Mediating the English way

THERE are many drawbacks to taking on a full-scale war before the courts or arbitral tribunals. For example, not all legal costs are recoverable, there are countless factors outside either party’s control which may affect the outcome, companies often find litigation nerve-wracking and time-consuming, and litigation can potentially destroy long-term business relationships such as joint ventures or partnerships.

It was only a matter of time, therefore, before participants in litigation, including judges, arbitrators, the parties themselves and insurers who fund litigation, appreciated the value of alternative means of resolving disputes, such as mediation. In fact, the English courts have taken it one step further and have become more inclined to impose costs sanctions on parties refusing to consider or undertake mediation.

Take, for example, the case of Dunnett v Railtrack. The claimant kept horses in a field next to a railway line operated by the defendant. The claimant asked for the gate separating the field and the track to be padlocked, but the defendant refused on the mistaken ground that it was illegal. When the claimant’s horse wandered onto the track and were killed, the claimant sued the defendant for negligence.

During the proceedings, the defendant made a number of generous Part 36 offers, similar but not identical to sealed offers in arbitration, to the claimant. But these were rejected. When the claimant lost at first instance, however, the judge suggested she go to mediation, which suggestion she forwarded to the defendant. The defendant flatly refused this. The claimant lost again on appeal, but the Court of Appeal made no order as to costs, i.e., it did not order the claimant to bear the defendant’s costs.

The Court of Appeal was unimpressed by the reason advanced by the defendants for refusing to mediate, which was that mediation was likely to involve a higher payment than that already offered and that they were not prepared to pay more than their latest Part 36 offer which was already generous. The court took the view that the defendant had grossly misunderstood and underestimated what mediation could achieve.

In Hurst v Leeming, the claimant was a partner in a solicitors’ firm who sued former partners but lost. As a result of this he went bankrupt. The claimant brought proceedings against the defendant, who was his barrister, for professional negligence. His claim was eventually withdrawn because he was frankly told by the judge who presided over the matter that his claim had no merit. But the claimant argued that there should be no order as to costs because the defendant had previously turned down invitations to mediate.

The court decided that the reason given by the defendant for turning down invitations to mediate - namely that the claimant’s claim had no merit - was unacceptable. Despite this, the court decided that, as a result of aspects of the claimant’s character, the mediation would not have any real prospect of success. Therefore, the court ordered the claimant to pay the defendant’s costs.

Taking these points separately, the court considered to be inadequate the argument that the claim lacked substance or merit. The court believed that this was the frame of mind of many litigants – the “I am right, you are wrong” approach – who did not appreciate that disputes which appear to be incapable of settlement before mediation often prove capable of resolution later on.

However, if the mediation had no real prospect of success in the first place, then the courts will not punish a party in costs for not mediating. There were aspects to the claimant’s character that persuaded the court in this case to arrive at this conclusion. The claimant was bankrupt, and had nothing to lose in the mediation. He was unable or unwilling to appreciate why his claim lacked merit. He also intended to get a substantial sum from mediation, which he was not entitled to, and was not likely to accept any other result.

But the court gave a stark warning that the “no real prospect of success” test should not be taken as a ready excuse not to mediate;

“If a mediation can have no real prospect of success a party may, with impunity, refuse to proceed to mediation on this ground. But refusal is a high risk course to take, for if the court find that there was a real prospect, the party refusing to proceed to mediation may, as I have said, be severely penalised.”

Finally, in SITA v Wyatt and others (Maxwell Batley) the defendant paid the claimant $35,000,000 in settlement of a dispute. The defendant then sought to recover in third party proceedings against the Part 20 defendant, but failed. When the court came to assess costs in the third party proceedings, the defendant submitted that the Part 20 defendant should be deprived of some of its costs. This was due to the latter turning down the former’s invitation to participate in a mediation between the claimant and defendant in which the claim was eventually settled.

The court decided that the Part 20 defendant should not be deprived of its costs for not joining in the mediation. This decision seemed motivated especially by the fact that the defendant’s desire to involve the Part 20 defendant was not in order to appraise the respective merits of each claim, but to get the latter to contribute to the former’s settlement to the claimant. Moreover, the way in which the defendant attempted to “browbeat and bully” the Part 20 defendant into mediation was disapproved of by the court, since it involved a threat of commencement of third party proceedings unless the Part 20 defendant attended the mediation. The court stated in conclusion that;

“In my judgment it would be a grave injustice to [the Part 20 defendants] to deprive them of any part of [their] costs on the ground that they declined [the defendant’s] self-serving invitations (demands would be a more accurate word) to participate in the mediation.”

It is clear that the English courts have recently become highly supportive of mediation and as a general rule are willing to deprive successful parties of their costs if they are seen to have ignored their opponent’s invitations, or the court’s orders, to mediate. They are not willing to tolerate excuses for not mediating that relate to the merits or other characteristics of the claim itself. In fact, it appears that the only excuse which the English courts will tolerate is that any mediation would have had no prospect of success. This can be established if a party was clearly not willing to accept any result other than one that does not reflect the merits of the dispute, or otherwise not being open-minded about what it is willing to accept (Hurst v Leeming), or that a party is virtually bullied into a mediation (SITA v Wyatt).

However, it seems that the English courts will always start with the assumption that mediation will work and will only draw the conclusion that it has no prospect of success in exceptional cases.

The English courts also seem to force mediation even if one of the parties’ cases is very weak, or virtually hopeless. This is reflected in both Dunnett v Railtrack and Hurst v Leeming. The former case typifies this, with the Court of Appeal indicating that all the claimant may want is an apology. However, in commercial disputes, many would query that, if a party has brought a claim or sets up a defence that is frankly hopeless, what point is there to mediate at all?

There is no doubt that mediations have become very fashionable. They are seen as economical when compared to the case going to a hearing. After all, mediations rarely last more than a day and do not usually require counsel involvement. P&I and defence clubs, as well as other institutions that fund litigation, are increasingly attracted by the potential savings in costs that mediation can bring, and are virtually demanding that mediation be considered as a matter of course.

Another case worth discussing is the decision of Cable & Wireless v IBM which gives huge support to mediation by confirming that clauses requiring parties to attempt ADR are valid and enforceable. The court took the view that, at least in England, there is presently available a “clearly recognised and well-developed process of dispute resolution involving mediation techniques provided by trained mediators”. Moreover, the ADR clause in the case required the parties to mediate using the procedure recommended by CEDR. Taken together with the public policy consideration of encouraging mediation, the court gave effect to the ADR clause.

Given that both BIMCO and the LMAA have, in 2002, introduced the Standard Dispute Resolution Clause and Mediation Terms, the Cable & Wireless decision is a timely affirmation that these provisions are both valid and enforceable under English law.

It is hoped that the English cases will be highly persuasive to London arbitrators and provide them with enough support to depart from the usual position of costs following the event. Moreover, Section 60 of The Arbitration Act 1996 will not impinge on this as the section prescribes that an agreement having the effect of a party paying the whole or part of the costs of the arbitration would only be valid if made after the dispute has arisen. The BIMCO Clause is not an agreement to pay whole or part of the costs. It merely gives arbitrators discretion to take into account the mediation process when awarding costs.

New York arbitrators may also, if they are so persuaded, apply the practice of the English courts, because they are empowered, under the SMA Rules, to award a reasonable allowance towards the successful party’s attorney fees, and are encouraged to do so. As for how London and New York arbitrators will actually exercise their discretion on costs, and whether they have any more success encouraging the appropriate use of mediation to resolve disputes, will be observed with keen interest.