A recent Technology and Construction Court ('TCC') case has underlined the need for parties to be careful about how they approach the question of costs when planning to mediate.
Lobster Group Ltd –v- Heidelberg Graphic Equipment Ltd and Close Asset Finance Ltd (TCC, 6 March 2008) was primarily concerned with a security for costs application. The Judge usefully reviewed the law, however, on the recovery of pre-litigation costs and he gave particular attention to the treatment of mediation in this context.
For some time now, if, after mediation, one party emerges liable for their opponent's costs – there has been a debate as to whether the expense of the mediation exercise can properly be viewed as:
- costs 'of and incidental to the proceedings' – this being a recovery permitted by s.51 Supreme Court Act 1981, or;
- something akin to 'work done in connection with negotiations with a view to settlement' – in which case, this would also be recoverable under the CPR Costs Practice Direction 4.6(8)
The default position
The standard agreement to which parties sign up before they mediate usually provides that the mediator's fee will be split equally and otherwise, that each party will bear its own costs.
That was exactly the form of Agreement used in NatWest Bank –v- Feeney (14 May 2007) and although they 'won' a settlement at the end of the day, the defendants were in for a nasty shock when they tried to claw back their costs relating to the mediation.
The appeal Court ruled that the subsequent settlement deal did not operate to unseat the original mediation agreement about costs. In those circumstances, although the parties had agreed expressly that the claimant should pay the defendant's 'costs of the counterclaim', this did not extend to cover the considerable outlay in preparing for and attending the mediation.
Timing of the mediation
The normal form of mediation agreement was also entered into in Lobster Group but that mediation had happened some 2½ years before proceedings were issued. Interestingly, in this case, the Judge drew a distinction between pre-action mediations (as in Lobster Group) and mediations that take place after litigation has started (like Feeney):
"... unlike the costs incurred in a pre-action protocol, I do not believe that the costs of a separate pre-action mediation can ordinarily be described as 'costs of and incidental to the proceedings'. On the contrary, it seems to me clear that they are not. They are the costs incurred in pursuing a valid method of alternative dispute resolution ... Both the course of the mediation itself and the reasons for its unsuccessful outcome are privileged matters known only to the parties. As a matter of general principle, therefore, I do not believe that the costs incurred in respect of such a procedure are recoverable ..."
The Judge went on to concede, however, that it was "much easier to see why" the cost of post-litigation mediations might be recoverable: there was greater proximity to the proceedings and on that footing, a mediation could well be regarded as 'negotiations with a view to settlement' (and so, recoverable under the Costs Practice Direction.)
Practical implications
In light of Feeney and now Lobster Group, some forward thinking is called for before signing up to the standardised provision about costs in any mediation agreement. Is this a pre-action mediation or one taking place after the issue of proceedings?
If you think that you might end up paying out after the mediation (with any settlement to include a contribution to your opponent's costs) it will probably be in your interests to stick with the default wording.
Alternatively, particularly if you are the claimant, it may be a good idea to legislate for what happens in the event of the mediation failing. This can be done by an explicit amendment to the agreement, providing for the costs of the mediation to be regarded as included as part and parcel of the costs of any subsequent Court action.
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