Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C41) Ltd

[2014] EWHC [2955] (TCC)

In Part 8 proceedings Mr Justice Ramsey ruled in favour of BAE. In relation to costs NGM accepted the principle that BAE was entitled to its costs to be assessed on a standard basis if not agreed, but argued that those costs should be reduced by 50% by reason of BAE’s unreasonable refusal to mediate the dispute. Following the Halsey case, courts can (and do) penalise parties who are considered to have unreasonably refused a request to mediate.

NGM said that because of their long-standing and continuing commercial relationship, NGM approached BAE on several occasions at management level to try and resolve the dispute amicably but those efforts were “spurned”. NGM’s claim was about money and that whilst it was necessary to construe two agreements, the issue of interpretation did not alter the financial basis for the claim which made the case suitable for mediation.

BAE was convinced that if a mediation had taken place, the case would not have settled. The in-house lawyer commented that if he had thought there had been a realistic possibility of there being a settlement which would have plainly been in the legal and commercial interests of BAE, he would have strongly recommended it. BAE said they rejected mediation for proper and sensible reasons. The dispute was about contractual interpretation so that the outcome was “all or nothing” in that if NGM were right it would recover in excess of £3 million, but if it were wrong it would receive nothing. As a result of legal advice received from solicitors and leading counsel, BAE was confident of its legal position and was aware that NGM was a successful company which could afford to litigate and could afford to lose and that this meant that it had no reason to settle the case for financial reasons.

Each time NGM contacted BAE suggesting mediation, an assessment was made. On each occasion, BAE concluded that mediation did not have a prospect of leading to a resolution of  the dispute. BAE was not prepared to countenance paying a sum of money on the basis of the commercial relationship which, if anything, tended the other way. If BAE paid money on what it considered to be an unmeritorious claim, this might lead to other unmeritorious claims and may have wrongly provided NGM with the view that BAE was not prepared to defend itself in cases where it had strong grounds for doing so. BAE thought that the mediation had been suggested in order to put BAE under pressure to make a settlement payment with respect to a claim which BAE considered had no real prospect of success.

BAE therefore considered it unreasonable to expend resources on a mediation. Mr Justice Ramsey considered that this was a case like many others, where points of construction were major issues at  the centre of a financial claim. In all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution to disputes which each party would regard as incapable of being settled and would be unable to settle without such assistance.

In terms of the merits, this was a strong case by BAE. It was not a borderline case or one which was suitable for summary judgment. It was a case where BAE reasonably considered that it had a strong case. This provided some if limited justification for not mediating. This was not a case where there was an offer to mediate and no response or, where the parties did not have some communication with a view to settlement. There were for example, two occasions when attempts to settle were made and an exchange of “without prejudice save as to costs” offers. BAE offered to settle on the basis of no payment, with each party bearing their own costs. This was an offer which, if it had been accepted by NGM, would have put NGM in a better position than it now found itself in, in terms of the outcome of the hearing. NGM has received no payment and accepts that it will have to pay BAE 50% of its costs. This factor was neutral or marginally in BAE’s favour in its impact when assessing the refusal to mediate.

The costs of mediation may well have been of the order of £40k in comparison with the overall costs incurred by both parties which are said to total about £500k. The claim was for some £3m. The costs of ADR cannot be said to be disproportionately high. There were two parties who had a commercial relationship. One party, NGM, clearly felt aggrieved, while the other party, BAE, clearly felt that it had the right to act as it did. Therefore this was just the kind of situation where a mediator could assist the parties in resolving the dispute and avoiding wasted management time and soured relationships even if,because they were large commercial entities, the effect would not be so long-lasting.

The Judge therefore concluded that this was a case, the nature of which, was susceptible to mediation and where mediation had reasonable prospects of success. However, BAE reasonably considered that it had a strong case. On that basis was it unreasonable for BAE to reject NGM’s offer to mediate? The Judge concluded that it was. Whilst BAE’s view of their claim provided some justification for not mediating, other factors showed that it was unreasonable for BAE not to mediate the dispute. Where a party to a dispute, which has reasonable prospects of being successfully resolved by mediation, rejects mediation on grounds which are not strong enough to justify not mediating, then that conduct will generally be unreasonable. That was the position here.

However, the refusal to mediate was not the only factor at play here. There was a “without prejudice save as to costs” letter. The existence of the letter did not justify a refusal to mediate, but it was independently a relevant factor that BAE made an offer which NGM was not successful in bettering. NGM’s conduct in not accepting that offer was similarly a matter to be taken into account.

The refusal to mediate meant that the parties had lost the opportunity of resolving the case without a hearing. The failure to accept the offer equally meant that the parties had lost the opportunity of resolving the case without a hearing. Whilst mediation at an earlier stage might have avoided costs, if BAE had mediated even at a later stage, its conduct would not have been unreasonable. Therefore the fair and just outcome was that neither party’s conduct should be taken into account to modify what would otherwise be the general rule on costs.