In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2)1, the  High Court found that the defendant had been unreasonable in its refusal to mediate. However, as the defendant had made a without prejudice save as to costs offer that the claimant had failed to improve at trial, the usual rules on costs applied. The defendant was awarded costs on the standard basis without any reduction.

Background

The parties were major participants in the defence industry and had a longstanding commercial relationship. The dispute centred on the construction of a licence agreement. The claimant, NGM, had issued proceedings for a declaration as to the entitlement of the defendant, BAE, to terminate the agreement for convenience under certain provisions of the licence. At trial the judge upheld BAE’s contention that on the true construction of the relevant contractual documents it was entitled to terminate the agreement for convenience. The decision considered in this article concerns the costs consequences of that  judgment.

The claimant accepted in principle that the defendant was entitled to costs to be assessed on the standard basis, but argued that those costs should be reduced by 50% because of the defendant’s unreasonable refusal to mediate.

Facts

During the course of the litigation there had been some attempt to settle the dispute. There had been a meeting between the parties. There was some without prejudice correspondence and the defendant had made an offer to settle “without prejudice save as to costs”. However, the claimant had also invited the defendant to mediate on several occasions but the defendant had refused. Its reasons for refusing included:

  • The nature of the dispute was not suitable for mediation. The dispute was about contractual interpretation. It was an “all or nothing” case
  • The defendant was confident of the merits of its case. As a result of legal advice received from solicitors and leading counsel, the defendant was confident of its legal position and thought that the mediation would only seek to put pressure on the defendant to settle a claim which it considered had no merit
  • The defendant did not consider that mediation would lead to resolution of the dispute. The claimant had been reluctant to provided information about its costs flowing from the termination prior to any suggested mediation. Further, the defendant was aware that the claimant was a successful company which could afford to  itigate and to lose, which meant that the claimant had no reason to settle the case for financial reasons

Decision

When considering costs and exercising its discretion under CPR 44.2, the court has regard to all the circumstances including the conduct of the parties before as well as during the proceedings. That conduct includes conduct by which a party refuses to agree to alternative dispute resolution (ADR): see Halsey v Milton Keynes General NHS Trust 2  and PGF II SA v OMFS Company 1 Limited3The question before the court was whether the defendant’s refusal to mediate was unreasonable.

Defendant’s refusal to mediate: was it unreasonable?

In deciding whether the defendant’s refusal to mediate was unreasonable, the judge considered the factors identified in Halsey.

The nature of the dispute

The judge stated that this was not a point of construction which would have affected the commercial relationship between the parties. The parties were concerned with the construction issue for the purpose of resolving the financial claim. The judge’s view was that in all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution to the dispute which the parties would otherwise be unable to settle without such assistance.

The merits of the case

The judge concluded that the defendant’s view that it had a strong case was reasonable and was a factor which provided some, limited, justification for not mediating. He considered the Court of Appeal decisions in Halsey and in Daniels v Commissioner of Police for the Metropolis4, where the court indicated that where a party faces an unfounded claim and wishes to contest that claim rather than make a payment to buy it off, the court should be slow to characterise that conduct as unreasonable. However, the judge considered these cases alongside the Jackson ADR Handbook, which suggests that this approach ignores the positive effect that mediation can have in resolving disputes even if the claims have no merit. The judge concluded that this reason (the strong merits) would not on its own be enough for the defendant to have refused mediation.

The extent to which other settlement methods had been attempted

The judge noted that in this case there was some attempt to settle the dispute by other means. Overall, the judge considered this factor to be neutral or marginally in the defendant’s favour in assessing its refusal to mediate.

Whether the costs of ADR were disproportionately high

The judge concluded that the costs of the proposed ADR could not be said to be disproportionately high. The judge agreed that the costs of mediation were likely to be in the region of £40k which were not in his view disproportionate when compared to the overall costs incurred by both parties of approximately £500k, and the value of the claim of approximately £3m. Mediation would, at the very least, have saved some of the costs of the correspondence between the parties.

Whether any delay in setting up or attending the ADR would have been prejudicial

The judge considered possible delay but concluded that it was not relevant as mediation could have taken place without affecting the litigation.

Whether ADR had a reasonable prospect of success

The judge disagreed with the defendant’s views on the prospects of mediation resolving the dispute and described this case as a “classic case” in which a mediator could have brought the parties together and where there was a reasonable prospect of success  in mediating. When assessing the prospects of success, he stated that the court cannot merely look at the position taken by the parties ie that the defendant did not want to pay anything and that the claimant would not settle without payment. This is the position in many successful mediations and ignores the skill of the mediator in finding solutions which have not been considered. He pointed to the published success rate of mediation (see the Jackson ADR Handbook) showing that generally mediation is likely to be successful.

Conclusion

The judge concluded that this was a case which was susceptible to mediation. He stated that where a party to a dispute, in which there are reasonable prospects of successfully resolving by mediation, rejects mediation on grounds which are not strong enough  to justify not mediating, then that conduct will generally be unreasonable. Taking into account all of the factors in Halsey the judge decided that the defendant had been unreasonable in its refusal to mediate.

Defendant’s without prejudice save as to costs letter

In addition to the defendant’s refusal to mediate under CPR 44.2(4)(c) one of the circumstances to be taken into account in deciding what order to make in relation to  costs includes “any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply”. The judge said that whilst the existence of the defendant’s “without prejudice save as to costs” letter did not justify the defendant’s refusal to mediate, it is independently a relevant factor that the defendant made an offer which the claimant was not successful in bettering. The claimant’s conduct in not accepting the offer also had to be taken into account.

The judge concluded that neither party’s conduct (refusal to mediate/failure to accept the “without prejudice save as to costs” offer) should be taken into account to modify the general rule on costs. As the defendant was the winning party, it was awarded costs on a standard basis without any reduction for refusing to mediate.

Comment

There is no presumption that a party to a dispute should agree to mediation or another form of ADR. The court should not compel parties to mediate. However, this case clearly demonstrates the importance with which the court views mediation, even in a case involving points of construction where the possible outcomes at trial are binary. A party to litigation who refuses an invitation to mediate should be prepared to justify to the court why it does not consider mediation to be appropriate. What is also interesting in this case, however, is that even if a defendant’s conduct in refusing to mediate is deemed to be unreasonable, it will not necessarily be decisive on the question of costs where other factors relevant to the issue of costs are present.