The Court found that a refusal by a Defendant to mediate did not justify an indemnity costs order.  
 
In Richards & Anor v Speechly Bircham Llp & Anor (Consequential Matters) [2022] EWHC 1512 (Comm) (16 June 2022), the Court found that it was appropriate to take into account other factors. The Court was critical of the failure of either side to make a cost-effective Part 36 offer and the fact that the Defendant had to pay costs up to and including trial on the standard basis was an "appropriate sanction" for not engaging in a process of ADR. 
 
The case is also another example of the Court ordering 90% of budgeted costs to be paid by way of an interim payment on account of costs and 70% for incurred costs plus the full 1% and 2% for the budgeting process. 
 
Background 
 
By way of background HHJ Russen QC noted that: 
 
"In support of the application for indemnity costs, Mr Leiper QC pointed to four offers by the Claimants to mediate contained in WPSATC correspondence between 21 December 2018 and 17 December 2020. All but the last was made before the Claim Form was issued on 22 September 2020. The Defendants' response to the first offer (made by letter dated 21 December 2018) was to say they did not consider that a mediation would be productive or cost effective at that stage. Their letter dated 3 January 2019 said they would keep the merits of some form of ADR under review once full disclosure had been given. The second offer of mediation (or some other form of ADR which might be useful in narrowing the issues between the parties, perhaps by focusing upon causation and loss) was made on 24 May 2019. The Defendants responded on 7 June 2019 to say that there was no point in engaging in mediation or ADR as the claim was doomed to fail. The third offer, made by letter dated 11 September 2020 and by reference to draft Particulars of Claim, was met with the same response that there was no point in a mediation because the claim was entirely without merit. The fourth offer, made by a letter dated 13 December 2020 in the light of the Defence and in advance of a CCMC, again elicited the response that there was little point in having a mediation over an unmeritorious claim. That response dated 17 December 2020 also referred to the expense of a mediation and indicated that the Defendants would be prepared to have a short without prejudice call between solicitors to explain why a Part 36 offer of £500,000 made by them the previous month would not be increased. 
 
Mr Leiper QC described this as a high-handed approach by the Defendants which was no doubt intended to overawe the Claimants and dissuade them from pursuing their claim." 
 
The Arguments 
 
The Claimant relied upon the case of Garritt-Critchley v Ronnan [2014] EWHC 1774 (Ch); [2015] 3 Costs LR 453. The Court noted that: 
 
"In that case the judge acceded to the claimants' application for indemnity costs based principally upon the defendants' failure to engage in mediation. As appears from the judgment on the application, the defendants had resisted the claimants' suggestion of mediation by saying that the positions of the parties were too far apart and, later, that they were confident of their position and did not consider there was any realistic prospect of the claimants succeeding. The main issue in the case was the factual one of whether or not a binding agreement for the issue of shares had been reached. If the claimants had established one had been concluded, the judge said there was a "sliding scale of compensatory award" and that it had become apparent to him during the course of the trial that the range was "really very considerable indeed." 
 
It is important to note that in Garritt-Critchley the court was deciding the application for indemnity costs in circumstances where, after a 4 day trial but before the judge gave his judgment on the claim, the defendants belatedly accepted the claimants' Part 36 offer to accept the sum of £10,000 plus their costs to date. That offer had been preceded by an earlier one under which the claimants had sought payment of £170,000, together with their costs, and also one by which the defendant offered to accept three-quarters of their costs upon the claimant discontinuing the claim. In support of his conclusion that the defendants' "failure to engage in mediation or any other serious ADR was unreasonable", the judge said their reasons for not doing so did not "stack up". In particular, the binary nature of the issue on liability, being one of fact, was one where both parties needed to engage in an analysis of the risk of their case not being accepted. The wide range of possible quantum scenarios was also an aspect which rendered the case suitable for mediation, as did a mediator's ability to defuse the emotion in the case and any feelings of distrust between the parties.
 
The Defendant argued that their approach to mediation was not unreasonable and that, in any event "an unreasonable refusal to mediate [was] only one facet of a party's conduct to be taken into account when determining costs." 
 
HHJ Russen QC noted as follows: 
 
"For the first point they relied upon the decision of Ramsey J in Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4l) Ltd [2014] EWHC 3148 (TCC); [2014] 6 Costs LO 879 and for their second upon the decision of the Court of Appeal in Gore v Naheed [2017] EWCA Civ 369. 
 
The first point was made by reference to the WPSATC correspondence relied on by the Claimants and also the Part 36 offers made by the parties: by the Claimants on 9 February 2021 in the sum of £4.25m, by the Defendants in the sum of £500,000 on 23 November 2021, and another one by the Claimants on 11 February 2022 in the sum of £3.5m. The Defendants also referred to without prejudice discussions between Leading Counsel as being consistent with a serious attempt by the Defendants to settle the dispute, though, as Mr Leiper QC observed, they remain privileged. He also said the first discussion took place on 2 February 2022 which he described as "the eleventh hour" in relation to the trial. 
 
In addition to relying upon what they described as their measured Part 36 offer, the Defendants highlighted that their initial response to the proposal of a mediation was that it should follow disclosure, with the position remaining unchanged in terms of there having been no disclosure by September and December 2020, and also pointed to the provision for mediation in their costs budget as an indication that they were open to mediation." 
 
The Court upon consider the arguments held that: 
 
"Having reflected upon the arguments I am not persuaded by the Defendants' argument that their approach to mediation was not unreasonable, that is to say it was a reasonable one. On this aspect, I am persuaded by Mr Leiper's response to that argument in his Reply Submissions dated 11 May 2022. In particular, in my judgment he was correct to observe that the Defendants' response of January 2019 was a refusal to mediate; that any concern about the need for some disclosure to shed light on certain aspects of the case (their letter focussed upon the absence of any realistic alternative investment in IPS UK) could have been explored in preparation for mediation or inquired into at a mediation; and that certain assumptions which the Defendants' submissions reveal had been made about the Claimants' motivations for and expectations of the litigation (which meant "mediation was therefore most unlikely to succeed") were just the kind of matters which a mediator would have explored. As was recognised by the observations of the judge in Garritt-Critchley, at [18], most mediators are skilled in seeking to moderate the expectations of any party which may be based on matters collateral to the merits of its case." 
 
"I would add that the same authority, at [23], also addresses the Defendants' point about the expense of a mediation given the uncertainty over its outcome. They compared the combined budgeted costs of approximately £105,000 with the judgment sum of less than £1.5m. However, not only does this involve undue scepticism over the prospects of a successful mediation but the more relevant comparison is between the costs of a mediation and the costs involved in taking the claim to a trial. The Claimants' and the Defendants' approved costs budgets (excluding VAT and ATE insurance premiums, if applicable, and making either no or insufficient allowance for the submissions mentioned in paragraph 3 above) were in the total sums of £755,037 and £865,762 respectively. Further, as the Claimants pointed out by reference to the fee earner time included in the ADR phase of the Defendants' budget, the costs of a mediation would have been significantly less than the £105,000 figure. 
 
In concluding that the Claimants have the better of the argument on the Defendants' first point, I also bear in mind the point that the Defendants' Part 36 offer was made only just over 3 months before the trial. Mr Leiper QC said this showed that the Defendants wanted to take the litigation to the wire in circumstances where they knew the Claimants had an ATE insurer behind them who, as a matter of commercial common sense, would be applying pressure on the Claimants to settle the action. I make no judgment about that but the timing of the Defendants' offer signifies their general passivity in the ADR process over the period of almost 3 years since a mediation was first proposed." 
 
Though the Court accepted that the Defendant's refusal to mediate was unreasonable, it did not equivocate this with an automatic costs penalty. It stated that: 
 
"the Defendants' second point is that an unreasonable refusal to mediate is only once facet of a party's conduct to be taken into account when determining the appropriate order for costs. Mr Tozzi QC and Mr Wright QC referred to the judgment of the Court of Appeal in Gore v Naheed [2017] EWCA Civ 369, at [49], where Patten LJ, citing an earlier decision of the court, said "…a failure to engage, even if unreasonable, does not automatically result in a costs penalty. It is simply a factor to be taken into account by the judge when exercising his costs discretion…"." 
 
The Court further said that: 
 
"Although I have concluded that the Defendants' failure to engage the Claimants' proposals for a mediation was unreasonable, that is only one aspect of the conduct to be considered in the exercise of the discretion under CPR 44.2. Further, "the conduct of all the parties", together with any measure of qualified success that a party may have achieved, is just one factor amongst all the circumstances that are to be considered alongside the general rule favouring the overall successful party when it comes to exercising it. A "failure" to engage in (or at) a mediation clearly does not carry the clearly defined costs consequences of an unaccepted but effective Part 36 offer; not least because of the difficulty of identifying with confidence, even in hindsight on what should be a summary determination rather than a further mini-trial, where any "blame" really lay within the pursuit and conduct of what is a privileged process. The uncertainty of outcome at any proposed mediation also means that the party who is suggesting unreasonableness on the part of the other cannot point to the result at trial and demonstrate that costs have been wasted through the mediation not having taken place. 
 
In my judgment, the Defendants' failure in this case to engage constructively with the mediation proposals does not justify an order for costs against them on the indemnity basis. To make such an order would involve elevating that factor over others which weigh in their favour. Those others include them successfully resisting a significant part of a claim put at around £4.3m (see the Judgment at [90]-[91]) and doing significantly better than either of the Claimants' Part 36 offers proposed (thereby avoiding the consequences of CPR 36.17(1)(b)). That is a very different outcome from the one in Garritt-Critchley. 
 
In circumstances where neither side made a cost-effective Part 36 offer, the Defendants' unreasonable conduct in relation to mediation is in my judgment sufficiently marked by an order that they pay the Claimants' costs down to and including trial on the standard basis. That is an appropriate "sanction" for them not engaging in a process of ADR which might have curtailed those costs in a significantly lower sum at an earlier stage of the proceedings." 
 
Payment on Account 
 
The case was budgeted and demonstrating again the power of a good Costs Budget, the Court ordered an interim payment on account of costs of 70% of the incurred costs and 90% of the budgeted costs plus the 3% for the budgeting process, providing a total interim of over £430,000.00. This is yet another example of a high interim payment in a budgeted case which must now be accepted as the default position.  
 
Practicalities 
 
A refusal to mediate on its own is not enough to warrant an indemnity costs order, though it is clear it will be a relevant factor to be considered. In BXB v Watch Tower and Bible Tract Society of Pennsylvania & Ors [2020] EWHC 656 (QB (11 March 2020) the Court criticised a Defendant for refusing to mediate because it felt it had a strong case. In BXB Mr Justice Chamberlain made an order for indemnity costs for all costs after the date the Defendant refused a JSM.  
 
Another case of interest is that of EAXB v University Hospitals of Leicester NHS Trust (unreported). In this case the Defendant instigated a JSM but made no offers at the same. The Claimant was successful in arguing that this stance was unreasonable with the fact that the parties were far apart not a sufficient enough reason to make an offer. 
 
With ADR becoming more embedded within the Court process, a refusal to mediate should not be undertaken lightly. Richards, however, shows that a refusal to engage in ADR in isolation does not equate to an automatic costs penalty and that an effective Part 36 offer remains a vital and important tool for all litigators.  
 
Should you have any queries arising from this article or upon costs generally then please do not hesitate to get in touch with our friendly team either via phone 01482 534567 or e-mail info@carterburnett.co.uk 
 
 
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