On 1 October 2017 we saw the long-awaited pre-action protocol for debt claims come into force. A pre-action protocol is a set of steps contained in the Civil Procedural Rules that parties must follow before a claim is made. The idea behind having a protocol is to promote early settlement of claims and reduce legal costs. If a party ignores a protocol, then he or she may be subject to a penalty in legal costs allowed by the Court.
The pre-action protocol for debt claims is in some respects more controversial than, say, the rules relating to the personal injury protocols, as debt claims are by their nature not “disputes”. The vast majority of debt claims (98%) are not even defended, according to Lord Justice Briggs’ report in July 2016 on the Civil Courts Structure Review. Care has been taken to try to balance placing reasonable requirements on creditors against creating measures that protect debtors and ultimately encourage them to engage with the process.
The debt protocol applies to all businesses claiming against an individual consumer. It will not, therefore, be used in “business to business” debts. The protocol also will not apply to construction claims or claims for mortgage arrears, which are already covered by other pre-action protocols.
What steps does a creditor now have to take?
The requirement for a creditor to send a letter of claim has not changed, but there is now a detailed list of information that the letter should contain, including:
• A total debt summary with details of interest or other charges such as administration fees.
• If the debt arises from an oral agreement, full details of where and when the agreement arose.
• If the debt arises from a written agreement, the date of that agreement, the parties to the agreement and a copy of that agreement (or a statement that a copy can be requested from the creditor).
• An up-to-date statement of account for the debt, including the amount of interest and any other charges imposed since the debt was incurred.
• Details of how the debt can be paid (e.g. method of payment and address for payment) and how to proceed if the debtor wishes to discuss payment options.
• If regular instalments are being offered, an explanation of why this is not an acceptable arrangement and why court action is being considered.
• A copy of the Information Sheet and Reply Form (both are provided at Annex 1 of the debt protocol).
• A copy of the Standard Financial Statement form.
The letter of claim should be sent to the debtor by post. It can be sent by email only if the debtor has explicitly asked the creditor to do so. The debtor has 30 days from the date of the letter to respond, and only then can the creditor start court proceedings.
What does a debtor have to do in response?
The debtor also has some requirements to fulfil if he or she chooses to respond to a letter of claim, including:
• Using the Reply Form at Annex 1 of the debt protocol. The debtor should also request copies of any documents he or she wishes to see and enclose copies of any documents that are considered relevant.
• If the debtor indicates that he or she is seeking advice, then the creditor must allow a reasonable period of time. Where advice is sought, court proceedings should not start in less than 30 days from receipt of a completed Reply Form. Extra time may be allowed where advice cannot be obtained within 30 days.
• If the debtor says in the Reply Form that he or she needs time to pay, then the creditor and debtor should try to reach an agreed payment plan based on the debtor’s income and expenditure.
• If the creditor does not agree to any proposal made by the debtor for repayment, then it should give written reasons.
Will it work?
The Court will look at the documentation and adherence to this protocol. Non-compliance will be taken into account when directions are given for the management of court proceedings and when it comes to the question of cost sanctions. The protocol does confirm that the Courts are not likely to be concerned with minor technical breaches, especially in urgent cases. As with any new rules, there will be attempts to use the protocol to deliberately slow down or stop claims, but I expect the courts to take a sensible view, and I hope any such behaviour will be short lived. The focus of the new protocol is to encourage debtors to engage or seek debt advice, and this ultimately must be a better option than a debt claim simply resulting in a default judgment.