When claimants take their employer to a tribunal and lose, costs are rarely awarded. Andrew McDonald explores why this recovery is becoming increasingly important.
With the growth of employment practices' liability policies covering proceedings in employment tribunals, the recovery of costs is becoming an increasingly important issue for insurers. And under the new coalition government, pressure for unmeritorious claimants to become liable for successful respondents' (defendants) costs is expected to increase.
So, can costs already be recovered? As proceedings draw to a close in tribunals for claims such as discrimination or unfair dismissal, it is generally accepted that costs are irrecoverable and both parties will bear their own irrespective of whether they have won or lost.
But there are exceptions to this rule. Under the Employment Tribunal Regulations 2004, the four most important circumstances in which costs can be awarded are: where a party in either the bringing or conduct of the proceedings has acted vexatiously, abusively, disruptively or otherwise unreasonably; where the bringing or conducting of the proceedings has been misconceived; where there has been a failure to comply with an order or practice direction; or where a party has been ordered to pay a deposit (maximum £500) as a condition of being permitted to continue to participate in the proceedings and that party has, ultimately, lost.
In addition, the Employment Tribunal does have jurisdiction to award costs for preparation time and wasted costs against the parties' representative.
Under the 2004 regulations, a tribunal may make a costs order against a party for either a sum not exceeding £10 000 or an amount determined by way of a detailed assessment in the county court.
In reality, costs will not be awarded to the winning party against the losing one in the vast majority of Employment Tribunal cases unless the losing party has acted badly or the claim was misconceived.
In 2008 and 2009, the Employment Tribunal made costs awards in only 367 out of a total of 151 000 cases issued — approximately one in every 400 cases. The average award for costs was £2470.
This has a number of practical ramifications for EPL insurers. If a claimant has an arguable — albeit poor — case insurers are unlikely to recover the costs incurred in defending those cases, even if the insured ultimately wins. Consequently, many claimants with weak cases are tempted to bring a claim in the Employment Tribunal, safe in the knowledge that there is unlikely to be a costs sanction against them.
And it is very difficult to put pressure on claimants to accept reasonable offers in settlement if they are determined to have their day at the tribunal, as there is no equivalent to a Part 36 offer — also known as an offer to settle. However, a number of recent cases illustrate that, in the right circumstances, costs will be awarded against claimants.
In the 2009 case of Daleside Nursing Home v Matthew in the Employment Appeal Tribunal, the claimant lost her claims of race discrimination, unlawful deduction from wages and unfair constructive dismissal. Central to the claim for race discrimination was the allegation that the claimant had been subjected to racial abuse by her manager. The Employment Tribunal found that this allegation was untrue and her claim for race discrimination failed. Notwithstanding this, the tribunal rejected the respondents' application for costs under the 2004 regulations on the basis that the claimant had a genuine belief in her claim and had not acted unreasonably.
However, the EAT found that the lie was "so much at the heart of the case" that the initial tribunal had been wrong in law to reject the application for costs and sent the case back to decide the appropriate level of award.
In the case of Dunedin Canmore Housing Association v Donaldson, which also took place in the EAT last year, the parties entered into a compromise agreement but the employer refused to make the payment due under the agreement, arguing that the claimant had breached the confidentiality clause included in the agreement. The claimant brought proceedings and the Employment Tribunal rejected both her evidence and her claim, finding that she had indeed breached the confidentiality clause. Notwithstanding this, it failed to make a costs order against her. Yet the EAT overturned the decision, stressing that if a party bases its claim on false facts, it should expect a costs award against it.
These cases demonstrate that while costs orders are the exception rather than the rule, insurers should always remember that a tribunal's jurisdiction to make a costs award, albeit limited, can be a useful weapon, particularly where a claimant is acting dishonestly.
Accordingly, EPL insurers and their solicitors should always: consider applying for deposits against claimants with weak cases at the outset; look out for factually hopeless, legally misconceived and unnecessary or dishonest allegations; keep a careful note of any unreasonable behaviour on behalf of a claimant in the conduct of proceedings; and, where appropriate, warn claimants of the intention to apply for costs.
Prior to the recent general election, the Conservatives indicated that, should they be elected, they may raise the limits for both deposits and/or costs awards to discourage weak or vexatious claims. In addition, there is a call in many quarters for the costs regime in the Employment Tribunal to be extended.
Many would like to see unsuccessful claimants who have brought claims that have marginal prospects of success — but who escape costs sanctions under the current regime — having to pay the respondents' costs of successfully defending the claim. This call is particularly loud from respondents who have to spend what can often amount to several weeks in the Employment Tribunal successfully defending claims.
While any proposal that dissuades unmeritorious claims being brought is to be welcomed, it must equally be borne in mind that any general extension of the costs regime may not be entirely good news for insurers. Claimants' costs constitute a very large percentage of the overall total claims spend for insurers in costs- bearing jurisdictions.
Although it is often extremely frustrating for EPL insurers to be unable to recover costs incurred in successfully defending tribunal claims, a general extension of the costs regime to allow the successful party — which would include claimants — to recover their costs from the loser may, in fact, ultimately be a much larger headache.
Andrew McDonald is an employment partner at Berrymans Lace Mawer
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