Section 51 of the Supreme Court Act 1981 provides that the award of costs “of and incidental to” proceedings is in the court’s discretion. In Re Gibson’s Settlement Trusts [1981], it was held that pre-action costs were, theoretically, incidental to proceedings and so fell within this section 51 discretion. This was confirmed by the Court of Appeal in Callery v Gray [2001] in which Lord Woolf held that “costs awarded will include costs reasonably incurred before the action started, such as costs incurred in complying with a pre-action protocol”.
However, the courts have recently found exceptions to this principle. In McGlinn v Waltham Contractors [2005], Justice Coulson held that such costs could be “incidental to” subsequent proceedings, but that whether an item of pre-action costs could correctly be described as incidental would be fact-specific. Coulson refused to award the defendant pre-action costs incurred, convincing the claimant to abandon certain allegations pre-issue on the basis that they were not ‘incidental’ as those allegations did not appear in the subsequent proceedings. He considered that to do otherwise, would penalise the claimant for acting according to the protocol.
Unsurprisingly, this decision is unpopular with defendants as, arguably, it allows claimants to make meritless allegations pre-action which they drop upon issue without attracting costs consequences. The defendant is nevertheless obliged to provide substantive responses to all allegations in the letter of claim, which may involve detailed factual investigation, expert evidence and irrecoverable expense for the defendant if the allegation to which the costs relate is abandoned.
Lobster Group highlights another limitation on the recoverability of pre-action costs. While the judgment relates to a security for costs application, it also addresses the law generally, especially the costs of pre-action mediations.
Lobster Group bought a printing press from the defendant,
Coulson held that, following Re Gibson and his decision in McGlinn, pre-action costs could be the subject of a security for costs application, but on the facts did not award security for pre-action costs.
- The majority of pre-action costs related to the failed mediation. They could not be described as “costs of and incidental to the proceedings” under section 51; they were the costs of pursuing alternative dispute resolution which had no connection to the subsequent proceedings.
- the time lag of two-and-a-half years before proceedings were issued gravitated against an award of mediation costs.
- at the time of mediating, the parties had agreed to bear their own costs of the process and it would be in breach of that agreement if, three years on, the defendant could recover its mediation costs from the claimant.
After McGlinn, there was concern that defendants would be unwilling to invest in substantive pre-action responses in case some allegations were dropped in proceedings and pre-action costs in investigating those allegations were irrecoverable. These fears do not appear to have been realised; defendants generally seem prepared to proceed under the protocol so as to reduce potential claims, thereby increasing the certainty of their position, even though they may have to bear the costs of doing so.
There may be similar concerns about the impact of Lobster Group on pre-action mediations. However, if parties consider a mediation will probably succeed, they are still likely to continue down that route in any event with a view to disposing of the issue at an early stage without the need for costly litigation.
The default position in most mediation agreements supplied by mediators is that each party will bear its own costs of the mediation. In a successful mediation, there is scope for the parties to override this within their settlement agreement. However, depending on how parties view their chances of success in the mediation, they may wish to consider making an amendment to the default costs provision up front. Claimants may be more inclined specifically to agree that the costs of the mediation will form part of the costs of the case. Defendants may be less inclined to do so. As the courts seem willing to give weight to the parties’ contractual agreement on this point, the key is to ensure that your mediation agreement contains a provision on costs — and preferably the provision you want.
Andrew Horrocks is a partner and Sophie Cubbon an associate in the commercial litigation and arbitration team at Barlow Lyde & Gilbert.
