It is generally understood that the cost liability of discontinuing a claim during proceedings is borne by the claimant.
CPR 38.6 (1) denotes that 'unless the court orders otherwise, a claimant who discontinues is liable for the costs which the defendant, against whom the claimant discontinued, incurred on or before the date on which notice of discontinuance was served on the defendant'.
What is the Defendant’s entitlement to costs prior to the issue of proceedings where the claim is discontinued?
In the matter of McGlinn v Waltham Contractors Limited & Others  1 CLR 27, HHJ Coulson QC noted that:
“Unless circumstances are exceptional, and thereby give rise to some sort of unreasonable conduct, costs incurred by a defendant at the pre-action protocol stage in successfully persuading a claimant to abandon a claim, rather in whole or in part, are not costs incidental to any subsequent proceedings, if, in those subsequent proceedings, such claims do not feature at all.”
So it is clear that if costs are incurred prior to the issue of proceedings, then there is no entitlement for the defendant to recover their costs, when the case is subsequently discontinued pre-issue. Section 51 of the Senior Courts Act 1981 gives the court the power to order a party to pay another party’s costs of and incidental to proceedings. The court does not want to penalise a party who has successfully avoided litigation as a result of engaging in appropriate pre action communications.
What is the Defendant's entitlement to costs where proceedings are issued but not served, and are subsequently discontinued?
Clydesdale Bank plc v Kinleigh Folkard & Hayward (6 February 2014)
In the above case an application for costs was made by the defendant. The case involved a professional negligence claim in relation to an alleged overvaluing of a property. A claim form was issued due to the expiry of limitation, but the claim was never served. The parties agreed various extensions of time for service and consent orders were agreed, with no order as to costs. The parties engaged in considerable pre-action communications together with extensive negotiations continuing for around 10 months post issue following which the claimant decided not to proceed with the case. Therefore the defendant made an application for their costs.
- Claimant’s arguments
The claimant submitted that due to the considerable amount of pre action communications with the defendant prior to service of proceedings (such correspondence being deemed ‘pre–action’) the defendant was not entitled to recover their costs as the costs were not incidental to court proceedings. It was argued that the court therefore had no jurisdiction to award such costs to the defendant. Further, the claimant submitted that for the judge to accede the defendant’s application would be undermining the pre-action protocol procedure.
- Defendant’s arguments
The defendant submitted that the claimants intention was always to commence proceedings due to the pre-action correspondence from the claimant containing work not relating to the pre-action protocol. Further, some of the correspondence was headed as ‘without prejudice save as to costs’ indicating the claimant’s anticipation of incurring costs. It was also submitted that the costs were in fact incidental to proceedings due to the fact that the claimant had issued the claim form.
Before coming to a decision Master Bragge considered many authorities including the findings in McGlinn v Waltham Contractors Limited. In particular he noted that in the case of Citation Plc v Ellis Whittam Ltd  EWCA Civ 155 the learned judge Tugendhat J, noted,
“In summary I take the law to be (1) if no claim form is issued, then there is no litigation and so there are no costs of litigation, whatever costs may have been incurred in complying with the pre action protocol; but (2) if a claim form is issued, the costs incurred in complying with a pre action protocol may be recoverable as costs ’incidental to’ any subsequent proceedings”
Master Bragge also referred to Section 51 of the Senior Courts Act 1981, which gives the court the power to order a party to pay another party's costs of and incidental to proceedings. Master Bragge confirmed that proceedings were indeed issued in this case and due to some of the pre action correspondence containing issues which related to matters determined not to be pre action, it was found that costs would be acceded to the defendant. The court held that costs consequences are triggered on the issue of the claim, not the service of it.
Can the Claimant avoid the costs?
The claimant's best approach to avoid any cost consequence resulting from the above issue would be to investigate the merits of the claim well before the limitation period expires. However, certain situations may prevent the claimant from doing this in a timely manner.
Claimants may opt to enter into a standstill agreement with the defendant, however such an agreement must be carefully drafted and requires full co-operation from the defendant. The result of not drafting clear terms in any consent order will have always have associated risks (see Excel Polymers Ltd v Achillesmark Limited  EWHC 1927 QB).
What is clear from the above is that if claimants are careless in their approach to discontinuing a claim, cost consequences will follow where proceedings have been issued. But pre-issue the claimant should be able to discontinue without costs consequence.