If you need to issue a claim to protect limitation, but before you have had the chance to investigate the full merits of your claim, where do you stand on costs if you then have to discontinue? A lender has recently fallen foul of costs and limitation when pursuing a valuer where the claim was subsequently abandoned. We now explain how that came about and what might have been done to prevent it.
If costs are incurred prior to the issue of proceedings, there is no entitlement to recover costs. The parties generally bear their own costs or come to an agreement on costs. However, if proceedings are issued, the general rule is that the unsuccessful party pays the costs of the successful party. The Civil Procedure Rules further provide that a claimant who discontinues a claim is liable for the costs incurred by the defendant. This is why it is crucial to investigate a claim fully before issuing proceedings, ideally by following the pre-action protocol that should flush out all relevant considerations.
However, a claimant may not always have time to do that before the expiry of a limitation period. In such circumstances, the claimant has to issue a claim to protect their position. What would the costs consequences be if the claimant decides not to pursue the claim after proceedings are issued but before the claim form is served? This was considered in detail in Clydesdale Bank plc v Kinleigh Folkard and Hayward .
Clydesdale Bank plc v Kinleigh Folkard and Hayward
In this case, the bank intimated a professional negligence claim against professional valuers. Since limitation was due to expire, the bank issued proceedings in December 2012 to protect its position. The bank and the defendant then agreed to extend the time for service of the claim form on several occasions. This was done by way of consent orders which also provided that there should be no order as to costs.
After proceedings were issued, the parties exchanged correspondence, making it clear that such correspondence was pursuant to the Pre-Action Protocol. The bank subsequently decided not to proceed with the claim and did not serve the claim form on the defendant. Since the work done up until that point was related to pre-action matters and the bank had not served the claim form, the bank believed there would be no costs consequences under the Civil Procedure Rules.
The Defendant made an application for costs since they had incurred costs after proceedings had been issued.
Judgment of Master Bragge
In coming to a decision, Master Bragge considered the decision of Judge Tugendhat in Citation plc v Ellis Whittam Limited who stated:
“In summary I take the law to be: (1) if no claim form is issued, then there is no litigation and so there are no costs of litigation, whatever costs may have been incurred in complying with a Pre-Action Protocol; but (2) if a claim form is issued, the costs incurred in complying with the Pre-Action Protocol may be recoverable as costs ‘incidental to’ any subsequent proceedings.”
Since proceedings were issued in this case, regardless of the fact that correspondence was in the style of pre-action correspondence, Master Bragge awarded the defendant their costs. The Court held that costs consequences are triggered on the issue of the claim form and not on service of it.
Could the costs ‘penalty’ have been avoided?
The first, and best, approach to avoid the issue is to investigate the merits of a claim well before expiry of any limitation period.
However that may not always be possible and, if no claim is issued before expiry of limitation, the claim may be barred. Yet, given the costs consequences of having to later discontinue, the claimant may try to agree with the defendant that time can ‘stand still’ to allow the pre- action protocol to be completed. Only once full information is known about the strength of the claim will the claimant then issue a claim, but without having lost the claim by the passage of time.
Some defendants may opt to be the object of a claim in order that they can recover costs if the claim is discontinued, but they could be liable for costs if the claim is pursued, so generally both parties ought to prefer to hold off proceedings to ‘hold the ring’ on who pays for the fight (if any) until more is known.
Standstill agreements can only be obtained by co-operation from the defendant and are not without risk: they need to be very carefully drafted. They also risk a claimant losing impetus in the claim and allowing the defendant to waste time and fail to engage properly once the urgent threat of a claim has receded. However these issues need to be balanced against the liability that could be incurred to a defendant who is not ultimately pursued. Even a simple claim could result in £5-10k of costs being incurred to defend unfounded allegations.
As with many decisions in litigation, the costs need to be weighed with the benefits, and so much may depend on the potential value of the claim, but the behaviour and attitude of the other party will also bear on the decision whether to issue a claim or agree a standstill.