UK: Unreasonable Refusal To Mediate Without Adverse Cost Consequences: A Departure From Halsey And PGF?

Northrop Grumman Mission Systems Europe Limited v BAE Systems (Al Diriyah C4I) Limited [2014] EWHC 3148 (TCC) ("NGM v BAE")

In a recent update, consideration was given to Halsey principles relating to the costs consequences of an unreasonable refusal to mediate and the 'modest extension' to those principles in PGF ( click here). This issue is one that has recently been back before the court.

In NGM v BAE the court did not depart from the general rule on costs in circumstances where one of the parties had unreasonably refused to mediate; concluding that, having taken all factors into account (in accordance with CPR 44.2), there was no reason to do so.

Facts

Part 8 proceedings were commenced by NGM in October 2013. Prior to issue, NGM made several offers to meet with BAE with a view to resolving the dispute; initially by way of communication between in-house legal teams and, latterly, through a formal request to mediate made by NGM's solicitors.

These requests were rejected by BAE. In their evidence to the court, BAE confirmed that detailed consideration was given by them to each ADR request, but that they had concluded that mediation did not have a prospect of leading to a resolution of the dispute; it was, in their eyes, a matter of contractual interpretation which led to an 'all or nothing' outcome and was therefore not suited to mediation. BAE's solicitors also set out, in response to NGM, that it would not be appropriate to meet or mediate prior to the provision of further information by NGM.

In January 2014 BAE made a without prejudice save as to costs offer of a drop hands. The offer was stated to be non-negotiable and was rejected by NGM.

Judgment

The Judge gave judgment for BAE. The issue of costs then fell to be determined.

In reaching judgment, Ramsey J applied the Halsey principles to the facts in this case. These principles, and the court's findings in relation to each, can be summarised as follows:

(i) Nature of the dispute: This was a case where the central issue was one of contractual interpretation, with the sum of £3m riding on it. Nonetheless, in such cases a "skilled mediator can assist the parties in resolving the dispute by finding a solution to disputes which each party would regard as incapable of being settled and would be unable to settle without such assistance" (at paragraph 57).

(ii) Merits of the case: BAE considered, reasonably as was borne out by the judgment of the court, that it had a strong case. Whilst a party's reasonable belief that it has a watertight case may be a sufficient justification for refusing to mediate, parties should not ignore the "positive effect that mediation can have in resolving disputes even if the claims have no merit" (at paragraph 59). In this case, BAE's reasonable view was "a factor which provides some but limited justification for not mediating" (emphasis added, paragraph 60).

(iii) Extent to which other settlement methods were attempted: the request to mediate and the 'posturing' by the parties was, in the eyes of the court, a classic situation where a mediator could have knocked heads and "cut through the positions of the parties" (paragraph 62). The court did also have a mind to the drop hands settlement offer made by BAE.

(iv) Costs of ADR: The court accepted that the costs associated with a mediation may well have been in the region of £40,000; in a dispute where the legal costs of both parties' totalled £500,000, and where the claim was for £3m, it could not be said that the ADR costs were unreasonably high.

(v) Prejudicial delay caused by ADR: there would have been no prejudicial delay in this case, and so this head was not a relevant consideration.

(vi) Prospects of successful ADR: the court, in looking at the case of two parties with entrenched positions and ever-souring relationships, considered it a "classic case" where a mediator could have brought the parties together.

Having considered these principles the court concluded that, despite its reasonable belief that it had a strong case, BAE's failure to mediate was unreasonable; this, as we know from Halsey and PGF, would normally result adverse costs consequences. Not here – the court holding that, as set out in CPR 44.2(4), a refusal to mediate was but one of the factors a court must take into account when considering costs. Another such factor was "any admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply" (CPR 44.2(4)(c)).

NGM's refusal to accept BAE's drop hands offer (an admissible offer - which NGM did not beat at trial) was clearly a relevant factor; had it been accepted, costs plainly would have been saved. Whilst the making of the offer could not justify BAE's refusal to mediate, it was nonetheless conduct that the court could take into account when exercising its discretion on costs.

In essence, BAE's unreasonable refusal to mediate and NGM's failure to accept an offer that it did not beat at trial, served so as to cancel each other out – the court's rationale that the refusal to mediate and the failure to accept the offer both meant that the parties lost the opportunity to resolve the case without a hearing. The court therefore made a standard costs order, namely that NGM, as the losing party, pay BAE its costs on the standard basis.

Comment

With a glance only as to the costs ruling, the case may be seen as a weakening by the courts of its stance on an unreasonable refusal to mediate (as had been clearly set out in Halsey and PGF). On closer inspection, this is not so – the court finding that BAE had been unreasonable in refusing to mediate despite this being a case where: (i) it was seen as an 'all or nothing' dispute based on a discrete contractual interpretation; (ii) the winning party had correctly identified the strength of its position; and (iii) the party refusing mediation could demonstrate a detailed and measured consideration as to its refusal.

In avoiding an adverse costs order in this case, BAE was able to point to its drop hands offer, and NGM's rejection of it, as conduct which restored a level of equality to the court's costs balancing exercise.

The case highlights the importance, not only of ADR, but also of the other factors set out in CPR 44.2(4) on which the court can place weight in deciding the costs order it is to make. Further, it serves to add some further meat on the bones of the Halsey principles, thereby assisting parties (and their legal teams) in identifying those cases (which, from the PGF and NGM judgments will be rare) in which would be reasonable to refuse to mediate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.