11 English summary

Parties in civil proceedings can behave in ways that cause unnecessary delay and extra costs. The aim of the research presented in this thesis was to evaluate the use of cost shifting to deter such behavior. The central research question was:

’Efficiently' here means that negative side effects of using a cost incentive should not outweigh the positive effects (either intended or unintended) on the criteria time, costs, quality of outcome and procedural quality.

The research targeted summons proceedings, including standard-type adver-sarial cases and two categories of cases with diverging cost shifting rules: intellectual property cases (IP cases) and disputes in which the parties are relatives. The sub-questions and research methods that were used to answer the central question will be briefly addressed below (in line with the chapter division of the thesis).

To define disruptive behavior and to evaluate the effects of potential cost incentives a framework of assessment was constructed consisting of four criteria: time, costs, quality of outcomes, and quality of procedure. A qualitative approach was adopted for this research to estimate the effects of disruptive party actions and of cost incentives on these four criteria. As reference materials legal literature, interviews, law and (behavioral) economics, and a few existing empirical studies were used.

The four criteria were operationalized as follows:

The first sub-question was: What are the unnecessary delaying and cost-increasing actions which the cost shifting incentives should tackle? This question was answered in three steps.

Searching potential new uses of cost shifting is only useful if it is clear what the current rules are and how they are applied in practice. This raised the second sub-question: To what extent is cost shifting currently being used in Dutch litigation practice to deter unnecessary delaying and cost-increasing actions, and what are the judges' underlying motives to use or not to use cost shifting to this end? To answer this question, both black letter law and law in action were examined.

The summons proceedings' main rule for cost shifting can be found in article 237 of the Dutch Code of Civil Procedure (Wetboek van Burgerlijke Rechtsvordering, Rv). The text of the provision seems to establish an 'English rule': the winner is awarded costs to be paid by the loser. However, there are some important nuances. The article itself specifies three qualifications. The court may decide not to shift any costs if (1) the parties are relatives (in which case cost shifting is rare) or (2) if neither party succeeds entirely. Additionally (3), the court can decide that unnecessary costs will be borne by the parties that incurred or caused these costs. Finally, the most important nuance is that the court generally assesses the costs by using a nonbinding 'price list': the court-approved scale of costs (liquidatietarief). This standardized scale only covers part of the costs actually incurred. Although generally courts do use this scale, they are free to depart from it. These nuances give courts much discretionary power, which they can use in order to take disruptive party behavior into account when apportioning costs.

Costs in IP cases are subject to article 1019h Rv, which stipulates that the unsuccessful party can be ordered to pay the reasonable and proportional costs the successful party has incurred to the extent deemed fair. This results in much higher amounts of shifted costs, compared to cost shifting under the standard scale of costs. District courts have introduced rates that indicate maximum amounts of reasonable and proportional costs (indicatietarieven), but these rates are not used in patent cases and in appeal cases. Moreover, the indicative rates in IP cases are not as rigidly applied as the scale of costs in regular cases. Courts are free to take behavior into account when they apply the criteria of reasonability, proportionality and fairness to the amount of reimbursable costs.

The court's large measure of discretionary power is hardly limited by treaty law requirements (such as article 6 of the European Convention on Human Rights and European law). The court's power can effectively be limited by the parties, by agreeing on a contractual clause that stipulates a different cost shifting system, as articles 237 and 1019h Rv are default provisions from which the parties may depart. Another important limitation of the court's freedom with regard to cost shifting is the preclusion in 2002 of the possibility to order a party's legal counsel to pay the litigation costs personally when counsel acted with gross negligence (wasted cost orders, eigen beursje).

Even though courts can attach cost shifting consequences to disruptive party actions, they seldom do. This conclusion can be drawn from a systematic analysis of case law published on www.rechtspraak.nl. Notwithstanding the limitations of a keyword search method, it is clear that courts are very reluctant to effect cost shifting consequences. Shifting of the actual costs (upward deviations from the scale of costs) in particular is extremely rare. What courts do slightly more often is to add or subtract some individual points, when they decide some costs were made unnecessarily.

Legal literature is silent on the reasons behind this reluctance and that is why this issue was included in the interview study among judges (see Chapter 5).

The first two sub-questions could not be fully answered by using legal literature and case law. For that reason a qualitative interview study was set up to take stock of judges' experiences with disruptive party behavior, find out why they are reluctant to use cost shifting consequences, and establish whether they recom-mend the reintroduction of wasted cost orders in Dutch civil procedural law. Eighteen judges from six different courts (two subdistrict courts, two district courts, and two courts of appeal) participated in a semi-structured interview. The main disadvantage of this research method is its limited external validity, but it has the great advantage of enabling thorough questions to be asked. Moreover, it creates room for follow-up questions and examples. As a result, the interview study yielded a comprehensive explorative picture of the judges' experiences, motives and opinions.

In general, the respondents considered it hard to draw the line between necessary and unnecessary party behavior because of a double information asymmetry. They know that counsel are unable to read judges' minds, nor are judges themselves able to fathom the exact background of behavior. Nevertheless, most judges did believe there to be a line, however thin or vague, which can be crossed. Most of them gave clear examples of disruptive actions. The perceived frequency of disruptive behavior differs from judge to judge, but none regarded disruptive actions as a structural problem. Most believed that disruptive actions are more often the result of negligence and/or incapability than of intentional or deliberate attempts to slow down proceedings.

It is late claims and facts and late submission of documents that the interviewed judges found particularly inconvenient, especially so in the case of repeat players in subdistrict court proceedings. Courts of appeal and district courts found frivolous claims and defenses and unnecessary procedural actions most disruptive. Unprepared appearance or non-appearance at a hearing were menti-oned relatively often across the board.

The interview study confirmed the judges' reluctance to bring about cost shifting consequences to deter disruptive behavior. In regular cases, none of the respondents had ever ordered a party to reimburse the other party's full and actual costs, even though all were aware that the law does provide for that option. Decisions of no cost shifting, because of misconduct by the winner, are also extremely rare. What judges sometimes do resort to is allocating unnecessary costs to the party that incurred or caused them. In family cases, judges almost never deviate from the common practice not to shift costs between relatives. In IP cases, the system of full cost shifting offers a wider margin to take party conduct into account. The interviewed judges also felt that such a course of action can be justified, because the losing party has a legitimate interest in knowing whether the winning party took pains to ensure efficient litigation.

The interviewed judges advanced several reasons for their reluctance to use cost shifting consequences. Most have concerns over legal certainty. They also want to avoid costs disputes within the main dispute (satellite litigation). A third reason is the low frequency of behavior that can unequivocally be qualified as disruptive. This lines up with the judges' own observation that the border between necessary and unnecessary behavior is hard to define.

The respondents also recognized other factors as being relevant: the availa-bility of alternative remedies, the low frequency of parties asking for costs sanctions, and the fact that the cost shifting decision brings up the rear in proceedings. However, some judges fiercely deny that the latter, psychological reason bears on their reluctance.

The suggested reintroduction of wasted cost orders drew rather more critical than positive responses. Nevertheless, almost all judges put forward arguments for either position. Wasted cost orders prompt counsel to proceed with greater caution and they protect clients from having to take their counsel to court. However, the interviewed judges also identified problems with regard to due process require-ments (counsel becomes a party to the proceedings), satellite litigation and the ill-observable attorney-client relationship.

In current Dutch practice, cost shifting consequences with the goal of deterring disruptive behavior are effected with caution. Are there alternatives that have a better score on the framework of assessment test criteria (see Chapter 2)? Inspiration was sought abroad to answer the third sub-question: Which potential incentives within the cost shifting system could possibly deter unnecessary delaying and cost-increasing behavior?

Three comprehensive comparative studies of cost systems were used1 to find alternative incentives that could have an effect on the Dutch system. On the basis of three selection criteria (diversity, feasibility and accessibility) five potential cost shifting incentives were selected for closer examination. These options were first discussed in the context of the countries of origin. They were subsequently rephrased in a global form as a necessary step towards eventual implementation in the Dutch system.

The five potential alternatives are:

The assessment of these five options against the test criteria can be found in Chapter 8.

The fourth and final sub-question was addressed in Chapters 7 and 8: What are the effects ofthe potential alternative cost shifting incentives on the test criteria?

Chapter 7 dealt with several theoretical and empirical insights about civil procedure that are relevant to the functioning of cost shifting incentives. The classic law and economics approach was used as a starting point, but additions and corrections were made when behavioral law and economics and/or empirical insights gave rise to different conclusions.

Information asymmetry between the parties is one of the reasons that some disputes are litigated instead of settled. Exchange of information can contribute to quicker and cheaper dispute resolution, which also explains (at least in part) why many categories of disruptive behavior are related to the concealment or late submission of information. However, if exchange of information is made mandatory and enforced too strongly, the result might be disadvantageous front-loading of costs and/or discovery abuse, such as fishing expeditions. Lawyers can sometimes help to decrease the information asymmetry and to mitigate some of their clients' irrationalities, which increases the chance of success of settlements. On the other hand, lawyers can also act against their clients' interests, because of the incentives offered by their fee structure and/or because they think it is in their interest to maintain friendly relations with the other party's counsel. This principal-agent problem clearly shows that the posi-tions of counsel and client are not identical. This aspect has to be taken into account when deliberating whether cost shifting consequences should be aimed at the client, at his counsel, or at both.

Presumably, negative external effects of disruptive behavior could be op-timally passed on to the party displaying this behavior by effecting consequences that are based on strict liability and that effectively cover the delay and extra costs. This conclusion can be drawn from the law and economics theory of tort law and deterrence. The underlying, substantiated assumption is that monetary incentives have preventive effects. Even then, fully effective deterrence is unattainable, mainly because there is a triangular field of tension between underdeterrence, satellite litigation and sufficient procedural safeguards. As a result, trade-offs are inevitable and have to be dealt with.

Before the use of cost shifting to deter disruptive actions was evaluated, insight was gained into the pros and cons of cost shifting based on a favorable outcome in civil proceedings. If recovery of the winner's costs has positive effects, these effects might diminish if cost shifting were used to deter misconduct instead of rewarding the victory. However, the effects of the English rule (loser pays all) versus the American rule (each party bears its own costs) on the test criteria are ambiguous. The Dutch system is somewhere in between. It takes away some of the drawbacks of the costly English rule, but it also undoes some of the positive effects of the loser pays all approach: better access for small and costly cases and a presumed positive effect on the quality of outcomes. On balance, none of the victory-based cost shifting systems has a positive effect, so there is no reason to assume that conduct-based cost shifting will harm current positive effects.

Finally, the instrumental use of cost shifting to deter misconduct was evaluated. In law and economics literature the deterrent effect of what is termed margin-based fee shifting is regarded as promising, but reports about the Rule 11 FRCP practice in the USA show that fine-tuning the system between the triangular field of tension (underdeterrence/satellite litigation/procedural safe-guards) is a complicated task. Moreover, the Canadian situation shows that unpredictability looms if the outcome of cost shifting depends on too many different aspects. Predictability is necessary to keep time and costs low as well as to protect the quality of outcomes.

Cost shifting consequences provide compensation for the other party, which can also have positive effects on the test criteria. Financial compensation can protect a party against being knocked out by the delay and extra costs caused by the other party. Penalizing misconduct and compensating the ' victim' can be perceived as ethical and might provide extra decision and outcome control, which increases the quality of the procedure.

Legal expense insurance, legal aid and insolvency might theoretically mitigate cost shifting incentives, but in Dutch practice this is hardly to be expected: legal expense insurers will internalize the incentives to display good behavior in their own codes of conduct; legal aid does not cover reimbursements of the other party's costs; and insolvency only mitigates the incentives if the party displaying disruptive behavior was able to anticipate insolvency when it performed the disruptive action.

The Dutch system as it stands is not best poised to deal adequately with the aspects of predictability and the triangular field of tension between underdeter-rence, procedural safeguards and satellite litigation. It does allow for conduct (or misconduct) to be taken into account when costs are allocated, but the rules do not provide guidance on when, and to what extent, the court should depart from the scale of costs or indicative rates or apply the unnecessary costs rule. As a result, judges are reluctant to effect cost shifting consequences in cases of misconduct. On the rare cases that they do, these consequences are fairly unpredictable. Moreover, if the unnecessary cost rule is applied, underdeterrence is unavoidable, because the added or subtracted points do not cover the full negative effects of delay and extra costs. In IP cases, the cost shifting incentives are strong enough, but they too are unpredictable, because it is unclear how the judge should take conduct into account when deciding on the reasonability, proportionality and fairness of the costs.

The five alternatives outlined in Chapter 6 were evaluated to ascertain which of these can improve the Dutch system in terms of time and costs spent without decreasing the quality of procedure and outcomes.

According to the theory of rules versus standards and the status quo bias, specific guidelines for effecting cost shifting consequences with regard to misconduct can reduce judicial reluctance. They can also increase deterrence, while keeping satellite litigation on a low level. Combined, these effects can favorably impact the time and costs criteria. To secure procedural quality, the court must continue to have the option of departing from the guidelines in cases that would otherwise yield an manifestly unreasonable outcome. Rule-making efforts can be limited by keeping the guidelines simple, by implementing the guidelines within judge-made directives (which are more easily modified), and by letting the guidelines refer to existing rules on party actions laid down in procedural laws and regulations.

Fixed maximum amounts may also complement the Dutch system in order to decrease the level of satellite litigation without affecting deterrence, providing that these caps are sufficiently high to cover most costs caused by or resulting from disruptive actions. The system's score on the test criteria time and costs will be improved, while the quality of outcomes and/or procedure will not be adversely affected. In contrast, fixed minimum amounts do not seem to be a useful addition.

Less promising is the indemnity basis. It links high cost shifting amounts to intentional or grossly negligent actions, but does not seem to add value, because regular disruptive actions (those that do not involve either bad faith or negligence) also need to be deterred by fully passing on the extra costs and delay to the party that caused them. If there is a need to deter actions with illicit utility more severely, it might be more promising to study the effectiveness of procedural fines.

Even though the level of deterrence will increase if counsel can be held accountable for the disruptive behavior they caused, the wasted cost order, despite its directness, does not seem to be the optimal solution. Court interference in the counsel-client relationship will lead to inefficiency and problems with the counsel-client privilege. It may also trigger counterproductive incentives for the other party, which might regard counsel as having deeper pockets than the client. An indirect approach - disciplinary law and professional liability law - seems to be a better way to encourage counsel to refrain from exhibiting disruptive behavior.

The final alternative that was considered is the no cost shifting incentives option, the zero option for short. The discussion of this alternative mainly consisted of a comparison between cost shifting incentives and other possible remedies. Informal instruments and substantive consequences were the most promising alternative remedies. The former are more suitable for the least severe disturbing actions (i.e., being 15 minutes late at a hearing), when formal sanctions will probably be considered draconian. The latter are especially fit for situations in which judges can estimate well beforehand whether an intended party action will be disruptive, so they can pre-empt it. For the remaining categories of disruptive behavior cost shifting consequences seem to be the best remedy, especially for behavior that can only be qualified as disruptive after the fact and when substantive consequences decrease the quality of the outcome and/or incite parties to bring an appeal. In sum, the zero option must, for the most part, be rejected.

It was concluded that the most promising alternatives are specific guidelines based on strict liability and fixed maximum amounts of costs. These options can potentially decrease the time and costs spent in Dutch civil procedure without adversely affecting the quality of procedure and outcomes.

The central research question - Can the Dutch system ofcost shifting be used or adapted in such a manner that parties in civil proceedings are efficiently stimulated to refrain from exhibiting unnecessary delaying and cost-increasing behavior, and ifso, how? - was answered in the affirmative. The Dutch system can probably be used (or modified) in such a way, provided that courts can predictably use fixed maximum amounts of costs and specific guidelines to shift the costs caused by disruptive behavior to the party displaying it.

The scope of this conclusion is limited by the chosen framework of assessment (the four test criteria) and the emphasis on the law and economics approach.

Legal practitioners, judges and other interest groups are called upon to create specific guidelines for effecting cost shifting consequences in relation to miscon-duct and to apply these guidelines to the court-approved scale of costs (and indicative rates in IP cases). Once implemented, these changes can be measured by means of a field experiment. The final recommendation is to do further research into the professional courtesy lawyers extend to each other, as well as into a system that combines cost shifting consequences with pay as you go court fees (paying per procedural step).2