Another reminder that parties who refuse to mediate do so at their peril...

14 October 2014

You have a strong claim or defence; either you are right or the opposing party is - there is no middle ground and there can only be one winner; mediation will cost too much; it will delay proceedings and it won't be successful anyway!

If you think these reasons are good enough to allow you to say no to mediation, think again. Anyone who refuses to engage in the mediation process will do so at their peril.

The recent case of Northop Grumman Mission Systems Europe Limited v BAE Systems (AL Diriyah) Limited [2014] provides yet another illustration - if one were needed - that a request to engage in mediation should be given serious consideration and should only be refused in exceptional circumstances.

Background

Northop Grumman Mission Systems Europe Limited (NGM) claimed some £3 million from BAE as a result of BAE obtaining deployment licences at a price to which it was not properly entitled by purporting to terminate a Licensing Agreement.

BAE denied any sums were due to NGM, alleging that it was entitled to and had exercised a termination for convenience clause and, although that clause would allow NGM to recover its termination costs, no such costs had been incurred in reality. The dispute essentially boiled down to contractual interpretation - whether there was a termination for convenience clause. £3 million depended on that interpretation.

The Technology and Construction Court gave judgment for BAE, holding that on a true construction of the Licence Agreement BAE was entitled to terminate that agreement under the provisions of the Enabling Agreement which governed the Licence Agreement.

The parties subsequently came back before the court on the issue of costs. NGM accepted that BAE was entitled to its costs to be assessed on the standard basis if not agreed, but argued the costs should be reduced by 50% as a result of BAE's unreasonable refusal to mediate the dispute.

Mr Justice Ramsey confirmed that, in considering costs and exercising its discretion under the Civil Procedure Rules (CPR) parts 44.2 (4) and (5), the court has to have regard to all the circumstances including the conduct of the parties before as well as during the proceedings. That conduct includes where a party refuses to agree to alternative dispute resolution.

Emphasis was placed on the importance of the six factors identified by the court of appeal in Halsey v Milton Keynes NHS Trust [2004] as being relevant in deciding whether a refusal to engage in mediation was reasonable. Taking each of these in turn Mr Justice Ramsey found as follows:

The nature of the dispute

Although the central issue in this case involved contractual interpretation, a skilled mediator could have assisted the parties in resolving the dispute.

The merits of the case

BAE did have a strong defence to the claims being made against it, although it was not a case that would have been suitable for summary judgment. It was a case where BAE reasonably believed it had a strong case, yet that 'reasonable view' only provided limited justification for not mediating.

The extent to which other settlement methods had been attempted

It was accepted that this was not a case where there was an offer to mediate and no response or where the parties did not have any communication with a view to settlement. BAE had confirmed that it was willing to pay termination costs to NGM, however, NGM faced difficulties in claiming the same level of termination costs as were being claimed for wrongful termination. BAE continued to ask for information that was not going to be produced and NGM continued to propose mediation. This was a classic situation where a mediator could have cut through the positions taken by the parties.

A without prejudice meeting took place between the parties and BAE made a without prejudice save as to costs offer to settle on the basis of no payment, with each party bearing its own costs. If this offer had been accepted, NGM would have been in a better position than it was following judgment in BAE's favour.

As a result, there was some attempt to settle the dispute by other means and this factor was therefore neutral or marginally in BAE's favour in assessing its refusal to mediate.

Whether the costs of ADR were disproportionately high

It was accepted that the costs of mediation may well have been in the region of £40,000, however, the overall costs incurred by the parties in litigating a dispute for £3 million amounted to some £500,000. On that basis, the court held the costs of ADR could not be said to be disproportionately high.

Whether any delay in setting up or attending the ADR would have been prejudicial

This was not a factor in this case - mediation could have taken place without affecting the litigation timetable.

Whether ADR had a reasonable prospect of success

The parties clearly had a commercial relationship. NGM felt aggrieved that BAE had terminated a contract for convenience when NGM had negotiated the Licence Agreement on the basis of an early commitment to buying licences at a lower price. BAE clearly felt that it had the right to terminate in circumstances where it no longer needed any licences. This was just the situation where a mediator could assist the parties in resolving the dispute and avoid wasted management time and soured relationships.

Many mediations are successful even where one party is intent on not paying anything and the other party will not settle without payment. Mediators have the ability to find middle ground by analysing with each party its expressed position and making it reflect on that and the other party's position. Mediators can help parties to find solutions which have not been considered. In this case, that could have included resolving the consequences of termination or finding future opportunities for the software or licence.

For these reasons, this was a dispute between parties where a mediated settlement would have been likely and there were therefore reasonable prospects of success.

Conclusion

Mr Justice Ramsey found that this was a case where the nature of the dispute was susceptible to mediation and where mediation had reasonable prospects of success. However, he also accepted that BAE reasonably considered that it had a strong case, which was proven by its success in the litigation. BAE's view of their claim did provide some justification for not mediating, however all other factors - taken together - meant that it was unreasonable for BAE not to participate in mediation.

While a decision that a party had unreasonably refused to engage in mediation would ordinarily mean that party would be penalised in costs, BAE was not subject to such cost penalties in this case. BAE had made a without prejudice save as to costs offer to NGM and CPR 44.2(4)(c) required that offer to be taken into account. The offer was not accepted by NGM, who then ultimately failed to do better than the offer at trial.

Mr Justice Ramsey held that the without prejudice offer made by BAE did not justify its refusal to mediate the dispute, however, NGM's conduct in not accepting the offer was similarly a matter to be taken into account. A refusal to mediate meant that the parties had lost the opportunity of resolving the dispute without the need for a hearing, but the same could be said of the failure to accept the offer.

As a result neither party's conduct was taken into account to modify the general rule on costs - NGM was ordered to pay BAE its costs to be assessed on the standard basis if not agreed. No reduction was made.

Comment

In this case BAE thought that they had a very strong case and the court accepted that it was reasonable for BAE to hold that view. However, that was not sufficient to amount to a reasonable refusal to mediate. Even though the case was in reality one concerning contractual interpretation, the court thought that it was still a case where a mediator could have helped the parties to find a way through their dispute.

Mr Justice Ramsey strongly endorsed the benefits of mediation and made reference to the Lord Justice Jackson's ADR Handbook, which clearly confirms the need for parties to seriously consider ADR. The recent cases of PGF II SA v OMFS Company 1 Limited [2013] and Phillip Garritt-Critchley & Others v Andrew Ronnan & Solarpower PV Limited [2014] also leave us in no doubt that arguing against mediation will be a difficult argument to win.

In PGF the Court of Appeal held that, as a general rule, failure to respond to an invitation to participate in mediation (or another ADR process) was unreasonable and the defendants were not entitled to their part 36 costs as a result.

In Garritt-Critchley the claimants were allowed to recover their costs on an indemnity basis as a result of the defendants' unreasonable refusals to mediate.

BAE were not penalised in costs in this case because of NGM's equally unreasonable refusal to accept the without prejudice offer made, which it subsequently failed to better. The two 'unreasonable' positions effectively cancelled each other out. However, the message coming from the courts could not be clearer. Any request to engage in mediation should be given serious consideration and refusing to mediate a dispute - even when a party reasonably believes it has a strong case and that mediation will not be successful because of that belief - is very likely to result in the refusing party being penalised in costs.

Mediation? As a general rule you should probably be saying okay...


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