Admissibility of without prejudice negotiations when ADR is refused

In the recent case of Reed Executive plc v Reed Business Information Ltd [2004] EWCA Civ 887 the Court of Appeal gave its first judgment on the issue of the costs consequences that result from a party’s refusal to mediate since the landmark ruling in Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 (see post). The case provides an illustration of how the principles set out in Halsey will be applied in practice and also affirms the rule that evidence of “without prejudice” negotiations will not be considered by the court on the question of costs unless both sides agree. Parties should therefore give careful consideration to whether their negotiations should be open or without prejudice as to costs.

Background

The latest hearing before the Court of Appeal followed its substantive judgment given on 3 March 2004. The Court of Appeal had allowed the defendants’ appeal from the first instance decision of Mr Justice Pumfrey on the liability issues in the proceedings, but the parties were unable to agree the consequential order to be made. A number of issues were therefore argued in the latest hearing. The main disagreement was about the correct costs order for both the appeal and the first instance hearing.

Although the claimants had had limited success in the proceedings, they contended that they should receive 70% of their costs of the first instance hearing and the appeal. The claimants relied upon the fact that they had shown a willingness to pursue ADR which, until shortly before the latest hearing, had been rejected out of hand by the defendants. The claimants contended that this stance was unreasonable in light of the Court of Appeal’s decision in Halsey and submitted that the defendants should be penalised in costs accordingly.

The defendants contended that they should receive 70% of their costs of the first instance hearing and all of their costs of their successful appeal. They denied that they had been unreasonable in refusing ADR and submitted that their attitude to mediation could not be fully justified without reference to the content of previous “without prejudice” negotiations between the parties but that the content of those negotiations was inadmissible. The claimants contended that the evidence of these negotiations was relevant and admissible on the issue of costs.

Issues

The following issues were considered by Jacob LJ, who gave the leading judgment in the Court of Appeal:

1. Could the court, following a judgment on liability, compel the parties in relation to issues of costs to disclose the detail of “without prejudice” negotiations?
2. Should the court’s order on costs reflect the fact that the defendants were not willing to pursue ADR after it was proposed by the claimants?

Disclosure of “without prejudice” negotiations

Jacob LJ considered the rule in Walker v Wilsher(1889) 23 QBD 335 which specified that:

“Letters or conversations written or declared to be “without prejudice” cannot be taken into consideration in determining whether there is good cause for depriving a successful litigant of costs.”

He held that Halsey had not affected this rule, referring to the fact that it was held in Halsey that:

“parties are entitled in ADR to adopt whatever position they wish, and if as a result the dispute is not settled, that is not a matter for the Court …[I]f the integrity and confidentiality of the process is to be respected the Court should not know, and therefore should not investigate, why the process did not result in agreement.”

Jacob LJ stated that party-to-party negotiations should be treated on the same basis and noted that the line between a third-party assisted ADR and party-to-party negotiations may be fuzzy. The court could not therefore order the disclosure of the detail of “without prejudice” negotiations when the question of costs came to be considered without the consent of all parties to those negotiations.

Jacob LJ acknowledged that the consequence of this was that in some cases the court would not be able to decide whether a party had been unreasonable in refusing to pursue mediation when determining issues of costs. However, Jacob LJ stated that this was not disastrous or damaging from the point of encouraging ADR. It was always open for either party to make open or Calderbank offers of ADR (offers expressed to be “without prejudice save as to costs”), such that the parties could debate the reasonableness or otherwise of pursuing ADR and then subsequently make this debate available to the court on the issue of costs.

Refusal to pursue ADR

Jacob LJ applied the principle enunciated in Halsey that if the court is to deviate from the general rule that costs should “follow the event”, the burden is on the unsuccessful party to demonstrate that the successful party has acted unreasonably in refusing to pursue ADR. On the facts of the case, Jacob LJ held that the refusal to mediate was not a relevant factor to be taken into account in the court’s decision on costs.

Jacob LJ stressed the importance of examining the facts surrounding the proposals of mediation made during the proceedings. The first proposal of ADR had only been made by the claimants following the first instance judgment, by which time the parties had already incurred a significant amount of costs. The claimants had also relied upon the defendants’ refusal of their invitation to make use of the Court of Appeal’s mediation scheme. However, Jacob LJ held that a refusal to mediate at this stage did not remotely show that the defendants had been unreasonable, noting that by this stage the claimants would have been negotiating from a position of considerable bargaining strength. Accordingly, Jacob LJ held that in the circumstances of such late proposals of ADR, it was entirely reasonable for the defendants to pursue their appeal rather than mediate the dispute.

Comment

The Court of Appeal ruling in Reed confirms that the principle that a party cannot rely on “without prejudice” communications in support of a submission that the opposing party has been unreasonable in refusing to pursue ADR remains good law post Halsey. Accordingly, parties should consider making offers of ADR and all communications in this regard on an open basis. Alternatively, the Calderbank formula of “without prejudice save as to costs” may be used. This applies particularly to the party urging ADR as the burden will be upon it to show the other party behaved unreasonably and it may not be possible to satisfy that burden on the openly available material. The party refusing ADR may also, however, wish to rely on this material to enable it to demonstrate to the court, if necessary, the reasonableness of the stance it adopted, especially against a background of the courts being in favour of ADR whenever appropriate.

The Court of Appeal ruling also provides an illustration of how the guidelines in Halsey should be applied in assessing whether a party has unreasonably refused to pursue ADR. Jacob LJ emphasised that the lateness of any proposal of ADR is a relevant factor. The ruling is therefore a further reminder to litigants and their advisers that they should give due consideration to ADR prior to or at least at an early stage of proceedings.