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21 October 2014
In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2)(1) the High Court found that the defendant had been unreasonable in its refusal to mediate. However, as the defendant had made a without prejudice save as to costs offer that the claimant had failed to improve at trial, the usual rules on costs applied. The defendant was awarded costs on the standard basis with no reduction.
The parties were major participants in the defence industry and had a longstanding commercial relationship. The dispute centred on the construction of a licence agreement. Claimant Northrop Grumman Mission Systems Europe Ltd (NGM) had issued proceedings for a declaration as to the entitlement of defendant BAE Systems (Al Diriyah C4I) Ltd to terminate the agreement for convenience under certain provisions of the licence. At trial the judge upheld BAE's contention that on the true construction of the relevant contractual documents it was entitled to terminate the agreement for convenience. The decision considered in this update concerns the costs consequences of that judgment.
The claimant accepted in principle that the defendant was entitled to costs to be assessed on the standard basis, but argued that those costs should be reduced by 50% because of the defendant's unreasonable refusal to mediate.
During the course of the litigation an attempt was made to settle the dispute. A meeting was held between the parties. There was some without prejudice correspondence and the defendant offered to settle "without prejudice save as to costs". However, the claimant also invited the defendant to mediate on several occasions, but the defendant refused. It gave the following reasons for its refusal (among others):
When considering costs and exercising its discretion under Civil Procedure Rule 44.2, the court has regard to all of the circumstances, including the conduct of the parties before as well as during the proceedings. This includes conduct in which a party refuses to agree to alternative dispute resolution.(2) The question before the court was whether the defendant's refusal to mediate was unreasonable.
Defendant's refusal to mediate: was it unreasonable?
In deciding whether the defendant's refusal to mediate was unreasonable, the judge considered the factors identified in Halsey v Milton Keynes General NHS Trust.
Nature of dispute
The judge stated that this was not a point of construction which would have affected the commercial relationship between the parties. The parties were concerned with the construction issue for the purpose of resolving the financial claim. The judge's view was that in all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution which the parties would otherwise be unable to settle without such assistance.
Merits of case
The judge concluded that the defendant's view that it had a strong case was reasonable and was a factor which provided limited justification for not mediating. He considered the Court of Appeal decisions in Halsey and in Daniels v Commissioner of Police for the Metropolis,(3) in which the court indicated that where a party faces an unfounded claim and wishes to contest that claim rather than make a payment to buy it off, the court should be slow to characterise that conduct as unreasonable. However, the judge considered these cases alongside the Jackson Alternative Dispute Resolution Handbook, which suggests that this approach ignores the positive effect that mediation can have in resolving disputes, even if the claims have no merit. The judge concluded that this reason (the strong merits) would not on its own be sufficient for the defendant to have refused mediation.
Extent to which other settlement methods had been attempted
The judge noted that in this case there was some attempt to settle the dispute by other means. Overall, the judge considered this factor to be neutral or marginally in the defendant's favour in assessing its refusal to mediate.
Whether mediation costs were disproportionately high
The judge concluded that the costs of the proposed alternative dispute resolution could not be said to be disproportionately high. The judge agreed that the costs of mediation were likely to be in the region of £40,000, which were not in his view disproportionate when compared with the overall costs of approximately £500,000 incurred by both parties and the approximately £3 million value of the claim. Mediation would at the very least have saved some of the costs of the correspondence between the parties.
Whether delay in setting up or attending mediation would have been prejudicial
The judge considered possible delay, but concluded that it was irrelevant as mediation could have taken place without affecting the litigation.
Whether mediation had a reasonable prospect of success
The judge disagreed with the defendant's views on the prospects of mediation resolving the dispute and described this case as a "classic case" in which a mediator could have brought the parties together and where there was a reasonable prospect of success in mediating. When assessing the prospects of success, he stated that the court cannot look merely at the position taken by the parties (ie, that the defendant did not want to pay anything and the claimant would not settle without payment). This is the position in many successful mediations and ignores the skill of the mediator in finding solutions which have not been considered. He pointed to the published success rate of mediation showing that generally mediation is likely to be successful.(4)
The judge concluded that this was a case which was susceptible to mediation. He stated that where a party to a dispute in which there are reasonable prospects of successful resolution by mediation rejects mediation on grounds that are not strong enough to justify not mediating, such conduct will generally be unreasonable. Taking into account all of the factors in Halsey, the judge decided that the defendant had been unreasonable in its refusal to mediate.
Defendant's without prejudice save as to costs letter
In addition to the defendant's refusal to mediate under Civil Procedure Rule 44.2(4)(c), one of the circumstances to be taken into account in deciding what order to make in relation to costs includes "any admissible offer to settle made by a party which is drawn to the court's attention, and which is not an offer to which costs consequences under Part 36 apply". The judge said that while the existence of the defendant's without prejudice save as to costs letter did not justify the defendant's refusal to mediate, it was independently a relevant factor that the defendant had made an offer which the claimant was not successful in bettering. The claimant's conduct in not accepting the offer also had to be taken into account.
The judge concluded that neither party's conduct (refusal to mediate and failure to accept the without prejudice save as to costs offer) should be taken into account to modify the general rule on costs. As the defendant was the winning party, it was awarded costs on a standard basis with no reduction for refusing to mediate.
There is no presumption that a party to a dispute should agree to mediation or another form of alternative dispute resolution. The court should not compel parties to mediate. However, this case clearly demonstrates the importance with which the court views mediation, even in a case involving points of construction where the possible outcomes at trial are binary. A party to litigation that refuses an invitation to mediate should be prepared to justify to the court why it does not consider mediation appropriate. However, what is also interesting in this case is that even if a defendant's conduct in refusing to mediate is deemed unreasonable, it will not necessarily be decisive on the question of costs where other factors relevant to the issue of costs are present.
For further information on this topic please contact Geraldine Elliott or Alexis Hogan at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(2) See Halsey v Milton Keynes General NHS Trust  EWCA Civ 576 and PGF II SA v OMFS Company 1 Limited  EWCA Civ 1288.
(3)  EWCA Civ 1312.
(4) See the Jackson Alternative Dispute Resolution Handbook.
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