Now everyone’s unhappy

Abba song. That may so for losers in love, but it is not necessarily the case for losers in litigation. Before Woolf’s reforms in 1998, the losing party nearly always had to pay the winner’s costs. This still the starting point for judges, but they also have to take into account whether an

“issue-based” order is appropriate. This means that if one side has lost on a particular

allegation or issue, the court might order that that party should not receive any costs

associated with that issue (and indeed might have to fork out for the other side’s costs) even if it won overall.

Take a construction-related example. A claimant might bring a claim for a 10-week extension of time (six weeks for a major variation, four weeks for late information) and a claim for prolongation and disruption. Suppose that it gets an order for a six-week extension of time and associated prolongation but fails on its other claims. The court might then refuse to give it its costs associated with the four-week claim and any of its disruption costs.

Arbitrators are not strictly bound by court procedures, but if they are minded to use their discretion to make issue-based orders they must exercise that discretion in a judicial manner. They cannot disregard any relevant case law.

The making of an issue-based order can have dramatic effects. In Kastor Navigation Co Ltd vs AGF MAT (2003) the successful claimant was awarded about $3m. The court nevertheless ordered it to pay its own costs and 70% of the costs of the defendant. This reflected the fact that most of the trial was taken up with an issue on which the claimant failed.

It was penalised because it contested every issue, and cross-examined witnesses aggressively and at length

Similarly, in the recent case of Johnson vs Gore Wood and Co a claimant failed to better an offer by the defendant, and would normally have had to pay the defendant’s costs from the date of the offer. However, the Court of Appeal held that it should pay only 50% of those costs, mainly because of the way in which the defendant had conducted the trial – through its lawyers, it had raised every single point that it could, contested every issue, and cross-examined the claimant’s witnesses aggressively and at great length.

The Court of Appeal has also now confirmed in the Kastor case that for an issue-based order to be made, it is not necessary to show that the party being penalised acted improperly or unreasonably. It is enough that it lost an issue that significantly increased the length or costs of the proceedings.

To what extent are issue-based orders a

good thing? Obviously parties should be encouraged to concentrate their efforts on the key areas. However, the current trend towards making these orders can have two adverse consequences.

First, the loser is now more inclined to rake back over the ashes of his defeat to find issues on which he succeeded, and then ask the tribunal for the costs of these. This means that further time and costs are then incurred.

Second, there is less incentive on a party to make an offer to settle if it knows that, even if it loses, there is still a good chance of getting some sort of costs order in its favour – especially as arbitrators (in particular) often tend to avoid giving the winner all his costs, for fear of appearing too one-sided.