13 June 2012 #Dispute Resolution
There are many different ways that a dispute can be resolved other than through the Courts. Since the Civil Procedure Rules were implemented in 1999, there has been a strong emphasis on encouraging parties to try to settle their differences out of Court wherever possible. In particular, the Courts have encouraged parties to resolve their disputes through mediation. Mediation is a form of Alternative Dispute Resolution (ADR) involving an independent third party (the Mediator) whose role is to encourage the parties to discuss the relative strengths and weaknesses of their disputes and to explore possible settlement options to bring about a mutually acceptable resolution. Mediation has proved to be very effective in resolving disputes.
In some jurisdictions, such as the United States of America, mediation is mandatory in all but name and it is very difficult to take most disputes to trial without first attempting to mediate, irrespective of whether the parties wish to or not. However, the English approach has been slightly different since the Courts will encourage parties to mediate but will not force them to do so. Parties remain entitled to resolve matters through the Courts without trying to settle through mediation if they wish to but run the risk of being penalised in costs as a result.
The general rule in litigation is that the losing party pays the legal costs of the victorious party, although the Court has discretion to depart from this rule. There is considerable case law on how the Court’s discretion should be applied including the Court of Appeal’s decision in Halsey –v- Milton Keynes General NHS Trust (2004). As mentioned above, the Courts have incentivised parties to use ADR, particularly mediation, by penalising those that unreasonably refuse to do so in costs. This means that a party who wins its claim at trial may not be able to recover all of its costs from the other side if they are deemed to have unreasonably refused an offer of mediation. In extreme cases, the victorious party may even be ordered to pay some of the other side’s costs.
The recent case of Swain Mason –v- Mills & Reeve (A Firm) (2012) is an interesting example of the way that the Courts will deal with a refusal to mediate.
Background – Decision at First Instance
The Defendant was a law firm that successfully defended a professional negligence claim brought by several former clients. The Judge held in favour of the Defendant but only awarded it 50% of its costs in part because the Claimant had proposed mediation twice and the Defendant had refused all such offers on the basis that the claim was without merit. The Judge considered that the Defendant’s refusal to engage in mediation, irrespective of their view on the merits, was unreasonable.
The Court of Appeal decision
The Claimants appealed the decision on the merits and the Defendant cross appealed the costs decision to the Court of Appeal (CA). The CA dismissed the Claimant’s appeal and partially granted the Defendant’s appeal. The CA defended the Defendant’s right to refuse to mediate and held that where a party was reasonable in its belief that it had a very strong case, it should not be penalised for refusing to mediate the dispute. Although, it should be noted that the CA indicated that such circumstances would be quite rare in practice.
The Judges also took into account the likelihood that a mediation would have brought about a settlement and noted that shortly before trial the Claimants had made a Part 36 offer for £750,000 plus costs whereas the Defendant’s best offer throughout the proceedings was a “drop hands” offer. The CA held that since the parties were so far apart, the Judge at first instance was incorrect in deciding that mediation had a reasonable prospect of success and that the Defendants had acted unreasonably in refusing to mediate. The Court of Appeal varied the Costs Order and ordered the Claimant to pay 60% of the Defendant’s cost of defending the proceedings.
The case is significant because it demonstrates that it is not always unreasonable to refuse to mediate and underlines the English approach of seeking to encourage mediation where there is a reasonable prospect of achieving settlement in contrast to the American system where parties are effectively compelled to mediate. Nevertheless, it must be borne in mind that the Defendant still incurred a loss of 40% of the total costs of defending the claim. Even where a party is deemed to have been proved entirely correct on the merits, it is still frequently in the parties’ commercial interests to seek to resolve matters through mediation, rather than bear significant irrecoverable litigation costs.