A world of change

At a recent seminar on Change in the Commercial Court, the mood of the audience changed from mild disinterest (“I’m only collecting CPD points”), through surprise, then disbelief, then anger. Some resented the burden that the changes would bring; others could see the intent of the changes but doubted whether they would be effective. All quickly grasped the scale of the changes.

What change?

The Commercial Court in the Court of Session was last reformed in 1994. The reforms were implemented to try and bring about a procedure which was “swifter, more flexible and with less emphasis on written pleadings than ordinary procedure” (Parliament House Book, page C386/1). The original intention was that there would be a rapid progression through the preliminary hearing, then procedural hearing and then final determination whether by proof or debate.

Unfortunately the Commercial Court has been a victim of its own success. A dramatic increase in business has brought its own pressures. Pressure on judicial time has meant less active case management, and a lack of frontloading of cases by solicitors. A reluctance to use sanctions to punish parties or agents who were not properly prepared meant cases were delayed, which in turn led to frustration about the whole process. Costs have increased and gradually judicial business has been lost, with clients choosing other fora, in particular London, to resolve their disputes.

It was against this background that a review of the Commercial Court procedures was undertaken by the Lord President’s Consultative Committee on Commercial Actions. Those practising in the Commercial Court had made representation to the Committee, and it was against that background that Practice Note No 6 of 2004 was drafted and approved.

Appearances are deceptive

In an open meeting held to explain the new Practice Note, Lord Clarke described it as “a significant change in approach”. The change comes as a result of what some see as the undue relaxation of the procedures under the old Practice Note. The result of the consultation carried out was that the profession desired change. The Practice Note should bring about real change, even a “culture change”.

The new Practice Note looks deceptively similar to the old one. The structure is broadly the same, with reference to the nature of commercial actions, election of procedure and so on. It is not until paragraph 3 that a hint is given of the changes to come. It states:

“3.—(1) The initial pleadings in a commercial action are expected to be in an abbreviated form: the purpose of the pleadings is to give notice of the essential elements of the case to the court and the other parties to the action. Compliance with the requirements of paragraph 11 of the practice note will enable the essential elements of the case to be presented in the pleadings in succinct form.”

This is mirrored in paragraph 6 which deals with defences. Detailed averments are not required in the defences any more than in the summons and it is not necessary that each allegation should be admitted or denied, provided that the extent of the dispute is reasonably well identified. One of the objectives of the procedure is to make the extent of written pleadings subject to the control of the court. Again reference is made to the requirement to comply with paragraph 11.

The rigours of paragraph 11

Paragraph 11 sets out the critical change in procedure.

“11.—(1) Before a commercial action is commenced it is important that, save in exceptional cases, the matters in dispute should have been discussed and focused in pre-litigation communications between the prospective parties’ legal advisers. This is because the commercial action procedure is intended for cases in which there is a real dispute between the parties which requires to be resolved by judicial decision, rather than other means; and because the procedure functions best if issues have been investigated and ventilated prior to the raising of the action.”

For the practitioner, this might be of only passing interest. What is new here? Of course there is pre-action correspondence. The dispute is discussed. The defender’s response is unacceptable so proceedings are raised. Of course there may be expert input, but there is no point to incurring that cost until the defender’s true position is known.

The new Practice Note sets out a much more rigorous approach. Prior to raising an action the pursuer will be expected to:

• (i) fully set out in correspondence to the intended defender the nature of the claim and the factual and legal grounds on which it proceeds;
• (ii) supply to the intended defender copies of any documents relied upon; and
• (iii) where the issue sought to be litigated is one for which expert evidence is necessary, obtain and disclose, to the intended defender, the expert’s report.

It is this last requirement that will surprise many practitioners. There are few commercial cases where expert input of some kind is not required.

The defender’s response

For their part, solicitors acting for the defender are expected to respond to such “pre-litigation communications” by setting out the defender’s position in substantial terms; and by disclosing any document or expert’s report upon which the defender relies. To that response the solicitors for the pursuer are expected to give a considered and reasoned reply.

The Practice Note therefore envisages at least three exchanges of correspondence. The general intention is that actions should not be raised using the commercial procedure, until the nature and extent of the dispute between the parties has been the subject of careful discussion between the parties and/or their representatives and the action can be said to be truly necessary.

Pre-action correspondence

The theme of the action only being raised if “truly necessary” is continued in paragraph 12.

“12.—(1) The preliminary hearing will normally be conducted on the basis that the provisions of paragraph 11 in relation to pre-action communication have been complied with. The preliminary hearing, and any continuations thereof, are not designed to give parties the opportunity to formulate their claim and response thereto.

“(2) Parties should lodge, prior to the preliminary hearing, and for consideration at the preliminary hearing all correspondence and other documents which set out their respective material contentions of fact and law which show their compliance with the provisions of paragraph 11. These provisions are supplementary to the provisions of rule 47.3(3).”

Suddenly the pre-action exchange of correspondence takes on a whole new light. Not only must the parties appear before the court with a clear idea of what the issues are, they must vouch that process to the court. The dangers of poorly drafted pre-action correspondence are obvious. The court is not there to “give parties the opportunity to formulate their claim and response thereto”. The dispute must be clear, and in consequence the procedure to be followed should be obvious, and swift.

Costs sanctions

It is at this point that the practitioner’s surprise turns to concern. What is to happen if the full facts are not known, or if upon further consideration and reflection a different legal argument is thought appropriate? The answer is found in paragraph 12(3). This states:

“(3) Where it appears to the court that the need to grant any request for a continuation of a preliminary hearing is brought about by a failure to comply with the provisions of paragraph 11, this may result in the party responsible for any such failure having the expenses of the continued hearing awarded against him on an agent/client basis. Apart from that possible disposal, motions for continuations of the preliminary hearings which are sought simply to enable information to be obtained, which could and should have been obtained, prior to the preliminary hearing, may be refused.”

The sanction is triggered by a failure to comply with the provisions of paragraph 11. Paragraph 11(1) requires that the issues are “discussed and focused in pre-litigation communications”. If an argument can be made that an issue is new, or has not been focused, and that further time is required to investigate that issue, a continuation may be sought. Expert input may be required. If that argument is successful, then the aggrieved party can expect expenses on an agent/client basis. That is in effect an indemnity, which can be very different from the normal scale of recovery.

There is also the possibility that the court will go further and dismiss an action if it can be said that the action is premature, on the basis that there has been a complete failure to comply with paragraph 11. However, tactically it may be better for the defender not to enrol such a motion but instead prepare their case at the pursuer’s expense.

Judicial determination

The focus on early disposal is emphasised in that the parties need to be in a position to lodge a document setting out in concise form the issues which they contend require judicial determination. The statement of issues should, where possible, be set out in an agreed document. Previously the statement of issues would come shortly before the proof or debate.

Practical implications

From the public comments of the commercial judges it is clear that they are keen to see “proper” commercial actions coming before the court. They wish to avoid the situation where the court is a useful meeting point for parties to formulate their claim and response. They will use the sanction of costs and they will award costs on an “agent/client” basis.

So… be warned, and hesitate before raising an action in the Commercial Court. The position a party should be in before the action is raised is to have the summons as it will, or should, stand before proof. Your factual position is clear, the expert position is clear and the issue for determination is clear. Collate that information, send to the other side, and demand a response.

Solicitors should also draft with one eye on the Practice Note and not necessarily for the other side. What issues have been raised, and more importantly what issues have not been addressed by the other side?

Just before the action is served, revisit the file. Is the issue known? If not, why not? Can the court be addressed on the issues, and any challenges that the defender may bring refuted?

The correspondence to be lodged also needs to be carefully considered. The practice of “open” correspondence and “without prejudice” needs to be adopted with a clear understanding of the purpose of each. It is conceivable that there will be three strands of correspondence: “without prejudice”, which seeks to settle the action; “open”, which deals with issues as they develop; and “practice note” correspondence, which summarises the position for the purposes of compliance with paragraph 11.

Recoverable expenses?

With the new Practice Note now requiring substantial frontloading, what are the prospects of recovering from the unsuccessful party the cost of compliance with paragraph 11? The answer is uncertain, there being no specific adjustment to the existing Act of Sederunt to deal with the new Practice Note.

However in the Court of Session a party is entitled to recover “only such expenses as are reasonable for conducting the cause in a proper manner” (RCS, rule 42.10(1)). The test is one of reasonableness, tied to the conduct of the case. What is now clear is that a party must comply with the provisions of paragraph 11 if the action is to be properly conducted. The position can be contrasted with that in McNair’s Executrix v Wrights Insulation Co Ltd 2003 SLT 1311 where an unsuccessful attempt was made to recover a legal expenses insurance premium. Lord Carloway observed (at [9]-[10]):

“By using the words ‘of process’… no restrictive meaning is intended other than that the outlay must be in respect of work reasonably undertaken, as the rule says, to conduct the cause; that is to say to prepare and to pursue the litigation to a conclusion, including the rebuttal of the contentions of an opponent.… Although the general reasonableness of the actings of an agent may be relevant in determining whether a fee should be allowed in certain circumstances … such reasonableness can only come into play once it is determined that the work undertaken or outlay incurred is at least potentially part of the conduct of the cause.”

Given the terms of the Practice Note, one can see how the preparation of pre-action correspondence, and obtaining and exchange of expert reports, would be recoverable as being part of the conduct of the cause.

Alternative dispute resolution

It remains to be seen how the Practice Note affects the reality of the Commercial Court. However one final point is to observe the relatively obscure reference to ADR. The English courts have adopted ADR with enthusiasm, on occasion penalising parties who fail to adopt the procedures available.

By contrast the Practice Note states (paragraph 11(2)):

“Both parties may wish to consider whether all or some of the dispute may be amenable to some form of alternative dispute resolution.”

This follows the provision dealing with exchange of correspondence by solicitors. There is no mention of  actively considering ADR, nor of the court being involved in the process. It is no more than a recognition that the process exists. This will no doubt come as a disappointment to those in the ADR business, but perhaps the rigour of the new Practice Note will drive parties to a cheaper, quicker and perhaps less painful solution – ADR.

John MacKenzie is a partner with Pinsent Masons. He sits on the Lord President’s Consultative Committee on Commercial Actions. The views expressed are personal, and not necessarily those of the Committee.