Cheap talk?

A hugely important change was made to para 4.7 of the practice direction on pre-action protocols by the 41st Update of the Civil Procedure Rules 1998. It read:

'The parties should consider whether some form of alternative dispute resolution procedure would be more suitable than litigation, and if so, endeavour to agree which form to adopt.... The courts take the view that litigation should be the last resort, and that claims should not be issued prematurely when a settlement is still actively being explored. Parties are warned that, if the protocol is not followed (including this paragraph), then the court must have regard to such conduct when determining costs.'

Complying with the rule

The new rule has been in place since April 2006, and it is now vital that both parties actively explore discussion and negotiation before issuing proceedings, particularly in relation to quantum disputes. The consequence of failing to follow the protocol and to endeavour actively to find alternative ways to settle the dispute is that the courts are willing to make cost orders. As there is a marked uplift in costs when proceedings are issued for both parties, failing to make proper efforts to settle a case without the need or proceedings can have the effect of the courts limiting claimant costs to predictive costs (in RTA cases) and, for defendant insurers, a significant increase in the level of costs they have to pay if standard costs apply.

As the parties have an obligation to comply with the overriding objective and the pre-action protocol, it is incumbent on them to disclose reasons for a rejected offer and make counter-proposals. They must be able to demonstrate that they have exhausted reasonable negotiations when they make offers of settlement and entered into discussions where agreement is not possible to narrow the issues in dispute. Special damages should, where possible, be backed up with documentation in support, and agreed and settled as early as possible. Constructive negotiations mean determining which aspects of an offer are agreed and which are not, and why. While ADR may not always be suitable for personal injury claims, it is incumbent on the parties at least to consider it in terms of negotiation between themselves, or in terms of formal court-based mediation. Simply making offers without due consideration will no longer adequately satisfy the court that all attempts at settlement have been made.

If the court can be persuaded that proceedings are premature and/or the claimant failed to enter into reasonable negotiations, the claimant runs the genuine risk of having their costs restricted to predictive costs. If the defendant can also demonstrate that not only would settlement have been achievable by a pre-issue exchange of offers, but that defence costs would have been saved, the court may award costs against the claimant. Seeking defence costs on the basis that, but for the claimant's conduct, the defendant would not have instructed solicitors, places the claimant at a very real risk in terms of an adverse cost award.

Courts' approach

This onus on negotiation is demonstrated by the courts' stance in Butcher v Wolfe [1999] 1 FLR 334 at 342A, which was concerned with Part 36 offers, 'why were the offers rejected, why was this case fought?'. Here the defendant made an offer to settle before action which was initially refused by the claimant but then accepted during the proceedings after the judge had said he was going to take that offer into account. The court awarded costs against the claimant. Farmer v Dix (2006), claim no 5RG08511, was an unreported first instance decision where the court's view was that the claimant's solicitors had acted unreasonably in issuing proceedings and thus only recovered predictable costs. In addition, the defendant was awarded costs for attending the assessment hearing. In Binch v Freeman (2005) CC (Unreported, 06.12.05), the court reasoned that, while the claimant should not have issued proceedings, since by doing so her solicitors had acted prematurely, the subsequent costs incurred by the defendant had been brought upon himself by his own inactivity following commencement of the action, so he had not been entitled to recover his costs. In Reid v The Capita Group Plc [2005] EWHC 2448, the claimant was ordered to pay the defendant's costs on discontinuance of proceedings where it had been premature for the claimant to issue proceedings in order to obtain disclosure of documentation and there had been insufficient notice of the proceedings to the defendant. It was clear, from the correspondence, that the claimant had supplied large amounts of the material sought. It was not reasonable to issue proceedings without a letter before action and it was only after issue that the claimant actually identified the particular documents sought.

No complacency

The parties therefore need to be mindful of the reasons for issuing proceedings and ask why offers are rejected. The onus is on the parties to take stock of the position pre-litigation and ensure full and frank compliance with the Protocol has taken place. The parties are now required to make more effort to discuss the issues, rather than partake of short exchanges of correspondence, while offers of settlement need to be genuine offers of settlement. Rejections should be backed by reasons for such a rejection and, where possible, counter-proposals. Neither party can afford to be complacent about negotiation and the need to explore all settlement options.