Mediation - The Effect on Costs in Legal Proceedings

© Daniel Atkinson 2002 13 October 2002

Practice Note

ADR and particularly Mediation is an important part of the process of resolving disputes.  The Courts in UK have embraced ADR through the Civil Procedure Rules.  The refusal of a party to consider ADR may affect the measure of costs and in some cases the award of costs at all.  In construction the Pre-Action Protocol for the Construction and Engineering Disputes applies.

The introduction of the Civil Procedure Rules in court proceedings has allowed Judges to case manage the process of dispute resolution more effectively.  There has been a shift of emphasis to early consideration of ADR and particularly mediation to resolve disputes.  Pre-Action Protocols have been introduced in a number of areas of the law.  In construction the protocol is the "Pre-Action Protocol for Construction and Engineering Disputes" and applies to all construction and engineering disputes (including professional negligence claims against architects, engineers and quantity surveyors) - paragraph 1.1.

There have been a number of recent decisions which demonstrate the willingness of the Court not to award costs in the normal way if the winning party does not take the opportunity of alternative dispute resolution, where this is appropriate. Three cases are described below.

The first case is a building case decided in March 2000, in which the more favourable measure of costs was awarded due to the behaviour of the other party. In Paul Thomas Construction Limited v Damian Hyland and Jackie Power (2000) TCC Judge Wilcox had stated at a hearing in which applications by Paul Thomas Construction had been dismissed, that he required justification of the conduct of Paul Thomas Construction in issuing proceedings as he considered that it might not be appropriate. He heard the issue at a further adjourned hearing.

Judge Wilcox observed that Paul Thomas Construction had adopted a heavy-handed approach. It was very much at odds with the TCC ethos that ran through the CPR. Hyland and Power reminded Paul Thomas Construction of their duty in relation to the protocol practice direction, and in particular paragraph 4 of the protocol. Judge Wilcox observed that it had no effect upon restraining the keenness and aggressive stance that was adopted by Paul Thomas Construction.

Judge Wilcox held that the conduct of Paul Thomas Construction was exceedingly heavy-handed. They had been uncooperative and were clearly in breach of the protocol practice direction and in particular paragraph 4. He held that it was wholly unnecessary to commence this litigation. It was wholly unreasonable. It was clear that there could have been and should have been explored alternative dispute resolution. That may include sensible discussions between the parties not necessarily involving a third party. There was in those terms some culpability in this case. He held that indemnity costs were warranted.

The second case is a decision of the Court of Appeal in February 2002. In Susan Dunnett v Railtrack plc (2002) CA Susan Dunnet’s appeal against the first instance decision was dismissed. Railtrack requested payment of its costs and in the usual course of events these would normally be awarded. When the judge at first instance had given his decision he had advised Susan Dunnett to explore the possibility of Alternative Dispute Resolution to "get shot of this case as soon as possible". Susan Dunnett had indicated she was willing to do so if Railtrack agreed. When Susan Dunnett referred the suggestion to Railtrack they turned it down flat. They were not even willing to consider it.

Lord Justice Brook observed that this was a case, at least before trial, when a real effort should have been made by way of alternative dispute resolution to see if the matter could be satisfactorily resolved by an experienced mediator, without the parties having to incur the heavy legal costs of contesting the matter at trial.

Lord Justice Brooke made a significant statement on the nature of mediation and the role of Mediators. He stated that skilled mediators were now able to achieve results satisfactory to both parties in many cases which were quite beyond the power of lawyers and courts to achieve.

Lord Justice Brooke emphasised the duty of lawyers in advising their clients of the overall objective. If they turn down out of hand the chance of alternative dispute resolution when suggested by the court they may have to face uncomfortable costs consequence.

Lord Justice Brooke then gave judgment refusing to award costs to Railtrack. He held that in the particular circumstances of the case, given the refusal of Railtrack to contemplate alternative dispute resolution at a stage before the costs of the appeal started to flow, it was not appropriate to take into account the offers that were made. The appropriate order on the appeal is no order as to costs.

The third case decided in May 2002 demonstrates the limits of the decision in Dunnett. In Hurst v Leeming (2002) Mr Hurst sued Mr Leeming for negligence. Mr Hurst, a solicitor, had failed in his claims against his former partners in a firm. He had failed at first instance, at Court of Appeal and in the House of Lords. Orders for costs were made against him. The failure in those proceedings led to his bankruptcy. Mr Hurst’s solicitors had instructed Mr Leeming QC. Mr Justice Lightman and Mr Hurst during Mr Hurst’s opening both concluded that the action had no merit and must be dismissed. That left the issue of the costs of the action.

Mr. Leeming would normally be entitled to his costs. However, Mr Hurst argued that no such order should be made because before and after the commencement of proceedings Mr Hurst invited Mr Leeming to proceed to mediation, but Mr Leeming refused.

Mr Justice Lightman observed that the professional negligence pre-action protocol laid down that in proceedings for professional negligence, if one party offered to proceed to mediation, the other party, if he refused, should state his reasons. He held that implicit in that protocol, and explicit in two decisions of the Court of Appeal, Cowl v Plvmouth City Council and Dunnett v Railtrack, is the proposition that a party who refuses to proceed to mediation without good and sufficient reasons may be penalised for that refusal and, most particularly, in respect of costs.

Mr Justice Lightman held that the critical factor in this case was whether, objectively viewed, a mediation had any real prospect of success. If mediation can have no real prospect of success a party may, with impunity, refuse to proceed to mediation on this ground.

Mr Justice Lightman held that, quite exceptionally, Mr. Leeming was justified in taking the view that mediation was not appropriate because it had no realistic prospect of success. On the material before the court (as on the material before Mr. Leeming) it was plain that Mr. Hurst has been so seriously disturbed by the tragic course of events resulting from the dissolution of the partnership. His judgment in respect of matters concerning the partnership and partnership action, and the conduct of that action on his behalf was seriously disturbed. He was a person obsessed with the injustice which he considered had been perpetrated on him and was incapable of a balanced evaluation of the facts. Accordingly Mr Leeming reasonably and fairly took the perfectly justifiable view on the facts that, by reason of the character and attitude of Mr Hurst, mediation had no real prospect of getting anywhere.

Mr Justice Lightman emphasised the exceptional nature of the case and then awarded costs in favour of Mr Leeming.

In Halsey v Milton Keynes General NHS Trust [2004] [2004] EWCA Civ 576 the Court of Appeal listed the factors that could be relevant in deciding whether a party had acted unreasonably in refusing to agree to ADR. The factors included the nature of the dispute, the merits of the case, the extent to which other settlement methods had been attempted, whether the costs of ADR would be disproportionately high, whether any delay in setting up and attending the ADR would have been prejudicial and whether the ADR had a reasonable prospect of success. Where a successful party had refused to agree to ADR despite the court's encouragement, that was a factor that the court would take into account when deciding whether his refusal was unreasonable.

In Burchell v Bullard [2005] CA BLR 330 the Court of Appeal observed that Halsey had made plain not only the high rate of a successful outcome achieved by mediation but also its established importance as a track to a just result running parallel with that of the court system. It was also observed that paragraph 5.4 of the Pre-Action Protocol for Construction and Engineering Disputes expressly required the parties to consider at a pre-action meeting whether some form of ADR would be more suitable than litigation.