UK: Mediation And Costs Sanction: Further Court Guidance

Introduction

Litigation can be a very expensive and time consuming process that can be a real drain on a party's resources. In some cases, the costs of fighting litigation and recovery of those costs can become as important to a party as winning the claim. Mediation is generally seen as a successful method of resolving disputes cheaply and quickly. The Courts are very keen to encourage parties to mediate disputes and often penalise those who refuse an offer of mediation. However, a failed mediation is expensive for both parties and can be a real distraction for the parties. In recent cases, the Court have reviewed the circumstances where a party may legitimately refuse to mediate.

Background

The general rule when determining who should pay the costs of litigation is that the losing party should pay the victorious party's costs. However, the Court retains a broad discretion to reduce the amount of costs a victorious party can recover from the losing party or, in some cases, make a costs award against the victorious party to penalise behaviour that is deemed unreasonable. One factor that the Court is likely to take into account is whether the parties attempted to settle their disputes through mediation. A mediation is a meeting between the parties where they are encouraged to discuss their dispute on a confidential basis with the assistance of an independent third party (the mediator) to see if a deal can be done to settle the case without the need to go to Court. The mediator's role is to assist in these settlement discussions, to test the strength of the parties' legal positions and to build common ground between the parties so that a settlement can be achieved. The use of mediation to try to resolve disputes has received strong judicial approval and there have been a number of cases where Judges have penalised parties that have refused to attend a mediation by not awarding them all of their costs of the litigation or even making a costs order against them.

Recent Updates

However, recent case law demonstrates that it should not be assumed that a refusal to mediate will automatically result in a costs sanction against the refusing party. In an article in May 2012, we reported on the Court of Appeal's decision in Swain Mason –v- Mills & Reeve (A Firm) (2012), which can be found here. In the Swain Mason case, the Court of Appeal recognised that there were circumstances when a party should not be penalised in costs for refusing an offer of mediation such as where the refusing party reasonably believed that it had a very strong case. The recent decision in ADS Aerospace Ltd v EMS Global Tracking Ltd (2012) is a further example where the Court is prepared to review the circumstances surrounding a refusal to mediate and consider whether the refusing party has acted unreasonably and should be penalised in costs as a result.

The Claimant (C) brought a claim for over $16 million in damages for alleged breach of an exclusive distribution agreement by the Defendant (D). At trial in July 2012, the Judge found in favour of D on all the key issues. As a result, D claimed its costs, which were approximately £877,000, of defending the proceedings.

Decision on Costs

In the subsequent hearing to determine what costs order should be made, the Judge considered the various efforts the parties had made to resolve the dispute other than through trial. The following events were of particular relevance:

• D's solicitors had opened settlement negotiations on 2 March 2012. C's solicitors had declined to enter into any negotiations until witness statements had at least been exchanged and possibly expert evidence as well.  
• D's solicitors made various efforts to enter into settlement negotiations with C's solicitors throughout April and also made a settlement offer of £50,000.
• C's solicitors rejected that offer on 31 May 2012 and instead proposed a mediation for week commencing 11 June 2012.  
• D's solicitors rejected this offer of mediation due to the trial commencing on 2 July 2012 and the fact that it was clear that C was not prepared to settle for substantially less than its $16,000,000 claim.
• The parties made settlement offers in June 2012. C offered to settle for £4,246,000 whereas D was only prepared to offer £100,000.

D accepted that C was entitled to its costs of successfully defending the claim in accordance with the general rule but that these costs should be substantially reduced because of D's rejection of C's offer of mediation. However, the Court held that D had not acted unreasonably in rejecting mediation and should not be penalised in costs for the following reasons:

• D had made repeated efforts to engage in settlement discussions as far back as 2 March 2012 and C had shown no interest in engaging in such discussions until 31 May 2012;
• It was clear from the parties' settlement offers in June 2012 that C believed that it was entitled to substantial compensation. D did not accept this view and it was unlikely that a mediator would be able to change these views sufficiently to bring about a settlement.
• D had remained open to the possibility of Without Prejudice negotiations throughout.
• The offer of mediation had come only a few weeks before trial. To prepare for a mediation would have been a significant distraction when the parties needed to focus on preparing for the trial.
• D was entitled to take the view that it had a strong case on the merits of the case and the Judgment had shown that this belief was reasonable.

The Court awarded D its costs to be assessed on the standard basis and further ordered C to make a substantial interim payment in respect of these costs.

Conclusion

The Court has a wide discretion in awarding costs and, as the ruling in ADS Aerospace shows, the Court is likely to take into account the parties' conduct throughout the whole process. Refusing an offer to mediate is still a big decision to make, but as recent cases show, this should not prevent a party to a dispute declining to mediate where it has consistently acted reasonably in the proceedings, and the offer to mediate is made late in the day with little prospects of success

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.