“Can I recover my costs from the other side?” This is one of the first questions asked in any dispute in which solicitors are involved and an important consideration when weighing up the commercial viability of pursuing a person for money owed to you.

The general rule is that the person against whom judgment is made (the loser) pays the costs of the winner.  Therefore, parties who are owed money base their argument that any settlement proposal must include an additional contribution to their costs on the basis that, if the matter proceeded to trial, a judge would make an order to that effect.

What happens though if settlement is reached before legal proceedings are commenced – can you justify a demand for your legal costs incurred up to reaching settlement? The short answer is there is no general entitlement to these costs.

Clients and solicitors alike need to know that, before a claim is issued, the general position (to which, yes, there are exceptions) is that there is no litigation and so there are no costs of litigation. In other words, if you instruct a solicitor to help you recover a debt and the debtor agrees to pay before you commence a claim, the costs you have paid to the solicitor are not legally recoverable. Solicitors need to tread carefully here because if they are seen to be demanding anything on behalf of their clients that is not legally recoverable they may be breaching their duties as a solicitor.

A possible exception to this position is where both parties have agreed under contract that such pre-action costs are recoverable, even where there is no litigation. Have a look at your terms to see if there is adequate provision for cost recovery. If not, then you may find yourself out of pocket.

You may also be able to recover pre-action costs in the absence of litigation through making a Part 36 offer. An offer under Part 36 of the Civil Procedure Rules automatically includes a provision for payment of the receiving party’s costs up to the point of acceptance, by the accepting party. The Court of Appeal has recently held that where an offer under Part 36 is made and accepted prior to the commencement of a claim, the claiming (or receiving) party will be entitled to recover its costs incurred up to the date of acceptance of the offer, notwithstanding that proceedings will never be commenced.

Interestingly, once proceedings are commenced, pre-proceedings costs are then recoverable as being costs “incidental to” those proceedings. Care should be taken though not to commence proceedings prematurely with the sole aim of rendering those pre-action costs recoverable. If you do, you may be penalised by the court if settlement is not reached. If running a business, to maximise your chances of achieving a favourable settlement at an early stage, it is essential that your terms and conditions provide you with sufficient protection in terms of recoverability of legal costs in addition to other factors such as certainty of respective obligation and fairness.

Why not let us carry out a free health check to see if your terms offer sufficient protection.

Please note that is intended as a general guide only and not legal advice.

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