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On 6 April 2007, a revised Pre-Action Protocol for Construction & Engineering Disputes (the “Protocol”) came into force. This new Protocol will govern all disputes from that date. Disputes that were already on foot and so the subject of the existing protocol will continue to be governed by that protocol.
The main changes are as follows:
- the introduction of a new paragraph 1.5 which specifically provides that costs incurred in the Protocol must be proportionate to the complexity of the case and the amount of money which is at stake. Thus, by way of example, parties will not be expected to marshal and disclose all supporting details and evidence that may ultimately be required if the case proceeds to litigation;
- by paragraph 4.3.1, whilst still being obliged to issue the letter of response within 28 days of receipt of the letter of claim, potential defendants can agree an extension of time up to three months to issue their letter of response;
- paragraph 5.1 sets a deadline for the pre-action meeting which should now normally be held within 28 days of receipt of the letter of response;
- paragraph 5.5(1) notes that parties will be asked to agree to define the relevant issues to be considered by experts and how such expert evidence will be dealt with;
- paragraph 5.4 makes it clear that no party shall be forced to mediate or participate in any other alternative form of dispute resolution; and
- however, all parties should be aware that by paragraph 5.6(v) the court may require a party who attended a pre-action meeting to disclose whether or not they considered or agreed an alternative means of resolving the dispute.
These amendments are intended to reflect the concerns of those using the Protocol which have arisen in practice since its introduction. It was felt that all too often the Protocol process was being manipulated to prolong the dispute between the parties, rather than to try to resolve that dispute in a constructive manner as envisaged by the Protocol. The changes are designed to help combat this.
The changes to the Protocol followed the interim report of a working party set up by Mr Justice Jackson which was tasked with considering whether any particular changes ought to be made to the Protocol. The working party reviewed the experiences of those operating under the existing Protocol and sought to identify any areas where problems had been encountered. The interim report noted that in general it was felt that the existence of the Protocol had:
“benefited the parties to disputes by providing them with an early opportunity to articulate and evaluate the strengths and weaknesses of the claims and defences.”
However, the working party also identified certain areas of concern, in particular in relation to the time and costs of complying with the Protocol. In respect to timing issues, that concern was that potential defendants were seeking long periods to prepare a letter of defence and that whilst a potential claimant might object, there was no real sanction or process to encourage agreement to a lesser period. It was recognised that further delay could be caused by the fact that the organisation of the Pre-Action Protocol meeting often could not commence until after the response to any counterclaim. This would result in the Pre-Action Protocol procedure taking up to12 months or more.
It can be seen that two of the amendments to the Protocol have been introduced to try and deal with this. First, the time within which potential defendants have to respond to the claim has been reduced from four to three months and now a much earlier deadline has been introduced for the holding of the pre-action meeting.
Another area of concern related to costs. Whilst the revisions do not directly address this issue, clearly by attempting to shorten the Protocol process, costs should be reduced. In addition, the new paragraph 1.5 has made it clear that the concept of proportionality must be considered in relation to the incurring of costs. A particular example given relates to the gathering together and disclosure of documentation, albeit that parties will still be able to make applications for pre-action disclosure in accordance with CPR Part 31.16.
Why is the Protocol important?
The Protocol applies to a wide category of disputes, including professional negligence claims against architects, engineers and quantity surveyors. It is of particular importance because a potential claimant must comply with the Protocol before commencing proceedings in the court. Paragraph 1.4 relates to compliance and states that:
“The court will look at the effect of non-compliance on the other party when deciding whether to impose sanctions.”
Non-compliance with the Construction and Engineering Pre-action Protocol was considered in the case of Paul Thomas Construction Limited v Hyland & Anor.[1] Here, the defendants had employed the claimant as a building contractor. A dispute arose over the quantification of the final account. The defendants offered to submit to a form of adjudication, but the claimant refused unless the defendants paid the entire costs of that process. The claimant then issued court proceedings and made unsuccessful applications under CPR Part 24 (summary judgment) and Part 25 (interim payments).
HHJ Wilcox considered whether the claimant was justified in issuing proceedings. He decided they were not, and that they had conducted themselves in an unreasonable manner in breach of the Pre-action Protocol. He further held that the appropriate sanction was for the claimant to pay the defendants’ costs on an indemnity basis. The judge concluded that the claimant had acted in a heavy-handed manner. He stated:
“Culpability here means wholly unreasonable behaviour. That must be measured against the reasonable conduct of reasonable solicitors at the time and must be informed by the current rules and, in particular, paragraph 1.4 of the pre-action protocol. I take the view that it was wholly unnecessary to commence this litigation… It is clear that [alternative dispute resolution]… could have been and should have been explored… That may include sensible discussions between the parties not necessarily involving a third party. In my judgment, there is in those terms some culpability in this case. In my judgment, indemnity costs are warranted.”
Obviously, until the changes are tested in practice, no one can say whether they will have the desired effect. However, as the Hyland case demonstrates, the courts will not look kindly on parties who act unreasonably. Of course, the rules must be read with care. Paragraph 5.4 makes it quite clear that a party cannot be forced to mediate. That is quite right. Practically there is little point in wasting resources in preparing for a mediation where one party has no inclination to take a proper part. However, do not forget that refusing to mediate can carry its own penalties and the Protocol notes that the court can enquire at an early stage whether ADR was considered.
Paying the price of failing to comply with the Protocol
The recent case of Charles Church Developments Ltd v Stent Foundations Ltd & Peter Dann Ltd [2007] EWHC 855 (TCC), which came before Mr Justice Ramsey, demonstrates what might happen if you do not comply with the Protocol.
The case concerned a development project in London. During the course of the piling, there were a number of incidents. In August 2000 and February 2001, CCD wrote to Stent about these, but thereafter Stent heard nothing further from CCD making any formal claim or anything else, until March 2003 when CCD informed Stent that they were investigating claims against Stent and others. CCD asked Stent to provide information and documentation in connection with that investigation. There was some correspondence between those advising Stent and CCD, but this ceased in about September 2004.
Then some 20 months later in June 2006, CCD served a formal claim on Stent. The claim form had been issued in February 2006. No attempts had been made to conduct any Pre-Action Protocol procedure before the issue or service of the proceedings. CCD accepted this and indeed apologised to the court for that conduct. In early 2007, Stent made an application to the court seeking an order that:
- CCD shall pay Stent’s costs of the claim to the 13 April, 2007, to be subject to detailed assessment if not agreed.
- CCD shall, in any event, bear its own costs of the claim against the first defendant to the 13 April, 2007.
Stent, referring to CCD’s failure to comply with the Pre-Action Protocol, relied on paragraph 2.3 of the Protocol Practice Direction which provides that:
“If, in the opinion of the court, non-compliance has led to the commencement of proceedings which might otherwise not have been needed to be commenced, or has led to costs being incurred in the proceedings that might otherwise not have been incurred, the orders the court may make include: (1) An order that the party at fault pay the cost of the proceedings, or part of those costs, of the other party or parties.”
CCD said two things by way of defence. First that this was a case where there were potential limitation difficulties. In those circumstances, CCD said that their failure was a failure to seek directions under paragraph 6 of the Protocol. Second, CCD said that the question of costs should not be determined now, but at the end of the action, or after settlement, when the position on costs would be clearer, and the court would have more information on which to base its decision.
The judge noted that CCD had not taken any steps to implement the TCC Pre-Action Protocol nor to alert Stent to the contents of the claim or the fact that proceedings were imminent. Indeed, he questioned whether there was an immediate limitation problem. Rather, in the period from 14 February 2006 to 8 June 2006, when these proceedings were finally served on Stent without advance notice, CCD spent much time and cost in preparing the particulars of claim for service in the proceedings, ignoring the pre-action obligations.
What was the effect of the breach of the Pre-Action Protocol?
A key objective of the Pre-Action Protocol is to enable parties to avoid litigation by agreeing a settlement of a claim before the commencement of proceedings. Judge Ramsey proceeded on the following basis:
“in this case, as in many similar cases, experience has shown that it is likely that the pre-action protocol would have led to a settlement without a need for court proceedings.”
CCD said that no order should be made at this stage because the decision as to the consequences of the failure to comply with the Pre-Action Protocol would be easier to make at a later stage when, for instance, the court knew the outcome of a mediation that was due to take place in May 2007. CCD also submitted that Stent’s application sought to gain a tactical advantage in relation to one issue – the costs up to the date of the mediation – whereas that could be dealt with in the context of the mediation.
Stent submitted that non-compliance with the Protocol had been established and the court was in as good a position now as it will be in the future to decide the question of costs. If the mediation were to fail, then the court would not know why it had failed, because such matters would be, and remain, confidential. Stent also said that the mediation was more likely to fail if the question of those costs was not resolved now.
The judge agreed the failure to comply with the Protocol meant that the parties were entering the mediation with an additional issue: the increased costs that had been incurred in the context of the proceedings, instead of under the Protocol procedure. He thought there were good reasons why that issue should be resolved now. In particular it would remove an extra issue which would allow the parties to mediate in a way that more closely mirrored a mediation at the end of the Protocol procedure.
Stent’s costs
The costs position as disclosed at the first case management conference showed that as at October 2006, CCD estimated its costs to date as £800,000 including solicitors’ costs and experts. Stent had incurred costs of £90,895 and Peter Dann some £80,000.
In relation to Stent’s costs, any order should place them in no worse a position than Stent would have been in, had the Protocol been complied with. The evidence indicated that they would initially have responded using their in-house technical team but that they would have required some outside expert engineering, delay and quantum input. The judge held that Stent was entitled to recover costs to reflect the increased work carried out because of the exchange of information taking place, not in the lower-cost atmosphere of Pre-Action Protocol procedure, but in the higher-cost atmosphere of court proceedings. In relation to solicitors’ costs, this should reflect, to some extent, the use of in-house solicitors, rather than external solicitors.
The judge was conscious that there were now two possible outcomes to the mediation. If there was a settlement, the additional element of the costs expended in that period will have been spent unnecessarily. If there was no settlement, then Stent would benefit from not having to spend certain elements of cost in the proceedings. However, the judge held that the costs order should reflect the likelihood that the claim could have been resolved by Protocol process. In all the circumstances, the judge decided that Stent should be entitled to recover from CCD 50% of its costs incurred from 9 June 2006 (the date the claim was served) until 13 April 2007.
CCD’s costs
Here, had the Pre-Action Protocol procedure been followed, then CCD’s costs from 14 February 2006 to 13 April 2007 would have been incurred in the lower-cost regime of the Pre-Action Protocol, rather than the higher-cost regime of court proceedings. Such costs would only generally become relevant if, at any stage, a costs order is made in CCD’s favour. In principle, in that event, CCD could seek payment of costs of and incidental to the proceedings, which might include the costs of complying with the Pre-Action Protocol. In assessing the position, the judge held in mind:
“(1) My conclusion that these proceedings would have been likely to be resolved had a pre-action protocol procedure been followed.
(2) The fact that the proceedings from 14 February 2006 to 13 April 2007 should have been carried out in the lower-cost atmosphere of the pre-action protocol process.
(3) The fact that if the proceedings are not settled, the proceedings will continue, and if CCD succeeds, it would otherwise be entitled to its costs in the period from 14 February 2006 to 13 April 2007.”
The judge therefore held that the proper way of dealing with the position on CCD’s costs was, as with Stent’s cost, to provide that CCD should, in any event, bear 50% of its costs of the proceedings from 14 February 2006 to 13 April 2007. That might well be a significant sum, bearing in mind the £800k CCD said it had incurred by October 2006.
[1] 08.03.2000 CILL 6/0 /1743.
