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| Issue No: | 32 |
|---|---|
| Published: | Winter 2006 |
| Article No: | 7 |
| Author: | Davis Moss |
| Title: | Are Costs Associated With Pre-action Behaviour Recoverable? |
Introduction
The issue of recovering the cost of a dispute is an ever-present consideration regardless of jurisdiction and forum. In the UK, when the Civil Procedure Rules were introduced in 1999, these provided the courts in England and Wales with a new procedural code. An overriding objective of the CPR is to assist the courts to deal with cases justly. To help achieve this objective, a system known as the Pre-Action Protocol has been introduced into the litigation process.
Compliance with the Pre-Action Protocol is intended to promote the prospects of achieving settlement as early as possible. It is also intended to ensure that other means of resolving disputes are attempted.
In this two-part article, David Moss asks what the position is with respect to the recoverability of costs associated with pre-action behaviour.
This article will focus on the recoverability of costs incurred by the parties in the pre-litigation stage.
Two relatively new concerns are: Firstly, the potential for recovery of the costs involved in complying with the Pre-Action Protocol for Construction and Engineering Disputes. Secondly, the extent to which one party may be denied costs on the basis that the other party alleges that the matters could have been dealt with by a form of alternative dispute resolution.
This first part of the article will consider the potential for recovery of costs involved in complying with the Pre-Action Protocol. Part 2, which will appear in the next issue of the Digest, will consider the extent to which one party may be denied costs on the basis that the other party alleges that the matters could have been dealt with by a form of alternative dispute resolution.
Pre-Action Protocol for Construction and Engineering Disputes
Pre-Action Protocols were devised to set guidelines and a timetable for the conduct of cases before court proceedings are issued. That is to say, before a party can issue a writ, it must have taken certain steps, as defined by these pre-action protocols.
The objectives of the specific protocol applicable to construction and engineering disputes are: Firstly, to encourage the exchange of early and full information about the prospective legal claim. Secondly, to enable parties avoid litigation by agreeing a settlement before commencement of litigation proceedings. Thirdly, to support the efficient management of proceedings where litigation cannot be avoided.
To this end, the Pre-Action Protocol sets out a procedure for the parties to follow which seeks to procure the full disclosure of both the claimant's substantive case and the defendant's response. To illustrate this, the Pre-Action Protocol requires the claimant to send a letter of claim setting out:
- The basis of the claim, incorporating both the facts and the law relied upon.
- If the claim has previously been rejected, why that rejection was wrong.
- The name of any experts on whose evidence the prospective claimant intends to rely, at the same time setting out the specific issues which will form the substance of that evidence.
This is then to be followed by an equally detailed response from the defendant, then a meeting between representatives of both parties and, if considered appropriate, the submission of the claim to a form of alternative dispute resolution.
It is important that the parties comply with the Pre-Action Protocol prior to issuing proceedings. The Practice Direction on Protocols provides that, if in the court's opinion, non-compliance with the Pre-Action Protocol has led to the commencement of proceedings which might otherwise not have been needed or commenced, or costs have been incurred in the proceedings, which otherwise might not have been incurred, the courts may make a number of orders imposing costs sanctions. That is to say, the court will penalise the party at fault, by having it pay some or all of the other party's costs.
Following the introduction of the Pre-Action Protocols, the Law Society and the Civil Justice council, published in June 2002; a report 'More Civil Justice? The impact of the Woolf reforms on pre-action behaviour'.
Although generally in favour of the Pre-Action Protocols, amongst the findings of the research was that due to the 'front-end loading' of the work involved in initiating a claim, costs have increased. The repercussion of this has more recently been discussed in a survey carried out by the Technology and Construction Solicitors Association amongst its members to find out how the Pre-Action Protocol for Construction and Engineering was working in practice.
One of the main areas of concern was the cost of complying with the protocol and whether or not those costs are recoverable in subsequent litigation. From the process described above, it is not difficult to see that these costs can, potentially, be substantial.
Until recently, there had been no direct authority on the recoverability of costs incurred in compliance with Pre-Action Protocols. However, a recent construction case sheds some light on the issue. In his judgment in McGlinn v Waltham Contractors Ltd (2005), Judge Peter Coulson QC considered whether certain pre-action costs are recoverable.
The Facts
It all started with allegations that several companies, including architect's firm Huw Thomas Associates had done such shoddy work on Ian McGlinn's house that it had to be knocked down. Unsurprisingly, Mr McGlinn wanted to sue and he duly followed the protocol, which led to mediation in November 2004. The mediation was unsuccessful and McGlinn issued proceedings shortly thereafter.
However, Huw Thomas alleged that the claims in the formal proceedings were, in some cases, different to those which were put forward as part of the protocol process. It was noted in particular that the claims now made against them did not include the initial claims in respect of over-payment to Waltham (the contractors) or claims in respect of loss and expense paid to Waltham - even though both claims were made against Huw Thomas during the pre-action stage.
Huw Thomas did not think they should have to pay for costs incurred in considering and responding to claims which were no longer part of the proceedings and filed an interim application asking McGlinn to compensate them for these costs.
Costs 'incidental to' proceedings
The judge began by pointing out that the Supreme Court Act provides that “costs of and incidental to” certain proceedings are at the discretion of the court. Huw Thomas argued that costs incurred by a party in complying with any Pre-Action Protocol are capable of falling within costs 'incidental' to proceedings. The judge took the view that, as a matter of principle, these costs may be recoverable in that context. However, the judge observed that whether any given cost should be considered to be 'incidental' to proceedings depends on the facts and circumstances in each case.
The judge considered whether a defendant's costs incurred in responding to a pre-action issue should be recoverable where that response was so successful that the issue was dropped in the pre-action stage. The judge did not think so. He thought that, unless there were exceptional circumstances, costs incurred by a defendant in dealing with and responding to issues which are subsequently dropped from an action when formal proceedings are issued, cannot be considered costs 'incidental' to those proceedings.
Pre-Action Protocols
Taking a broader look at Pre-Action Protocols, the judge said it was important for parties to know that they will not be penalized if they decide not to pursue claims in court which they had started during the pre-action stage. The whole purpose of the Pre-Action Protocols, he said, was to narrow issues and to allow a prospective defendant, where possible, to demonstrate to the prospective claimant that a particular issue would not hold water in court. In the case at hand, the judge thought that the Pre-action Protocol had done its job and that it would be wrong to penalise McGlinn for abandoning claims which the defendants had demonstrated were going to fail in court.
Decision
Accordingly, the judge ruled that as a matter of principle, unless there are exceptional circumstances, costs incurred by a defendant at the Pre-Action Protocol stage in persuading a claimant to drop a claim, are not costs 'incidental' to proceedings and are therefore irrecoverable. The judge added that even if the costs were considered to be incidental to the proceedings, he would not exercise his discretion to award the costs as he considered that such an award would be contrary to the spirit of Pre-Action Protocols. The application was dismissed.
This case appears to be the first step in what might be yet another contentious area in the context of costs recovery. It remains to be seen how the Courts will respond to other pre-action costs issues. In particular there have been reports of increasing numbers of speculative Pre-Action Protocol letters. In these situations, it may be that it is unfair to expect a prospective defendant to incur substantial costs in responding to a claim that is never formally pursued.