Mediation: the carrot and stick approach

As a mediator, I prefer people to use my services because good things happen rather than to avoid bad things happening. There have been a number of recent examples where bad things - costs penalties - have happened to people found by the courts to have unreasonably refused mediation. I will take a look at those sticks later, but first let's have a look at the carrots.

Settle claims early

There are significant benefits to clients, insurers and lawyers in mediating and settling claims early. Clients want to settle legal disputes as quickly as possible to reduce their legal fees. This applies to claimants on Conditional Fee Agreements (CFAs) who fund the success fees out of their compensation. Parties rarely relish the prospect of going to court and giving evidence. Apart from the legal fees, there can be significant costs of preparation, lost management time and other opportunity costs associated with litigation, which can be difficult to quantify. Businesses may be concerned about losing clients with whom they are in dispute, which is likely to happen if they get a 'winner and loser' result at court but can be avoided in mediated settlements. Claimants have a cash-flow issue and want to recover damages and costs as quickly as possible.

Insurers want to reduce the life cycle of cases. They want to manage risks and reduce their legal spend, which are usually translated into key performance indicators (KPIs) for their panel firms. This leads on to the benefits to lawyers. Delivering early settlements at the right price will contribute to competitive results and meet or exceed insurer-clients' expectations. Similarly, claimants achieving satisfactory results quickly will be satisfied clients likely to return for more of the firm's services or to refer new clients. Claimant solicitors on CFAs can reduce the risk of zero recovery and also improve cash flow by shortening the duration of the claim, converting work in progress (WIP) into cash more quickly. Mediation is not the best thing since sliced bread, but it does have tangible financial benefits to clients, insurers and their lawyers in appropriate cases.

Penalties in costs

There has always been the potential for parties to be penalised in costs for unreasonably refusing to mediate. In a recent flow of cases the penalties have sometimes been severe. The defendant in PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288 failed to recover the £250,000 in costs incurred after it had made a Part 36 offer which was accepted by the claimant one year later. In the unreported case of Lynn v Borneos LLP t/a Borneo Linnels (30th January 2014), the court denied a successful defendant 40 per cent of its costs following a trial. The defendant in Garritt-Critchley and Others v Ronnan and Solarpower PV Limited [2014] EWHC 1774 (Ch) paid indemnity costs to the successful claimant after a trial. It is clear that winners or losers who have unreasonably refused to mediate are being penalised.

Before these cases, and the case of Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2) [2014] EWHC 3148 (TCC), came along, it was relatively easy to 'reasonably refuse' to mediate. The

Court of Appeal in Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 laid down a non-exhaustive list of factors relevant to the question, which I call the 'Halsey reasons'. Dyson LJ outlined them at paragraph 16:

"… factors which may be relevant to the question whether a party has unreasonably refused ADR will include (but are not limited to) the following: (a) the nature of the dispute; (b) the merits of the case; (c) the extent to which other settlement methods have been attempted; (d) whether the costs of the ADR would be disproportionately high; (e) whether any delay in setting up and attending the ADR would have been prejudicial; and (f) whether the ADR had a reasonable prospect of success."

The recent cases have systematically dismissed arguments relating to the Halsey reasons. In the PGF case, as well as making it clear parties must respond promptly and clearly to offers to mediate, the court set aside arguments about the merits of the case and whether or nor mediation had reasonable prospects of success. The same arguments were disregarded in the Lynn case. In Garritt-Critchley, the judge dealt with arguments about all the Halsey reasons apart from attempts at other settlement methods and delays, which were not relevant in the case. In the Northrop Grumman case, the defendant was held to have unreasonably refused to mediate. The fact that the judge considered the defendant to have had a reasonable view that it had a strong case was a factor which provided some, but not enough, justification for not mediating. When considering prospects of success, the court should not just consider the position of the parties because that "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".

Lawyers, insurers and clients should consider the benefits when deciding whether or not to use mediation to persuade opponents to get around the table.

Philip Hesketh is a mediator and director at Trust Mediation and Expedite Resolution, which works closely with the Chartered Institute of Arbitrators

www.ciarb.org