Mediation continues to grow in popularity as an alternative form of dispute resolution. More and more people are acknowledging the potential benefits of trying to achieve a negotiated early settlement rather than fighting it out in Court. Indeed, even the Courts themselves recognise the benefits of mediation and have the power to impose costs penalties on a party who wins at trial but has refused to take up an earlier offer to mediate.

In a case decided earlier this month the unsuccessful Claimant sought to reduce the Defendant’s entitlement to its costs by 50% as it claimed the Defendant had unreasonably refused its offers to mediate. The Court held that it would have ordered the costs’ reduction except that the Claimant had not accepted a “drop hands” settlement offer previously made by the Defendant and had not beaten that offer at trial.

The case of Northrop Grumman Mission Sytems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd [2014] EWHC 3148 (TCC) concerned the construction of a licence agreement between the parties. The Court found in favour of the Defendant. The Claimant accepted that the Defendant was entitled to its costs on the standard basis but submitted that the costs should be reduced by 50% having regard to the Defendant’s unreasonable refusal to mediate.

The Court re-visited the factors set out by the Court of Appeal in Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, [2004] 1 W.L.R. 3002 that should be taken into account in considering whether a refusal to mediate was reasonable. Those factors are:  

1. Did a party fairly believe that the nature of the case precluded its suitability for mediation?
2. Did a party reasonably believe their case was ‘watertight’?
3.  To what extent were other settlement methods attempted?
4.  Would the costs of mediation be disproportionately high?
5. Would engaging in mediation cause prejudicial delay?
6. What were the prospects of mediation being successful?

Although the Court accepted that the Defendant had acted reasonably in considering it had a strong case, this provided it with only limited justification for not mediating. The Court emphasised the independent perspective a mediator can bring, even to claims that are considered by each side to be very strong. Likewise, the Court dismissed the Defendant’s submission that the costs of mediation would have been disproportionate. The costs of mediation would likely have been in the region of £40,000 whereas the overall costs of the legal proceedings were £500,000 (for a claim for £3 million). Overall, the Defendant had acted unreasonably in refusing to mediate.

However, the Defendant had previously made a drop hands offer that the Claimant had failed to beat at trial. Although the offer was not made in accordance with Part 36 of the Civil Procedure Rules it was, nevertheless, an offer that the Court was entitled to take into account. The Court stated that the Defendant’s refusal to mediate had deprived the parties of the opportunity to settle the case at an earlier stage but so had the Claimant’s refusal to accept the drop hands offer. The fair and just outcome was that neither party’s conduct should affect the general rule that the loser pay the winner’s costs.

Comment

The official line is that the Courts cannot force a party to mediate. However, they have been showing their disapproval of a refusal to mediate for several years now and this case is the latest in a long line. The message is loud and clear – refuse to mediate at your peril. What is interesting about this case is that the Court has looked at the conduct of both parties and taken other settlement offers into account.

So, are the Courts acting unreasonably by effectively forcing parties to mediate? At Ortolan we are big fans of mediation. 8 out of 10 mediations supposedly settle on the day or shortly after - that’s a high success rate.

Mediation has obvious advantages in that disputes can be settled at a much earlier stage and, generally, at less expense than litigation. It also has less obvious advantages. It can help to preserve an on-going relationship between the parties in a way that litigation cannot. It also allows for a much greater range of outcomes. Litigation usually involves a winner and a loser and the Courts are very limited in the types of orders that they can make. Mediation, on the other hand, results in an agreement negotiated by the parties rather than a decision imposed upon them by a Judge. That is often more beneficial and satisfying to both parties, particularly in relation to a commercial dispute.