UK: Alternative Dispute Resolution: Relevance to Cost Awards

Last Updated: 10 July 2002

Pre-Woolf reform days costs "would follow the event". In other words, the successful party to legal proceedings would usually recover its reasonable costs.

However, post-Woolf and CPR, the courts have made it clear that costs will not follow the event if the successful party has failed to consider or to participate in an alternative dispute resolution process. It is likely that courts will take a similar view if parties fail to comply with any applicable Pre-action Protocol. Furthermore, recent cases also indicate that the test for awarding indemnity costs is lower than it used to be. Certainly, courts when making costs orders will closely consider the parties’ conduct, both before and during proceedings. Against the background of judicial decisions is the recent address given by the Lord Chancellor to the International Arbitration Council in which he told the audience that his department’s view was that no proceedings should be commenced until parties had exhausted all possible means of resolving their dispute.

Parties to a construction or engineering related dispute are required to participate in the Technology and Construction Court (the "TCC") Pre-action Protocol subject to certain limited exceptions such as where the proceedings are for the enforcement of an adjudicator’s decision or if compliance would mean that a potential claim may be time-barred under the Limitation Act 1980, or any other relevant legislation.

The TCC Protocol requires the parties to consider whether some form of alternative dispute resolution procedure would be more suitable than litigation, and if so, they must endeavour to agree which form to adopt. Arguably, by following the Protocol the parties are already engaged in a form of alternative dispute resolution but if parties do not want to face costs orders being made against them in any subsequent proceedings, they must also consider ADR. If the parties choose to follow ADR they must have clear reasons for this.

In Paul Thomas Construction Limited v. Hyland & Another (TCC, 8 March 2000) an indemnity costs order was made against a party, which had failed to consider ADR.

More recently, in Dunnett v. Railtrack plc (The Times, 3 April 2002), the defendant asked for an order that the claimant pay its costs on the grounds that the defendant had succeeded before the Court of Appeal, the claimant having rejected its offer to settle the case before the appeal. The Court of Appeal refused to do so because the defendant had refused to consider ADR. Lord Justice Brooke (with whom Lord Justice Robert Walker and Lord Justice Sedley agreed) specifically stated that he hoped any publicity given to this part of the judgment would draw the attention of lawyers to their duties to further the overriding objective of the Civil Procedure Rules, which include encouraging parties to use ADR and if in circumstances such as had occurred in this case, they turn down "out of hand" the chance of ADR when suggested by the court, they may have to face "uncomfortable costs consequences". The Court of Appeal declined to take the defendant’s settlement offers into account and questioned the defendant as to why it had refused to contemplate ADR as suggested by the court on granting leave to appeal. The Court of Appeal was highly critical of the defendant’s response. The defendant stated it had not considered ADR as it was not willing to contemplate payment over and above that which it had already offered the claimant. The defendant’s view was that ADR would necessarily involve the payment of (more) money. The Court of Appeal said this approach to ADR showed an apparent misunderstanding of its purpose and noted that skilled mediators are now able to achieve a result satisfactory to both parties in many cases, which is beyond the power of lawyers and courts to achieve.

The Dunnett decision followed another Court of Appeal decision, Cowl & Others v.Plymouth City Council [2001] EWCA Civ 1935. Lord Woolf, giving the decision of the court said that in the context of a judicial review "both sides must by now be acutely conscious of the contribution alternative dispute resolution can make to resolving disputes in a manner which both meets the needs of the parties and the public and saves time, expense and stress". Lord Woolf also stated that the failure to adopt ADR, in particular when public money is involved, is "indefensible".

It should also be noted that the TCC Protocol does not address the question of payment of costs incurred by the parties acting in compliance with the Protocol. If the parties are able to resolve their dispute without recourse to litigation then neither party will be able to recover costs from the other party. Costs – only proceedings are not a solution to this problem which is increasingly becoming a cause for concern.

If proceedings are commenced it is now easier than previously for a court to award indemnity costs. The decision of the Court of Appeal in Reid Minty (a firm) v. Gordon Taylor [2001] EWCA Civ 172 made it clear that is no longer necessary for the court to look for moral turpitude or the like in exercising its discretion to award costs on an indemnity basis.

Guidance as to the approach a court should take in assessing indemnity costs is contained in Kiam II v. MGM Ltd [2002] EWCA Civ 66. The conduct of the party should have been unreasonable to a high degree and not merely wrong or misguided in hindsight. The court applied this principle to award indemnity costs to the claimant in a recent personal injury case, Craig & ors v. Railtrack plc & anor LP 202023303 (18.02.02) since it was critical of the length of time it had taken the defendants to resolve the dispute.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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