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Recent decision delivers warning about costs liability

The question of whether a claimant had to pay the defendant's costs incurred after issue but before service was considered in 2014 in Clydesdale Bank plc v Kinleigh Folkard & Hayward Limited

In 2012, Clydesdale issued a "protective" claim against KFH alleging that they had negligently overvalued a property. In fear of limitation issues, Clydesdale invited KFH to enter into a standstill agreement in its Letter of Claim five days prior. But, given the short notice, KFH failed to respond in time. 

Extensions to serve proceedings were agreed and considerable correspondence, making reference to the Pre-Action Protocol, soon exchanged between the parties. For want of evidence proving causation and loss, however, Clydesdale later abandoned its claim before serving proceedings.

Hot on the heels of the Bank's decision, KFH issued an application for its costs incurred in correspondence. Clydesdale argued that: (i) the correspondence should be viewed as "pre-action" communications, as it made reference to the Pre-Action Protocol and, therefore, were not costs of or incidental to proceedings; and (ii) the Court did not have jurisdiction under the Senior Courts Act 1981 (the Act) to award costs, which were not of or incidental to proceedings.

To this, Master Bragge held that despite the "pre-action" style correspondence, such communication nonetheless took place after proceedings had started. As such, the Court had jurisdiction under s.51 of the Act. The Master confirmed that it is the issue of the Claim Form that triggers s.51 jurisdiction, not its service, and as such KFH was entitled to its costs from the Bank.

So where are we now? – The recent decision in Webb Resolutions

In May 2011, Webb sent a Letter of Claim under the Pre-Action Protocol to Countrywide alleging that they had overvalued a property in 2007. 

Webb made offers to settle the claim on several occasions – all of which were rejected. With the limitation date fast approaching, and absent a standstill agreement, a damages claim for £27,000 plus interest was issued in August 2013. Countrywide's reluctance to advance settlement talks, however, plus the claim's low value led Webb to decide not to serve the proceedings on proportionality grounds allowing the Claim Form to "expire".

Relying on Clydesdale, Countrywide issued an application for its pre-action and post issue costs. Though, in contrast to Clydesdale, in which KFH had incurred most of its costs post issue, Countrywide had incurred substantial pre-action costs in correspondence with Webb during the two years prior to issue. Webb accepted that the Court had discretion to award Countrywide its costs under the Act, and that those costs may include pre-action costs. The question, therefore, was how should the Court exercise its discretion? 

Webb contended, amongst other points, that it should only pay Countrywide's costs incurred post issue, and brought several authorities to Master Nurse's attention to support its stance. The Master dismissed them all, however, stating that the issue of the Claim Form "fundamentally changes the position", and that it would be wrong to ignore the "considerable expense" that Countrywide had incurred and Webb's own acknowledgment of the "disproportionate expense of the course it was on". The Master concluded that Countrywide were entitled to all costs that flowed after the Letter of Claim had been sent.

What does this mean for prospective claimants?

Limitation is an ever-present issue for claimants, often leaving them with little option but to issue a claim in order to preserve their cause of action. The decisions in Clydesdale and Webb Resolutions, however, flag the risk that the claimant may be left to foot the defendant's bill for pre-action and post issue costs should they issue but then choose not to serve proceedings. So what lessons can be drawn?

  • Investigate claims without delay (and manage it carefully) – If a claimant suspects that it may have a claim, investigation work should be carried out promptly so that the merits are assessed before limitation becomes a real concern. Furthermore, carrying out the "leg-work" without substantive involvement from the other side will help to decrease the risk of facing an application for costs should the claimant have to issue but then walk away before service.
  • Avoid "calling the Defendant’s bluff"– Claimants should be dissuaded from issuing proceedings as a way to put pressure on the other side to settle. Doing so risks the adverse costs consequences that may follow should the claim not be worth pursuing after issue.
  • Remember proportionality is king – In Webb Resolutions, by July 2013 (before issue), the claimant's costs alone were in excess of £60,000, vastly overshadowing its claim for damages. It already knew Countrywide's position on any possible settlement and should have taken the commercial decision to walk away at that point rather than doing so after it had issued proceedings. Claimants need to question whether the claim is worth pursuing financially and if there is any realistic chance of advancing it by issuing, especially if all reasonable attempts under the Protocol have already failed.
  • Enter into a standstill agreement – If limitation soon becomes an impending concern, inviting the other side to enter into a standstill agreement is – almost always - the preferable solution. Agreeing in writing to treat the costs as "pre-action" costs before issuing may also be a viable alternative. Though, with increasing awareness of the above decisions, the other side may be less inclined to agree and may attempt to force a claimant’s hand.
  • Beware the unreasonable defendant – Situations will inevitably arise where close to the expiry date for limitation, the claimant assesses that it has a good claim worthy of pursuit and proposes a standstill agreement but is forced to issue as the defendant unreasonably refuses to enter into it. Some defendants may then, again unreasonably, refuse to engage under the Protocol - in the hope that the claimant's costs of trying in vain to follow the Protocol will soon outweigh quantum thus forcing them to walk away and pick up the defendant's costs. In such circumstances, if the claimant remains confident the claim has merit, they should not be afraid to press ahead and serve.

McGlinn v Waltham Contractors Limited (2005 WL 1650593); Whittaker v Ford and Warren (2015 WL 7769321); Citation Plc v Ellis Whittam Ltd [2012] EWHC 764 (QB).

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2016. Specific advice should be sought for specific cases. For more information see our terms & conditions on www.TLTsolicitors.com

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