Why you should prepare for litigation – even when you’ve ruled it out

With the Court focusing on more robust case management, it is more important than ever to ensure that the correct steps are taken as soon as a potential dispute arises. A common misconception is that a dispute does not become litigious until proceedings are issued. This often results in failings at the outset of a dispute that can potentially have a significant impact at a later stage on disclosure, settlement negotiations and costs.

There is no substitute for taking early legal advice. In this briefing we outline the practical steps to take to try to shape the record from the outset of any dispute to be in the best possible position if proceedings are commenced.

1. What should I do if a potential dispute arises?

Generally speaking, parties to civil disputes should act in accordance with the Practice Direction on Pre-Action Conduct (“PDPAC”) and the Pre-Action Protocols (the “Protocols”) which form part of the Civil Procedure Rules (“CPR”). The PDPAC and the Protocols specify what parties to potential proceedings should do from the initial stages of a dispute up to the issue of proceedings.

However, there are circumstances when compliance with the PDPAC and Protocols is not possible or appropriate. For example:

• Where the remedy sought is of an urgent nature: it may be necessary apply to the Court to obtain an injunction to allow a search another party’s premises, to freeze assets or to prevent a breach of intellectual property rights.  The delay of complying with the PDPAC and/or the Protocols could mean that urgent relief becomes impossible;

• Where the dispute arises out of a written contract, there may be an agreed dispute resolution mechanism which the parties are obliged to follow before initiating a formal claim.

• Where the limitation period applicable to the claim is about to expire, it may be necessary to issue protective proceedings at the same time as, or even before, serving notice of a claim.

2. PDPAC and Protocols 

The Protocols govern the initial conduct of the parties in respect of particular types of dispute, including the following:

• Professional Negligence;
• Defamation;
• Housing Disrepair;
• Possession;
• Construction; and
• Personal Injury

If the dispute does not fall under one of the Protocols then it is necessary to follow the directions set out in the PDPAC. Both the PDPAC and Protocols provide guidance on the following:

(i) Time limits for responding to correspondence;

(ii) Disclosure of information;

(iii) Exploring settlement;

(iv) Instruction of experts and

(v) Sanctions for failing to comply.

Common examples of non-compliance with the PDPAC and Protocols include failing to provide sufficient information in the Letter of Claim; failing to act within specified time limits; failing to disclose documents and/or failing to engage in alternative dispute resolution.

Whether you intend to serve a Letter of Claim, or you are on the receiving end, there are a number of issues to clarify to avoid potential breaches of the PDPAC and Protocols:

• Does the PDPAC or a particular Protocol apply to the dispute?
• What time limits does the PDPAC or Protocol impose?
• Will expert evidence be necessary (and if so should the parties try to agree a joint expert)?
• What is the position in relation to disclosure of documents?
• Should any particular steps be taken in relation to settlement or exploring ADR?; and
• What are the risks with not complying with the specified procedure?

Failure to comply with the PDPAC and Protocols may have significant costs consequences. Civil Procedure Rule 44.3(5) (a) states that, when exercising its discretion as to costs, the Court will consider “conduct before, as well as during the proceedings and in particular the extent to which the parties followed the Practice Direction (Pre-Action Conduct) or any relevant pre-action protocol”

Whilst minor departures are unlikely to result in an adverse costs order, costs sanctions have been imposed where the failure to comply with the Protocols has resulted in a party commencing proceedings and/or costs being incurred where they could have been avoided.  For example, in the case of Straker v Tudor Rose (A Firm) (2007), the Claimant successfully obtained judgment against the Defendant and exceeded the Defendants Part 36 Offer. However, on assessment the Court only awarded the Claimant 60% of his costs on the basis that, by refusing to consider settlement, he had not properly complied with the pre-action protocol.  (This decision was later overturned on appeal for other reasons.)  Following the Jackson reforms, the Court is taking an ever more robust approach to the issue of costs, and compliance with the PDPAC and Protocols is likely to be scrutinised more closely than ever.

3. Document Preservation

Parties to proceedings (and anticipated proceedings) have a duty to preserve evidence.  Once it becomes clear that a claim is likely to be made, care must be taken not to damage or dispose of any documentary evidence, which includes not only paper files but emails, photographs, computer disks, tape recordings and any other means of recording or storing information.  In extreme circumstances, deliberately destroying evidence may be viewed as a contempt of Court.   We suggest that at the outset of a potential dispute a nominated person or team collects and stores all relevant documentary evidence (including electronic evidence).

As a general rule, however confidential a document may be or however harmful to your case, it will have to be disclosed to your opponent as part of the litigation process.  With this in mind, careful consideration should be given to:

• • Any disclosure obligations imposed by the Protocols. For example, the Protocol on professional negligence sets out that a party should comply with any reasonable request for “pre-action” disclosure.
  • The ongoing duty of disclosure.  Careful records should be kept of any discussions (for example in minutes of meetings which refer to the dispute) or of amendments made to documents which are relevant to the potential claim;

• • The documents that are privileged and those which are not.

4. What is Privilege? 

A party is entitled to refuse to allow his opponent to inspect documents which are protected by privilege.  Two types of privilege which can be attached to documents:

• • Litigation Privilege – this relates to confidential documents that were created for the dominant purpose of actual or pending litigation. It includes documents prepared by employees and third parties; and

• • Legal Advice Privilege – this relates to confidential communications (and evidence of those communications) between a client and its lawyers, which were written for the purpose of giving or obtaining legal advice. This will cover presentational or strategic advice provided that it relates to a client’s legal rights and obligations. However, it will not apply to advice, for example, of a purely strategic or commercial nature, nor notes relating to legal advice produced by employees or non-legally qualified third parties (such as accountants).   In addition, privilege can be lost if advice is circulated too widely within the business.

Do not assume instructions to your chosen expert or copies of his draft reports will be covered by privilege. Not only can these be disclosed and ultimately used by your opponent to weaken your position, but it can also be reviewed by the Court on the question of costs and compliance with the Protocols. In the case of Board of Trustees of National Museum and Gallery v AEW Architects (2013), the Court was critical of the Defendant’s instructions of an architect expert pre-action in which they did not ask “what could reasonably have been expected architects in the [Defendant’s] position“. The Court suggested that, had coherent thought been given to this issue at an early stage, the trial could have been avoided altogether.

5.  Pre-Action Negotiations 

5.1 Offers to Settle 

CPR 36.3(2) (a) is intended to make the whole Part 36 regime available to parties before proceedings are commenced, and for offers to have the anticipated costs consequences if proceedings are issued. As noted in the Court of Appeal Case in Solomon v Cromwell Group PLC Oliver v Doughty (2011): “The effect of accepting a Part 36 Offer made before a claim is issued, is that the Claimant is entitled to recover costs incurred in contemplation of proceedings”

On this basis, if there is sufficient information concerning the dispute to formulate a settlement offer, consider making an early Part 36 offer.  The costs consequences (in particular where a Defendant rejects the Claimant’s offer, which the Claimant subsequently “beats”) can act as a strong incentive to settle the action.  Equally, it is important to properly consider any Part 36 Offers received at the outset of a dispute to avoid potentially significant costs consequences at a later date.

Any failure to clarify the precise intention of the parties as to costs in making a pre-action offer could lead to undesirable consequences. It is important that the wording of the offer (be it a Part 36 offer or otherwise) is correct.

5.2 Without Prejudice Communications 

A common misunderstanding is that in using the words ‘without prejudice’ the parties can say or write what they like in negotiations.  In order to benefit from the protection of the without prejudice rule (which means that without prejudice correspondence is inadmissible as evidence to the trial judge):

• • there must be a dispute (to include negotiations before Court proceedings are issued);
  • the substance of the without prejudice communication must be concessionary in nature (i.e. made for the purpose of achieving an early settlement). A party may not rely on without prejudice privilege if they make unsubstantiated threats or claims.

Even where the expression ‘without prejudice’ is not used but the communication clearly contains a concession, a party may still be able to claim privilege. The Court will look at the substance of the communication rather than the form. The courts generally apply an objective analysis to work out what was the intention of the author, and how it would be understood by a recipient.  However, correct labelling is important as the onus is on the party asserting without prejudice privilege to establish that the communication was in fact made without prejudice.

5.3 Alternative Dispute Resolution (“ADR”)

Parties should always consider whether ADR could be used to resolve their dispute. This is required by all the Protocols and the PDPAC, and a Court may ask the parties to produce evidence demonstrating the forms of ADR they have considered. A party may have to explain any failure to engage in ADR when costs are assessed, especially if an opponent can demonstrate that ADR would have resulted in an early settlement and have saved costs.

In many cases, some form of ADR is likely to prove successful.  However, this is not always the case, and each request for ADR should be considered in all the circumstances.  You may wish to consider the following:

• • The nature of the dispute and whether the subject matter makes it unsuitable for ADR.  Is a commercial resolution possible, or is the intervention of the Court necessary.
  • The merits of the case; for example, a “watertight” case may be a reasonable excuse for refusing to explore ADR;
  • The costs of ADR: is it disproportionate to the sum in dispute? A full day’s mediation with Counsel in attendance can cost thousands with no guarantee of success.
  • The prospects of ADR succeeding. A refusal may be justified if the mediation is unlikely to succeed.  This may be the case where, for example, all other settlement attempts have been ignored or your opponent refuses to reconsider its position or make any concessions.

If you decide that ADR is not appropriate, it is essential to respond promptly in writing and give clear and full reasons why ADR is refused at that stage. Do not rule out ADR at a later date: there is an ongoing obligation on the parties to attempt to resolve disputes without the intervention of the Court, and the reality is that almost all disputes settle before trial.

Summary

Whenever a dispute arises, a clear strategy is essential.  Failure to consider the matters set out above at an early stage could undermine your case and out you at serious risk on costs. If you have any queries relating to a potential dispute, we recommend seeking independent legal advice.