The Construction and Engineering pre-action protocol: the cost of non-compliance

Legal costs are under the microscope more than ever before. Lord Justice Jackson is now almost mid-way through his year-long review of costs in civil litigation, after having published his Preliminary Report in May. We can expect major reforms flowing from his Lordship’s review that will endeavour to make civil litigation more cost effective.

One of the issues that Lord Justice Jackson is addressing is the cost of complying with the Pre-Action Protocols (including the Construction and Engineering Protocol). Although many people regard the Protocols as having brought about real improvements to the court system - by encouraging parties to settle their disputes, rather than go to court - the Protocols have been criticised because they “front end” legal costs.

Parties often go through a detailed, time consuming and expensive dialogue and information exchange concerning their respective positions as part of the pre-action process. If the dispute does not settle, they then have to do it all again in court proceedings, although by the time the matter reaches court the battle lines are usually much clearer than before the pre-action process. The perception of some people is that the Protocols, in some cases, simply prolong cases that were always going to fight, and increase the cost of resolving the dispute.

Roundstone

The prospect of an early settlement is the carrot proffered by the Pre-Action Protocols, with the prospect of an adverse costs order (or a stay of proceedings) for material non-compliance being the stick. In the recent TCC case of Roundstone, Coulson J used the stick of a costs order to punish a party for material non-compliance. In summary, the relevant facts were these:

• An owner brought an action against a contractor for damages alleged to be suffered as a consequence of the contractor’s breach of contract in constructing a floor slab. Proceedings were commenced without the parties having complied with the Construction and Engineering Pre-Action Protocol.
• There was a dispute about whether the defendant contractor was engaged directly by the owner, or whether it was in fact a subcontractor of another contractor. There was also a question of whether that other contractor (who was not sued by the owner) was responsible for the defects with the floor slab.
• The parties agreed that the proceedings should be stayed, to allow the Pre-Action Protocol to be complied with. A mediation was arranged between the owner and the defendant contractor. The defendant, which had not provided a substantive response to the claim against it, proposed to do so in the form of a mediation position paper.
• However, just before the mediation date, the contractor pulled out of the mediation, on the basis that it would not be worthwhile, as the other contractor refused to participate in the mediation.
• Just after the mediation was aborted, the owner obtained default judgment against the defendant contractor.

Coulson J held that the default judgment should be set aside (as the defendant had genuine grounds for contesting the claim made against it). However, the owner sought its costs that were “thrown away” by virtue of the defendant having pulled out of the mediation at the last minute.

• Coulson J held that the owner was entitled to these costs, because the defendant should have participated in the mediation even if the other contractor would not participate.
• His Lordship held that pre-action mediation costs are generally not recoverable, because they are not “costs of and incidental to the proceedings”. However, costs that are incurred in complying with the Pre-Action Protocol are usually recoverable, because they are “incidental to” the proceedings.
• In this case, because the parties had agreed to mediate in purported fulfilment of their Pre-Action Protocol obligations, the costs associated with the mediation would be recoverable.

Comment

• Roundstone highlights the importance of ensuring that a mediation is agreed to take place under the guise of compliance with the Pre-Action Protocol, or some other part of court proceedings. Mediation costs may be considerable, and if those costs are incurred wholly outside of the proceedings, they will not subsequently be recoverable in any court proceedings as “incidental” costs. Alternatively, if (as is often the case) the parties intend that they should bear their own mediation costs in any event, the relevant mediation agreement should explicitly say as much.
• Coulson J noted that the costs incurred in complying with the Pre-Action Protocol “are regarded by many as high enough already”. An idea which is floated in Lord Justice Jackson’s Preliminary Report on costs, to keep “pre-action” costs proportionate, is to allow a claimant to commence proceedings without first having entered into a pre-action dialogue. After the proceedings are commenced, the court will then stay the proceedings to allow a “pre-action” (or rather “post-action”) dialogue to take place. If it appears that the dialogue is likely to be fruitless, the court can be approached to allow the claim to continue. The court will also be there, if needed, to make other orders that will keep costs under control.
• The CPR, including in particular the Construction and Engineering Pre-Action Protocol, has revolutionised the way in which construction disputes are resolved. So too has adjudication under the HGCR Act. The emphasis is now upon the early and cost effective resolution of disputes. The Pre-Action Protocol process has worked well, but can it be improved upon? This is an issue for debate, and an issue that Lord Justice Jackson’s review of costs is grappling with.

Reference: Roundstone Nurseries Ltd v Stephenson Holdings Ltd [2009] EWHC 1431 (TCC)