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.
