Developments in mediation

The Civil Procedure Rules (CPR) were substantially revised over a decade ago. The courts now emphasise to parties that they must embrace Alternative Dispute Resolution (ADR), including mediation, in order to resolve disputes in a cost effective manner. The overriding objective at CPR Part 1 confirms that the court’s case management duties include, “encouraging the parties to use an alternative dispute resolution procedure if the Court considers that appropriate and facilitating the use of such procedure.”

The courts now regularly incorporate a window into the procedural timetable so that disputing parties can attempt to compromise claims at an early and cost effective stage, by way of without prejudice settlement discussions. CPR Part 26 even allows the court to stay proceedings to facilitate ADR. Failure by a party to consider the merits of mediating may result in adverse costs sanctions being awarded against it even if ultimately it succeeds in proving its case at trial.

The Cross-Border Mediation (EU Directive) Regulations 2011, SI 2011/1133 seek to ensure that the principles of mediation are embraced in (often costly) cross-border disputes. It is anticipated that this legislation will also have a percolating effect on the way that parties handle domestic disputes as it further emphasises the need for them to embrace ADR.

A summary of the key decisions relating to ADR is provided below. The recent decision in PGF II SA v OMFS Co 1 Ltd [2013] EWCA Civ 1288 (”PGF” - see below) extends the principles set down in the leading case of Halsey v Milton Keynes General NHS Trust (2004).

In Halsey, the Court of Appeal (CoA) established the principle that a successful party that unreasonably refuses to mediate is at risk of having its costs, usually awarded in its favour following judgment, substantially reduced. The extent of any penalty will depend upon:

• The relevant facts of each particular case
• The nature of the dispute
• Whether ADR methods (aside from mediation – such as without prejudice discussions) occurred.
• The likely costs of the proposed ADR.
• Whether, ADR, had it taken place, would have been successful in compromising the claim.

Mediation is more often than not undertaken on a confidential basis. However, the case of James Carleton, Earl of Malmesbury & Others v Strutt & Parker (A Partnership) [2008] focuses on issues arising from the conduct of the parties during the course of ADR in that dispute.

The claim, valued at c. £90 million, focused on alleged negligence following the leasing of land used by Bournemouth International Airport for car parking facilities. At the conclusion of the quantum assessment, the court valued the claim at just shy of £1m plus interest. Based on this heavily discounted award, the defendant contended that the claimant’s costs ought also to be heavily reduced.

When deciding on the proportion of costs to be awarded, the court looked at the conduct of both parties before and during the mediation. Interestingly, the parties agreed to waive the privilege which normally exists when engaging in without prejudice communications. This waiver included the parties’ discussions at mediation.

In particular, the court looked at the following facts:

• The defendant was found liable in February 2007. The court found that damages were to be awarded on the basis of diminution in value rather than, as contended by the claimant, loss of income. The date for assessment of damages was fixed for October 2007.
• The claimant’s solicitors refused to mediate unless there was a without prejudice meeting held between the solicitors prior to mediation. At that meeting, the claimant’s solicitors stated that the claimant’s lowest figure was £70m. The defendant declined to propose a counter offer, no doubt concluding (correctly as it came to pass) that the offer was vastly over valued.
• At the subsequent mediation in October 2007, the claimant put forward its best offer of £9m plus 80% of its costs; the defendant offered £1m inclusive of interest with each party bearing its own costs.

The court held that the claimant’s proposals were, “plainly unrealistic and unreasonable,” and elected to severely discount the claimant’s costs stating that had the claimant better reflected the true position, the mediation might have succeeded.

Conversely in Nigel Witham Ltd v Smith & Isaacs (No.2) [2008] the court was asked to penalise the successful party in costs as it only agreed to mediate at a late procedural stage and when a large proportion of the costs had already been incurred. The court refused, citing that ADR had in fact taken place between the parties and it doubted whether the claim would have been resolved had such a forum taken place at an earlier stage.

The court accepted that it is not always easy to judge when the best time for parties to attempt mediation (or other forms of ADR) was and that the considerations can vary between claimant and defendant. The judge stated that: “the trick in many cases is to identify the happy medium; the point when the detail of the claim and the response are known to both sides, but before the costs that have been incurred in reaching that stage are so great that a settlement is no longer possible.”

The very recent Court of Appeal (CoA) decision in PGF concluded that a clear failure to respond to a request to mediate was unreasonable immaterial of whether, in the defendant’s mind, there was good reason to refuse to engage in ADR. The court applied The Jackson ADR Handbook (ed Blake, Browne and Sime) (2013), para 11.56 general rule that a party’s decision not to respond to a reasonable request to mediate was unreasonable immaterial of whether it was an outright refusal, a refusal to engage in a particular form of ADR suggested, or at the particular time suggested.

In PGF, the defendant unsuccessfully appealed the decision of the court preventing them from recovering some of their costs in the action following the claimant’s belated acceptance of the defendant’s Part 36 offer. The court decided that the claimant had discharged its burden of proof in showing that there was a reasonable prospect that this matter could have been resolved at mediation. On that basis, it was held that the defendant had acted unreasonably in failing to respond to the claimant’s request to mediate which had actually been made after the defendant’s Part 36 offer).

Keoghs’ comment

• ADR is now a route to settlement which the parties can ill-afford to disregard. The difficulty is judging the best time to engage in ADR. In certain circumstances, parties may face the wrath of the court and potential adverse cost sanctions if they consent to mediation at a very late stage and when the majority of the costs of the action have been incurred. Clearly, failing to engage with your counterpart in respect of why mediation would not best serve your client is now, following the decision in PGF, frowned upon by the courts.
• Lord Justice Briggs in PGF explained that, when electing not to engage in mediation, the declining party ought to:
  • a) Not ignore an offer to engage in ADR;
  • b) Respond promptly in writing, giving clear and full reasons why ADR is not appropriate at the stage, based if possible on the Halsey guidelines;
  • c) Raise with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR, together with consideration of how that shortage might be overcome;
  • d) Not close off ADR of any kind, and for all time, in case some other method other than that proposed, or ADR at some later date, might prove to be worth pursuing.
• When engaging in mediation, the parties must maintain commercial realism and adopt a reasonable approach to compromise.
• The Earl of Malmesbury case concluded that a party which adopts an unfeasible stance at a mediation resulting in its failure is in fact no different to a party who unreasonably fails to mediate. Parties must seek to mediate and, when doing so, attend in good faith.
• ADR discussions ought to remain privileged. There seems little benefit to a successful party agreeing to waive privilege. To do so permits the court the opportunity to examine a party’s conduct (as well as any notes made during the course of the ADR) and makes it vulnerable to an adverse costs order if the court decides that its conduct during the ADR was inappropriate.