Wooden letter blocks spelling "rules"

New Legal Cost Rules Unattractive for Dispute Resolution Through Court

Following the Justice Jackson review of Costs in Civil Cases, on the 1st April 2013 the Ministry of Justice introduced new CPR rules requiring parties in litigation to engage more in pre-action protocol and make serious attempts to resolve their disputes. Parties are now required to consider "some form of ADR" (Alternative Dispute Resolution). The impact of non-compliance or refusal to consider ADR in pre-action may lead to adverse costs being awarded against the offending party, thus it is very important that ADR is explored. ADR however is not mandatory there is only a requirement to "consider" it.

The Ministry of Justice recognises that parties going to Court to decide their quarrels often find themselves in lengthy and very expensive litigation. Often the costs end up outstripping the value of the dispute significantly and the matter then turns into an even bigger bun fight over the costs, and costs of the costs, which defeats the entire process of justice. The Court rarely awards all the costs of proceedings on an indemnity basis, you would have been lucky to get 60% of them back under the old system, it is likely to be less now. Court costs can escalate from an estimate of £100,000 to £1 million over years of proceedings, as can often happen there is little hope of recovering an equitable outcome in such instances. The new rules attempt to address this problem by encouraging parties to get out of the Court system and resolve by using ADR. It is recognised by the Ministry that parties should not be trapped into pursuing cases beyond the point that is economic for them to do so and the Court should be the last resort. However, Court is often the only option available to a party seeking justice, thus often making justice inaccessible on the grounds of cost and time. The prospect of lower recovery of costs now introduced simply makes this problem more acute.

The new rules demand better case management including requirements to exchange cost budgets, there are new limits and rules for Conditional Fee Arrangements, Legal Expenses Insurance and Damage Based Agreements (e.g. personal injury claims). There is a new test on the proportionate value of costs, new part 36 rules, an increase in the small claims limit to £10,000 and other rules which increase the risk of non-recovery of costs in Court proceedings.

Unfortunately, although there is encouragement by the Ministry of Justice to direct parties down the path of ADR, the Court does not obviously advertise it and even then, only promotes mediation, which in many construction cases is ineffective. Added to this there is a possible risk that many lawyers may not understand ADR and the required essential specialist knowledge, say of a Chartered Quantity Surveyor may not available; the ADR consideration may often be sidestepped. Consequently, the more commercially effective ADR routes are often not considered properly, the costs escalate plus time and nerves are taken down a long-time path to oblivion in Court.

In the Commercial Construction Industry, many of us are all now familiar with adjudication which is the main ADR process in which disputes are now decided. Adjudication is supported by two pieces of legislation, the Housing Grants Construction and Regeneration Act 1996 and the Local Democracy and Economic Development Act 2009. These Acts, known as the "Construction Acts", give a Statutory Right to commercial par ties in construction contracts to adjudicate their disputes and give powerful rules in respect to rights to payment. Such power has had a massive impact on the construction industry where malpractice and disputes are very commonplace, leading to cash flow harm and bankruptcy; adjudication hits hard on these problems quickly, where Courts are mainly ineffective due to lack of speed and cost. The Court also does little to advertise or inform parties of the existence or effectiveness of adjudication, which is unfortunate, as stated the Court encourages mediation. Mediation is only effective where two parties are honestly in a dispute, have misconceived beliefs as to their position and have a willingness to resolve matters. Our experience in construction contracts is that disputes are rarely of this nature. The construction industry is very "dog eat dog", there is a culture of bullies and aggression, commercial political power in procuring work and works are often very complex an d easily subject to defects and mistakes. Add to that commonplace mismanagement of time, resources, contract procurement and co-ordination, problems readily arise, history speaks for itself. Profit margins are sensitive to mistakes and there is often little willingness to resolve matters where mistakes from common mismanagement are made. Construction projects are always set up with armies of subcontractors, where the nature of payment travels down a "food chain", there is thus a further culture of reluctance to pass payment down the chain. Where a party is deliberately intent on taking money off the other to preserve their own position, the construction industry norm, mediation will never work. Consequently, there are few construction mediations and little help from the Courts as their perception of ADR being a process called "mediation" which is a wrong one for construction matters. Most eminent construction dispute resolvers do not advocate the use of mediation, but recommend adjudication, which has no mandatory right to be adopted in all cases.

An acute example of where adjudication has no mandatory right to be started is demonstrated by the fact that householders are exempt from the Statutory right to adjudicate, most domestic cases brought before us at Arbicon are situations where the builder has run off with the loot leaving a badly built ruin behind as you may have seen on TV's "Cowboy Builders". If Court proceedings are started and the Court demands mediation, do you seriously think the Cowboy is going to mediate? Not a chance. If there was a right to adjudicate, the dispute would be legally all over in days and the Cowboys would have to think twice about their malpractice. Instead the householder is faced with only being able to litigate over a long period of time and incurring disproportionate legal costs, with no guarantee of outcome. By the time the litigation ends there is a risk also that the Cowboy has dissolved his firm and/or disappeared long since to somewhere unknown in Spain.

Other ADR processes include arbitration, which might be considered in the pre-action stages. In the absence of an arbitration clause/agreement it cannot be used. Although backed by an excellently drafted piece of legislation, the Arbitration Act 1996, arbitration has sadly fallen away on time and cost factors plus the invention of adjudication. Time and cost are the evolutionary forces in the survival of ADR processes. The old way of thinking is that arbitrations should be run like a Court, so experiencing the CPR style and lawyer procrastination that ADR seeks to move away from, thus the process has been largely rejected by the industry. The new way of thinking, which is not widely promoted is that arbitrations should be run more like adjudications, such a style and approach is the Arbicon way, the Arbitrator decides how the process runs and has an obligation to save time and cost, it also allows awards on legal costs unlike adjudication so on that basis why not use it in this way? There is unfortunately a fear and perception in the industry that a "fuddy duddy" bent on acting like a Court protracting proceedings will be appointed and that is too great a risk to contemplate. Arbitration is due to be reborn and promoted in a new way, we look forward to it.

It is clear that the Commercial way to deal with construction disputes is ADR, more so now that legal costs are under more scrutiny. The best solution is driven by the evolutionary forces of time and cost and at present, adjudication is the most favoured route. The Courts say they want parties to go to ADR, but they do not go far enough in making it mandatory or even allow a party liberty to apply to the Court to force the use of adjudication. The Courts need to understand that mediation in many complex construction disputes is a waste of time and that for certain parties such as domestic householders access to justice using Court proceedings is prohibitive on the grounds of costs and long-time periods. The new rules, whilst helpful in pre-action protocol do not go far enough in supporting ADR and in our view put justice further out of reach.