Recent decision highlights costs risk in issuing a claim form which is not then served

Significant costs can be incurred in the pre-action period while parties investigate a claim and follow pre-action protocols. At the same time, it is not uncommon for settlement discussions to be on-going. Where discussions stall, a claimant may be tempted to issue a claim form without serving it immediately, in an attempt to convince the defendant it is serious about its claim in order to advance settlement discussions. It has the added advantage of stopping the limitation clock from running, where that is an issue. 

However, a recent High Court case demonstrates the risk inherent in such a tactic if the claimant is not genuinely committed to pursuing its claim if settlement discussions fail: as soon as the claim form is issued the claimant may become liable for all of the defendant's (potentially very significant) pre-action costs, and not only those which were incurred after the claim form was issued: Webb Resolutions v Countrywide Surveyors (Deputy Master Nurse, May 2016). 

James Farrell and James Robson, a partner and associate in our disputes team, consider the decision below.

Background

The defendant valued a residential property in August 2007 at £117,000. In reliance on that valuation, a loan of £105,301 was advanced to a couple secured on the property.  The claimant then purchased that loan in July 2009. 

By January 2010 the couple had defaulted on their loan repayments and the property had been repossessed and sold for a sum significantly lower than the 2007 valuation. 

In May 2011 the claimant sent a letter of claim to the defendant alleging that the defendant had negligently or in breach of contract overvalued the property.  The claimant claimed losses of £31,148.  The defendant responded in full in June 2011.  There then followed two years of settlement discussions, during which costs were incurred which, the court said, were disproportionate to the value of the claim – the claimant incurred costs of over £62,000 against its initial claim of £31,148 and against its final offer to settle of £12,500 (plus costs). 

In August 2013, with the expiry of the limitation period looming, the claimant issued a claim form but did not serve it.  The claimant brought to the defendant's attention the fact it had issued a claim form, made one last attempt at settlement – which was unsuccessful – and then allowed the claim form to lapse, thereby abandoning its claim. 

The defendant applied to recover from the claimant the costs which it had incurred during the two year pre-action period and in the period after the claim form was issued.

Decision

The Deputy Master said that it was clear from the Civil Procedure Rules and the authorities that issuing a claim form fundamentally changes the position on costs.  If a claim form is not issued, a defendant cannot seek an order for its pre-action costs.  However, when a claim form is issued, the court has discretion to award to a defendant its costs "of and incidental to" the litigation (which will ordinarily include pre-action costs) if that claim is subsequently abandoned.  This is the case whether a claimant formally discontinues the claim or, as in the present case, simply allows the issued claim form to lapse.  The fact that a claim form has not been served is only a factor to be taken into account when the court's discretion is exercised.

In this case, the Deputy Master held that the defendant was entitled to its costs, including its pre-action costs, "of and incidental to" the claim, which included all the expense that followed as a direct consequence of the letter of claim.  Factors he took into account included that the costs incurred by the defendant dealing with the abandoned claim were significant, that the claimant had been aware throughout of the disproportionate expense of the course it was on and that the cost consequences of a claimant issuing a claim form are clearly spelled out in the relevant statute and the Civil Procedure Rules.