I've heard there's a clause I can add to my business terms that lets me recover all of my costs if I have to sue someone who doesn't pay. Can I add that?

I expect that what you mean is an 'indemnity' clause.  If your contract contains one, your customer agrees to pay all of your expenses in the event of non-payment or dispute.  This includes legal fees (though you may have a harder battle to convince a court that it was reasonable to instruct a lawyer to handle a small claim - one under £10,000 - and so recover legal fees).  

In October 2023 the Courts extended fixed recoverable costs (FRC - the amount of costs that the 'losing' party would have to pay to the 'winning' party at the end of a civil money claim) to apply to claims up to £100,000.  

The FRC are pretty realistic and would allow most lawyers with reasonable hourly rates to adequately represent their client in a straightforward claim without exceeding the limits.  There will always be firms, though, whose hourly rates, or approach to litigation, may cause costs to overrun those levels, even in the most straightforward claims.  

In less straightforward claims you may have to 'cut your cloth' to keep costs lower, or choose to pay for the privilege of a rolls royce service as the FRC do not leave much room for 'excess'.  It is possible that if you wish to bring a money claim for less than £100,000 you would have to pay to your lawyer a significant surplus in fees that aren't recoverable from the opponent.  That would eat into the money you are seeking to recover.

The wording of the FRC rules allows parties to 'opt out' of the regime.  This seems to make sense if you know you will win (so you could try to recover more), but as you don't know how the relationship with each particular client is going to end, you cannot predict whether or not it is the right decision at the outset.  You may find that by choosing to opt out you could be opening yourself up to a big bill for the customer's costs if you lose a case.  

I wouldn't suggest you pick and choose which customers you ask to 'opt out', so you will likely need to decide whether or not to include an opt out clause in your terms and conditions and use them consistently. 

Some factors to consider when deciding:

• what sorts of disputes have you been involved in?  Were they complex and technical (so take some time for lawyers to get to grips with)?  If so, you may not be able to fit your costs within the FRC.
• what is your success rate in claims?  If you have been defeated before, particularly on the basis of your terms not being adequate, you may wish to consider more globally your terms and conditions first.  If your terms are sound, you stand a better chance of succeeding in a straightforward non-payment claim.
• what is your risk profile?  If you don't like the risk of higher costs bills, you might prefer to stick to the costs rules and not opt out.

The intention of the wording in the rules provides that parties can "each agree" that they wish to opt out of the FRC (by saying that the particular rule won't apply to any claim between them).  This means that you cannot agree in isolation; your contract should include a specific term stating that your indemnity clause will apply and the FRC will not (whether that is at the outset of your relationship or later, as it hasn't been clarified if an 'opt out' must be made at initial contract stage or if it can be made later).

It hasn't been tested, though, whether a contract could be agreed that allows for only one party's costs to be opted out.  My view is that it is unlikely this would be allowed and any clause attempting only to opt out one party and not the other would likely be held to be an unfair contract term.  

I think this would especially be the case if the party who has opted out is a business, against a consumer, so that the business only has to pay FRC if the customer wins but the customer has to pay more if the business wins.  That would depend on the bargaining power of the parties to the contract at the time it was entered, though - two businesses entering a contract would usually be considered sophisticated enough (and able to take legal advice) to negotiate terms when contracting.

There doesn't seem to be a right answer to opting in or out at the moment.  Hopefully it will become more certain how the courts will deal with opt out once some cases have been reported in this area.

If you want to discuss potential amendments to your business terms, or need a view on your costs exposure in an existing claim, get in touch.

What we can learn about settlement offers from Hugh Grant and News Group Newspapers?

HRH Prince Harry appears determined to fight News Group Newspapers to trial.  A few months ago, Hugh Grant bowed out of his own concurrent claim, quoted as saying that he couldn't risk potentially becoming liable for c£10m of the newspaper's costs as well as his own if he rejected an offer made under the rules used by the civil courts in England and Wales known as a Part 36 offer.

This was an oversimplification of the rules.  I suspect it was lost in translation when being reported, because it doesn't state when the offer was made or accepted or what NGN's overall costs were predicted to be.  

NGN appears to have lost the appetite for fighting, as recently it was reported that 39 of the litigants in the hacking scandal have accepted offers, presumably made under Part 36.

So what is a Part 36 offer?  And why did these litigants, including Grant, decide to throw in the towel?

A Part 36 offer is a special kind of offer made to an opponent in litigation.  Provided it is made in the correct way, with the prescribed wording, it gives protection on costs to the person making it if they win the case at trial.  

The offer can be made at any time, but the costs protection only applies to the costs incurred after it is made.  The Court can still make whatever order it wishes in relation to the costs incurred before the offer is made.

What happens if a claimant makes an offer to the defendant?

If a claimant (the person who brings the claim) makes an offer, and it is accepted by another party (usually the defendant) within 21 days, the accepting party must pay the claimant's costs to the point the offer is accepted.  

If the amount of costs to be paid cannot be agreed, the Court will decide how much must be paid.  If there is any doubt as to whether or not a particular item on the bill should be paid, the Court will remove it from the bill.

If the defendant rejects the offer, the rules provide that if the outcome is 'at least as advantageous' as the terms of the offer (i.e. equal to), the defendant must pay the claimant's costs from the date 21 days after the offer was made.  However, when the Court assesses the costs any item on the bill in doubt will be paid by the rejecting party. 

The defendant also must pay interest both on any sum they are ordered to pay to the claimant, and on costs, from the date the offer could be accepted.  The current rate of interest is up to 10% above base rate.

Lastly, the defendant must pay an additional 10% of the sum payable to the claimant (for the first £500,000, than 5%, up to an overall maximum of £75,000).

While the Court does retain some discretion about whether or not to award these additional sums, in my experience it takes something significant to make it depart from the rules.

*It should be noted that the rules are slightly different for cases which fall within the Court's Fixed Recoverable Costs regime (money claims between £10,000-£100,000)*

Can a defendant make an offer?

A defendant can also make a Part 36 offer.  In making the offer, the defendant is also offering to pay the claimant's costs up to the point of acceptance, provided the offer is accepted within 21 days.  If the defendant's offer is rejected, and the claimant fails to beat the offer, the claimant must pay the defendant's costs from the time the offer could have been accepted.  

Should I make an offer?

Due to the serious consequences that flow from rejection of a reasonable offer, it is usually a brave litigant who rejects a Part 36 offer and doggedly pursues a claim to trial (and usually also against solicitors advice).  For this reason, when used correctly, Part 36 offers can be a strategic tool to ensure early settlement.  If settlement appears unlikely, a Part 36 offer is the best protection on costs that can be put in place.  

There is a good deal of merit in making a Part 36 offer early on, as the costs protection (and risk to the opponent in rejecting the offer) begins as early as possible.  That isn't to say that a later offer is not worth making.  

Where you are a defendant so that in making the offer, you are agreeing to pay the claimant's costs to date, it is still very often worth making.  This is because if the claimant 'wins' the case in any sense (e.g. is awarded £1 in damages), the ordinary rule is that you would pay the claimant's costs of the claim.  

An early competitive offer, if accepted, will eliminate your exposure to future costs (both your own and your opponent's).  If the offer is made tactically, at a level the claimant is unlikely to defeat, it will either focus the claimant's mind on settlement, or protect you if the claimant fails to beat your offer at trial (because in that case the claimant would normally be ordered to pay your costs from 21 days after the offer was made to trial). This appears to be what NGN did here (though possibly later than would sensibly be advised).

So what was Hugh Grant so worried about?

It isn't clear at what stage the offer was made, as the story might have been written some time after the settlement was tied up.  It isn't immediately clear why his concern appeared to relate to the entirety of NGN's costs.  If he rejected the offer as claimant at a late stage, and didn't beat the offer, he still would have been entitled to seek his own costs to the date of rejecting the offer from NGN.  He would only have become liable for NGN's costs from the time he rejected the offer.  

I have no doubt that he was accurately advised, and the story was lost in translation, or 'spun' to explain why he bowed out.  There is likely also to be an element of him wanting to maximise return for the charity he donated the damages to, rather than gambling on that gift.  

Ordinarily, the opponent's costs aren't likely to reach seven figures, so the sums are less eye-watering.  There remains, though, a risk when dealing with Part 36 and so this type of offer really should be taken very seriously.  

If you would like to discuss any aspect of Part 36 further, please get in touch