In times when money and resources are ever constrained, legal costs are certainly to the forefront of clients' minds. This note aims to highlight some ways in which parties to construction and engineering contracts can reduce their potential costs' exposure in circumstances where a dispute has arisen and dispute resolution proceedings are inevitable or unavoidable.

The costs of a dispute can be quite significant and include a party's legal costs (solicitors' and barristers' fees), experts' fees, costs of other third party advisers, stenographers' fees, internal management costs including the time and resources of key personnel within the organisation. This list can be multiplied by two if a paying party is on the receiving end of an adverse costs order meaning that it is not only responsible for its own costs but also for the winning party's costs.

The degree to which each party to a dispute may ultimately be responsible for the costs of that dispute essentially depends on two factors: (i) the forum in which the parties choose or are contractually bound to resolve their dispute and (ii) the level of costs protection put in place by the parties.

Choosing your dispute resolution forum

In court and arbitration proceedings, the 'normal rule' is that costs follow the event, which means that that the winning party is generally entitled to recover its costs from the losing party (unless the parties have agreed otherwise). A judge or arbitrator has, however, discretion to depart from the 'normal rule' if he or she considers that there are 'special circumstances' warranting such a departure. For example, where there are distinct heads of claim on which the claimant has failed to succeed, the judge or arbitrator may decide that a proportionate costs order representing the relative degree of success in respect of the overall claim may be more appropriate in the circumstances.

Costs in alternative dispute resolution forums, including, mediation, conciliation and adjudication are generally dealt with quite differently to the costs of arbitration or litigation. The normal rule in ADR is that each party to the dispute bears its own costs, irrespective of whether it wins or loses.

Methods of Costs Protection

A responding party to arbitration or court proceedings would be well advised to consider all potential means by which it may avail of protection against being faced with a bill - both for its own costs and also for the claimant's costs. Such costs protection measures come in the form of a sealed or calderbank offer usually tendered in arbitration proceedings (also available to court litigants under certain circumstances) and/or a lodgement of money into a court account. Both of these tools provide a mechanism whereby a responding party offers to pay the claimant or tenders into court a certain sum in settlement of the dispute including a commitment to pay the claimant's reasonable costs up to the date of the offer. If the claimant rejects the offer and ultimately does not beat it by way of the judgement or award rendered then ordinarily, the claimant must bear its own legal costs from the date the offer was made and will also be responsible for the respondent's legal costs from the date of the offer. The rationale for this is that all costs incurred by both parties since the date of the offer are essentially wasted because both parties would have been in a better costs' position had they accepted the offer when it was made.

Having dealt with the measures of protection ordinarily afforded by a calderbank offer, it is timely to consider an exception to the general principle on the operation of calderbank offers which has been introduced by way of a relatively newly inserted arbitration costs undertaking in the Standard Form of Tender to the Public Works Contracts.

Arbitration Costs under the Public Works Contracts– who is responsible?

In or around early September 2011, the Government Construction Contracts Committee inserted a new costs undertaking in the Standard Form of Tender for use with the Public Works Contracts which provides that each party must bear its own costs of any arbitration entered into, except in the case where a sealed offer is made and the contractor does not beat it, then the contractor will be liable for both parties' costs. The provision does not, however, allow for the reverse situation whereby the contractor beats the sealed offer and would ordinarily be entitled to recoup its reasonable costs. On the contrary, it seems that, in such circumstances, the contractor is still responsible for its own costs of the arbitration.

The insertion of such a provision will clearly impact contractors when tendering as it may be viewed as an impediment to a contractor ever taking a claim forward to arbitration. Anyone involved in arbitration knows that the costs can be very significant, and the imposition of a requirement that each party bear their own costs, no matter what the outcome, and no matter whether a sealed offer is made or not, will render arbitration inaccessible to many, notwithstanding the merits which a contractor's claim may have.

It is difficult to reconcile the revised Standard Form of Tender with the Arbitration Rules 2008 (the "Arbitration Rules") applicable to the Public Works Contracts. Specifically in relation to costs, the Arbitration Rules provide that the arbitrator will be responsible for fixing the costs of the arbitration and that the costs should in principle "follow the event", namely, the successful party recoups its costs. This is quite clearly out of sync with what is now prescribed in the Form of Tender.

Emerging Costs Trends in Ireland

The Mediation and Conciliation Bill 2010 once enacted, will impose an express obligation on solicitors to advise their clients of the option of conciliation/mediation prior to commencing proceedings. Order 56 A of the Rules of the Superior Courts introduced in November 2010 encourages disputing litigants to engage in ADR and provides that a party's refusal to partake in alternative dispute resolution can attract an adverse costs order in any future court proceedings.

Conclusion

It is imperative for cost conscious disputants to bear in mind that issues should be dealt with in proportion to the amount of money involved. Alternative dispute resolution and early case settlement strategies should be promoted at every possible juncture, particularly where the value of the dispute does not warrant the expenditure of significant costs. If parties are contractually or otherwise obliged to resolve their dispute by way of litigation or arbitration then the adoption of case management techniques whereby the length and extent of discovery, submissions and evidence is limited are essential.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.