Introduction
Choosing a dispute resolution forum
Methods of costs protection
Arbitration costs under Public Works Contracts
Emerging cost trends
Comment
At times when money and resources are constrained, legal costs are at the forefront of clients' minds. This update highlights some ways in which parties to construction and engineering contracts can reduce their potential costs exposure when dispute resolution proceedings are unavoidable.
The costs of a dispute can be significant and include:
- legal costs (solicitors' and barristers' fees);
- experts' fees;
- costs of other third-party advisers;
- stenographers' fees; and
- internal management costs, including the time and resources of key personnel within the organisation.
This list can be multiplied by two if a paying party is on the receiving end of an adverse costs order (ie, it is responsible not only for its own costs, but also for the winning party's costs).
The degree to which each party to a dispute may ultimately be responsible for the costs of that dispute essentially depends on two factors:
- the forum in which the parties choose or are contractually bound to resolve their dispute; and
- the level of costs protection put in place by the parties.
Choosing a dispute resolution forum
In court and arbitration proceedings the normal rule is that costs follow the event, which means that the winning party is generally entitled to recover its costs from the losing party (unless the parties have agreed otherwise). However, a judge or arbitrator has discretion to depart from this rule if he or she considers that there are special circumstances warranting such a departure. For example, where there are distinct heads of claim on which the claimant has failed to succeed, the judge or arbitrator may decide that a proportionate costs order, representing the relative degree of success in respect of the overall claim, may be more appropriate.
Costs in alternative dispute resolution (ADR) forums, including mediation, conciliation and adjudication, are generally dealt with quite differently from the costs of arbitration or litigation. The normal rule in ADR is that each party to the dispute bears its own costs, irrespective of whether it wins or loses.
A responding party to arbitration or court proceedings would be well advised to consider all potential means by which it may avail of protection against being faced with a bill – both for its own and for the claimant's costs. Such costs protection measures come in the form of:
- a sealed or Calderbank offer, usually tendered in arbitration proceedings (also available to court litigants under certain circumstances); and
- a lodgement of money into a court account.
Both of these tools provide a mechanism whereby a responding party offers either to pay the claimant or to tender into court a certain sum in settlement of the dispute, including a commitment to pay the claimant's reasonable costs up to the date of the offer. If the claimant rejects the offer and ultimately does not beat it by way of the judgment or award rendered, then ordinarily the claimant must bear its own legal costs from the date on which the offer was made and will also be responsible for the respondent's legal costs from the date of the offer. The rationale for this is that all costs incurred by both parties since the date of the offer are essentially wasted because both parties would have been in a better costs position had they accepted the offer when it was made.
An exception to the general principle on the operation of Calderbank offers, which has been introduced by way of a relatively newly inserted arbitration costs undertaking in the Standard Form of Tender to the Public Works Contracts, is examined below.
Arbitration costs under Public Works Contracts
In September 2011 the Government Construction Contracts Committee inserted a new costs undertaking in the Standard Form of Tender for Use with the Public Works Contracts, which provides that each party must bear its own costs of any arbitration entered into, unless a sealed offer is made and the contractor does not beat it, in which case the contractor will be liable for both parties' costs. However, the provision does not allow for the reverse situation, whereby the contractor beats the sealed offer and would ordinarily be entitled to recoup its reasonable costs. On the contrary, it seems that in such circumstances the contractor is still responsible for its own costs.
The insertion of such a provision will clearly impact on contractors when tendering, as it may be viewed as an impediment to a contractor ever taking a claim forward to arbitration. Arbitration costs can be significant, and the imposition of a requirement that each party bear its own costs – no matter what the outcome and no matter whether a sealed offer is made – will render arbitration inaccessible to many, notwithstanding the merits which a contractor's claim may have.
It is difficult to reconcile the revised Standard Form of Tender with the Arbitration Rules 2008 applicable to the Public Works Contracts. Specifically in relation to costs, the Arbitration Rules provide that the arbitrator will be responsible for fixing the costs of the arbitration and that the costs should in principle follow the event (ie, the successful party recoups its costs). This is clearly out of sync with what is now prescribed in the Standard Form of Tender.
Once enacted, the Draft Mediation Bill 2012 will impose an express obligation on solicitors to advise their clients of the option of mediation prior to commencing proceedings. Order 56(a) of the Rules of the Superior Courts, introduced in November 2010, encourages disputing litigants to engage in ADR and provides that a party's refusal to partake in ADR can attract an adverse costs order in any future court proceedings.
Cost-conscious contractors must bear in mind that issues should be dealt with in proportion to the amount of money involved. ADR and early case settlement strategies should be promoted at every possible juncture, particularly where the value of the dispute does not warrant the expenditure of significant costs. If parties are contractually or otherwise obliged to resolve their dispute through litigation or arbitration, then the adoption of case management techniques through which the length and extent of discovery, submissions and evidence are limited is essential.
For further information on this topic please contact Karen Killoran at Arthur Cox by telephone (+353 1 618 0000), fax (+353 1 618 0618) or email ([email protected]).