Protocol, costs and disclosure: three key Woolf-isms

In the last edition of our Bulletin, we outlined the requirements of the new Pre-Action Protocol for Construction and Engineering Disputes (the Protocol) which was brought into force in October 2000. Compliance with the Protocol is mandatory except in limited adjudication, summary judgment or interim injunctive relief proceedings.

Penalties for non-compliance

Whilst the stated aims of the Protocol are to limit costs, perversely it is generally accepted that the Protocol results in a front loading of costs. The parties to a potential action are now obliged to incur significant costs before proceedings have even been issued. The alternative is the risk of penalties being imposed by the Courts once proceedings are commenced.

• The CPR provide that the fact of whether or not a party has complied with the Protocol can be taken into account when giving directions (CPR 3.1(4)). Therefore if you have failed to comply with the Protocol (and the opposing party has attempted to do so) do not be surprised if, at the case management conference, the Judge's directions appear to be more onerous for you than they are for your opponent; or when you fail to comply with a directed date for service of a pleading or witness statements the Court appears more inclined than previously to issue an Unless Order.
• Under CPR 3.1(5), the Court has power once proceedings have commenced to order a party to pay a sum of money into Court if for no good reason than that party has failed to comply with the Protocol.
• Whilst, as always, the Court has discretion to award costs as it deems appropriate, the CPR specifically state that the Court must have regard to the conduct of the parties which should include the conduct before the proceedings were commenced and the extent to which the parties complied with the Protocol. CPR 44.3(6)(d) provides that the Court can make a specific order that a party must pay costs incurred before proceedings have begun.
• In a recent Court of Appeal decision (Rowley v Cerberus Software Limited 6 April 2001) CPR 44.3 was applied. Lord Justice Ward stated that: "The conduct of the parties includes whether it was reasonable to raise, pursue or contest a particular allegation or issue... In our judgment this is conduct which justifies the Court expressing its disapproval of the way the litigation has been conducted." Lord Justice Ward also stated that old legal authorities which support the view that the successful party recovers his costs may be of limited value given that the Courts are now operating under a completely different regime. The Court of Appeal were also mindful of the overriding objective of the new rules which requires them to deal with cases justly and they held that in the circumstances of this particular case "the justice of the case has been met by the Appellant succeeding on appeal but that it will not be met by requiring the Respondent to pay for that success". In this case no order was made for costs and therefore the successful party was not awarded any of its costs.

It should also be borne in mind that the CPR specifically provides that a party may tell the Court that a pre-action meeting took place, when it took place and who attended. The Court can also be told why a party did not attend and why a meeting did not occur. The Court can also be told if any agreement is reached and the substance of any such agreement.

Recovering pre-action costs

Clearly therefore, even if one discounts the possible benefits of complying with the Protocol, it is in the parties' interests at least to be seen to be going through the motions of the Protocol. There is always the possibility that the application of the Protocol will result in a settlement of the issues in dispute. In the event that a settlement is reached prior to proceedings being issued it is entirely feasible that a party may have incurred considerable legal and expert costs. The CPR anticipates that after compliance with the Protocol the parties may have reached settlement on everything except the issue of pre-action costs and CPR 44.12A provides for a costs only proceeding where:

"(a) the parties to a dispute have reached an agreement on all issues (including which party is to pay the costs) which is made or confirmed in writing; but
(b) they have failed to agree the amount of those costs; and
(c) no proceedings have been started".

Therefore provided proceedings have not yet been issued there is a mechanism for the recovery of pre-action costs. The only stumbling block to this may be the caveat requiring that the parties have agreed which party is to pay the costs. However, given that the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, it is probably only in very unusual circumstances where the paying party to a settlement will refuse to accept that it is liable for the other party's costs, albeit it may value those costs at nil. If the parties cannot agree who in principle is liable for the costs then it is unlikely that there would be a settlement in any event.

Pre-action disclosure

Unlike other Pre-Action Protocols, for example for personal injury cases, the Protocol for Construction and Engineering Disputes does not specifically set out any guidelines or requirements in respect of pre-action disclosure. The Protocol does state that the parties should use their best endeavours to agree the extent of disclosure of documents with a view to saving costs. The stated aims of the Protocol refer to the parties having provided each other with sufficient information and an early exchange of information. It is, probably because of the extent of disclosure in construction disputes that the Protocol does not go any further in this regard. However, under CPR 31.16 a Court can order a party to disclose documents before proceedings have been commenced. An application for pre-action disclosure can be made if:

• both the applicant and the respondent are likely to be parties to any subsequent proceedings;
• the documents requested should be disclosed as part of the standard disclosure procedure; and
• disclosure before proceedings have started is likely to dispose fairly of the anticipated proceedings or result in the dispute being resolved without proceedings being commenced or save costs.

Costs of pre-action disclosure

CPR 48.1 provides that the general rule is that the Court will award the person who is required to produce the documents his costs of the application and of complying with any order made on the application. The Court, as in other cost matters, has discretion to make a different order in respect of costs after having regard to all the circumstances including the reasonableness of resisting the application and whether or not the parties have complied with any relevant pre-action protocols.

In a recent case (Bermuda International Securities Limited v KPMG 27 February 2001), Bermuda International Securities applied to the Court for an order that KPMG disclose certain specified documents prior to proceedings having been issued. The Judge at first instance decided that KPMG should disclose the documents and furthermore that they should not have forced Bermuda Securities to make an application in order to get access to the documents and that therefore a Costs Order would not be made in KPMG's favour. The Judge considered that:

• KPMG had unreasonably resisted the production of documents;
• the documents requested related to a narrow and ascertainable issue;
• KPMG had themselves already reviewed the documents; and
• in all the circumstances it was not burden to KPMG to hand them over.

It appears that the Judge did not make any distinction between the costs of the application and the costs of physically producing the documents. KPMG appealed and on appeal it was accepted by Bermuda International Securities that the Cost Order should be varied so that they actually paid for the exercise of producing the documents. Lord Justice Waller stated that:
"It is important that it is recognised that in relation to pre-action disclosure, the cost of the actual exercise will be paid for by the applicant for that disclosure. But so far as the application is concerned, if it has been unreasonably resisted, those are the very circumstances contemplated where the order for costs may be different. In this case KPMG were really resisting the production of documents root and branch…. They were obviously concerned about the precedent that might be set, but in circumstances where the issue is in fact a narrow one and readily ascertainable, and where they themselves have already reviewed the document and it was no burden to hand them over, it was certainly open for the Judge to make the order for costs that he did. Once again it does not seem to me possible to impugn the exercise of his discretion in that regard".

Although this case arises out of an application for pre-action disclosure and not the application of pre-action protocols, it illustrates the emphasis that the Courts place on the importance of pre-action activity and co-operation. It also indicates that the Courts are likely to use their powers to enforce cost penalties on parties who do not comply with the Protocol and that they will be looking for parties to enter into the spirit and intentions of the Protocol. The Pre-Action Protocol itself states that:

"If the Court has to consider the question of compliance after proceedings have begun, it will be concerned with substantial compliance and not minor departures … minor departures will not exempt the "innocent"party from following the protocol."

The Lord Chancellor's Department has just released figures which demonstrate that there has been a drop in the number of claims issued since the new rules came into effect in 1999. This reduction is attributed at least in part to the implementation of pre-action protocols.

In summary the message is simple: whether or not you are in favour of the introduction of the Protocol, as a potential claimant or potential defendant compliance with the Protocol is advisable and pre-action co-operation desirable if you want to create the right impression with the Court. If the parties are able to enter into the spirit of the Protocol it may also result in clearer issues, reduced trial time, more efficient management of proceedings, less wasted costs or even an early settlement.

For further information, please contact Tania Maycock at tania.maycock@cms-cmck.com or on +44 (0) 20 7367 2299.