ADR and building disputes

Under the Civil Procedure Rules, litigants are expected to give serious consideration to whether their dispute can realistically be resolved out of court. The Court of Appeal has given recent indications that a party who unreasonably refuses to attempt to settle a dispute by mediation may be penalised by an adverse costs order. The Court of Appeal has now re-affirmed that position in Burchell v Bullard [2005] EWCA Civ 358, a case which involved a small building dispute.

To view the article in full please see below:

Full Article

The dispute that gave rise to the litigation was, in many ways, unremarkable. A married couple engaged the services of a builder to perform renovations and extensions to their home. The builder submitted claims for payment, as the work was performed. The first two of those claims were paid. But the builder's third payment claim was not. The owners refused to pay because, in their view, the builder's work was shoddy, and a substantial amount of money would be required to rectify it.

The dispute between the builder and the owners crystallised into litigation. The builder sued for payment for work performed, for slightly under £20,000. The owners counterclaimed for the cost of rectifying the defective works, and other matters, which they contended were worth in the order of £100,000.

The case was heard initially in the County Court, where the judge allowed the builder's claim for around £18,000, and allowed the owners' counterclaim to the extent of some £14,000 (plus interest and VAT). The net result was that the builder was entitled to recover around £5,000 from the owner. Thus, expert witnesses had been called, solicitors and counsel instructed, and expensive litigation was prosecuted with a five-day hearing – when the truth was that only £5K was at stake. The legal fees for both parties were in the order of £185K. The Court of Appeal described this disproportion as "horrific".

What made matters worse, and what attracted the scrutiny and ire of the Court of Appeal, was that very early in the dispute – well before litigation had been commenced – the builder had offered to try to settle the dispute by way of mediation, but the home owners had rejected this offer out-of-hand, with the only explanation proffered being that the issues in the case were too complex for mediation.

The starting point in awarding legal costs in legal proceedings is, in broad terms, that the unsuccessful party is to pay the successful party's costs. Put in legal phraseology, this is usually described under the rubric that "costs follow the event".

Here, the builder sued the owners, and succeeded substantially on his claim (recovering £18,000 or so, against a £20,000 claim). The trial judge awarded the builder the costs of his claim. The owners had also met with success in their counterclaim against the builder, but their success was relatively limited (i.e. they recovered around 15% of the value of their claim). Nevertheless, the partial success of the home owners could be said to justify the view that they ought to be paid the costs of their counterclaim, and that is what the judge ordered.

The trial judge's decision on costs was successfully appealed by the builder to the Court of Appeal. The builder contended that the approach taken by the trial judge to the award of costs was incorrect. The trial judge had incorrectly limited himself by adopting a rigid "costs follow the event" approach, and by doing so he failed to recognise that he had a broad discretion in awarding costs, including the ability to make a single award of costs to the builder for a proportion of its total costs (as opposed to making separate costs orders for each party's respective claim).

The builder's arguments found favour with the Court of Appeal, who allowed the appeal, and among other things awarded the builder 60% of his total legal costs, with the owners being required to bear all of their own costs. The Court held that the trial judge should have placed greater emphasis on the fact that the home owners were only marginally successful in their counterclaim, compared to the total amount which they claimed. The Court of Appeal also placed great emphasis on the way the home owners had conducted themselves, both before and during the litigation. Of particular importance was the fact the owners had never made an offer to settle the dispute, and moreover they had unreasonably refused to participate in a mediation which was suggested by the builder. On this last point, the Court had regard to the landmark decision of the Court of Appeal in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002 (Law-Now, 12.5.2004), where it was held that the reasonableness or not of a litigant's refusal to participate in ADR would be judged by having regard to, among other things, (a) the nature of the dispute; (b) the merits of the case; (c) whether the costs of the ADR would be disproportionately high; and (d) whether the ADR had a reasonable prospect of success.

When considering these four matters, Ward LJ (with whom Rix LJ agreed) was scathing of the owners' conduct, holding:

• "a small building dispute is par excellence the kind of dispute which…lends itself to ADR";

• "the merits of the case favoured mediation. The [owners] behaved unreasonably in believing, if they did, that their case was so watertight that they need not engage in attempts to settle. They were counterclaiming almost as much to remedy some defective work as they had contracted to pay for the whole stipulated work. There was clearly room for give and take. The stated reason for refusing mediation that the matter was too complex for mediation is plain nonsense";

• "the costs of ADR would have been a drop in the ocean compared with the fortune that has been spent on litigation"; and

• "the way in which [the builder] modestly presented his claim and readily admitted many of the defects, allied with the finding that he was transparently honest and more than ready to admit where he was wrong and to shoulder responsibility for it augered well for mediation. The [builder] has satisfied me that mediation would have had a reasonable prospect of success. The [owners] cannot rely on their own obstinacy to assert that mediation had no reasonable prospect of doing so".

Despite these findings on appeal, the Court did not impose a costs sanction against the owners for their conduct. The primary reason for not doing so (and one senses that it was a close thing) was that the offer to mediate, and the subsequent refusal, occurred at a time (i.e. 2001) before strong judicial pronouncements were given by the Court of Appeal (from 2002 onwards) as to the importance of ADR under the Civil Procedure Rules, and that costs sanctions may apply against litigants who unreasonably refuse to participate in ADR. The present position was summarised by Ward LJ, in remarks made directly to the legal profession, but which are necessarily of importance to those in the building industry:

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 03/05/2005.