Costs and construction litigation
This article considers how Lord Justice Jackson’s civil costs report of December 2009 is likely to affect construction litigation.1
It may surprise some to know that the decision whether to retain a pre-action protocol for construction and engineering disputes is finely balanced. There is a strong body of opinion to the effect that the protocol serves to increase, rather than reduce, costs. Opinion is widely divided on whether the pre-action protocol is effective. The Jackson report noted that the TCC judges and TECBAR felt the protocol widely increases costs and should be abolished, or replaced by a stay of proceedings to allow the assigned judge to oversee the pre-action process. In contrast, TeCSA’s view was that the protocol works when followed sensibly.
The recommendation for now is that the protocol be amended so that (a) it is less prescriptive, and (b) the costs (or at least the recoverable costs) of complying with the protocol are reduced. The need for the protocol should be reviewed by TCC judges, practitioners and court users after 2011 (when the TCC joins the Commercial Court and Chancery Division in the Rolls Building — it should be noted that those two jurisdictions do not have a protocol).
In the meantime, it is recommended to strengthen the wording on “proportionality” in para.1.5 of the pre-action protocol (repeated in para.2.1.3 of the TCC Guide). This serves to remind practitioners that compliance with the protocol requirements should be proportionate to the size, nature and complexity of the claim. It is also recommended to make the letters of claim and response less prescriptive. The claim letter should not reproduce a draft pleading. Documents should not normally be annexed. The emphasis appears to be on a common sense approach to setting out the relevant facts and issues without “front-loading” the costs.
As matters currently stand unless and until actual proceedings are issued each party bears its own costs of compliance with the protocol. There is a tendency by respondents to insist upon a fully pleaded letter together with evidence from a claimant before deigning to send a substantive response. This is not in the spirit of the protocol. Until recently, a claimant has been at risk of issuing prematurely. This has operated as a bar to issuing proceedings and often drags the negotiation stage on unnecessarily whilst running up additional irrecoverable costs.
However, as the law now stands, the costs incurred by each party in the protocol process may, in principle, be recovered as costs incidental to the litigation: see Roundstone Nurseries Ltd v Stephenson Holdings Ltd 2. This does not include the costs of a separate stand-alone ADR process, which is distinct from the pre-action meeting required by para.5.1 of the protocol. The Jackson report recommends that, insofar as a party has gone beyond the requirements of the protocol, the costs of those excessive labours shall not be recoverable. The cost estimates lodged at the first CMC should state what costs have been incurred in complying with the protocol. If it is found that either party has gone substantially beyond the requirements of the protocol the judge should decide the amount of costs to be disallowed. The objective of this proposal is to stamp out excessive front-loading.
It is now clear that pre-action costs may be recovered where proceedings are issued and parties will run an irrecoverable cost risk if they go substantially beyond the requirements of the protocol. This is a sea-change in approach.
Furthermore, the report recommends that a power should be added to CPR r.25.1 enabling the court to give directions pre-action where there is non-compliance with the protocol. Orders which the court should be permitted to make include (1) that the parties are relieved from the obligation to comply or further comply with the protocol, and (2) that a party do take any step which might be required in order to comply with the protocol. This is a useful step whereby practitioners can seek guidance from the TCC judges and should help to stamp out tactical prevarication and abuse of the protocol.
The TCC generally
Encouragingly, the report records that the TCC is regarded as generally satisfactory by users, and (although not without exception) litigation in the TCC is not a type of litigation where there are significant concerns as to the proportionality of costs. Also the existing system of “docketing”, allocating a judge from start to finish, is said to be an effective approach to case management and is likely to be copied in other courts, e.g. Chancery. However, in relation to small construction cases (concerning domestic extensions, etc.) there are specific concerns about disproportionate costs.
Statements of case
In most practice areas of litigation, including construction, serving overlong and discursive statements of case has been criticised as giving rise to additional costs, both for the offending party and for all other parties. The recommendation is that, where shortcomings in statements of case can be clearly identified at the outset, the court should direct the offending party to re-plead. Where the deficiencies or irrelevancies only become apparent later, the trial judge should give a direction to the costs judge as to what costs should be disallowed. It is suggested that s.5 of the TCC Guide be amended to make this power (which the court already has) clearly signposted to practitioners, and that the power should be used more frequently. Barristers need to flag any concerns about overlong pleadings to the judges as soon as practicable, and judges will need to be seen to make orders penalising such offences. Practitioners will need to concentrate on drafting key issues and refrain from setting out too much evidence and argument.
Witness statements Similarly, some witness statements go through the bundle commenting upon every recorded event! The report suggests that the court should be more flexible about allowing supplementary evidence-in-chief. The court already has discretion to allow supplementary evidence-in-chief under CPR r.32.5(3). Once this flexibility is adopted, if witness statements containing much irrelevant or unnecessary material continue to be lodged, then the report suggests that a costs sanction should be imposed, e.g. the trial judge should only allow, say, 90 per cent recovery of costs or should give an indication to the costs judge as to what costs should be disallowed. In other words, keep the main witness statement short and to the point. If, as often happens close to trial, a sub-issue suddenly takes on greater importance, then this can be dealt with in a supplemental statement.
Practitioners are going to have to learn new skills for drafting and editing witness statements.
Lists of issues
There is a generally held view, supported by the report, that agreeing lists of issues is an unnecessary waste of time and cost. The recommendation is that paras 14.4.1 and 14.4.2 of the TCC Guide should be simplified, so that they focus on key issues rather than all issues in the case. Considerable time and cost can be spent trying to agree such lists. Surely in the event of non-agreement lists could simply be exchanged and filed.
The new Practice Direction governing disclosure of electronically stored information (ESI) is due any time now, but has been delayed, as it was expected in December 2009 in final form and was to have been brought into effect in April 2010. Nevertheless, it is likely to bring in a new ESI Questionnaire. The substance of the draft Practice Direction is described in the Jackson report as “excellent”.
The report recommends that e-disclosure as a topic should form a substantial part of CPD for all litigation solicitors. Standard disclosure under CPR is prohibitively expensive. The report proposes a new r.31.5A, with a “menu” option:
“Draft New Rule 31.5A: Disclosure in a substantial case
(1) In a substantial case this rule replaces rule 31.5.
(2) A ‘substantial case’ in this rule is:
(a) a case before the Commercial Court or the Admiralty Court; or
(b) a case in which the total of the sums in issue exceeds £1million; or
(c) a case in which the total value of any assets in issue exceeds £1million; or
(d) a case agreed by the parties to be a substantial case; or
(e) a case marked, whether because of the nature or extent of the disclosure the case is likely to involve or otherwise, as a substantial case by the court at the point of allocation to the multi-track or at any other point.
(a) the parties agree proposals for the scope of disclosure; and
(b) the court consider that the proposals are suitable; the court may approve them without a hearing and give directions in the terms proposed.
(4) Not less than 14 days before the first case management conference each party must file and serve a report, verified by a statement of truth by the solicitor or other person who will have the conduct of giving disclosure for that party, which:
(a) describes in broad terms what documents exist or may exist that are or may be relevant to the matters in issue in this case;
(b) describes where and with whom those documents are or may be located (and in the case of electronic documents and metadata how the same are stored);
(c) estimates the broad range of costs that could be involved in giving standard disclosure in the case;
(d) states whether any and, if so which, of the directions under (7) below are to be sought.
(5) Not less than 7 days before the first case management conference, and on any other occasion as the court may direct, the parties must, at a meeting or by telephone, discuss and seek to agree a proposal in relation to disclosure that meets the overriding objective.
(6) At the first or any subsequent case management conference the court shall decide which of the following orders to make in relation to disclosure:
(a) an order dispensing with disclosure; or
(b) an order that a party disclose the documents on which it relies, and at the same time requests any specific disclosure it requires from any other party; or
(c) an order that (where practical) directs, on an issue by issue basis, the disclosure to be given by a party on the material issues in the case; or
(d) an order that a party give standard disclosure; or
(e) an order that a party disclose any documents which it is reasonable to suppose may contain information which may (i) enable the party applying for disclosure either to advance his own case or to damage that of the party giving disclosure, or (ii) lead to a train of enquiry which has either of those consequences; or
(f) any other order in relation to disclosure that, having regard to the overriding objective, the court considers appropriate.
(7) The court may at any point give directions as to how the disclosure ordered is to be given, and in particular:
(a) what searches are to be undertaken, of where, for what, in respect of which time periods and by whom;
(b) whether lists of documents are required;
(c) how and when the disclosure statement is to be given;
(d) in what format documents are to be disclosed (and whether any identification is required);
(e) what is required in relation to documents that once existed but no longer exist;
(f) whether (under rule 31.13) disclosure shall take place in stages.
(8) In exercising its discretion under paragraphs (6) and (7) the court will consider what disclosure would be proportionate to the circumstances of the case.”
If a new CPR r.31.5A is adopted as proposed, this rule would apply to substantial cases in the TCC, as in all other courts. The conclusion is that the “menu” option is the best approach to disclosure issues in relation to substantial cases. Initially this rule was to be for substantial cases only (e.g. £1 million plus) but the report now suggests that it be extended by adding to the draft rule:
“(f) any case in which the costs of standard disclosure are likely to be disproportionate to the sums in issue or the value of the rights in issue.”
This would extend the menu option to any case where the costs of standard disclosure are likely to be disproportionate. This will often apply therefore to some lower value construction disputes. In application, standard disclosure may well be ordered more often in the TCC than in the Commercial Court.
Unfortunately there are inconsistencies between the draft rule and the draft Practice Direction on ESI, and therefore it is not feasible to finalise the draft rule until the awaited Practice Direction on ESI is in final form.
E-working was introduced into the TCC under a pilot scheme on July 20, 2009. It is hoped that there will be a facility for documents lodged at different stages of the proceedings to be added into a chronological bundle.
In summary, the Jackson report harangues the failure of the court system to have moved into the twenty-first century. The report notes that 13 years have now elapsed since Lord Woolf published his report. Ten years have elapsed since the introduction of the Civil Procedure Rules, and yet the courts still do not have an IT system which is adequate for the delivery of civil justice at proportionate cost. Instead, there is a “patchwork quilt” of different IT systems that have evolved without proper coordination. There had been plans to introduce a holistic electronic system across England and Wales, known as the Electronic Filing and Document Management (EFDM) project. However, the EFDM project was halted for lack of funding in late 2008.
E-working could be considered the spiritual successor to EFDM. E-working provides an electronic filing system for court users and an electronic case file for judges and court staff plus the listing component from the Commercial Court IT project (CCIT). It can be described as being fully end-to-end, covering all transactions between parties, court staff and judges. So far, e-working seems to have been successful, integrating reasonably well with other software such as Microsoft Windows applications. However, at the time of the Jackson report it is confined to the Commercial Court and the TCC.
One reason for the success of the e-working system installed at the TCC and the Commercial Court is that both a judge and a practitioner were embedded in the development team. The report recommends that this practice should be followed in future development teams for specific IT projects.
Once e-working has been introduced across the High Court in London, the report recommends that it should be rolled out across all County Courts and District Registries across England and Wales. This would achieve the objectives of the now-cancelled EFDM. Ramsey J. has recently drawn attention to the success of e-working at the London TCC and has urged that it be introduced to TCC courts at regional centres outside London.
Low value construction disputes For low value construction disputes, it is proposed to tackle disproportionate costs in three ways:
(a) a fixed costs regime;
(b) case management by specialist judges; and
(c) greater use of ADR.
At the moment, there is no fast track in the TCC: see CPR Pt 60.6(1). It is proposed that Pt 60 or its Practice Direction be amended to permit TCC cases to be allocated to the fast track where appropriate. The criteria are set out in CPR r.26.6(4) and (5): the sum in issue is no more than £25,000; the trial can be concluded within a day; and there is one expert on each side. Some small building disputes satisfy these criteria. It is also recommended that a small number of district judges with suitable construction experience should be authorised to try fast-track TCC cases. This recommendation will require statutory amendment.
Assigning these cases to the fast track enables the parties to gain the benefit of a proposed fixed costs regime for the fast track. The proposal is an overall limit on recoverable costs of £12,000 (£13,500 in London) up to trial. This includes counsel’s fees, expert fees, other disbursements and all other pre-trial outlays. Court fees and the trial advocacy fee (fixed under CPR Pt 46) should be separate. The court’s power to control the recoverable costs of expert evidence is derived from CPR r.35.4(4): “The court may limit the amount of a party’s expert fees and expenses that may be recovered from any other party”. Consideration should always be given to making use of this provision when the court gives permission for expert evidence in fast-track cases. The applicant should furnish an estimate of the cost of the proposed expert evidence with their application for permission.
The figure of £12,000/£13,500 should be reviewed by the Costs Council (see below) every year.
Fixed costs will not apply in a case where a party acts so unreasonably that the court makes an order for indemnity costs against that party.
Litigation which proves more complex can be re-allocated to the multi-track by the judge under CPR r.26.10.
Whether these proposals will work as well in practice as the theory suggests remains to be seen. The fact remains that it is very difficult to prepare even a small construction dispute for trial without incurring over £20,000 in costs, and there are likely to be many applications for transfer to the multi-track, based in reality more on actual cost to date than upon greater complexity. Particular care will need to be taken when briefing experts so as to keep their costs within the recoverable limit.
Low value building disputes which are nevertheless outside the scope of the fast track e.g. because the trial cannot be completed within a day, or because the expert evidence is more extensive than envisaged by r.26.6(5) should be assigned to the county court TCC at the earliest possible time so that such cases can be managed and tried by judges or recorders with specialist experience. This is already fully dealt with in the TCC Guide and the TCC’s Annual Reports, e.g. p.12 of the Annual Report for the year ended September 30, 2008, by Ramsey J. In reality, this proposal could take time to build up support from practitioners. Few county courts are perceived as having either the right judges or adequate back-of-house resources for parties willingly to commence county court proceedings outside small claims business.
The report states that the two principal forms of Alternative Dispute Resolution (ADR) are conventional negotiation and mediation. It recommends that mediation should be promoted with particular vigour for those low value construction cases where conventional negotiation is unsuccessful. It is noteworthy that Jackson L.J. deliberately mentions conventional negotiation as part of the suite of ADR methods. Good old-fashioned sensible negotiation is often overlooked and substituted for trendier methods such as mediation or expert determination, but at far greater cost. Conventional negotiation should not be overlooked. It can save considerable cost.
The report cross-refers to a mediation survey of TCC cases which was contained in the preliminary report. Perhaps unusually, proactive mediators (who commented robustly on the evidence and highlighted weaknesses in each side’s case) were regarded as more effective than, and generally as preferable to, purely “facilitative” mediators. It is a common feature of all TCC cases that the disputes between the parties involve much technical detail.
Case management and costs management go hand in hand. The TCC already has effective case management.
One form of costs management has been piloted in the Birmingham TCC since June 1, 2009. The report confirms that the results so far are encouraging. Jackson L.J. emphasises that effective costs management is a skill which all lawyers could acquire, however, there needs to be an effective training programme. In addition he recommends that rules should be drafted, setting out a standard costs management procedure which judges would have a discretion to adopt if and when they see fit, of their own motion or upon application by one of the parties. The report proposes that the rules for costs management be drafted in summer 2010 once feedback from pilot exercises has been analysed. Costs management should be for the discretion of the TCC judge. Jackson L.J. says it should not be compulsory in the TCC.
It is also recommended that when an assessment of reasonable costs results in an excessive figure “proportionality” comes into play. In essence proportionality trumps reasonableness! If utilised by the costs judge the exercise of this discretion will certainly draw practitioners’ attention to the need to keep costs proportionate. It is of course often a difficult balance to fully investigate the facts and present the argument and evidence whilst keeping the cost proportionate. Clients will need to be educated that there is an inherent risk in not leaving all stones unturned, but that this is the way that litigation must be conducted in the future to avoid irrecoverable wasted costs, which will eradicate the financial benefit of any judgment.
The recommendation for a Costs Council is not new and has in the past received support from the Civil Justice Council and the Senior Costs Judge in 2006. In the event, the recommendation was not implemented and instead in 2007 the Advisory Committee on Civil Costs (ACCC) was set up. The Jackson report says that if its recommendations are accepted then an independent and authoritative body will need to undertake the following tasks every year:
(i) set guideline hourly rates for solicitors for summary assessments (and, as is now recommended, for detailed assessments in addition);
(ii) review the matrices of fixed costs for the fast track; and
(iii) review the overall upper limit for fast-track costs.
The report points out that these tasks are collectively far more onerous than the ACCC’s current role, which is limited to setting guideline hourly rates for summary assessments. The Costs Council should also regularly review the recoverable fees of counsel. The report therefore recommends that the ACCC be disbanded and that a Costs Council be established.
Part 36 In order to provide greater incentives for defendants to accept settlement offers, the report recommends that where a defendant fails to beat a claimant’s offer, the claimant’s recovery should be enhanced by 10 per cent. This proposal applies to all litigation, not just in the TCC business.
Clearly there is still much to be done, but it is evident from the Jackson report on civil costs that many steps can be taken in the TCC which do not require a change in legislation. Much can be done by updating the TCC Guide. It is to be hoped that while I have been drafting this article Mr Justice Ramsey has pipped me to the post and re-drafted the TCC Guide!
However, bringing about real change is going to involve a change in attitude by practitioners and the judiciary. The judiciary need to be seen to be taking a firm but consistent approach to penalising disproportionate cost while dealing fairly with the dispute. Practitioners (lawyers and expert witnesses) need to change their ways and will have to make difficult decisions over what information will not be pursued or included. The Bar needs to get much more involved in understanding the level of costs involved at every stage, and we will see a far greater number of submissions on costs. We are all going to have to deal with requests for costs to be disallowed. No doubt there are harsh times ahead!
A version of this article first appeared in Construction Law Journal (Const. L.J. 2010, 26(7), 589-597).
1 Since writing this article both the new Practice Direction 31B on electronic documents, and the second edition, second revision of the TCC Guide came into effect on October 1, 2010. As anticipated the TCC Guide has adopted many of the recommendations mentioned in the Jackson report.
2  EWHC 1431 QBD (TCC) at -.
3 MA(Cantab), MCIArb.
Reviewed in 2015