Recovery of Reasonable Costs after 16 March 2013

The right to claim the “reasonable costs” of recovering a debt only arises when:

1. the Act applies i.e. when there is no alternative “substantial remedy” for late payment in the contract; AND

2. the fixed sum of £40, £70 or £100 (depending on the value of the debt) does not cover the payee’s reasonable costs of recovering the debt.

It is not clear from the Regulations what is meant by “reasonable costs”, and this has led some to question whether the costs of adjudication or legal proceedings can be recovered as “reasonable costs”. However, although the courts have yet to clarify the issue, it is unlikely the Regulations will be interpreted in this way.

The legal costs of adjudication are irrecoverable and the Housing Grants, Construction and Regeneration Act 1996 (as amended) prohibits contracting parties from including any term in their contracts which provides for one party to the pay the other’s legal costs incurred in adjudication. It would therefore be contradictory if the Regulations allowed the recovery of legal costs in adjudication proceedings.

As far as legal proceedings are concerned, if the Regulations permitted the automatic recovery of legal costs, this could undermine both the detailed procedural rules and the courts’ general discretion in relation to the award of costs.

It therefore seems that the “reasonable costs” which payees can recover under the Regulations will be limited to costs incurred prior to formal debt recovery proceedings, such as the administrative costs of sending letters and possibly the cost of preliminary legal assistance such as solicitors’ letters.

Payees should, however, note that it is unlikely the paying party will voluntarily pay their “reasonable costs”, at least not without considerable scrutiny of the costs incurred. In some cases, it may be necessary to consider legal action in order to recover costs, which is unlikely to be appropriate unless significant costs have been incurred. Payees should therefore ensure they keep detailed records of the costs they incur in recovering debts.

Ref Source: Hawkswell Kilvington www.hklegal.co.uk