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The Recoverability of Pre-Action Costs: An Unfair Balance

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About The Author

Jonathon Wright (Guest Contributor)

Jonathon read Law LLB (Hons) at Newcastle University. He was subsequently awarded a major Middle Temple Scholarship for the BPTC, which he undertook at Nottingham Law School, completing it in June 2014. Jonathon is currently a paralegal and writing an LLM at Nottingham Law School. Outside of law, Jonathon is a keen linguist, having taught himself several languages.

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The introduction of the Jackson Reforms in April 2013 was an attempt to promote proportionate cost management in civil litigation and, since their introduction, it was fair to say that they have improved the costs regimes associated with civil litigation.

However, it is arguable that such reforms did not go far enough to touch on the issue of pre-action costs. For example, it is evident that a party will, even in exceptional circumstances, be unable to recover their pre-action costs from an opponent following an action being abandoned. The fairness of this rule is questionable. Indeed, this article will examine the clear tension that exists between (1) the Pre-Action Protocol contained in the Civil Procedure Rules (which upholds a commitment to not punishing a party for dropping a case prior to the commencement of litigation) and (2) a defendant forced incur cost to defend a matter that is subsequently abandoned with no form of recourse to recover costs.

The General Rule of Pre-Action Costs

The general rule derives from Section 51 of the Senior Courts Act 1981 ("SCA 1981") which details that costs can only be recovered by a party if such costs are “costs of, or are incidental to the proceedings”. Therefore, costs that relate to pre-action in isolation are not deemed to be as part of, or incidental to, proceedings.

The Impact of the Jackson Reforms and the Pre-Action Protocol

The purpose of the Jackson Reforms was to “reduce litigation costs” and prevent “uncontrolled litigation costs”. Mirroring this theme, the purpose of the Pre-Action Protocol is to encourage parties to try to settle the issues without proceedings.

As such, the protocol sets out a range of factors that parties must adhere to in order to be in compliance. This can include an exchange of information and expert evidence, which, depending on the nature of the case, can drive up costs for a party defending an action.

Failure to adhere to such pre-action requirements can lead to, for example, payment of part or all of the costs of the proceedings and payment of such costs on an indemnity basis. Therefore, in order to comply with the pre-action protocol, a defendant will be forced to incur costs.

Judicial Reluctance to Allow Exceptions

Two cases following the introduction of the Civil Procedure Rules have addressed the issue of the recoverability of pre-action costs. In the more recent case of McGlinn v Waltham Contractors [2005], the defendants sought to recover pre-action costs following the abandonment of allegations that had been pursued at the pre-action stage. However, in his judgment, Peter Coulson QC echoed the general rule that pre-action costs are not recoverable, but with some qualification. Such qualification was that pre-action costs are not recoverable “unless the circumstances are exceptional and give rise to unreasonable conduct”.

The judge in McGlinn not only failed to define what circumstances would constitute the threshold of ‘exceptional’, but also held that even if the circumstances were exceptional, he would not have exercised his discretion to award the defendants their costs. He reached this conclusion on the grounds that awarding the defendants their pre-action costs would be contrary to the purpose of the Pre-Action Protocol

Indeed, he considered that penalising a party for dropping a claim prior to the commencement of litigation would frustrate the purpose which the protocol was intended to achieve. Therefore, it appears that even if exceptional circumstances exist, to depart from the general principle is a rarity.

Combating the Judicial Reluctance: A Breakthrough?

In Associated Newspapers v Impac Limited [2002] FSR 18, upon the defendants bringing Part 8 proceedings seeking costs after an application by the claimants was withdrawn, the Judge allowed the defendants to recover their pre-action costs. Despite it being held that although it was an interim application (and not proceedings) that had been issued and Section 51 of the SCA 1981 did not apply, it was determined that the High Court had an inherent jurisdiction to award costs in these circumstances in order to achieve a just result.

The rationale for departing from the general principle was that it was grossly unfair to take a party to the brink of litigation and cause them to incur heavy costs that were not recoverable. It seems therefore that the behaviour of the claimant in Impac met the threshold of exceptional set out by the Judge in McGlinn for awarding pre-action costs.

However, it is ostensible that the decision on costs in Impac struggles to sit well with the general rule, and the later decision in McGlinn. The Judge clearly made the order for pre-action costs on the basis of fairness, but this does not detract from the fact that the ruling remains inconsistent with the purpose of the Pre-Action Protocol: that a party should not be punished for relinquishing a claim prior to litigation. What is more, the likelihood that cases factually akin to Impac in the future being able to recover such costs is minimal due to such a conflict with the Pre-Action Protocol.

Unfairness in the Status Quo

It is widely recognised that the purpose of the Pre-Action Protocol is to set out the steps the court would normally expect parties to take before commencing proceedings. Indeed, the Pre-Action Protocol encourages parties to try to settle the issues without proceedings.

From this, the logical conclusion is that if an action can be resolved and litigation avoided, each party should not be punished via costs. That being said, this rule can be open to abuse. For example, a defendant can incur a great deal of pre-action cost as a result of a certain issue being pursued pre-action by a claimant that will not be recoverable. Indeed, while there is scope within the Pre-Action Protocol that the costs of complying with the Pre-Action Protocol should be reasonable and proportionate – with failure to observe this rule resulting in any disproportionate costs becoming recoverable as part of the proceedings – this does not go far enough.

It fails to address the issue that arises whereby substantial costs are incurred by a defendant as a result of the claimant’s pursuit of the matter, but the matter is dropped prior to the commencement of proceedings. It is not clear how these costs can be recovered. Indeed, in these circumstances, a defendant may be taken to the brink of litigation, incur heavy costs, but be barred from having any redress to recover such costs.

This creates an unfair balance as the claimants’ cost position is protected through the Pre-Action Protocol whereas the defendants’ receive little protection at all. Therefore, the balance that needs to be achieved between maintaining the principle of the Pre-Action Protocol and a defendant incurring excessive costs heavily favours, in this scenario, the claimant without any obvious justification.

Conclusion

The general rule that pre-action costs are not recoverable has failed to be fractured by attempts by defendants to recover such costs. Whilst it is recognised that pre-action costs can be awarded if exceptional circumstances exist, there remains an ostensible judicial reluctance to do so.

The primary rationale for this is the commitment to the purpose that sits behind the Pre-Action Protocol: that a party should not be punished for dropping a claim prior to litigation. In addition, whilst the Jackson Reforms may have found success in reducing uncontrolled litigation costs for matters that have evolved into proceedings, they do not go far enough in dealing with uncontrolled litigation costs pre-action.

As a result, this allows a claimant to drop certain issues pre-action without worrying about whether the defendants can seek redress for costs. This, therefore, creates an imbalance in that the claimant is protected by the Pre-Action Protocol, but the defendant fails to be afforded any such protection despite complying with the rules therein.

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Tagged: Banking & Finance, Commercial Law, Courts, Dispute Resolution, Justice, Litigation

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