Keywords: Section 51 of the Supreme Court Act 1981; re Gibson’s Settlement Trusts [1981] Ch 179; Ian McGlinn –v– Waltham Contractors Limited and others [2005] EWHC 1419 TCC; Lobster Group Limited –v– Heidelberg Graphic Equipment Limited and Close Asset Finance Limited [2008] EWHC 413 TCC; Pre-Action Protocol for Construction and Engineering Disputes; Alternative Dispute Resolution; Yuanda (UK) Co Limited v WW Gear Construction Limited [2010] EWHC 720 (TCC). 

It may sound familiar.  A party to a dispute has spent months attempting to conclude it.  Finally, there is an agreement to settle and what’s more, settlement was reached without the need to issue proceedings.  However, it has come at a price.  Not such insignificant sums have been incurred on a legal team which may include solicitors, professional advisors and experts.  Is this expenditure in any way recoverable?  Read on and get a reality check!

From authority, statute and court rules, pre-action costs are generally not recoverable. 

Section 51 of the Supreme Court Act 1981 provides that costs of and incidental to proceedings in the Court of Appeal, the High Court and the County Court shall be at the discretion of the court.  Therefore, for any costs to fall to be considered there must be proceedings.  In re Gibson’s Settlement Trusts [1981] Ch 179, where costs were incurred before proceedings commenced, Sir Robert Megarry stated that: “…if there is no litigation there are no costs of litigation…”

Both Section 51 and Gibson’s Settlement Trusts were considered at paragraph 9 in Ian McGlinn –v– Waltham Contractors Limited and others [2005] EWHC 1419 TCC: “I am of the view that, as a matter of principle, the costs incurred in complying with a Pre-Action Protocol may be recoverable as costs ‘incidental to’ any subsequent proceedings.”  Therefore, costs only fall to be considered where proceedings (in the context of litigation), have commenced. 

If there are no proceedings, it is impossible for any costs incidental to proceedings to fall to be considered.  This is reinforced by Section 2.7 of the Technology and Construction Court Guide:

“2.7     Costs of compliance with the Protocol.
2.7.1    If compliance with the Protocol results in settlement, the costs incurred
will not be recoverable from the paying party, unless this is specifically agreed.
2.7.2    If compliance with the Protocol does not result in settlement, then the
costs of the exercise cannot be recovered as costs, unless:

• those costs fall within the principles stated by Sir Robert Megarry V-C in Re Gibson’s Settlement Trusts [1981] Ch 179; or
• the steps taken in compliance with the Protocol can properly be attributable to the conduct of the action.”

There is therefore, no cause of action for recovering any costs that may have been incurred during the Protocol period.

Unless the parties have pre-agreed¹, costs incurred in ADR, which includes mediation, are also not recoverable.  It was held in Lobster Group Limited –v– Heidelberg Graphic Equipment Limited and Close Asset Finance Limited [2008] EWHC 413 TCC, that, ADR proceedings and its outcome are privileged matters and hence not recoverable:

“16 First, unlike the costs incurred in a pre-action protocol, I do not believe that the costs of a separate pre-action mediation can ordinarily be described as "costs of and incidental to the proceedings". On the contrary, it seems to me clear that they are not. They are the costs incurred in pursuing a valid method of alternative dispute resolution. Those costs were incurred in a form of dispute resolution which had no connection to these proceedings… Both the course of the mediation itself and the reasons for its unsuccessful outcome are privileged matters, known only to the parties. As a matter of general principle, therefore, I do not believe that the costs incurred in respect of such a procedure are recoverable under s.51.” 

With the courts continuing to be very keen on promoting alternative dispute resolution and with the Pre-action Protocol playing an ever increasing role in resolving the parties’ differences, pre-action costs will only escalate in the future.  It is therefore imperative for the parties’ representatives to ensure that the case is carefully managed pre-action in order to avoid incurring significant costs which cannot be claimed back. 

© Michael Gerard Consulting Limited
October 2010

¹The situation is different for statutory adjudication – see Yuanda (UK) Co Limited v WW Gear Construction Limited [2010] EWHC 720 (TCC).