Recovery of costs is always an important issue. Severe cost sanctions can be ordered by the court if a party unreasonably refuses to engage in alternative dispute resolution (ADR) processes. Mediation, as a form of ADR, has been around for some time. The costs of preparing can be substantial. This fact alone can be put forward as an excuse not to mediate. It’s a double edged sword: if you don’t mediate you could be penalised in costs and if you do mediate then, potentially, if the matter does not settle, you could incur irrecoverable costs.

But that need not necessarily be the case. In a recent appeal of a cost judge’s decision in National Westminster Bank v Feeney, the court confirmed that costs arising from a mediation do fall within the definition of recoverable costs of litigation. However, this is only the case if it is not contrary to any provision relating to costs contained in the mediation agreement or in the subsequent settlement agreement.

The facts

The parties attempted to settle their dispute by mediation. The mediation agreement contained the standard provision that each party would pay its own legal costs of the mediation and would bear the mediation costs, such as the costs of the mediator and venue, jointly. The mediation was unsuccessful although the parties did later reach a negotiated settlement which included a provision that the claimant pay the costs of the defendants’ counterclaim on a standard basis, to be assessed if not agreed.

The defendants included in their costs of the litigation:

  • the half share of the mediation costs, being the costs of the mediator, and
  • the legal costs of preparing for and attending at the mediation.

The confusion!

The cost judge, at first instance, decided that although the legal costs were not recoverable (because the mediation agreement provided that each party would bear their own legal costs), the parties’ agreement to share equally the mediation costs meant that whoever ultimately was awarded their costs of the litigation could recover their half share from the other party. This came as a surprise to many who had viewed the wording of this standard provision (each party bear its own costs) as stipulating the parties’ clear agreement that these costs were to be borne equally, irrespective of the ultimate outcome of the mediation or any subsequent court proceedings. Moreover, if the parties’ intention had been that these joint costs would subsequently become part of the litigation costs, then the mediation agreement should have specifically provided for this.

The appeal

The appeal judge confirmed that, on the facts of this case, neither the mediation fees nor the legal costs were recoverable by the defendants, due to the specific wording of the mediation agreement and the very general form of wording used in the subsequent settlement agreement. However, the following principles arise from the decision:

  • Both the legal costs and mediation costs incurred in a mediation are costs that, prima facie, are capable of being included in the costs of the litigation as they fall within the definition of recoverable costs of litigation under the Civil Procedure Rules.
  • However, when determining what are the recoverable costs in the litigation, in each case, the terms of the mediation agreement are binding on the parties unless altered by the wording of the settlement order.
  • A provision in a settlement order stipulating that one party pays the other’s costs, to be assessed if not agreed, is not of itself sufficient to amount to an agreement altering the terms of a mediation agreement. Specific wording is required.

So, for example, if the mediation agreement stipulated that each party is to bear its own legal costs, for those costs to be recovered as litigation costs the settlement agreement would have to provide that the paying party in the litigation pays the recovering party’s costs, with a specific reference in the settlement agreement to “including the legal costs of the mediation”.

Lessons to learn

If you are engaging in mediation, or any other form of ADR, you should discuss and agree with the other party:

  • Who is going to pay the legal costs;
  • Who is going to pay the mediation costs; and
  • Whether the legal costs, mediation costs or both are subsequently to become part of the litigation costs if the mediation is unsuccessful.

Record the agreement to the above in the mediation agreement. Most mediation providers should cover the issue in a standard mediation agreement. If it is the intention of the parties that the costs should become part of the litigation costs then this must be specifically stated in the mediation agreement, otherwise it will be assumed that these costs are excluded from the litigation costs.

If, at the time of the settlement agreement, you want to agree a different cost provision from that set out in the mediation agreement, the new provisions must be specifically stated in the terms of the settlement order.

If your mediation agreement is silent on the issue of costs, or you do not have a mediation agreement, the safest option is to include provision specifically in your settlement order in relation to these costs. If you say nothing, those costs will become part of the recoverable costs of the litigation, to be paid by the losing party, subject to any order by the court to the contrary.

An agreement permitting subsequent recovery of the legal costs of the mediation or the mediation costs, or both, may help to focus the minds of those attending the mediation to work towards a resolution