Covid-19 Disputes

The Practice Direction on Pre-Action Conduct and Protocols highlights the need to actively consider ADR (usually mediation), and treat litigation as a “last resort”. It provides the court with the discretion to take into account any non-compliance when giving directions for case management and awarding costs orders. Whilst parties cannot be forced to mediate, the court can give directions to encourage resolution of a claim, and any unreasonable refusal to engage in settlement discussions will likely be punished through costs awards. There are several recent cases that say that a party, even if it is successful at trial, will suffer a costs penalty if it doesn’t engage in mediation.

  1. A successful Defendant who failed to engage in mediation found that The High Court disallowed a substantial part of its costs:Wales (t/a Selective Investment Services) v CBRE Managed Services Ltd & Anor[2020] EWHC 1050 (Comm).  This case shows that a refusal to participate in ADR may have serious consequences for parties who win their case, as well as for the losing party. The first defendant “repeatedly declined and, indeed, refused to participate in mediation”  In contrast, the second defendant repeatedly indicated a willingness to engage in mediation. HHJ Halliwell did not, therefore, disallow any of the second defendant’s costs for a failure to engage with ADR.
  2. “No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution” (Mr Justice Griffiths in DSN v Blackpool Football Club Ltd [2020] EWHC 670)

Parties in litigation should approach a dispute with a commercial mindset. ADR must be treated as a priority otherwise that party is likely to be penalised by the court in costs, and in the current climate, parties should expect to conduct a mediation online. The UK Government published a guidance note on 7 May 2020 stating that it expects commercial contractual parties to act “responsibly” and “fairly” in their dealings with one another during the “Covid-19 emergency”. This is guidance, but it is likely that this public policy consideration will be borne in mind by the courts of England and Wales for the foreseeable future. Even after the effects of Covid-19 has reduced, the court will still expect parties to engage with ADR. If a party does not so, it will need to justify this to the court and it may face potentially significant costs penalties. The courts will not simply pay lip service to the civil procedure rules requiring a party to consider and engage in ADR,

A party who fails to engage in ADR runs the risk of an adverse costs order being made against it: so a party may be ordered to pay the other party’s costs on the indemnity basis). This is even in cases where a party considers that its counter-party’s claim has no merit.

Whilst a party might push back on an offer to engage with ADR (for example on the basis that the claim is not sufficiently advanced), it should set out the basis for any rejection in correspondence and ensure that it revisits the possibility of engaging in ADR as the proceedings develop in order to demonstrate to the court that it has acted reasonably.

In certain cases, there can be a number of significant benefits in engaging with an ADR process compared to drawn-out litigation. For example, mediations can provide parties with a confidential and relatively low-cost means to seek to achieve a commercial settlement and/or narrow the issues in dispute. It may also allow a party to understand the other party’s strategy and identify weaknesses in each side’s case.

In 2017, OMV Petrom SA v Glencore International AG confirmed that “the parties are obliged to make reasonable efforts to settle and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court’s powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process“.

Recently, the court has imposed indemnity cost (an order that the paying party pay approximately 70-80% of the counterparty’s legal costs and disbursements).orders against parties who unreasonably refused to engage in ADR.

BXB v Watch Tower and Bible Tract Society of Pennsylvannia and anor  Engalnd & Wales Queens Bench Division 30 January 2020 

The claimant claimed that the defendants should pay all of her costs on the indemnity basis in view of their unreasonable conduct and, in particular, their refusal to engage in ADR.

Mr Justice Chamberlain laid down four principles before giving his decision.

  1. Whether to order that costs be assessed on the standard or the indemnity basis is for the discretion of the judge, having regard to the conduct of the parties and the circumstances of the case. But an award of indemnity costs requires something that “takes the case outside the norm”: Excalibur Ventures LLC v Texas Keystone Inc. (No. 2) [2017] 1 WLR 2221.
  2. An unreasonable refusal to engage in ADR may justify an award of indemnity costs to a claimant, even where the claimant recovers very substantially less than originally claimed: Garritt-Critchley v Ronnan [2014] EWHC 1774 (HHJ Waksman QC). One reason for this is that “[p]arties don’t know whether in truth they are too far apart unless they sit down and explore settlement”.
  3. Silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds: PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288, [2014] 1 WLR 1386 (Briggs LJ). This is in part because “a failure to provide reasons for a refusal is destructive of the real objective of the encouragement to parties to consider and discuss ADR, in short to engage with the ADR process”.
  4. However, a finding that a party has unreasonably refused even to engage in discussion about ADR produces no automatic results in terms of a cost penalty. It is simply an aspect of the parties’ conduct which must be addressed in a wider balancing exercise: Gore v Naheed [2017] EWCA Civ 369, [2017] 3 Costs LR 509 (Patten LJ).

Mr Justice Chamberlain awarded the claimant costs on the indemnity basis from the date of the defendants’ unreasonable refusal to engage with the claimant’s invitation to attend a joint settlement meeting.

DSN v Blackpool Football Club Ltd

In this case, the defendant failed to beat the claimant’s Part 36 offer, and the court made an order for indemnity costs in favour of the claimant from the date of the expiry of the claimant’s Part 36 offer.

However, Mr Justice Griffiths also ordered that the defendant pay the claimant’s costs on the indemnity basis from the point in time when the defendant unreasonably refused to engage with ADR.

The defendant here refused to engage in any settlement discussions. It didn’t respond to any of the three Part 36 offers (except to reject the final one). The defendant had said that “no purpose would be served by any form of ADR”, after considering all of the available evidence, since it “continues to believe that it has a strong defence to this claim and stands by the contents of its Defence”.

Mr Justice Griffiths stated that “the reasons given for refusing to engage in mediation were inadequate. They were, simply, and repeatedly, that the defendant ‘continues to believe that it has a strong defence’. No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution.”

He also commented positively on the process of ADR: “Experience has shown that disputes may often be resolved in a way satisfactory to all parties, including parties who find themselves able to resolve claims against them which they consider not to be well founded. Settlement allows solutions which are potentially limitless in their ingenuity and flexibility, and they do not necessarily require any admission of liability, or even a payment of money. Even if they do involve payment of money, the amount may compare favourably (if the settlement is timely) with the irrecoverable costs, in money terms alone, of an action that has been successfully fought. The costs of an action will not always be limited to financial costs, however. A trial is likely to require a significant expenditure of time, including management time, and may take a heavy toll on witnesses even for successful parties which a settlement could spare them. As to admission of liability, a settlement can include admissions or statements which fall short of accepting legal liability, which may still be of value to the party bringing a claim.”