Hong Kong: Failure to Mediate May Result in Adverse Costs Consequences

Originally published 6 September 2010

Keywords: failure to mediate, adverse costs, Civil Justice Reform, Golden Eagle, GR Investment Holdings

This article looks at the potential adverse costs penalties that parties may face for unreasonably failing to mediate in light of the new Civil Justice Reform. Parties must make genuine attempts to mediate and the Court will impose costs sanctions on those who do not have strong grounds for refusing to mediate.

Summary

The recent decision in Golden Eagle International (Group) Limited v. GR Investment Holdings Limited¹ sends the message that parties should make a genuine attempt to mediate before continuing with litigation. Failure to provide a reasonable explanation for refusing to mediate will result in adverse costs consequences.

Background

The Plaintiff succeeded at trial and was awarded a sum higher than its previous sanctioned offer to the Defendant. Costs were sought on an indemnity basis, meaning that the Plaintiff stood to receive up to 90% of its costs, on the basis that attempts were made to mediate which were unreasonably refused by the Defendant.

After making the sanctioned offer, the Plaintiff had proposed mediation which the Defendant refused without giving any reasons. At the pre-trial review, the Court enquired about the reasons for refusal and did not accept the Defendant's answer that refusal was for 'commercial reasons'. The Defendant was asked to reconsider its position but still refused to mediate.

Ruling

The Defendant relied on the English decision inHalsey v Milton Keynes General NHS Trust² to justify its refusal to mediate. It was held in Halsey that departure from the general rule that the 'losing party should pay the winning party's costs' would only occur where the winning party acted unreasonably in refusing to mediate. The judge inGolden Eagle concluded that a party must have strong grounds for refusing to mediate.

A contention that a dispute could not be 'easily mediated' is not a strong enough ground since it was noted inGolden Eagle that few cases were unsuitable for alternative dispute resolution. 'Reasonable belief of a strong case' is only relevant in clear-cut cases e.g. where a party would have succeeded in an application for summary judgment. Borderline cases will not fall within this category.

Where previous settlement offers are made, such offers should be "sensible and realistic" in order to succeed. Arguments that the parties have a wide difference in attitude towards settlement and that mediation is a waste of time and effort will likewise not succeed, since mediation can "bring about a more conciliatory attitude between the parties". A party claiming that the costs of mediation will be disproportionately high will not have strong grounds for refusal, since mediation costs are usually significantly lower than the claim itself.

The judge held that the burden was on the refusing party to provide a reasonable explanation for refusing to mediate. The willing party did not carry any burden to show that mediation had a reasonable prospect of success.

The Courts will only impose costs sanctions where the parties refuse to mediate. There is no costs sanction if the parties cannot reach settlement after making a reasonable effort in mediation. According to Practice Direction 31, this means 'participation in mediation up to the agreed minimum level'. This was defined in Hak Tung Alfred Tang v Bloomberg L.P. (a firm) and Another³, to be "at least one substantive mediation session (to be determined by the mediator) with the mediator". Parties should therefore show that they are sincere in their attempts to resolve their disputes by mediation.

In addition, the judge observed that costs of mediation would fall under legal costs, recoverable by the successful party even if the mediation proved unsuccessful, as shown in Chun Wo Construction & Engineering Co. Ltd. v China Win Engineering⁴.

Conclusion

Parties wishing to litigate should be warned - they must show the courts that, before engaging in time-consuming and costly litigation, they have made a genuine attempt to mediate the matter, or face adverse costs penalties. As enunciated inGolden Eagle, the Courts will not tolerate a party's unreasonable failure to mediate. Parties should therefore seek advice on and seriously consider whether mediation is appropriate and whether it is reasonable to mediate, particularly where the other party has requested it.

Footnotes

1. HCA 2032/2007, 25 June 2010.

2. [2004] 1 WLR 3002.

3. HCA 198 2010, 16 July 2010.

4. HCCT 37 2006, 12 June 2008.

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