When the court comes to consider costs and to exercise its discretion under Civil Procedure Rule 44.2, it has regard to all the circumstances, including the conduct of the parties before as well as during the proceedings (CPR 44.2 (4) and (5)).

That includes conduct by which a party refuses to agree to alternative dispute resolution (see White Book, part 1, at paragraph 44x.3.21, Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 and PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288). The significance of the role of alternative dispute resolution and the obligation on the parties to consider ADR before and during the litigation process is further reinforced by the Jackson ADR Handbook (Oxford University Press (2013)).

One of the factors which the court will have regard to when exercising its powers as to costs is ‘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’ (CPR 44.2(4)(c)). This was a determining factor in the recent case of Northrop Grumman Mission Systems Europe Limited v BAE Systems (Al Diriyah C41) Ltd [2014] EWHC 3148 (TCC).

Northrop concerned Part 8 proceedings in which Ramsey J (pictured), sitting in the Technology and Construction Court, gave judgment upholding BAE’s contention that on a true construction of a licence agreement, BAE was entitled to terminate that agreement for convenience. In relation to costs, NGM accepted the principle that BAE was entitled to its costs to be assessed on a standard basis if not agreed, but contended that those costs should be reduced by 50% by reason of BAE’s unreasonable refusal to mediate the dispute.

BAE had previously, through the exchange of ‘without prejudice save as to costs’ correspondence, offered to settle on the basis of no payment, with each party bearing their own costs. This was, Ramsey J noted, an offer which, if it had been accepted by NGM, would have put NGM in a better position than it now found itself in terms of the outcome of the hearing. This offer was rejected by NGM which referred to its offers of mediation.

In support of its contentions, NGM submitted, inter alia, that the dispute was suitable for mediation as the essence of the dispute was about the payment of licence fees and support costs, and the fact that the dispute involved matters of construction did not make it unsuitable for mediation. Reference was made to paragraph 17 of Halsey where the court mentioned the Commercial Court working party on ADR, which stated in 1999 that some parts of Commercial Court work did not lend themselves to ADR.

It said that the most obvious kind was where the parties wished the court to determine issues of law or construction which may be essential to the future trading relations of the parties, an ongoing long-term contract or were of general importance in a particular trade or market.

NGM contended that this was not a case where the issues of construction were essential to future trading relationships or important in any wider context. In any event, NGM argued, matters had moved on. The emphasis on, and the perceived benefits of, ADR had strengthened over the years (see, in particular, PGF II at [24] to [30]) and there was no objective reason why construction issues should not be amenable to mediation so that a skilled mediator could ‘hold up a mirror’ to the parties’ respective arguments, and identify the risks and merits involved as in any other case.

In relation to the merits of the case, NGM submitted that it is the reasonableness of a party’s belief that it has a strong case which is of importance. In Halsey at [19] Dyson LJ, as he then was, drew a distinction between cases that would have succeeded on an application or summary judgment and more borderline cases. NGM submitted that this was a case where the merits weighed in favour of ADR. Finally, NGM argued that the cost of litigation in the matter outweighed any costs which would have been incurred in engaging in mediation.

BAE argued that it is a sophisticated commercial client with in-house counsel who considered mediation and its likelihood of achieving settlement, saving time, costs and obviating risks and the possibility that a skilled mediator could achieve a solution.

In relation to the Halsey factors, BAE contended that NGM’s case involved a relatively short point of contract interpretation on which a claim totalling more than £3m depended. Therefore this was not a long-running dispute and not a dispute which cried out for mediation, but one where a party could legitimately consider whether mediation was worthwhile and reasonably conclude that in all the circumstances it was not.

In relation to the merits of the case, BAE submitted that it reasonably concluded that this was not a borderline case. BAE and its external lawyers considered that BAE was correct as a matter of law and also had commercial merits of not paying for licences it did not require. In relation to the costs of mediation, BAE submitted that the costs were not small in comparison with the costs of the trial which could have taken half a day and, even with NGM’s witness statements, each party only estimated the trial to take one day.

In relation to whether ADR had a reasonable prospect of success, BAE submitted it was a dispute between two commercial enterprises which would take up relatively little court time which both parties could afford to fight. There was an issue of contractual interpretation on which the claim depended and the parties could, and would, never agree the meaning and effect of the clause at the heart of the dispute.

Ramsey J held the following:

1. Nature of the dispute. Ramsey J regarded this case as being like many cases where points of construction are major issues at the centre of a financial claim. In all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution to disputes which each party would regard as incapable of being settled and would be unable to settle without such assistance.

2. Merits of the case. This was a case where BAE reasonably considered that it had a strong case. Both in Halsey at [18] and in Daniels v Commissioner of Police for the Metropolis [2005] EWCA Civ 1312, the Court of Appeal 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 authors of the Jackson ADR Handbook properly, in Ramsey J’s opinion, draw attention at paragraph 11.13 to the fact that this seems to ignore the positive effect that mediation can have in resolving disputes, even if the claims have no merit. A mediator can bring a new independent perspective to the parties if using evaluative techniques and not every mediation ends in payment to a claimant. Nevertheless, on the merits of the case, Ramsey J considered that BAE’s reasonable view that it had a strong case is a factor which provides some but limited justification for not mediating.

3. Extent to which other settlement methods were attempted. Ramsey J noted that this was not a case where there was an offer to mediate and no response; or where the parties did not have some communication with a view to settlement. Rather, the manner in which parties engaged in correspondence (NGM proposing mediation and BAE requesting information) meant that neither party persuaded the other party of its views. Again it was a classic situation where a mediator could have cut through the positions taken by the parties.

On this basis, there was some attempt to settle the dispute by other means in terms of a face-to-face meeting and a ‘without prejudice save as to costs’ offer. Overall this factor was neutral, or marginally in BAE’s favour, in its impact in assessing the refusal to mediate.

4. Costs of ADR. The costs of ADR could not be said to be disproportionately high. ADR would, at the very least, have saved some of the costs of the correspondence between the parties by avoiding the positions taken.

5. Prejudicial delay caused by ADR.  This was not a factor in this case. Mediation could have taken place without affecting the litigation.

6. Prospects of successful ADR. This was a classic case in which a mediator could have brought the parties together. In assessing the prospects of success, Ramsey J did not consider that the court could merely look at the position taken by the parties. It was clear that if BAE did not want to pay anything and if NGM would not settle without payment then there would not be a settlement.

However, this is the position in many successful mediations. Ramsey J explained that this position allows a mediator to bring the necessary skills of evaluation and facilitation to find solutions which have not been considered. The published success rate of mediation (see paragraph 13.03 of the Jackson ADR Handbook) shows that mediation is generally likely to be successful.

This was, Ramsey J argued, a case which was appropriate for mediation and where mediation had reasonable prospects of success. Was it unreasonable for BAE, which considered it had a strong case, to reject NGM’s offer to mediate? Ramsey J concluded that it was: ‘Where a party to a dispute, which there are reasonable prospects of successfully resolving by mediation, rejects mediation on grounds which are not strong enough to justify not mediating, then that conduct will generally be unreasonable. I consider that to be the position here.’

However, BAE’s ‘without prejudice save as to costs’ letter was a relevant factor to be taken into account and this was an offer which NGM was not successful in bettering. NGM’s conduct in not accepting that offer was similarly a matter to be taken into account.

Ramsey J reasoned thus: ‘The issue is how those two aspects of conduct should be taken into account where BAE has been, overall, the successful party. A refusal to mediate means that the parties have lost the opportunity of resolving the case without there being a hearing. A failure to accept the offer has equally meant that the parties have lost the opportunity of resolving the case without a hearing. While mediation at an earlier stage might have avoided costs, if BAE had mediated even at a later stage, its conduct would not have been unreasonable.’

Ramsey J concluded that the fair and just outcome should be that neither party’s conduct should be taken into account in order to modify what would otherwise be the general rule on costs (that is, the loser pays the winner’s costs).

Although the case is an illustration of the pro-ADR stance which the courts are continuing to follow, especially after the Jackson reforms and PGF, it also demonstrates how the courts will consider the relevant facts of each case when determining whether a refusal to mediate is unreasonable for the purposes of CPR 44.

The case also highlights the significance of CPR 44.2(4)(c). It follows from Northrop that where a successful party in litigation can demonstrate that it has made a without prejudice offer to settle, then that may suffice for the purposes of showing the court that is has not acted unreasonably in rejecting an offer to engage in ADR. 

Masood Ahmed, University of Leicester