Recovery of legal costs: To issue or not to issue? That is the question...

1st July 2016

Following the introduction of the Civil Procedure Rules (CPR) and the more recent Jackson reforms, the courts are increasingly keen for parties to attempt to resolve their disputes without recourse to litigation.  To that end, the CPR include various Pre-Action Protocols (PAPs), which encourage parties to exchange correspondence and documents and to investigate the potential for reaching a negotiated settlement before any court proceedings are commenced.  Whilst the intention to encourage amicable settlement is laudable, one of the key criticisms of the PAPs is that their effect is to ‘front-load’ costs.  Parties are spending increased amounts pre-action, but in what circumstances can those costs be recovered?

Recovery of Pre-Action Costs

The law is clear that where proceedings have been commenced (or ‘issued’), whether or not they are ever served, costs of and incidental to those proceedings – including costs incurred pre-issue – are recoverable at the discretion of the court [1].

However, in Citation Plc v Ellis Whittam Ltd [2012] EWHC 64 (QB) the High Court held that if no claim is issued, then there are no proceedings and so there are no costs of or incidental to proceedings which can be recovered, regardless of whatever costs may have been incurred in complying with a PAP.

The position was brought sharply into focus for a claimant in the recent case of Webb Resolutions Ltd v Countrywide Surveyors Ltd [2016] Ch Div (4 May 2016).

Webb Resolutions v Countrywide Surveyors – Recoverability and Proportionality

In this case the claimant’s solicitors sent a letter of claim to the defendant under the Professional Negligence PAP, alleging that the defendant had negligently overvalued a property and claiming £24,500 plus the expenses of repossessing and selling the property and interest. The defendant’s solicitors responded, denying liability. Pre-action correspondence ensued, with no significant change in either party’s position until, some two years later and with limitation about to expire, the claimant issued, but did not serve, court proceedings. The claimant’s solicitors had, by this time, incurred costs of some £60,000. The claimant then finally made a Part 36 offer indicating that it would accept the total sum of £12,500 in settlement (which was not accepted), before abandoning the claim. When the defendant’s solicitors subsequently discovered that the claim had been issued, the defendant sought to recover its costs, including those incurred pre-action.

The High Court ordered that the defendant could recover all its costs, both pre-action and post-issue.

The Court noted the clear difference to costs recoverability that the law makes when proceedings have been issued, and confirmed that that could include pre-action costs. The fact that proceedings were never served was merely a factor that the court could take into account when exercising its discretion to award costs.

Other factors, which were particularly important in this case, were the fact that the defendant had been put to considerable expense in responding to the claim and, crucially, the fact that the claimant had been aware throughout of the disproportionality of costs being incurred as against the relatively low value of the potential claim.

WM Comment and Practical Advice

The Webb Resolutions v Countrywide Surveyors case is a good reminder of the need for claimants to consider carefully the recoverability of pre-action costs when deciding whether to commence proceedings. Issuing merely protective proceedings that, in all likelihood, will never be pursued; or issuing tactically to put pressure on a defendant to settle what might not necessarily be a very strong claim, could give rise to liability to pay the defendant’s (potentially significant) pre-action costs. At the same time, however, if a claimant does not issue proceedings and therefore avoids liability for the defendant’s costs, neither will it have a legal entitlement to recover its own.

So, whether you are a claimant or a defendant, or acting for either party, it is important to bear in mind the following legal and practical points at the outset of any dispute.

• If court proceedings are never issued, there is no jurisdiction for the court to make a costs order and so neither party will incur any liability for the other’s costs.
• It is, however, open to the parties to negotiate a settlement between themselves and to agree whatever they like about who should bear what costs of the dispute and in what amount.
• If the parties intend to deal with the payment of costs as part of any settlement, it is important to make sure that the issue of costs is dealt with expressly in any settlement agreement. A failure to do so will mean that costs are not recoverable as part of the settlement. As stated above, if proceedings have never been issued, this would mean that costs would not be recoverable at all.
• If the parties reach agreement as to who is to pay costs but not the amount, either party can issue ‘costs-only’ proceedings and the court will have jurisdiction to assess, and make an order for, costs.
• If a Part 36 settlement offer is made to settle a dispute and no proceedings are issued, Part 36 costs consequences [2] can apply.
• If proceedings have been issued and then the dispute is settled, either party can ask the court to decide the issue of costs. The court will exercise its discretion in making any costs award, and will take into account matters such as the parties’ conduct and proportionality.
• If the issue of costs has not been resolved (albeit the substantive dispute might well be), a claimant may issue court proceedings to trigger the ability for it to claim its own pre-action costs (despite the attendant risk of incurring liability for the defendant’s costs). In these circumstances, full proceedings must be commenced – not merely costs-only proceedings. The significant investment that may be required to bring a claim to the point of issue might deter claimants of low value or high risk claims. This vulnerability might be exploited by shrewd defendants.
• A claimant may wish to consider, tactically, whether to request in the pre-action letter of claim a costs-exclusive sum which would be accepted in return, only, for a quick (and therefore cost-effective) settlement; and whether to frame such request as a Part 36 offer.
• Another option for a claimant, to show strength and to increase pressure on the defendant as well as to trigger its legal entitlement to claim costs, might be to issue proceedings sooner rather than later (although such a tactic should be weighed against the likely merits and value of the potential claim – it is also important to ensure that the Pre-Action Protocol steps have been concluded).
• If you are, or act for, a defendant who has had to deal with a claim which is subsequently abandoned or narrowed in scope, you should take steps to ascertain whether proceedings were ever issued but not served in which case you can (as did Countrywide) seek to recover your costs.

If you have or face any potential claim, you should take specialist legal advice at the earliest possible stage so as to protect your position as regards pre-action costs from the start. Please do not hesitate to contact Gwendoline Davies if you have any queries or would like any advice or assistance.

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[1] Section 51 Senior Courts Act 1981; CPR 7.2, 44.2 and 44.3; Re Gibson’s Settlement Trusts [1981] Ch 179; Clydesdale Bank plc v Kinleigh Folkard & Hayward [2014]
[2] Where a valid Part 36 offer is not accepted and the offering party then equals or does better than its offer at trial, the party who failed to accept faces the automatic sanction of having to pay the offering party’s costs from the date of expiry of the “relevant period” – usually 21 days from the date of the offer.  In those circumstances, if the offering party is the claimant, the defendant has to pay the claimant’s costs on the indemnity basis.  In addition, in monetary claims claimants can see their damages enhanced by 10% on awards of up to £500,000, and by 5% above that, up to a maximum enhancement of £75,000; and in non monetary claims, the sum awarded to the claimant in respect of costs can be enhanced by 10% up to a maximum of £75,000.  Interest is usually also payable in respect of both costs and the whole or part of any sum of money awarded.