The courts can sanction parties who unreasonably refuse to mediate their dispute or who fail to mediate where it is appropriate. So why do some parties still plough on with litigation or arbitration proceedings? In this article, we review a recent example of the court's support for the mediation process and summarise the incentives for disputing parties to mediate. We then take a look at some of the reasons parties commonly use to justify a refusal to mediate and offer some suggestions to help parties reconsider.

Thakkar v. Patel – another pro-mediation case

In Thakkar v. Patel [2017] EWCA Civ 117, the Court of Appeal issued a severe costs sanction to a party for dithering about whether to mediate their dispute.

The parties had each rejected settlement offers and the litigation proceedings were put on hold (stayed) to allow negotiations and mediation to take place. Both parties were willing to mediate initially. However, when the claimant's attempts to get the defendants to mediate failed, they lost confidence in the alternative dispute resolution (ADR) process and carried on with the court proceedings.

The matter went to trial and each party was successful to some degree in their respective claim/counterclaim. The trial judge assessed the parties' conduct, including their offers to settle and attempts to mediate, and ordered the defendants to pay 75 per cent of the claimant's costs of the claim. This was a severe sanction given the result and the defendants appealed.

At the costs appeal hearing, Jackson LJ had to consider the effect of a settlement offer made under Civil Procedure Rule (CPR) Part 36 (CPR36) that had been withdrawn and the consequences of a failure to mediate. In this article, we deal with the latter.

Jackson LJ found that the trial judge was correct to take into account the parties' failure to mediate and place most (but not all) of the blame for that failure on the defendants. Both sides had initially expressed a willingness to mediate but, while the claimants had actively pursued a mediation, the defendants had dragged their feet and delayed.

Jackson LJ dismissed the defendants' appeal and upheld the costs penalty against them for failing to mediate. In his view, the case had been suitable for mediation on the grounds that: there was a real prospect that mediation would have achieved a result and avoided the trial; the dispute was about money only; the two parties were not far apart; and their costs had far exceeded the amount in issue. The costs order was tough but within the proper ambit of the trial judge's discretion: it was not so severe that the Court of Appeal should intervene.

The court's message: embrace mediation. Just get on with it

In a useful summary, Jackson LJ said:

"The message which this court sent out in [PGF II SA v. OMFS Company 1 Limited [2013] EWCA (Civ) 1288; [2014] 1 WLR 1386] was that to remain silent in the face of an offer to mediate is, absent exceptional circumstances, unreasonable conduct meriting a costs sanction, even in cases where mediation is unlikely to succeed.

The message which the court sends out in [Thakkar] is that in a case where bilateral negotiations fail but mediation is obviously appropriate, it behoves both parties to get on with it. If one party frustrates the process by delaying and dragging its feet for no good reason, that will merit a costs sanction."

Jackson LJ's decision leaves little room for misinterpretation. Dragging your feet without good reason is just as risky as an outright refusal to mediate: costs sanctions are likely.

Thakkar is another example of the courts' willingness to sanction parties who do not engage in mediation. Litigation must be a last resort. So why are some parties still holding back?

A decade or so ago, parties might have been suspicious of the relative novelty of mediation and ignorant of its process and benefits. In addition, sadly, some lawyers might have been reluctant to propose ADR processes fearing its popularity would affect their fee income from acting for litigants.

We have come a long way – particularly in the last few years since the Jackson reforms were introduced into the Civil Procedure Rules (CPR). The concept of mediation and other ADR processes are now essential elements of dispute resolution. While mediation is not compulsory in this jurisdiction (some would add "yet"), it has become an established alternative to court that should be tried and exhausted before finally resorting to a trial of the issues. (Wright v. Michael Wright (Supplies) Ltd and another [2013] EWCA Civ 234). ADR as a concept is enshrined in the CPR in a number of ways:

  • the CPR Pre-Action Protocols set out pre-action processes that parties must comply with before starting proceedings (or risk sanctions or the proceedings being put on hold to allow for ADR);
  • the Construction and Engineering Pre-Action Protocol (the Protocol) requires the parties to exchange information and to meet at least once before starting proceedings. Holding a mediation ensures the parties' compliance with this requirement;
  • the Protocol also refers to the ADR Handbook, the brainchild of Jackson LJ, which was first published in 2013 and has been endorsed by the courts (for example, in PGF II SA v. OMFS Co 1 Ltd [2013] EWCA Civ 1288). Its practical guidance on all aspects of ADR is frequently relied on as authoritative by the courts; and
  • the Technology and Construction Guide (third revision, second edition) requires the court to encourage the parties to use ADR and to facilitate its use (confirming that, in most cases, ADR will take the form of mediation).

What sanctions can the court impose?

The courts have wide discretion on what costs orders to make during the proceedings and after the trial. The normal rule is that the successful party will recover its costs (although bear in mind that even successful parties are unlikely to recover all their costs).

When deciding on costs, the court will take into consideration a number of factors including a party's failure to mediate. A successful party who unreasonably refused to mediate might not recover all or a part of its costs, or might have to pay some of the unsuccessful party's costs. An unsuccessful party who has refused to mediate might be ordered to pay the claimant's costs on an indemnity basis – in other words, costs that are not proportionate to the sum in dispute/recovered.

Any reduction in costs recovery is a significant sanction – one that can obliterate any sums recovered on the claim/counterclaim. The threat of this sanction should not be taken lightly.

Quite apart from the risk of costs sanctions for those who do not comply with the Protocol and ignore or refuse ADR, the mediation process in particular offers wider, commercial benefits and the scope for parties to resolve a dispute in practical ways not available in court. In mediation, parties can meet, present, explain, complain, discuss, reflect, argue and let off steam on the issues – all within a neutral, confidential environment. Other benefits include the following:

  • the mediator is an independent third party who facilitates the dispute using substantial expertise and insight to help the parties narrow the issues in dispute. Should there be no settlement, the parties will normally leave the mediation with a better understanding of the issues behind the dispute. This extra knowledge and insight into the other party's thinking might well lead to a later settlement and avoid the expense of future court proceedings;
  • the introduction of costs management and costs budgeting has further limited the costs that parties can recover in litigation – even if successful at trial. The sheer expense of going to court should in itself make earlier settlement through ADR an attractive option for most;
  • court fees for issuing proceedings have risen substantially. An early settlement through mediation before commencing proceedings can avoid this additional expense;
  • disputes can affect commercial and personal reputations. Some parties have a commercial need for a dispute to remain private. Others value privacy for its own sake. Mediation offers such parties a chance to resolve their issues in a confidential environment: most documents and discussions relating to the mediation and the process itself will be kept private. The parties can participate knowing that their position will remain private to themselves and the other party.
  • litigation and arbitration proceedings can leave commercial relationships in tatters. The mediation process can maintain or restore and in some cases even strengthen business relationships;
  • mediation also offers scope for more practical settlements  unlike litigation and arbitration. For example, as well as or instead of a payment, a party might agree to carry out snagging or complete some works. Or a party might simply want an apology. The court does not have power to make such orders. Proceedings are a drastic step to take if you do not achieve what you want at the end of it.

Parties must have good reason to refuse mediation

Parties who refuse mediation and end up in court will later have to show they had good reason not to mediate. Whether a failure to mediate is reasonable will depend on multiple factors including: the nature of the dispute, the merits and the extent to which the parties have tried other methods to settle; whether the ADR costs are disproportionately high; and whether the time needed to set up and attend a mediation would have proved prejudicial (for example, if it would have affected the listed start date of the trial).

The judge will assess the reasons for refusal in the context of the facts as a whole: a failure to engage in mediation, even if unreasonable, will not automatically result in a costs penalty. (See Gore v. Naheed & Anor [2017] EWCA Civ 369 (24 May 2017).) In Gore, the judge accepted the claimant's view that a mediation would have had no realistic prospect of succeeding and would only have added to the costs. The case raised quite complex questions of law which made it unsuitable for mediation – and on those facts, the judge did not penalise the claimant for not mediating its dispute.

The complex legal issues in the Gore decision might set it apart from most cases and, for the most part, parties will need to be convinced they are being reasonable before rejecting mediation. In other cases, for example, the courts have dismissed excuses such as "the matter was too complex" (Burchell v. Bullard [2005] EWCA Civ 358) or "the parties are too far apart in their claim" (Garritt-Critchley and others v. Ronnan and another [2014] EWHC 1774 (Ch)).

So despite all these incentives to mediate, why do some disputing parties continue to resist or ignore mediation?

We've set out below some responses we've come across when suggesting ADR either to clients or to the other party in a dispute. We have added a few comments and suggestions to consider if you feel minded to give similar responses.

Why should we mediate? It's not compulsory … and we've got a good claim.

  • While mediation is not compulsory, the threat of costs sanctions should make parties consider the financial effect of a potential sanction on their business. The costs of mediation are considerably less than going to court. While the initial outlay might seem expensive, it might well prove to have been a cheap alternative in hindsight.
  • Parties who believe firmly in the strength of their claims might regard mediation as backing down or showing weakness. They often see no reason why they should back down. This is short sighted. Both parties can learn more about the dispute in a mediation. If your claim is strong, this will become clearer to the other side during a mediation and a settlement should become more likely.

I missed that item when pricing the specification. If I ignore their requests for the documents, it might go away ... Besides, I don't want the MD to find out …

  • Disputes are often a result of errors, misjudgements or accidents. Dealing with the consequences can be challenging, awkward and/or embarrassing. Some might not realise the significance of smaller issues until they have multiplied.
  • Finding a solution involves recognising there is a problem, taking responsibility and owning up to mistakes, then being practical and creative about finding a solution. Some are naturally equipped to take a proactive approach. Others prefer to stick their heads in the sand or are too stressed to deal with it.
  • Mistakes and errors should be addressed as soon as possible to reduce the potentially considerable strain on the individual[s] involved and, if appropriate, to encourage them to get involved in resolving the issue.
  • An employer needs to exercise a certain degree of compassion when handling another's mistakes. Those who feel they need to hide their mistakes could well be under significant personal or work-related stress.
  • A culture of blame will not encourage people to admit mistakes straight away. Review company policies and attitudes.
  • Additional training might also be appropriate to avoid future issues.
  • In some cases, disciplinary action might be needed. In this case, care should be taken to follow the appropriate employment policies and procedures.

I refuse to be in the same room as that man …

  • Personality issues are common in disputes – indeed many disputes boil down to two individuals' failure or reluctance to resolve a small problem as soon as it arises.
  • Personality issues could be dealt with by taking the key people (potentially) responsible for the issues (or the clash) out of the settlement discussions. Involve other, possibly more senior members of staff who can deal objectively with the dispute.

I'm too busy trying to meet the completion date / dealing with the disruption claim …, I'll deal with that tomorrow (or the next day, or the next …

  • When a claim is made and a dispute becomes formal, requests for information and action from your lawyer must be complied with as soon as possible. If proceedings have already commenced, court deadlines are almost impossible to move – and even if the court agrees to move dates, the change will often incur additional costs liabilities.
  • There is always another urgent job to be done during any project. Review commitments with your team and employer. Make time for meeting requests relating to a potential mediation and court proceedings as quickly as possible.
  • Keep lines of communication between you, your team and your lawyers open. Keep up to date. If a delay is likely or a problem arises, let the legal team know as soon as possible.

I've finished that job – I need to get on and win more work …

  • Dealing with a claim is never comfortable. It eats into management time, might entail late working and often feels counterproductive. However, ignoring requests to provide information or refusing to face the issues head on at a mediation might only serve to increase the time commitment later on (if the matter goes to court) – as well as incurring more expense.

I don't know enough about the claim and don't know where to look for the documents.

  • Unfortunately a lack of information will rarely be a good reason to refuse mediation. It might initially justify a delay in agreeing to mediation. However, the lack of knowledge should prompt you to ask for more information so that you can better assess your position and the other side's claim or defence. The "lack of knowledge" is only a reasonable response for a short while.
  • Set aside time to collate the information and record the action you take.
  • Keep the lines of communication open with your legal team – ensure you keep them up to date with how the search is progressing.
  • If ex-employees hold the required information, seek their help.

I know it's [partly] our fault but we can't risk a settlement at the mediation. With our current cash flow, we can't afford to pay up. If we're forced to pay up, we'll be insolvent …

  • Not dealing with a dispute and allowing it to proceed towards trial will only exacerbate your financial problems: all you are doing is increasing your liability for legal costs and potentially damaging your business reputation. After judgment and a costs order, insolvency might be your only option (if it has not already happened by then).
  • If cash flow is the issue, remember that a mediation need not result in an order to pay a specific sum by way of financial settlement as in court proceedings.
  • A mediation gives a financially strapped party scope to negotiate for repayment by instalments or in kind (for example, by carrying out remedial works). It might also lead to more work.

Every situation must be considered on its facts and, naturally, the above suggestions might not assist every party in a dispute. However, regardless of the difficulties inherent in trying ADR processes, such as mediation, parties would be wise to listen to Jackson LJ's advice in Thakkar to embrace mediation and "just get on with it".