Summary and implications

A comprehensive report on the cost of court proceedings will emerge at the end of the year. It will recommend a number of changes that will potentially benefit those involved in construction disputes. These include:

  • a possible extension of fixed costs regimes to include lower value claims. This may in many cases render court proceedings more attractive than adjudication;
  • reforms to make it easier to recover the costs incurred in the earliest stages of a dispute. At present, costs incurred in complying with the court’ pre-action protocols (as mentioned in the earlier article in this newsletter by my colleague Matthew Taylor) are frequently not recoverable;
  • changes to the way that claims can be funded – including the possible introduction of American-style ‘contingency fees’. This may encourage more ‘gainshare – painshare’ arrangements between litigants and their lawyers.

What is the problem?

The cost of resolving disputes has always been a thorny issue for the construction industry. The desire to reduce those costs has driven a number of reforms over recent years, most notably the introduction of a statute-backed adjudication system.

Unfortunately, adjudication has not been a universal cure-all. It is usually an interim measure only – so if one party doesn’t like the result, it can still go on to have the issues resolved in court. Often, the rules do not permit the parties to recover the considerable costs they may incur in securing adjudicator’s decisions. And such decisions, frequently produced under tremendous time pressure, by individuals without the large range of highly technical skills needed to resolve highly technical disputes, can be of such indifferent quality that the parties are forced to turn to the court (or to highly-paid specialist arbitrators) to provide definitive answers.

The legal costs associated with court proceedings can devour the profits generated by otherwise successful projects; and the cost of taking or defending such proceedings thus remains of fundamental importance to the construction industry.

Earlier this year Lord Justice Jackson, a senior judge who spent much of his previous career as a barrister working on construction disputes, produced a draft report analyzing how the litigation costs system has reached its present (unsatisfactory) stage of evolution. He is now assimilating the comments of the many parties keen to see change in the system - and the rather fewer parties who are content with the status quo. His final report is due out at the end of the year, and can be expected to champion some changes that will be of great interest to our somewhat beleaguered industry. This briefing considers some of the measures that may be implemented.

Fixed costs for smaller claims

The amount of costs a party currently has to pay to have a dispute determined by the court can be pretty indeterminate.

In only a few categories of cases – uncontested claims, road traffic accidents, employer’s liability claims – are fixed and proportionate costs the norm. Lord Justice Jackson is now considering whether fixed cost regimes should be extended to cover all ‘fast track’ cases – a category which includes (or might be extended to include) many lower-value construction claims.

This may make litigation much more attractive than adjudication as a way of resolving many disputes. Typically, the court fees for a smaller case will be a lot lower than the fees payable to an adjudicator. There will be much less scope for procedural manoeuvres about ‘jurisdiction’ and fewer fights about the enforceability of the decision. And, perhaps most importantly, there will be some prospect of a successful party recovering its own costs – whereas in a typical statutory adjudication, both parties have to bear their own costs, even where one party has clearly been shown to be in the wrong.

Easier recovery of costs incurred early on

Under the present system, disputants must go through some elaborate procedures, set out in a formal protocol, before they can get to the point of issuing a claim form at the court. These procedures are designed to help highlight and narrow the scope of the issues in dispute, and thus reduce the amount of time the parties would otherwise spend before a Judge. Unfortunately, costs incurred in refining and resolving claims that are sorted out through the protocol procedures are usually treated by the court as being irrecoverable. This is unfair.

Lord Justice Jackson has suggested that the protocol procedures could in future be undertaken after a claim form has been issued at court. This will have the dual benefit of making it much easier to recover the costs spent on the process of attempting to narrow differences; and of enabling the specialist construction judges to supervise the process – which, as Lord Justice Jackson notes, in itself can lead to the avoidance of unnecessary costs, and the recovery of a much greater proportion of the costs actually spent.

Alternative ways of funding proceedings

Lord Justice Jackson notes that whilst there has been considerable growth in litigation where the claimant’s costs are underwritten by ‘After the Event’ (“ATE”) insurance policies, this has resulted in costs for defendants spiralling upwards – partly because the claimant is having his costs paid by others and has less incentive to control what is spent; and partly because the cost of the ATE policy, which is in principle recoverable from a defeated defendant, can be ruinously high and, in some cases, totally disproportionate to the risk being undertaken by the insurer.

The judge is considering whether the entire costs of such policies should continue to be recoverable. If he decides that they should not be, we can expect a cooling-off of insurance-backed litigation. He recognizes, however, that ATE policies can create an avenue to justice for those who would otherwise be unable to afford to litigate; and that it may be necessary to create other avenues to ensure that such access to justice is maintained. This is perhaps doubly important in current economic circumstances, where companies may simply be too strapped for cash to fund court proceedings in the normal way.

Interestingly, one of the ways Lord Justice Jackson thinks that justice might in future be pursued is by permitting ‘Contingency Fees’ – where the lawyers are paid a pre-agreed proportion of the sums recovered, and get nothing if nothing is recovered. This is a commonplace of American litigation, but has previously been scorned in this country. If the idea is adopted, it may see widespread use in construction cases. Partnering between contractors and developers and their lawyers - pain sharing and gain sharing – may suddenly become fashionable; ironically just as such concepts are starting to fall out of favour in many other construction industry contexts.

Court - a better bet than Adjudication?

Lord Justice Jackson is proposing a fixed costs regime that may be applied to smaller construction claims – will this make court proceedings a more attractive option than adjudication?

Perhaps yes, because:

  • There will be some prospect of getting your costs back. With most adjudications, there is no such chance.
  • The fees the court will charge will be lower than those many adjudicators will charge.
  • Lots of the current wrangling about jurisdiction, and the enforceability of adjudicator’s decisions will be bypassed.

However:

  • Fixed costs may be set at too low a level to repay the cost of properly preparing complex technical issues for the court to consider.
  • Judges dealing with lower-value claims may not have enough specialist knowledge of the industry.