Should the usual costs award to the successful party be reduced in consequence of its refusal to mediate?
The Facts
During December 2010 BAE Systems (Al Diriyah C41) Limited (鈥淏AE鈥�) entered into a Licence Agreement with Northrop Grumman Mission Systems Europe Limited (鈥淣GM鈥�) for the use of certain software. On 11 November 2011 BAE terminated the Licence Agreement. NGM disputed BAE鈥檚 right to terminate for convenience only and claimed some 拢3m in compensation.
During 2012 and 2013 the parties engaged in without prejudice exchanges including a lawyers鈥� meeting. NGM made several written proposals to mediate but BAE repeatedly refused asking NGM to first provide substantiation of its money claims. During October 2013 NGM commenced Part 8 proceedings seeking a declaration that on a proper interpretation BAE was not entitled to terminate the Licence Agreement for convenience only. On 20 January 2014 BAE made a 鈥渨ithout prejudice save as to costs鈥� offer that the proceedings should be brought to an end without payment to NGM and with each party paying their own costs.
On 8 September 2014 Mr Justice Ramsey decided the interpretation point in favour of BAE.
On the subsequent application for costs, NGM accepted that BAE was entitled to its costs assessed on a standard basis if not agreed, but argued that those costs should be reduced by 50% on account of BAE鈥檚 unreasonable refusal to mediate.
BAE responded that it had reasonably rejected mediation for proper and sensible reasons, including that: (i) it was confident it had a strong defence; and, (ii) that there was no realistic possibility of settlement through mediation where the contractual interpretation point was 鈥渁ll or nothing鈥�.
The Issue
Should the usual costs award to BAE as the successful party be reduced by 50% (or otherwise) in consequence of its refusal to mediate?
The Decision
The judge reviewed the parties鈥� exchanges and made the following findings vis-脿-vis the factors identified by the Court of Appeal in Halsey vs Milton Keynes General NHS Trust.
Nature of the dispute The judge agreed that the fact that the dispute involved a point of contractual interpretation did not make the dispute unsuitable for mediation per se.
Merits of the case: The judge held that BAE鈥檚 reasonable view that it had a strong defence provided some but limited justification for not mediating.
Other methods of settlement The judge considered that BAE鈥檚 other attempts to settle the case, including the lawyers鈥� meeting and 鈥渨ithout prejudice save as to costs鈥� offer were neutral or marginally in BAE鈥檚 favour.
Costs of ADR The judge did not consider the anticipated mediation costs of 拢40,000 to be disproportionately high for a claim of 拢3m.
Prospects of successful ADR: The judge thought that this was a situation where a mediator might have brought the parties together and found a middle ground or acceptable commercial solution even if the parties鈥� respective positions indicated that there would not be a settlement.
Overall, the judge concluded that whilst BAE鈥檚 view of the merits provided some justification for not mediating, other factors showed that BAE was unreasonable in rejecting NGM鈥檚 offer to mediate. However, the judge acknowledged that NGM鈥檚 conduct in not accepting BAE鈥檚 20 January 2014 offer was also a relevant factor under CPR 44.2(4)(c). He therefore thought a fair and just outcome would be to apply the general rule on costs without taking into account either party鈥檚 conduct, so that BAE was awarded its costs on a standard basis without discount.
Commentary
In contrast to PGF II SA vs OMFS Company 1 Limited [2013], this was not a case in which one party had simply ignored a proposal to mediate. BAE could show that on each occasion it had rejected NGM鈥檚 mediation proposals following due consideration, including assessing the strength of its defence and the prospects for settlement. Nevertheless, having weighed up each factor in Halsey, the judge concluded that BAE鈥檚 reasonable belief that it had a strong defence was not in itself enough to make the rejection of mediation reasonable.
This decision supports the position set out in the Jackson ADR Handbook that parties must engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal. The judges have frequently stressed - and parties cannot disregard - the positive effect mediation can have in resolving disputes even in the most difficult and hostile circumstances. It may now be difficult to conceive of a set of circumstances that might reasonably justify rejecting ADR.
Michelle Knight
Fenwick Elliott LLP
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