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Since pre-action protocols were introduced, parties have incurred significant costs prior to proceedings being issued as they attempt to clarify the key issues in dispute with a view to resolving matters without the need for litigation. While the courts have held that, in principle, pre-action costs are recoverable, the recent decision in Lobster Group v Heidelberg Graphic Equipment emphasises the difficulties in recouping such costs.

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, Heidelberg. A dispute arose and, after an unsuccessful pre-action mediation, Lobster went into liquidation and issued proceedings two-and-a-half years later. Heidelberg sought security for costs, including costs of the pre-action period, until the trial date.

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.

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