INDEMNITY COSTS NOT AWARDED WHEN A DEFENDANT REFUSED TO MEDIATE: HIGH COURT DECISION TODAY

In  Richards & Anor v Speechly Bircham Llp & Anor (Consequential Matters) [2022] EWHC 1512 (Comm) HHJ Russen (sitting as a High Court judge) refused an application for indemnity costs made on the basis that the defendants had refused mediation. The judge held that the defendants had been unreasonable in failing to mediate, however such refusal did not automatically lead to costs penalties.  In particular such an order could elevate a failure over and above the importance of making realistic Part 36 offers.

“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.”

THE CASE

The claimants obtained judgment at trial for £1.45 million.  This judgment dealt with issues relating to costs and interests.

THE CLAIMANTS’ APPLICATION FOR INDEMNITY COSTS

The claimants sought indemnity costs on the basis of the defendants’ refusal to engage in mediation.

THE JUDGMENT ON THE INDEMNITY COSTS APPLICATION

1. 1. The Claimants say they are the successful party under the Judgment and that under the general rule (CPR 44.2(2)(a)) the Defendants should be ordered to pay their costs of the proceedings. They seek the assessment of those costs on the indemnity basis, on the ground of what is said to have been the Defendants’ unreasonable refusal to engage in mediation.

1. 1. They also seek a payment on account of their costs recovery (CPR 44.2(8)) in the sum of £787,388.40 including VAT (£656,157 excluding VAT). That sum is calculated by taking 75% of the incurred costs and 90% of the approved estimated costs as those appeared in the front sheet of the Claimants’ costs budget appended to the Order of HHJ Pelling QC dated 16 April 2021.

1. 1. The Defendants accept that they are liable to pay the Claimants’ costs. However, they say the assessment should be on the standard basis. They say an appropriate payment on account the costs would be £600,000 including VAT.

1. 1. 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.

1. 1. 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.

1. 1. He relied upon the decision of HHJ Waksman QC (as he then was) in Garritt-Critchley v Ronnan [2014] EWHC 1774 (Ch); [2015] 3 Costs LR 453. 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.“

1. 1. 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.

1. 1. Mr Leiper QC also relied upon the reference in Costs & Funding Following the Civil Justice Reforms (8^th ed, as contained in the 2022 White Book supplement) to the “constant pressure from the judiciary and court users for greater use of ADR.” He said the defendant firm was particularly well-placed to appreciate this encouragement rather than disregard it.

1. 1. The Defendants resist an order for costs on the indemnity basis by saying their approach to mediation was not unreasonable and that, in any event, an unreasonable refusal to mediate is only one facet of a party’s conduct to be taken into account when determining costs. 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.

1. 1. 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.

1. 1. 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.

1. 1. The parties have made comprehensive and helpful written submissions on the question of whether or not indemnity costs should be ordered on the basis that the Defendants unreasonably refused to engage in a mediation. I have considered them in the light of the relevant correspondence and do not intend to repeat them in full here.

1. 1. 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.

1. 1. 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.

1. 1. 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.

1. 1. In conclusion, the Defendants’ reliance upon 5 of the 6 factors identified by Ramsey J in Northrop Grumman v BAE Systems at [56ff] as bearing upon the reasonableness of a refusal to mediate – (1) the nature of the dispute; (2) the merits of the case; (3) attempts at other settlement methods; (4) costs of ADR; (5) the prospects of successful ADR – does not assist them.

1. 1. However, 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…”.

1. 1. In Gore v Naheed the defendant appellants did not rely upon what they contended to have been the claimant’s unreasonable refusal to mediate in support of an argument for indemnity costs. Instead, as the losing party liable to pay the claimant’s costs, they argued that judge should have made some allowance in their favour for the fact that the claimant had either refused to or failed to engage with their proposal of mediation. That had also been the thrust of the unsuccessful argument (for a discount in the costs liability to reflect an unreasonable refusal to mediate) in Northrop Grumman. It was unsuccessful in that case because the judge found that the defendant’s conduct in unreasonably refusing to mediate was balanced out by the claimant not accepting an offer which they failed to better.

1. 1. The Court of Appeal in Gore v Naheed concluded that the judge’s refusal to make any such allowance was not wrong in principle and declined to interfere with his order. The case concerned declaratory and injunctive relief over a right of way and the judge had said that he considered that the case raised quite complex questions of law which made it unsuitable for mediation. Patten LJ expressed his own view in more general terms when he questioned whether “the desire of a party to have his rights determined by a court of law in preference to mediation can be said to be unreasonable conduct particularly when, as here, those rights are ultimately vindicated“. He went on to endorse the observation that even an unreasonable failure to engage in mediation does not automatically result in a costs sanction.

1. 1. 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.

1. 1. 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.

1. 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.