Conduct at mediation and its impact on costs assessed by the courts

In two recent cases (7th Earl of Malmesbury and others v Strutt & Parker [2008] EWHC 424 (QB) and Nigel Witham Ltd v Robert Smith and others [No.2] [2008]EWHC 12 (TCC)) the High Court has reviewed and sanctioned an extension of the Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 criteria beyond cases concerning mere refusals to mediate.

What Halsey decided

• Depriving a successful party of some of its costs on the ground that it refused to mediate is an exception
   
• An unreasonable refusal to mediate should be assessed by reference to:
  •  the nature of the dispute and the merits of the case
     
  • whether other settlement methods have been attempted
     
  • whether the cost of mediation would have been disproportionately high
     
  • whether there would have been delay to the trial if mediation had been undertaken
     
  • whether the mediation had a reasonable prospect of success
     
  • the encouragement of the court (this may of itself be demonstrative of an unreasonable refusal to mediate)

7th Earl of Malmesbury

The claimant alleged that the defendant was negligent in negotiating leases on its behalf. No mediation took place before the liability trial (although there was a without prejudice meeting of the various parties' solicitors). The claimant established overall liability of the defendant, but quantum issues were deferred. A mediation took place before the quantum trial but a settlement was not reached. The court awarded the claimant £915,139. The costs of the action were high (£5.38m across all parties).

Decision on Costs

The parties surprisingly agreed to waive privilege over their without prejudice communications on the issue of costs. Judge Jack was therefore able to review in some detail the conduct of the parties at the without prejudice meeting and the mediation.

The defendant argued that the claimant should be treated as the unsuccessful party because it recovered only a small fraction of that originally claimed (around £100m). The defendant also argued that the claimant's unreasonable conduct in relation to the without prejudice meeting and the mediation should be taken into account when making costs orders.

As regards the without prejudice meeting, it was intended that a mediation would follow this but it did not. The judge found that the failure to mediate was due to the attitudes taken by both parties and so it was not open to either party to claim that the failure to mediate should be taken into account on costs. Although not explicitly stated, the judge appeared to be applying Halsey.

As regards the mediation that took place prior to the quantum trial, the judge found that although the highest figure for damages put forward openly by the claimant at the time of the mediation was £5.3m, the claimant offered to accept £9m plus 80% of its costs at the mediation. The judge found that this was "plainly unrealistic and unreasonable. Had they made an offer which better reflected their true position, the mediation might have succeeded". The court found that the figure advanced at the mediation was overstated, assumed that the claimant would be entirely successful in relation to every head of damage and that certain issues on liability would be found in the claimant's favour on appeal.

Judge Jack acknowledged that the courts had not yet considered the conduct of parties at mediation when deciding costs orders. He found the current facts analogous to an unreasonable refusal to mediate under Halsey and ordered that the claimant's costs be reduced by 20%.

Nigel Witham Ltd

This case concerned building renovations undertaken by the claimant on two hotels owned by the defendants. The work was delayed and relations broke down between the parties culminating in the claimant issuing proceedings for unpaid fees. The defendants submitted that the claimant had been overpaid. A judicial settlement conference took place shortly before the trial but was unsuccessful. The defendants were eventually awarded £1,320.08 at trial, taking into account the claim and counterclaim.

Decision on costs

Judge Coulson QC found that an adverse costs order might be made against a successful party if it mediated but delayed unreasonably in doing so. The court recognised that the Halsey principles might apply in an "exceptional case" where mediation was very late and had little chance of success and if the successful party unreasonably delayed in consenting to mediation. On the facts the court held that nothing suggested that the defendants had unreasonably delayed mediation, particularly given that the claimant had stalled in particularising its claim. Further, even had the defendants consented to mediation earlier, the court was not persuaded that it would have achieved a settlement.

Comment

The 7th Earl of Malmesbury is unusual in that the judge found himself free to examine the conduct of the parties at mediation. Parties may choose to waive privilege in a bid to establish the Halsey criteria, but this case serves as a warning to exercise great caution before doing so. It could well have the opposite effect on costs, particularly if aggressive settlement offers are made at the mediation.

The refusal to mediate before the liability trial involved a straightforward consideration of the conduct of the parties in refusing mediation, applying Halsey. Judge Jack concluded that there was no unreasonable conduct on either side. As regards the mediation before the quantum trial, the judge recognised that he was interpreting Halsey in a novel way, and he did not actually apply the Halsey criteria to the facts. Given the criteria are predicated on a refusal to mediate, this is unsurprising as the majority of the criteria are not applicable. One analysis is that Judge Jack was guided by the spirit of Halsey to assess the conduct of the parties pursuant to CPR 44.3. This confers wide discretion on the court and obliges it, when assessing costs, to have regard to the conduct of the parties. Conduct includes the manner in which a party has pursued or defended its case, and whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue. As such, although this case purports to extend the applicability of Halsey, Judge Jack perhaps merely found Halsey useful to decide the issue of conduct under CPR 44.3.

Nigel Witham Ltd illustrates the tension between claimants proposing early mediation and defendants delaying it until they know the case against them. In exceptional cases that delay may of itself amount to unreasonable conduct attracting costs sanctions. It is expected that judges will only elect to impose costs sanctions in cases where the delay is on its face wholly unreasonable. Deciding when it is right to mediate can be difficult. The judge found that "a premature mediation simply wastes time" but "delay in any mediation until after full particulars and documents have been exchanged can mean that the costs which have been incurred up to that point themselves become the principal obstacle to a successful mediation". While recognising this tension, there are often more reasons to mediate early than delay where heavy costs are being incurred. The lack of particularity in the claim (which caused the defendants to delay in this case) could have been flushed out at a mediation, perhaps with the result that the legal costs would not have dwarfed the sums eventually recovered.