This article was originally published in the November 2014 edition of Motor Finance

With many motor finance disputes, it may appear that there is a strong claim or defence; there is no middle ground and there can only be one winner. On that basis, you'd be forgiven for thinking it would be reasonable to refuse to mediate because it would be too costly, would delay proceedings and wouldn't be successful anyway. Think again!

The case of Northrop Grumman Mission Systems Europe Limited v BAE Systems (AL Diriyah) Limited [2014] provides further illustration that a request to engage in mediation must be given serious consideration and should only be refused in exceptional circumstances.

Background

The dispute between the parties boiled down to one of contractual interpretation – either there was a termination for convenience clause in an agreement governing the licensing agreement the parties had entered into, or there wasn't. £3 million depended on that interpretation.

The court found that BAE could terminate and no sums were due to Northrop. Being the successful party, BAE was entitled to its costs of the proceedings. Northrop argued that those costs should be reduced by 50 percent due to BAE's unreasonable refusal to mediate the dispute.

Applying existing case law, the court found that:

  • Although the central issue in this case involved contractual interpretation, a skilled mediator could have assisted the parties in resolving the dispute.
  • BAE did have a strong defence but that 'reasonable view' only provided limited justification for not mediating.
  • Other settlement methods had been attempted. In particular, BAE had made a without prejudice save as to costs offer to settle on the basis of no payment, with each party bearing its own costs. Northrop failed to beat this offer at trial.
  • The costs of mediation (£40,000) were not disproportionately high compared to the £500,000 the parties incurred in litigating the dispute.
  • Any delay in setting up or attending the mediation would not have been prejudicial. The mediation could have taken place without affecting the litigation timetable.
  • Mediation had a reasonable prospect of success as the parties clearly had a commercial relationship. A mediator could have assisted the parties to resolve the dispute and avoid wasted management time and soured relationships.

Although BAE's view of their claim did provide some justification for not mediating, considering all the other factors, the court held it was unreasonable for BAE not to participate in mediation. 

Such a finding would ordinarily mean BAE would be penalised in costs. However, BAE escaped such an order due to Northrop's equally unreasonable refusal to accept BAE's without prejudice offer.

Each party's unreasonable behaviour cancelled the other's out and the usual order that the winner's costs be paid prevailed. No reduction was made.

Comment

Any request to engage in mediation should be given serious consideration. Refusal - even when a party reasonably believes it has a very strong case and so why buy it off – is likely to result in the refusing party being penalised in costs.

If minded to refuse, consideration should be given to the Jackson ADR handbook which sets out steps a party should take if it considers it has reasonable grounds for doing so in order to try and avoid a costs sanction.