We all know how frustrating it is when a debtor is either unable or unwilling to pay you money that is due and owing. When the amount of that debt is significant, it is inevitable that you will have to expend time and further money on legal fees trying to recover that debt. In most circumstances, at least a portion of those legal costs can also be recovered from your debtor. There are, however, a couple of things that you can do to assist with recovery of your legal fees.

Be Proactive With Your Contract Drafting

Ensure that a lawyer has adequately drafted your contract if you require a party to pay you for either goods or services. Your contract should include a clause (or clauses) setting out your rights and entitlements in circumstances where that party defaults on payment. A well-drafted contract will state that you are entitled to claim ALL of your costs of recovery, including legal fees, from your debtor once they have defaulted on payment. You can rely on this clause during negotiations with your debtor, as well as later if you are required to commence formal court proceedings.  

Letter of Demand

Before you can begin formal court proceedings, you must send your debtor a letter of demand. As the name suggests, the purpose of a letter of demand is to demand payment of the outstanding debt from the debtor. It provides the debtor with a final opportunity to pay the debt before you commence court proceedings. 

It is also important that your letter of demand not only set out the amount of the principal debt which is owing but that if you choose to commence court proceedings, the debtor will be liable to pay your additional legal costs. Sometimes, this alone is sufficient motivation for your debtor to pay any outstanding amount.  

What Else do I Need to Know?

There are some other important factors you should know once you have initiated court proceedings: 

  1. If you commence proceedings in the Small Claims Division of the NSW Local Court, your legal costs are capped. For example, if your claim is worth between $5,000 and $10,000, you can only claim a maximum of $802.56 in legal costs (current as at 23 June 2016).
  2. A party that is self-represented is not usually entitled to recover professional legal costs.
  3. If you are unsuccessful in your proceedings, the court can make an order requiring you to pay the defendant’s legal costs. The court can order costs on either an ordinary basis or an indemnity basis. For more information on the types of costs and orders that a court can make, you can read our article, ‘But I won!  Why can’t I recover all of my out of pocket expenses and legal costs?.
  4. Costs can be awarded against any party who causes an unnecessary delay during proceedings.  

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If you require your contracts reviewed or need to start debt recovery proceedings, or if you have any questions about the Small Claims Court, get in touch with our disputes team on 1300 544 755. 

Vanessa Swain

Next Steps

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