court will approach the assessment of individual items. One must look at the wording of a contractual term to decide whether it is intended that costs are to be recovered on the standard or indemnity basis. Littlestone and Ors v Macleish [2016] EWCA Civ 127 is the leading authority. Contractual terms using phrases like: “Properly incurred costs”; “All costs”; “Reasonable costs” or “All reasonable costs” have all been held as a matter of contractual interpretation to mean the paying party must pay costs on an indemnity basis. 

In practice, it is rare for a contact to contain phrasing that would indicate an intention to pay costs on the standard basis. 

Therefore, usually costs ought to be awarded on an indemnity basis.

How does one claim contractual costs?

Contractual costs are a right pursuant to contract. Whenever one makes a claim to enforce a contractual right, they are expected to plead it. The situation is no different for a contractual costs claim. The basic requirements for pleading apply in the same way: 

  1. The term ought to be pleaded – the relevant term in the contract should be identified; 
  2. The Claimants contention on the proper construction ought to be set out – for example, that the term properly construed entitles the Claimant to an indemnity in respect of their legal costs; and 
  1. Finally, the particulars of the circumstances giving rise to the right to rely upon the term should be set out.

It would seem that in some of the reported cases, Judges may have awarded costs on the basis of a contractual term, without it being expressly pleaded. However, all three of the core authorities (Chaplair, Gomba and Ibrahim) notedthat the claim for contractual costs had been pleaded and the Defendant had had the opportunity to join issue. Failing to expressly plead the point is a risk that will rarely be worth taking. The author has on a number of occasions seen Judges otherwise willing to exercise the discretion under s.51 refuse to do so because contractual costs were not pleaded.

Of course, anything pleaded, is subject to a defence, which might target the contractual costs clause in a number of ways. Most notably under the Unfair Contracts Terms Act 1977 and/or the Unfair Terms in Consumer Contracts Regulations 1999/the Consumer Rights Act 2015 (depending upon when the contract was entered into). However, there may also be arguments as to its proper construction.

The contract does not have an express contractual costs clause, is it possible that one might be implied?

Generally speaking, we think it is unlikely that the Courts will find an implied term to pay legal costs. However, there is one possible exception – the Late Payment of Commercial Debts (Interest) Act 1998. The act, as most of you will be familiar with, applies to business contracts for goods and services. Unless expressly excluded by the contract, the Act implies a number of terms into the agreement. Section 5A was inserted into the act to implement EU Directive 2011/7. Section 5A materially reads:

“(1) Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).

(2) That sum shall be–

(a)for a debt less than £1000, the sum of £40;

(b)for a debt of £1000 or more, but less than £10,000, the sum of £70;

(c)for a debt of £10,000 or more, the sum of £100.

(2A) If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.

(3) The obligation to pay a sum under this section in respect of a qualifying debt shall be treated as part of the term implied by section 1(1) in the contract creating the debt.”

In short, section 5A implies a term into a relevant agreement that the creditor is entitled to the larger of the sums specified in ss.5A(2) or the reasonable costs of recovering the debt. 

Article 6(3) of the Directive reads:

“The creditor shall, in addition to the fixed sum referred to in paragraph 1, be entitled to obtain reasonable compensation from the debtor for any recovery costs exceeding that fixed sum and incurred due to the debtor’s late payment. This could include expenses incurred, inter alia, in instructing a lawyer or employing a debt collection agency.

Therefore, where the act applies, there is a statutorily implied contractual costs clause. There are no reported cases relating to claims for contractual costs in proceedings subject to a fixed costs regime. However we think there can be little doubt that section 5A will disapply fixed costs, this is for two reasons:

  1. Chaplair and Ibrahim are good authority that a contractual costs term has the effect of disapplying the fixed costs regime; and
  2. The fixed costs regimes are provided for in the Civil Procedure Rules – secondary legislation – Section 5A is primarily legislation and where the two conflict, primarily legislation takes precedence.

Again, a failure to plead may well be fatal to a claim.

Conclusion

We rarely see the use of contractual costs terms on the small claims track although we cannot think why – the law is quite clear and well settled. We wonder whether there will be wider spread use, and understanding, of contractual costs clauses once the new fixed costs rules applicable to fast track and intermediate track claims  come into effect. We certainly think so.