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Costly Consequences for Declining Mediation 

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This article aims to explain what mediation is and why it should not be dismissed in construction disputes. 

Disputes arising from construction contracts are common.  Whilst statutory adjudication has provided a compulsory and temporarily binding platform for construction disputes to be settled outside of court, parties must not overlook other forms of alternative dispute resolution (“ADR”), particularly mediation, as a forum for negotiation before referring a dispute to adjudication or litigation.  HHJ Waksman QC summarised the importance of mediation in Garritt-Critchley v Ronnan (2014): “Parties don’t know whether in truth they are too far apart unless they sit down and explore settlements” 

What is mediation? 

Mediation is a form of ADR whereby the parties to a dispute consent to a third-party mediator being appointed to oversee and assist negotiations.  Mediation can be initiated at any time; it aims to facilitate flexible commercial bargaining whilst avoiding more expensive forms of dispute resolution such as adjudication or litigation.   

Mediation is non-binding as the mediator has no legal power and he does not make a Decision but rather facilitates the attempts to resolve the dispute.  Mediation will generally succeed if both parties have some common ground i.e., both agree that party A owes Party B money, but the dispute is over how much.  Thus, if the parties do not reach an agreement, then the mediation process fails.  

Why mediate? 

By suggesting mediation, the party in question (Party A) is affording the other party (Party B) with an opportunity to negotiate the dispute on a without prejudice basis; Party A are demonstrating a willingness to engage in ADR before referring the dispute to a more expensive process.  It has been a long-established position at common law that parties should show this willingness to engage in ADR wherever possible; see for example Dunnett v Railtrack Plc (2002); Hurst v Leeming (2002); Shirayama Shokusan Co Ltd v Danova Ltd (2003)).  There are commercial and public policy reasons for this, which include:  

  1. ADR can preserve good commercial relationships;  
  1. ADR takes less time and money than other processes;  
  1. Greater privacy is afforded to the parties; and  
  1. ADR helps to relieve pressure on the court system.  

This is emphasised by Part 1 of the Civil Procedure Rules (“CPR”) which underlines this duty to engage in cost effective and active management of disputes.  This included the ability for Parties to make offers to settle disputes via Part 36 of the CPR.  

Cost penalties for refusing mediation 

Considering the above, it is unsurprising that where parties have declined the request to mediate, hefty penalties (i.e., indemnity costs) have been imposed by courts where no response or good reason has been given.   

In PGF II SA v OMFS Company 1 Ltd (2013) the court made it clear that ‘a failure to provide reasons for refusal is destructive’ thereby emphasising the courts clear desire for parties to engage in ADR.  Whilst failure to respond to a mediation request or failure to provide reasons will not automatically result in penalties, these factors will be considered in the context of the overall conduct of the parties in the wider dispute.  Even where a party has been successful in litigation, they can be penalised in costs for ignoring an earlier mediation proposal (for example Royal Bank of Canada v Secretary of State for Defence (2003)). 

i. DSN v. Blackpool Football Club Ltd (2020) 

DSN v Blackpool Football Club demonstrates that the courts are willing to penalise parties who refuse mediation when the court is deciding the issue of costs.  The penalised party in this case gave only one reason for refusing mediation and failing to respond to CPR Part 36 offers, that reason being that they believed that they had a “strong defence”.  The court held that “[n]o defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution”.  The court here referred to a passage in OMV Petrom SA v Glencore International AG (2017) to remind the parties that: 

 “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.”  

The court found that an interim payment of £200,000 on account of costs should be ordered – otherwise known as indemnity costs.  The court conveyed a clear message here: Parties must engage in ADR; it is not enough for parties to dismiss offers to mediate on the basis that they believe that they have a strong case.  Where parties do not engage in ADR but are successful in litigation then indemnity costs can still be used to penalise them for defaulting straight to litigation.  

ii. Are there alternatives to mediation? 

Corenso (UK) Limited v The Burnden Group Plc (2003) provides authority for the fact that mediation is not the only viable form of ADR for the parties to a dispute.  In this case, the defendant made a Part 36 Offer of £64,000.  Before the trial, the Part 36 offer was then increased to £90,000 before and was accepted by the Claimant.  However, the Defendant sought cost penalties to be imposed on the Claimant for refusal to mediate. 

The court held that a party may refuse mediation if it engages in other forms of ADR and so the Claimant was not penalised.  The Claimant here had considered mediation and contended that it was not the right platform to address the dispute; they instead engaged in negotiations throughout the dispute and made it clear that they were willing to settle the matter without the need for litigation.  This case demonstrates that where the parties show a genuine willingness to approach the dispute constructively, cost penalties will not be automatically imposed for refusing mediation.  

QG Comment 

Courts still regard ADR as being a fundamental pillar of dispute resolution.  Whilst mediation is one of the most commonly used forms of ADR, it is not an absolute must for the parties to a dispute, provided they demonstrate a clear willingness to engage in constructive dispute settlement before referring the dispute to litigation. 

When deciding the issue of costs, the court will generally consider a range of factors, including: 

  • The nature of the dispute; 
  • The facts of each individual case; and 
  • Whether ADR has been attempted. 

The parties to a dispute arising out of a construction contract would therefore be advised to demonstrate a willingness to mediate and/or reach an amicable settlement of the dispute before issuing a claim form.  Should the mediation be successful, then it can save thousands of pounds in legal costs.  Should the mediation be unsuccessful, then it is not binding, and either party could consider referring the dispute to be decided by an Adjudicator.   

Should the dispute then progress to court, the court will consider the conduct of the parties and their attitudes towards ADR when determining costs.  

Quigg Golden represent parties in mediations.  Please do not hesitate to contact us if any of the above issues concern you or your business.  

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