Be prepared to mediate or prepare to pay

In Garritt-Critchley¹ the High Court ordered that the defendants pay the claimants’ costs on an indemnity basis after a continuing and unreasonable failure to engage with mediation before then accepting a Part 36 offer late following trial.

Background

The dispute concerned an agreement for the issue of shares.

The claimants’ letter before claim dated 24 February 2012 stated that the value of the claim was £208,000, but explained that it was hoped that the issue of proceedings would be unnecessary as the claimants were willing to enter into an “appropriate form of ADR, such as mediation at the appropriate time.” The defendants were unreceptive to that offer to mediate, and the claim was issued on 6 July 2012.

The issue of settlement arose again when the parties filed their allocation questionnaires. In the defendants’ allocation questionnaire they made clear that they were unwilling to engage in any settlement activity and did  not want a mediation to be arranged by the court. The explanation given in the allocation questionnaire was that “the parties are too far apart at this stage”.

This position was queried by the claimants’ solicitors in correspondence. Again, they were rebuffed with the defendants’ solicitors stating that “we and our clients are well aware of the penalties the court might seek to impose if we are unreasonably found to refuse mediation, but we are confident that in a matter in which our clients are extremely confident of their position and do not consider there is any realistic prospect that your client will succeed, the rejection is entirely reasonable”.

Correspondence continued between the parties, with the claimants continuing to refer to the good sense in engaging in settlement negotiations, and the defendants maintaining that their confidence in the success of the defence made mediation inappropriate.

At the Case Management Conference on 28 May 2013, District Judge Khan gave directions to take the matter to trial. The judge made clear that the court considered it to be in the interests of the overriding objective that mediation be carried out. This position was reinforced by the unusual direction that any party refusing to attend mediation was required (shortly before the trial) to file in a sealed envelope a witness statement explaining the reasons for that refusal.

Two months before trial the claimants made a settlement offer under Part 36 of the Civil Procedure Rules in the sum of £10,000 plus their costs to-date. The period for accepting that offer expired without it being accepted. Instead, the defendants made a counter-offer (also under Part 36) that the claimants should discontinue the action and pay the defendants 75% of their costs.

The defendants’ counter-offer was not accepted by the claimants, but they maintained their openness to settlement discussions providing that the defendants were willing to engage in constructive negotiation (rather than inviting the claimants “simply to discontinue”).

The trial began on 14 January 2014 and took place over four days. In the window between the conclusion of trial and judgment being handed down, the defendants sought the claimants’ agreement to accept out of time the claimants’ Part 36 offer to pay £10,000 and all of the claimants’ costs.

Decision

A consequence of accepting a Part 36 offer outside the relevant period for acceptance (generally 21 days or more, specified in the offer) is that if the parties do not agree the liability for costs, the court will make an order.

The claimants asked the court to grant an order for indemnity costs (rather than the default position of costs on the standard basis) on the principal ground that the defendants had unreasonably failed to engage in mediation. The court, in considering this application, found the burden of proof lay on the claimants to show that the defendants had acted unreasonably.

The court described the underlying claim as being an “action of a fairly typical kind” in

which there was no great glut of authorities put before the court at trial. Instead it was essentially a question of fact, applying “well-known contractual principles”. A lot therefore turned upon the credibility of each parties’ witnesses, consideration of contemporaneous documentation and also the commercial sense of each side’s case.

In addition, there was an obvious sliding scale of damages if the claimants were successful and expert evidence was adduced in this regard. The range of possible awards “was really very considerable indeed” and this “was not an all or nothing case”.

Accordingly, this was, the court held, a “classic matter” for mediation or negotiation, with ample room for manoeuvre between the parties.

The court referred to the Court of Appeal judgment in Halsey²  as authority for the position that the circumstances in which a party might reasonably rule out mediation are exceptional, but may include where the party wished to:

• resolve a point of law;
• obtain a binding precedent; or
• obtain injunctive or other relief, essential to protecting its interests.

None of these types of factors applied here.

Instead, the defendants were found not to have approached the matter “in the correct way at all”. The defendants’ position was that they had reasonably refused mediation on  the basis that they were confident that no agreement would ever be reached. The court found that it was simply not realistic for someone in the defendants’ position to say that the odds were “so stacked in [their] favour that there is really no conceivable point in talking about settlement”. In such circumstances the court would expect to see an application for summary judgment. No such application was ever made.

The court also considered it irrelevant that there was a level of dislike and mistrust between the parties, which was unfortunately “very often the case” between parties in litigation. Despite that hostility, the claimants had been willing to mediate from the off. The court noted that removing the emotion and distrust between litigating parties is a prime example of where the skills of a mediator can be best deployed.

Finally, the defendants sought to rely on the decision in PGF II SA³ as evidence of their reasonable behaviour, in that they had not simply ignored the claimants’ offers to negotiate, but had responded promptly. This was, the court held, “neither here nor there”, the defendants having effectively closed off ADR.

On this basis, the court granted the order for indemnity costs. Importantly, the court specifically stated that it was not intending by  its judgment to discourage parties from the late acceptance of Part 36 offers. This case was “not about the late acceptance of an offer… it is about the unreasonable failure to engage in a mediation”.

Comment

It is difficult to imagine a case in which a party could more strongly be steered towards engaging in mediation or negotiation and yet remain so steadfastly in opposition to it. However, despite the exceptional facts of this case, it is of broad application.

It is, of course, not compulsory for parties to engage in mediation, but a party must consider it carefully, and if it will not engage in mediation, should be prepared to justify that exceptional stance clearly in line with the guidelines in Halsey.

This case clearly demonstrates the importance the court places on engaging in mediation, which extends to the communications relating to the process. In the context of a Part 36 settlement, it will likely increase the cost of settling a claim significantly if the other side’s costs are payable on an indemnity basis. More broadly, any party which fails reasonably to participate in mediation may well lose any usual or discretionary.