The question of costs liability following an “unreasonable” failure to mediate remain a developing area of law. This is an area with profound practical implications for litigators and their clients. That is why the decision of Mr Justice Ramsey in Northrop Grumman Mission Systems -v- BAE Systems [2014] EWHC 3148 (TCC) is essential reading for all litigators.


The application followed an earlier judgment where Ramsey J held that BAE were entitled to terminate a licence agreement on 20 days notice.  Northrop were the unsuccessful claimant in that action and conceded liability to pay 50% of BAE’s costs. However Northrop argued that they should only be liable for 50% of the costs because of BAE’s refusal to mediate.


Part of the judgment contains a succinct summary of the relevant law.

“Refusal to Mediate

  1. When the court comes to consider costs and to exercise its discretion under CPR 44.2, it has regard to all the circumstances including the conduct of the parties before as well as during the proceedings: see CPR 44.2 (4) and (5).
  2. That conduct 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 Limited [2013] EWCA Civ 1288.
  3. In Halsey the particular factors which the Court of Appeal identified as being relevant included the nature of the dispute, the merits of the case, the extent to which other settlement methods had been attempted, whether the costs of ADR were disproportionately high, whether any delay in setting up or attending the ADR would have been prejudicial and whether ADR had a reasonable prospect of success.
  4. In PGF II the Court of Appeal referred to the Jackson ADR Handbook where, at paragraph 11.56, it sets out practical steps which a party should take if it considers it has reasonable grounds for refusing to participate in an ADR process following a request from the other party. Briggs LJ, giving the judgment with which the other members of the court agreed, commented on that paragraph and said at [30]:

The ADR Handbook, first published in 2013, after the period relevant to these proceedings, sets out at length at para 11.56 the steps which a party faced with a request to engage in ADR, but which believes that it has reasonable grounds for refusing to participate at that stage, should consider in order to avoid a costs sanction. The advice includes: (a) not ignoring an offer to engage in ADR; (b) responding promptly in writing giving clear and full reasons why ADR is not appropriate at the stage based if possible on the Halsey guidelines; (c) raising with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR together with consideration of how that shortage might be overcome; (d) not closing off ADR of any kind and for all time in case some other method than that proposed or ADR at some later date might prove to be worth pursuing. That advice may fairly be summarised as calling for constructive engagement in ADR rather than flat rejection, or silence. It is apparent from the footnotes that the authors drew heavily on the first instance decision in the present case…

  1. Briggs LJ then concluded at [56]:

Finally, as is recognised by the weight placed on the judge’s decision in the passage in the ADR Hand-book to which I have referred, this case sends out an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal, or the undertaking of some other form of ADR, or ADR at some other time in the litigation. To allow the present appeal would, as it seems to me, blunt that message. The court’s task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasise that message by a sanction which, even if a little more vigorous than I would have preferred, none the less operates pour encourager les autres….

  1. Chapter 11 of the Jackson ADR Handbook, dealing with sanctions for refusing to engage in ADR processes, usefully summarises the relevant principles to be derived from cases where a refusal to engage in an ADR process had been considered, to the date of publication of the book in early 2013.”


The case has to be read in full because there were a large number of factors that led to the eventual decision in relation to costs. In summary:-

  • The case was not just about money.
  • The parties had a long, and ongoing, commercial relationship.
  • The case was about contractual construction.
  • BAE believed (rightly it transpired) it had a strong case.
  • Some attempts had been made in relation to without prejudice meetings.
  • BAE believed mediation was being used as a strategy to apply pressure to settle in a case where Northrop had no reasonable prospect of success.
  • Northrop had declined to give information in relation to the alleged costs of termination.
  • After the issue of proceedings BAE made a “drop hands” offer in relation to costs. With Northrop discontinuing the action and both parties agreeing to pay their own costs.


Merits of the case

  1. I have come to the conclusion, after considering the arguments, that this was a strong case by BAE. I would not call it a borderline case nor one which was suitable for summary judgment. It 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 have 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. As stated in Halsey, the fact that a party reasonably believes that it has a watertight case may well be sufficient justification for a refusal to mediate.
  2. The authors of the Jackson ADR Handbook properly, in my view, 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. As they state, 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.
  3. However, on the merits of the case, I consider that BAE’s reasonable view that it had a strong case is a factor which provides some but limited justification for not mediating.

Extent to which other settlement methods were attempted

  1. This is 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.
  2. The correspondence shows that from December 2011 BAE said that it was willing to pay termination costs under Clause 10.4. It soon became clear that NGM’s claim under Clause 10.4, however strongly it was put, was a difficult claim to make so as to claim the same sum as it claimed for wrongful termination. There was then a degree of posturing by BAE in which it sought information from NGM on its costs under Clause 10.4 when it knew there were none. Equally, NGM continued to seek to argue the difficult case that there were substantial costs. It was in this context that NGM proposed mediation but each time BAE requested further information. That correspondence was ultimately unsuccessful in either party persuading the other party of its views. BAE continued to ask for information which was not going to be produced and NGM continued to propose mediation. Again it is a classic situation where a mediator could have cut through the positions taken by the parties.
  3. There were also two occasions when attempts to settle were made. Although there is little evidence of what happened, perhaps because it was a without prejudice meeting, there was a meeting between in-house lawyers on 22 November 2012 at which mediation was suggested by NGM and rejected by BAE on the basis that it did not consider that mediation would be useful in bringing the parties together.
  4. The more significant matter is the exchange of “without prejudice save as to costs” offers. BAE offered to settle on the basis of no payment, with each party bearing their own costs. This is an offer which, if it had been accepted by NGM, would have put NGM in a better position than it is in terms of the outcome of the hearing. It has received no payment and accepts that it will have to pay BAE 50% of its costs. This offer was rejected by NGM who referred to its offers of mediation.
  5. 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. I think that, overall, this factor is neutral or marginally in BAE’s favour in its impact in assessing the refusal to mediate. I shall consider, separately, the important effect of the offer made by BAE.

Costs of ADR

  1. I accept that the costs of mediation may well have been of the order of £40,000. This compares to the overall costs incurred by both parties which are said to total about £500,000. The claim was for some £3m. On this basis, I consider that the costs of ADR cannot be said to be disproportionately high. They would, at the very least, have saved some of the costs of the correspondence between the parties by avoiding the positions taken.

Prejudicial delay caused by ADR

  1. This is not a factor in this case. Mediation could have taken place without affecting the litigation.

Prospects of successful ADR

  1. In this case there were two parties who had a commercial relationship. One party, NGM, clearly felt aggrieved that BAE had terminated a contract for convenience when NGM had negotiated the Licence Agreement on the basis of the early commitment to buying licences at a lower price. The other party, BAE, clearly felt that it had the right to terminate in circumstances where it no longer needed any licences. I consider that this is just the situation where a mediator could assist the parties in resolving the dispute and avoid wasted management time and soured relationships even if, as large commercial entities, the effect will not be serious or long lasting.
  2. This was a classic case where I consider that a mediator could have brought the parties together. In assessing the prospects of success I do not consider that the court can merely look at the position taken by the parties. It is 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. It ignores the ability of the mediator to find middle ground by analysing with each party its expressed position and making it reflect on that and the other parties’ position. It allows the mediator to bring the necessary skills of evaluation and facilitation to find solutions which have not been considered. These may include such things as bringing other commercial arrangements or disputes into the discussion or, in this case, resolving the consequences of termination or finding future opportunities for the software or licences.
  3. The published success rate of mediation (see para 13.03 of the Jackson ADR Handbook) shows that generally mediation is likely to be successful. In this case for the reasons set out above, I consider that this is a dispute between parties where a mediated settlement would have been likely. There were therefore reasonable prospects of success.


  1. This is therefore a case where the nature of the case was susceptible to mediation and where mediation had reasonable prospects of success. However, BAE reasonably considered that it had a strong case. On that basis was it unreasonable for BAE to reject NGM’s offer to mediate? I have come to the conclusion that it was. Whilst BAE’s view of their claim provided some justification for not mediating, I consider that the other factors show that it was unreasonable for BAE not to mediate the dispute. Whilst BAE point out that the matter was resolved by a comparatively short Part 8 hearing, even that would have been likely to have been avoided by the use of mediation.
  2. 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.
  3. However, the refusal to mediate is not the only factor to take into account in this case. CPR 44.2(4)(c) points out that one of the circumstances to be taken into account in deciding what order to make in relation to costs includes “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“. The “without prejudice save as to costs” letter of 20 January 2014 was just such an admissible offer. Whilst the existence of the letter does not justify a refusal to mediate, it is independently a relevant factor that BAE made an offer which NGM was not successful in bettering. NGM’s conduct in not accepting that offer is similarly a matter to be taken into account.
  4. 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. Whilst 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.
  5. Overall, in this case, I have come to the conclusion that the fair and just outcome should be that neither party’s conduct should be taken into account to modify what would otherwise be the general rule on costs.
  6. Accordingly, the appropriate order is that NGM should pay BAE its costs, to be assessed on a standard basis, if not agreed, without any reduction.”


This case requires careful reading because:

  • The judge made it quite clear that is was unreasonable for BAE not to consider mediation, despite it having a strong case.
  • The “drop hands” letter appears to have been of some importance in the consideration of the overall costs award.
  • BAE received all its costs despite the unreasonable failure to mediate.

This highlights the danger of refusing to mediate.  The judge clearly took into account the fact that there had been attempts at settlement and that the claimant would have been better off if it had accepted the first “drop hands” offer.