Front-loading – when can defendants recover costs incurred pre-action?

The recent decision in Webb Resolutions Ltd v Countrywide Surveyors Ltd was excellent news for defendants who incur considerable costs rebutting a claim that the claimant decides to give up on. The court was entitled to award the defendant its costs because proceedings had been begun.

As defendants know to their cost, the position is different where proceedings are never issued or where pre-action claims are nowhere to be seen once the particulars of claim appear. We review the different scenarios in which defendants can find themselves bearing the bill for claims that are ultimately abandoned.

Scenario 1 - costs incurred in complying with the protocol

You receive a letter of claim from a claimant. You incur significant costs preparing your response and instruct an expert. The claimant backs down on seeing your response and evidence. Can you recover any of your costs from the claimant?

Comment

No. There are no proceedings and costs can only be recovered by a party if they are “costs of or incidental to” the proceedings (section 51 Senior Courts Act 1981). When the concept of pre-action protocols was introduced by the Civil Procedure Rules, no provision was made for the recovery of costs incurred in complying with a protocol. This was a policy decision based in part on the belief that cost shifting tends to increase costs because parties feel able to incur costs in the expectation that the other party will pay them (Citation Plc v Ellis Whittam Ltd).

Scenario 2 – pre-action costs of dealing with abandoned claims

During the pre-action protocol stage, you incur costs which ultimately persuade the claimant not to pursue some of the claims in the letter of claim when he issues proceedings. Can you recover your costs related to those abandoned claims?

Comment

Not usually. The defendant tried to recover these costs as costs "incidental to" the subsequent proceedings in McGlinn v Waltham Contractors Ltd. The judge held that these costs cannot be recovered save in exceptional circumstances, usually requiring some sort of unreasonable conduct. He commented that it would be wrong in principle to penalise the claimant for abandoning claims which the defendant had demonstrated were not going to succeed, because that would penalise the claimant for doing the very thing the protocol was designed to achieve.

Scenario 3 – failure to follow the protocol before issuing proceedings

Unlike Scenario 2, in this scenario, the claimant does not follow the protocol before issuing proceedings to protect time. The proceedings are served and then stayed to give the parties time to follow the protocol procedure. At this stage, you incur costs which ultimately persuade the claimant not to pursue some of the claims. Can you recover your costs related to those abandoned claims?

Comment

Quite possibly. Points abandoned after following the protocol procedure would in this situation be “costs of and incidental to” the proceedings which will already be in existence so costs incurred in dealing with these points can be recovered. The policy behind the McGlinn decision would not protect a claimant who has failed to follow the protocol before issuing proceedings. The courts have not been sympathetic to claimants who issue without warning – see Phoenix Finance v Federation de l'Automobile and Charles Church Developments Ltd v Stent Foundations Ltd.

Scenario 4 – claim abandoned after issue but before service of the claim form

You incur costs dealing with a letter of claim and do not agree a standstill agreement so that the claimant issues the claim form to protect time. The claimant never serves the claim form and goes quiet. Can you recover your costs?

Comment

Quite possibly. This is what happened after two years of pre-action negotiations in Webb Resolutions Ltd v Countrywide Surveyors Ltd. Where the claim form is issued but not served, proceedings have begun (CPR 7.2). The issue of a claim form gives the court jurisdiction to order "costs of and incidental to" those proceedings. CPR 7.7 provides that "where a claim form has been issued against a defendant, but has not yet been served on him, the defendant may serve a notice on the claimant requiring him to serve the claim form or discontinue the claim within a period specified in the notice”. The normal costs rule on discontinuance is that the claimant pays the defendant’s costs (CPR 38.6).

Scenario 5 - costs of defending a withdrawn application

You receive formal notice from the claimant's solicitors that they are going to apply for an injunction against you the following day. They have informed the court so a judge is on standby at the end of the telephone and you instruct counsel to prepare to defend the application. The next day the other side tell you that they have decided not to proceed with the application. Can you recover your costs?

Comment

Yes. This happened in Associated Newspapers v Impac Ltd where the Mail on Sunday was proposing to run an article about Jeffrey Archer and was put on notice of an injunction application. The claimant applied by Part 8 claim for the costs they had thrown away. The court granted the application, relying on its inherent jurisdiction to make an order for costs before proceedings have been issued. The Master also commented that the claimants, instead of merely claiming their costs, could equally have sought a declaration as to their entitlement to costs.

What remains uncertain, however, is whether the parties have to be actually or metaphorically at the door of the court before the inherent jurisdiction comes into play or whether a party who threatens to make an application but backs down at an earlier point could also have an order for costs made against him.