What does an enforcement clause deal with?
An enforcement clause outlines how the contracting parties’ obligations, duties or responsibilities will be enforced under the contract. They also indicate the repercussions of a failure to fulfil the contract.
Prior to October 2023 parties to commercial disputes would often rely on the costs provision included in a contract or lease to recover their costs of resolving a dispute. However, FRC has caused significant concern for many, where the FRC calculation could be much less than the successful party has spent.
Since the extension of the FRC regime from October 2023, which pulled into the regime most contractual disputes with a value of up to £100,000.00 before interest, the importance and potential value of a contract term covering enforcement costs, and what costs would apply, has significantly increased.
What do commercial contracts often include with regard to enforcement costs?
There is no express contractual right to recover enforcement costs, and it is not a standard clause in commercial transactions – rather, an express contractual right is an important inclusion in a commercial contract, to be included (if agreed) in an initial contract or a renewal of a contract where relevant.
Typically, prior to October 2023, a contract on a commercial matter would provide for allocation between the parties of costs relating to entering into and carrying out the terms of a contract. If no costs clause is included, the contract is effectively silent as to costs, and each party would bear their own costs.
Can parties contract out of FRC to avoid the limit that would apply?
From 6th April 2024 the rules state that the Court can only order FRC where they apply, unless the parties have each expressly agreed that FRC should not apply.
Therefore, agreement can result in a contract out of the FRC regime, which then allows costs to be recovered from an opposing party on an hourly rate basis, escaping FRC and the limit that would apply.
An agreement to contract out of FRC in relation to the enforcement costs should be made at the outset if possible, and must be clear that both parties expressly agree to contract out. Alternatively, the contract could be updated or an addendum agreement prepared by consent. It may also be a term agreed as a specific clause to the settlement agreement (rather than included in the contract itself).
If opting out of FRC, it can be expected that costs will be assessed on the indemnity basis, pursuant to CPR 44.5, and subject to detailed assessment if not agreed.
The relative infancy of the ‘new’ FRC regime, and considerations moving forward
Relatively speaking, the new FRC regime remains in its infancy and parties will only have visibility as to the implications of the same once decisions are reported. Once there is enough case law to predict the court’s approach then parties can expect greater certainty around the approach both to the FRC regime and any attempts to contract out of the same, enabling them to carry out a better analysis at the outset and consider if it is appropriate to both include an enforcement costs clause and to seek escape from the FRC regime, both of which could take rather significant negotiating with the other contracting party.
In any event, the following take home points are likely to be relevant:
- The FRC regime will limit enforcement clause costs to the relevant FRC calculation on matters with a value of up to £100,000.00.
- FRC will be calculated based on an amount that is fixed, that amount being determined by the stage at which the case is resolved along with a percentage of the claim value.
- If not ‘contracted out’ of, the FRC regime will apply and could result of a costs award to the ‘winning’ party that is less than that party has spent to enforce the contact.
- An express contractual right to recover enforcement costs must be included in a contract in order for costs of enforcement to be recovered.
- On cases where this is clearly available, and where FRC apply, take a view at the outset if possible, to consider if it would be preferable to opt out of FRC (see CPR 45.1(3)). This must be expressly agreed by all contracting parties.
- If an agreement to contract out is reached, this should be confirmed expressly as soon as possible, included in a contract, an addendum agreement or in a settlement agreement.
Be prepared for a potential dispute to arise here – a party who perceives themselves to be in a stronger position when entering a contract may likely be more agreeable to contract out of FRC (and indeed to agree to the inclusion of an enforcement costs clause) than a party in a weaker position, who would consider FRC a more favourable default option.
The inclusion of an enforcement costs clause will continue to be one of significant discussion between the parties when entering a commercial contract and now, the application of FRC should also be added to those discussions.