As we noted in last year’s Review, on 6 April 2007, a revised Pre-Action Protocol for Construction & Engineering Disputes came into force. There have already been a number of decisions where the courts have indicated how the Protocol should be interpreted.

In particualr, Mr Justice Akenhead has had to consider the approach to take when faced with an application to stay proceedings in order for the Pre Action Protocol for Construction & Engineering Disputes (“the Protocol”) to be followed in two cases. In both, he decided that the correct approach to take was a pragmatic one.

Orange Personal Communications Services Ltd v Hoare Lea1

The dispute arose out of works carried out at the Bristol Data Centre. Kier had been engaged to carry out the fit out works including an air conditioning system. Haden Young were responsible for that air conditioning system. There was a flood which was said to have caused some £2m of damage. Orange issued proceedings against both Kier and Haden Young in relation to the flood. The position taken by Kier and Haden Young in those proceedings was that they were not in any way to blame for the loss and damage which was, they said, due to failings by Orange and/or its design team.

Hoare Lea had been retained in relation to the design of the M&E works. As it was nearly six years after the flood and fearing a possible limitation defence, Orange issued separate proceedings on 15 August 2007 against Hoare Lea and APS Project Management who had carried out various project management services. APS dropped out of proceedings, having obtained a stay under the 1996 Arbitration Act. In the first action, a trial date was fixed for 14 January 2008. However, the timetable slipped and the trial was pushed back to October. The directions made provision for ADR in April.

In December 2007, Orange served Particulars of Claim on Hoare Lea in the current action. Orange did not actually consider that Hoare Lea had anything to do with the flood. Orange’s approach was a belt and braces one, being contingent upon the argument put forward by Kier and/or Haden Young in the first action succeeding. If that happened, Orange intended to assert that Hoare Lea was responsible in tort for the failures leading to the flood. Perhaps sensibly, Orange sought an application to seek an Order that the claims be consolidated or heard together. Hoare Lea then issued an application that the claim be stayed because Orange had not followed the Protocol. Orange responded by offering to provide any particular information which Hoare Le said they might require. As the Judge noted, that offer was not taken up. The reasons why Hoare Lea made the application were as follows: 

  1.  The Protocol was there to be complied with and should generally be complied with. There are general advantages in following the protocol process; 
  1. Orange were guilty of a number of failings. It could have served the proceedings earlier. It should have served the proceedings earlier. Orange should have brought the matter before the Court earlier to seek directions at the time it issued the Claim Form; 
  1. Hoare Lea wanted to avoid additional costs which would inevitably be incurred if the Protocol process was not implemented, for example in relation to the exchange of information and the narrowing of issues; and
  1. The Particulars of Claim were inadequate, failing properly to define the allegations of negligence. This could be resolved during the Protocol process.

Having considered the authorities, Mr Justice Akenhead made the following general observations:

“(a) The overriding objective (in CPR Part 1) is concerned with saving expense, proportionality, expedition and fairness; the Court’s resources are a factor. This objective whilst concerned with justice justifies a pragmatic approach by the Court to achieve the objective. The overriding objective is recognised even within the Protocol as having a material application.

(b) The Court is given very wide powers to manage cases in CPR Part 3 and elsewhere so as to achieve or further the overriding objective.

(c) The Court should avoid the slavish application of individual rules, practice directions or Protocols if such application undermines the overriding objective.

(d) Anecdotal information about the effectiveness of the Pre-Action Protocol process in the TCC is mixed. It is recognised as being effective both in settling disputes before they even arrive in the Court and narrowing issues but also as being costly on occasion and enabling parties to delay matters without taking matters very much further forward.

(e) Whilst the norm must be that parties to litigation do comply with the Protocol requirements, the Court must ultimately look at non-compliances in a pragmatic and commercially realistic way. Non-compliances can always be compensated by way of costs orders.”

Accordingly, having considered the situation as a whole, he dismissed the application put forward by Hoare Lea. The Judge gave a number of reasons, including:

  1. He did not consider that the protocol process in this particular case would be sufficiently productive to justify a stay; 
  1. Hoare Lea already had the relevant pleadings from the earlier action. Therefore there had already been an exchange of information. Hoare Lea had also been reluctant to take up Orange’s offer to provide additional information. 
  1. Bilateral discussions between Hoare Lea and Orange would not narrow issues significantly because Orange’s published primary case was not against Hoare Lea; 
  1. A settlement was much more likely if all parties participated in the ADR planned for the spring. A timetable could be set up now to enable that to happen. This chance might be lost if there was a stay; 
  1. The two claims were intimately connected. It would be unfortunate if they had to be tried separately. A timetable could be achieved now which could secure the trial of both claims. 
  1. Little in terms of time or costs will be saved by embarking upon the protocol process. That said, the Judge reserved any application for additional costs for the future. 
  1. Finally, the Judge noted that although Orange had not complied with the Protocol to effect the protocol process, that failure had not been “contumelious or Machiavellian”.

This left the question of the costs of this application. The Judge was concerned about the failings of Orange and thought that Orange could have told Hoare Lea about the potential claim earlier. There were also delays by Orange in relation to the procedural elements of this application. Accordingly, the Judge was of the view that Orange should pay their own costs and pay one third of the costs of Hoare Lea. This reflected the likely increase in Hoare Lea’s costs occasioned by Orange’s procedural failings.

Conclusion

As always, the judges of the TCC will consider individual cases on their own merits. This may be why the Judge here adopted his “pragmatic” approach to the claim for a stay. He duly considered the whole context of the dispute between not just Orange and Hoare Lea but all the parties involved. He also considered both parties’ conduct. Orange may not have followed the Protocol, but it had not done so wilfully and Hoare Lea, being pragmatic, could have accepted Orange’s offer of additional information. Had this been a claim just between Orange and Hoare Lea then the situation may well have been different. However, there was a bigger picture, and taking that picture into account, the overall over-riding factor was the need to try and resolve the entire dispute. Allowing Hoare Lea’s application for a stay might have jeopardised this.

TJ Brent Ltd & Anr v Black & Veatch Consulting Ltd2

Mr Justice Akenhead has now further clarified what he means by the adoption of a pragmatic approach to the Protocol. B&V alleged that Brent had failed to comply with the Protocol. In many respects, the facts of the case do not really matter. Of more importance are the comments made by Mr Justice Akenhead about this type of application. First of all, in response to criticisms made of Brent’s Letter of Claim, the Judge said that there was no need for the Letter of Claim to provide information in “ultimate detail” unless it was critical to the claim. The court should ask whether the absence of information was such as to prevent or make it difficult for a defendant to respond in detail:

“What the Court should do in considering the Pre-action Protocol is to look at the matters in substance, not as a matter of semantics... and not for technical non-compliances with the letter of claim requirements in the Pre-action Protocol.”

Here the Letter of Claim, provided a clear summary of the facts on which the claim was based and identified so far as possible the principal contractual terms and statutory provisions relied on as well as the nature of the relief claimed. The Judge also commented on the time taken by B&V to raise the alleged failure to comply with the Protocol. Whilst he accepted that it was not incumbent upon a defendant as a matter of practice or procedure to have to raise the issue once the Particulars of Claim were served, the delay here, some 7 months had passed, undermined the stance taken now by B&V.

Further, Mr Justice Akenhead commented that it was not enough to demonstrate that there had been a failure to comply with the Protocol. A party making such allegations also had to demonstrate the effect of such failure. For a defendant to succeed in this type of application, it would have to establish that there was some realistic prospect, prior to the issue of the proceedings, of: 

  1. a mediation taking place; and 
  1. some prospect (but no certainty or even necessarily probability) that a resolution of the disputes between the parties would be achieved.

A court would need to consider what would have happened if there had been an attempt at alternative dispute resolution during the period when the Protocol process would have taken or did take place. Not only must a court consider whether there had been non-compliance, it must also consider the extent to which the failure to follow aspects of the Protocol might have prevented a resolution of the dispute. The onus of proof is on the defendant to show that a settlement would or could realistically have been achieved at that stage. Here, B&V’s unwillingness to attend meetings or discuss any matters without prejudice in any way, suggested that settlement was unlikely.

Conclusion

Mr Justice Akenhead also referred back to his earlier decision where he made it clear that the Overriding Objective was concerned with saving expense, proportionality, expedition and fairness. Adopting that pragmatic approach to the facts of the present case, it was clear to the Judge that, in substance, B&V was very well aware, before these proceedings commenced, what the nature of the claim was against it. It did not know every detail but it knew in substance and it was able to deal with it in substance. Therefore B&V was able to work out what its defences were in some detail. The Judge cautioned that a court should be slow to allow the rules to be used in such a way for one party to obtain a tactical or costs advantage where in substance the principles of the Protocol have been complied with. Accordingly, the application failed.

Mediation and the costs of the pre-action process

It is well known that, where a claiming party is a limited company, if it appears by credible testimony that there is a reasonable belief that the company will be unable to pay the defending party’s costs if its claim fails, then it may be required to provide security for the defending party’s costs. Mr Justice Coulson in the case of Lobster Group Ltd v Heidelberg Graphic Equipment Ltd & Anr3 was asked to consider whether a party seeking security for costs can include within those costs, the costs of pre-action activities including mediation.

The dispute between the parties related to the purchase of an alleged defective printing press. In January 2005, a mediation took place which failed to produce a settlement. Over two years later, in May 2007, proceedings were issued. As the claimant, Lobster, had been placed in administration, it was agreed that it was appropriate to provide security. However the amount of that security was not agreed. Heidelberg sought in the region of £160k, including security in respect of the costs incurred during the pre action proceedings. Mr Justice Coulson noted that, as a matter of principle, the costs incurred by a party prior to commencement of litigation proceedings can be recovered as costs. Following the case of McGlinn v Waltham Contractors,4 that is provided those pre-action costs could be said to be either the costs of or costs incidental to the proceedings. Lobster put forward a number of reasons as to why the application for security in respect of the pre action costs was misconceived. Of these, the Judge that the following were important: 

  1. a considerable part of the pre-action costs were incurred in relation to the mediation and those costs were not recoverable in any event; and
  1. the length of the pre-action period was such that these costs should not form the subject of an order for security.

The mediation was carried out under the CEDR model form and the parties had, in the usual way, agreed to bear their own costs and share the costs of the mediator. Accordingly, the Judge was firmly of the view that mediation costs should not form part of the security ordered. The only way in which such costs would be recoverable would be if the parties had agreed that the specific costs could be the subject of any subsequent application. The Judge did take into account the delay. He thought that a court would be slow to exercise its discretion to award security in respect of costs incurred two years before proceedings were commenced. The longer the delay between the incurring of the pre-action cost and the application for security based on that item of cost, the more reluctant the court would be to make such an order. Here, the pre-action period was very prolonged covering a period from the mediation to proceedings of nearly two and a half years. The Judge said he would be very reluctant to decide that after all this time, Lobster should provide security to Heidelberg for the costs incurred during this period. That would be “unnecessarily draconian”.

Conclusion

The Judge disallowed the pre-action costs incurred by Heidelberg. The main reason for this was that a large proportion of the costs related to the mediation, the secondary factor was the large gap in time. However Lobster was required to provide suitable security up to the exchange of witness statements in the sum of £70k, being £50k to reflect the period from the application to the exchange of witness statements and an assessed figure of £20k to reflect the costs incurred from the commencement of the proceedings to the making the application for security for costs. Some concern has been expressed about the costs parties are required to incur as a consequence of the requirements of the pre action protocols.

Where companies are bringing claims, and there are legitimate questions about their ability to repay any costs that may be awarded against them, then those defending such claims may be well advised to consider including their pre action costs in any application they may bring for security.