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New Debt Protocol Proposes Mediation

The Civil Procedure Rule Committee (CPRC) has produced a draft debt protocol. The CPRC hopes to introduce the new Pre-Action Protocol for Debt Claims (“the Debt Protocol”), and a revised Pre-action PD in April 2015.

The draft protocol, which applies to any business (including a sole trader) claiming payment of a debt from an individual (including a sole trader) would revolutionise the way in which debt claims are made and do away with perceived heavy handed debt collection practices and result in the increased use of ADR including mediation in debt claims.

Like the other pre-action protocols, the debt protocol would encourage the parties to resolve the matter without the need to start court proceedings, exchange early and full information about the matter and consider using an Alternative Dispute Resolution (ADR) procedure.  Failure to do so could result in a costs order being made against the creditor.

Specifically, the creditor is expected to provide full details of the debt to the debtor and allow them 28 days to respond, to include:

1.     whether it includes interest and, if so, setting out any interest calculation;

2.     whether it includes charges and other sums and, if so, setting these out;

3.     where the debt arises out of a written agreement, either a copy of that agreement or an explanation of why no copy is available;

4.     and where the debt arises from an oral agreement, who made the agreement, what was agreed (including, as far as possible, what words were used) and when and where it was agreed; providing, where relevant, details of the original debt and creditor, and any assignments of the debt together with details of the relevant notices of assignment;

5.     if regular instalments have been offered by or on behalf of the defendant, or are being paid, explaining why a court claim is being considered; providing details of how the money can be paid (for example the method of payment and the address to which it can be sent);

6.     stating that the defendant can contact the claimant in order to discuss repayment options and providing the relevant contact details.

The claimant is required to allow the defendant sufficient time to seek debt advice and, in any event, at least 28 days. If a defendant is seeking specialist debt advice which cannot be obtained within 28 days, the defendant must tell the claimant, who must allow reasonable additional time to enable the defendant to obtain that advice.

This follows on from the recent case of LAKEHOUSE CONTRACTS LTD V UPR SERVICES LTD (2014).  Mediation and ADR is now venturing into new territory, where it was previously inconceivable, such as the arena of insolvency, debt and winding up petitions. In this case, where a winding-up petition had been wrongly presented because the petition debt was genuinely disputed on substantial grounds, the company was entitled to its costs of resisting the petition on the indemnity basis, but only up to the point at which its own conduct of the litigation became unreasonable; thereafter there should be no order as to costs. The Petitioner also asked the Company to mediate the underlying dispute before the costs of the disputed petition exceeded the petition debt. The Company refused to agree to mediation. The Petitioner then asked the Company to agree to directions for the hearing of an application to strike out the petition while its undertaking not to advertise continued. The Company continued to refuse mediation unless the petition was withdrawn and its costs paid. At the hearing of the petition the Petitioner consented to it being struck out or withdrawn on the basis that there would be mediation in respect of the underlying dispute. However, the Company refused mediation This is interesting, as previously a Company would not have to mediate in respect of a winding up petition. Now a petitioner has a potential additional line of defence to a costs order if the debt is disputed in winding up petitions.

In respect of the Debt Protocol, not unsurprisingly, creditors are unhappy with the draft Protocol.  They wrote to the CPRC objecting to the Protocol on the following grounds:

1.     That it would be too expensive to comply with paragraph 3.1 of the Debt Protocol to supply details of the contract and statements of account in every letter of claim in every case when many are not defended and creditors often rely on “portfolio letters”. However, the CPRC argue that CPR Part 16 requires this information when a claim is issued, except in the case of claims issued electronically where the particulars of claim are also issued electronically, and supplying it early is likely to aid settlement. If a creditor intends to issue a claim, each letter of claim should be individually prepared.

2.     That the defendant should be allowed 28 days to seek debt advice (paragraph 4.3 of the Debt Protocol). Again, the CPRC considers that the reductions in public funding mean waiting times for appointments for advice can be significant, and advice should help to settle the case or to narrow the issues.

3.     Creditors also object to the requirement to consider ADR (Section 6 of the Debt Protocol). As the CPRC comments, this is standard in all the protocols, and complaining to an Ombudsman or attempting mediation may settle any dispute more quickly and cheaply than issuing proceedings.

One can only speculate at how creditors will be penalised if they do not follow the protocol and the debtor does not defend proceedings.  In those circumstances, fixed costs will be allowed upon a request for judgement and there will be no opportunity for the Court to deprive the creditor of any of its costs.  However, if the debtor applies to set aside the judgment or defends the claim, then the creditor is likely to be penalised in relation to costs, whatever the outcome on the merits.

If the Protocol is introduced, creditors would be well advised to consider offering a telephone mediation, or, in line with the ADR/ODR Directive, making available an online dispute resolution process, before considering issuing proceedings.