A credit application and terms and conditions of trade form the basis of your organisation’s relationship with its customers. They establish the rules of the game, and if a problem occurs with the business relationship, you want to be able to rely on these documents to help resolve the issue. A cost recovery clause is an important element of your terms and conditions, enabling you to claim most of your debt collection costs in the event of payment default.
However, even with a cost recovery clause including full indemnity, it is unlikely that you will recover all of your legal costs in every case. There are a number of reasons for this.
Legal costs are split into two categories. First, there are “scale costs”, these are a schedule of costs set by the Court which are automatically awarded to you when your solicitor secures a default judgment. If your terms and conditions also contain a cost recovery clause, the Court will usually award other costs such as collection agency fees and charges at the same time. These costs will form part of the judgment debt amount which the Court has determined you are owed and upon which you can commence enforcement action. The scale of legal costs are basically a reflection of what the Court thinks the debtor should repay the plaintiff for bringing the action.
Where a matter is more complicated or takes longer to prepare, the resulting costs are called “solicitor–client” costs. These will always be higher than scale costs.
Even though your terms and conditions may allow for recovery of those solicitor–client costs (on a full indemnity basis), to claim them, your solicitor would need to take the matter to a full hearing and seek orders of the Court with respect to those costs, which in itself adds further costs and delays to the process.
As a rule, unless legal costs are able to be charged at the Court Scale, you will not get all your legal costs awarded on default judgment, and sometimes even after judgment is awarded, there is still work for your solicitor to do in order to finalise the matter.
It is also important to note that the court is unlikely to award the full amount of solicitor–client costs even if your solicitor applies for them and wins. In these circumstances, the Court generally awards “party-party” costs, and the rule of thumb is that party-party costs are about 60% to 65% of the total solicitor-client costs.
The bottom line is that there will always be some out of pocket expenses on a litigated matter. Even on the rare occasion that the Court awards ‘indemnity’ costs, these only cover about 90% of the total solicitor-client costs.
The public policy behind this is simple. The courts rarely agree that a defendant should pay absolutely all of the costs of the plaintiff. That’s because a plaintiff (you) will often seek advice from their solicitor or discuss tactics or options which the defendant (the debtor) shouldn’t pay for because it is specific legal advice passing between you and your solicitor.
The indemnity clauses in the terms and conditions are very useful for negotiation and for matters that settle before they reach Court (which is the majority of matters) but for actual litigated matters, there will always be a gap between what you pay out and what you get back as a result of a successful costs order.
For further information about this subject, or advice on any aspect of debt recovery, please contact Mark Logue on 0409 749 709 or by email at m.logue@4ampac.com.au
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