8 December 2017 by

Can my commercial contract protect me from legal costs?

It is widely believed that who pays the legal costs of a dispute is entirely at the court’s discretion. In applying its discretion the court considers, but is not bound by the general principle, that the loser pays some or all of the winner’s costs.  What is less well known and something for businesses to consider including in their contracts, is an indemnity clause providing for who pays costs in the event of a dispute and on what basis they are assessed.

The Court of Appeal has decided that where there is a legal cost indemnity clause in a contract, then the court will usually make findings in line with such a clause when awarding costs. This is a principle that has been followed by the court in other cases.

Another potential benefit of such clauses is in respect of lower value claims (less than £10,000) heard by the small claims court. Generally in these cases the court will not make an order for costs, regardless of the result, and each party have to pay their own legal costs. The court can though in limited circumstances exercise their discretion and order one party to pay the other’s costs. The inclusion of a legal costs indemnity clause may well be a factor taken into account by the court as to whether to exercise their discretion and award costs.

The protection such clauses offer are not however absolute.  A party is still not permitted to claim costs that are found to be unreasonable in amount or unreasonably incurred in the first place; this also does not apply to a contract between a client and their solicitor.

In conclusion, although not guaranteed, the inclusion of a costs indemnity clause could well assist you in trying to recover your costs in any future dispute, or afford you protection from paying the other side’s costs – it is certainly something you should be at least thinking about.

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