Summary and implications
The Pre-Action Protocol for Construction and Engineering Disputes (the “Protocol”) may be considered to be merely a procedural step by some whereas to others its serves a very practical purposes in assisting parties to resolve disputes. Whatever your view of the Protocol is, it remains the case that the courts require parties to comply with the spirit if not always the letter of the Protocol and that parties who fail to comply may be punished severely in respect of costs. The court may also consider a party’s conduct when awarding interest on damages.
The sanctions available to the court are set out at paragraph 4.6 of the Practice Direction on Pre-Action Conduct (the “Practice Direction”)* which are:
- the power to stop proceedings until the required Pre-Action steps have been taken;
- the power to make costs orders against a party failing to comply;
- the power to make orders in respect of interest against a party failing to comply.
The issue of costs and Pre-Action conduct has been considered by Lord Justice Jackson in his on-going review of the costs of civil ligation. It has been proposed that the Protocol process would take place after proceedings have been issued at which point the court would have the power to manage the Protocol process and the costs of the process would become costs of the action. This is in response to concerns that the current Protocol process front loads costs too much and that those costs incurred Pre-Action may not be recoverable as the courts do not have the power to make awards in respect of costs incurred Pre-Action.
Sanctions and Examples of Failure to Comply with the Protocol
The Practice Direction gives the court wide powers to penalise parties who have failed to comply with the Protocol.
In circumstances where a party has issued proceedings without first going through the Protocol process, the defendant could seek to have the proceedings stayed to ensure those steps that should be taken Pre-Action have been. The court has been willing to make such orders and force the parties to comply with Protocol. This may be a useful option to a defendant who feels they have been ambushed by a claimant and who genuinely does not know the claim it is expected to answer. The exception is where a claimant needs to issue proceedings because the limitation period is set to expire and there is not enough time to go through the Protocol process. In those circumstance the claimant must apply to the court for directions as to the timetable and form of the procedure to be adopted by the court at the same time that it requests the court to issue proceedings.
Where a party has issued proceedings without complying with the Protocol and has then carried on with that claim the court has made adverse costs orders against that party. In a 2002 case* the claimant had tried, unsuccessfully, to pursue a claim without first issuing a letter of claim setting out its case. Even though no Pre-Action Protocol applied to the case the court held that a failure to issue a letter of claim was unreasonable conduct and as a result the claimant had indemnity costs awarded against it. The award of indemnity costs means that the party who has the benefit of the award is likely to recover closer to 80% of its costs rather than the 60% it is more likely to recover if costs are assessed on a standard basis.
* Phoenix Finance Ltd v FIA (Costs)  EWHC 1242
Where a party has failed Pre-Action to set out its claim with any clarity and has then gone on to amend its claim, time and again, the court has been willing to make a costs order against that party. In one particular case a claimant was ordered to pay the defendant’s costs of proceedings up to the date when the claimant finally presented a case to which the defendant could properly respond*.
The court’s powers in respect of interest extend to awarding interest at a lower rate than a claimant failing to comply would otherwise have received or awarding interest at a higher rate, of up to 10% above base rate, against a defendant that has failed to comply.
Consequences of Technical but not Serious Non-Compliance
Whilst the court has the power to make severe orders against parties failing to comply with the Protocol it remains at the court’s discretion to do so. In the case of technical non-compliance with the Protocol the court has been unwilling to impose severe sanctions.
The Technology and Construction Court (the “TCC”) has recently considered technical non-compliance*. In this case the defendant sought a costs order against the claimant for failure to comply with the Protocol. Specifically the defendant argued that the claimant had failed to serve a Protocol compliant letter of claim. It was held that the court’s approach should be to look at the substance of the issue of alleged non-compliance and not the technical details of any failure to comply.
The court found that whilst there may not have been in strict terms a Protocol compliant letter of claim, the defendant had been presented with a clear summary of the basis of the claim against it with details of the main contractual terms and what the claimant was seeking. The court did not make an order against the claimant for failure to comply with the Protocol. It can therefore be seen that whilst the threat of seeking a costs order
against a party that has failed to comply with the Protocol may be a useful tool, particularly given the potential severity of the sanctions open to the court, the court will equally look unfavourably on a party who seeks to force a slavish compliance with the exact letter of the Protocol. There is clearly a balance to be struck between ensuring you have satisfied the substance of the Protocol without requiring such strict compliance that the time and costs expended become disproportionate to the value of the dispute.
Civil Litigation Costs Review: Preliminary Report
On 8 May 2009 Lord Justice Jackson published his preliminary report into the costs of civil litigation. The report looked in part at the conduct of proceedings in the TCC and one of the issues it considered was costs incurred in the Protocol process.
Concerns have been raised for some time in the industry that the Protocol process in the TCC forces parties to incur substantial costs before proceedings have been issued and that those costs may then not be recoverable as the court only has the power to make awards in respect of costs that are incidental to the actual proceedings. This means that if the parties spend considerable time and money narrowing the issued between them that it is very unlikely those costs will be recoverable.
Lord Justice Jackson has suggested that the Protocol process takes place after proceedings have been issued. The proceedings will be stopped to allow this to happen. Lord Justice Jackson has suggested that this would have a number of benefits as the court could take control of the process and prevent one party from obstructing the Protocol process, something than can currently commonly occur. The court would also be able to bring the Protocol process to an end if it was going nowhere, something that can currently be difficult for parties to agree on. Moving the Protocol process post issue of proceedings would also bring the costs of the process within the costs of the action and remove some of the current problem of costs of complying with the Protocol being irrecoverable.
The report is currently the subject of a consultation that is due to be completed in December this year. However, It has already been suggested that the TCC may pilot the Protocol process taking place after proceedings have been issued. My colleague Ian Radford discusses the potential reforms in more detail in the following article.