New construction and engineering pre-action protocol: less information and more litigation?

There is a risk, however, that the early and ‘well-informed’ settlements the protocol is designed to achieve may give way to an uninformed pre-action process, leading to expensive litigation.

Key changes

The primary changes include:

  • Parties can contract out of the protocol.
  • Parties can agree to use a ‘Protocol Referee Procedure’ to resolve disputes around the implementation of the protocol. The protocol referee will be appointed by the chairman of TeCSA. They will reach a decision no later than 10 days after the notice of appointment setting out future directions for conduct of the protocol process and whether there has been non-compliance with the protocol.
  • Parties should normally meet within 21 days (reduced from the previous 28 days) after receipt by the claimant of the defendant’s letter of response.
  • The deadline for the defendant’s letter of response can only be extended by 28 days (rather than the previous three months).

However, perhaps the most worrying change for insurers is the relaxed requirements of the claimant in particularising its claim. The aim of the game is now simplicity. The protocol objectives have been reformed so that the parties no longer need to provide full information, but merely “sufficient information about the proposed proceedings broadly to allow the parties to understand each other’s position”. In the letter of claim the claimant need only provide a “brief summary” of its claim and the relief sought. Expert reports are neither expected nor required.

Practical issues

In a situation where claimants are not required to particularise their case in detail and the timeline for investigations has been squeezed, it will be difficult for insurers to assess their exposure. Insurers may be pressured to evaluate liability and quantum without the tools to do so in an informed and accurate manner.

In the absence of expert evidence, which is often critical to the technical nature of construction disputes, insurers may struggle to rationalise their decision making internally in terms of their evaluation of liability and their setting of reserves. The new protocol emphasises the desirability of early and accurate case analysis, but there is a risk that defendants may not be provided with the information to accomplish this, leading to a ‘finger in the air’ approach to reserves.

Time will tell. However, the new provisions do have the potential to be barriers to settlement. The parties could find themselves forced along the pre-action timeline and in the midst of litigation before they are in a position to establish their exposure and make informed decisions on strategy and the future conduct of the claim. The desire to avoid the front-loading of costs may simply have the converse effect of shifting costs along the timetable. It leaves insurers in the invidious position of second guessing what the claimant and/or its expert may say at a later stage. Insurers may have to choose between the risk of assessing a claim and its value without all of the desired information or allowing the claim to continue and potentially developing in a detrimental manner.

Implications

It will be necessary to see how the changes to the protocol play out and we expect to see litigation regarding the role of the protocol referee. In practice, where a claimant is keen to resolve the dispute, letters of claim may not alter significantly in terms of detail or evidence in support. In particular, in more straightforward claims where expert evidence is not critical, the protocol may continue to facilitate the early resolution of claims on an informed basis but with a reduced initial spend.

We believe that working closely with insureds at the outset will become more important. This will enable an understanding of the potential liability and quantum of any claim in the absence of a requirement on claimants to set out their case and/or provide expert evidence in support of their allegations.

Underwriters may want to consider more stringent notice provisions, similar to existing conditions precedent regarding the notification of adjudications. These will ensure that the tighter deadlines can be complied with and the information gathering exercise is commenced as soon as possible. Insurers may wish to consider obtaining legal and expert input at the earliest possible stage so as to ensure that both the insurers’ and the insured’s position is protected.

Finally, with less information on liability and quantum, insurers may find it increasingly difficult to assess if their reinsurance will be triggered and if/when reinsurers should be notified.