Made to measure
Unless you can prove that non-compliance has caused a measurable increase in costs, it is unlikely that a costs order will be made or any penalty given, warns Francesca Kaye
The new practice direction on pre-action conduct introduced in April 2009 was designed to assist early resolution and support efficient management of cases.
An enduring criticism of such protocols has been the courts' failure to apply sanctions for non-compliance with them. To address this, section II 4.2 of the practice direction states: 'The court will expect the parties to have complied with this practice direction or any relevant pre-action protocol.' A non-compliant party may be asked to explain itself.
Non-compliance includes failure by one party to provide sufficient information to enable the other side to understand the issues; failure to comply with a time limit or within a reasonable time; or an unreasonable refusal to consider ADR.
Sanctions include staying proceedings, costs orders, indemnity costs orders, and power to award interest up to a rate of ten per cent over base. Interestingly, the ultimate sanction of strike out is not provided for. Recent cases suggest parties have been more willing to pursue sanctions for non-compliance.
By November 2009, Mr Justice Ouseley was concerned by alleged non-compliance and costs sanctions. He reviewed the decision of Mr Justice Briggs in Bank Of Tokyo '“Mitsubishi Ufj Limited and Anor v Baskan Gida Sanayi Ve Pazarlama As & 13 Ors [2009] EWHC 1696 and the facts of the case before him, concluding that 'there was no failing on B's part to abide by the pre-action protocol that caused any measurable increase in costs worthy of granting an adverse costs order against it' (Malcolm William Green V (1) Sunset & Vine Productions Ltd and ors (Costs) [2009] EWHC 1610 (QB)).
He agreed with Mr Justice Briggs that a party did not have to prove more than non-compliance to put the other party at risk of adverse costs, but that it was necessary to show that non-compliance actually resulted in increased costs.
The decisions of Mr Justice Briggs and Mr Justice Ousley suggest that a party must show a measurable increase in costs as a result of their opponent's non-compliance. In many cases, there will be no evidence of an actual costs increase that does not require a judge to gaze into a crystal ball and consider hypothetically what would have happened if there had been compliance. The outcome of Charles Church Developments Ltd v Stent Foundations Ltd & ors [2007] EWHC 855 (TCC) before Mr Justice Ramsay was unusual because such evidence was available and Ramsay J was persuaded of its veracity.
A successful claimant may argue that a defendant's non-compliance unnecessarily increased costs because had they complied a settlement would have been achieved earlier. In instances of substantial non-compliance, it may in fact have saved costs overall as the protocol stages would have been shortened.
An unsuccessful defendant might argue that the claimant's costs should be reduced because of their substantial non-compliance or that a reverse costs order should be made.
An application in relation to alleged non-compliance is likely to be redundant if an effective part 36 offer to settle had been made. This would result in the judge being able to award costs, indemnity costs and/or interest in any event with no specific and separate decision relating to non-compliance by either a defendant or a claimant.
How can disapproval be shown?
This highlights the difficulty with the current approach of the courts. How do they show their disapproval of substantial non-compliance if, on its face, the non-compliance does not result in a measurable increase in costs? Mr Justice Briggs in Bank of Tokyo recognised that 'it would for example clearly be wrong to ignore a flagrant disregard of an applicable pre-action protocol merely because the court concluded that the litigation would have ensued in much the way that it did, even if the protocol had been complied with'. It remains to be seen how that sentiment will be adopted by the judiciary.
There are two proposed developments which may assist:
a. The Civil Justice Council's review of all pre-action protocols includes consideration of the consistency of sanctions. However, consistency alone does not assist in determining the circumstances in which sanctions should be imposed.
b. A mortgage pre-action protocol checklist (form N123) has been developed for mortgage possession proceedings for residential property. Two completed copies of the checklist must be handed to the judge at the mortgage possession hearing. The form poses a series of questions, and where the answer demonstrates a failure to comply with the protocol an explanation must be given. The form has a statement of truth and is therefore evidence of compliance or lack of compliance. Use of checklists is now being considered for all protocols.
At present you must demonstrate substantial non-compliance (not minor or technical non-compliance) and provide details of additional costs 'wasted' or thrown away as a result.
In most cases, non-compliance will be pre-issue resulting in the earlier issue of proceedings than would otherwise have been contemplated '“ possibly without any negotiation or mediation. Can evidence be produced to show that had mediation or negotiation been conducted pre-issue the case would have settled without further costs being incurred?
While non-compliance continues to be frustrating, time consuming and difficult to explain to clients, unless you can make a direct link of that non-compliance to actual measurable increased costs there seems little prospect of succeeding in obtaining a costs order or other penalty by way of sanction.