In Paul Richards and another v Speechly Bircham LLP and another (Consequential Matters)  EWHC 1512 (Comm), the High Court refused to make an award for indemnity costs where a party unreasonably refused to mediate. The judgment contains a useful example of the analysis the court will undertake to determine whether a refusal to mediate is unreasonable and, if so, whether a sanction should apply. It also serves as a useful reminder to parties that a refusal to mediate will not always result in serious costs sanctions even if such refusal is determined by a court to be unreasonable.
The claimants sued their former solicitors, and after trial, of the total of approximately £4.7m in damages claimed, they were awarded approximately £1.5m. In other words, they succeeded in around 30% of their claim.
The claimants sought their costs of the underlying claim on the indemnity basis (as opposed to the standard basis) alleging that the solicitors had unreasonably refused to mediate. The solicitors had in fact refused four separate offers to mediate.
The solicitors denied that their refusal to mediate was unreasonable. They said that they had made a “measured” Part 36 offer of £500,000 (in contrast, the claimants’ Part 36 offers were in the sum of £4.25m and £3.5m respectively) and that one of their barristers had had a without prejudice discussion with the claimants’ barrister. The solicitors also argued that their position had been that a mediation should follow disclosure, but no offer to mediate was made after disclosure.
The competing bases of costs assessment and why the distinction matters
In England and Wales, the default position in litigation is that the unsuccessful party pays the successful party’s costs. For most commercial disputes above a certain value, the level of costs that the loser pays the winner will be subject to a separate assessment process if the parties cannot agree the amount payable.
Two principles of costs assessment are that:
- The court will not allow costs that have been unreasonably incurred or are unreasonable in amount.
- The court will only allow costs that are proportionate to the matters in issue (save as set out below).
The two bases of assessment are:
- The “standard” basis, where the court will resolve any doubt it has regarding reasonableness in the favour of the paying party.
- The “indemnity” basis, where any doubt about the reasonableness of the costs claimed is resolved in favour of the receiving party, and there is no requirement for those costs to have been proportionate to the matters in issue.
The effect of this is that an award of costs on the indemnity basis will typically lead to a significantly higher costs award than one on the standard basis.
The court determined that the solicitors’ refusal to mediate was unreasonable. Their concerns regarding disclosure could have been addressed either before or during the mediation. Further, the solicitors’ Part 36 offer was made only just over three months before the trial, which indicated apathy on their part towards the ADR process.
However, the solicitors also raised an alternative argument: that an unreasonable refusal to mediate was simply a point for the court to take into account when exercising its discretion to make an award of costs. The court noted that an unreasonable failure to mediate does not result in an inevitable costs sanction because it is difficult to determine the effect of the refusal on a process that the court could not examine in detail as it was protected by without prejudice privilege. The outcome of any mediation is by its very nature uncertain, and this creates a difficulty in determining whether its absence would in fact have led to a costs saving.
The judge decided to award the claimants their costs on the standard basis up to and including trial. He considered that this was an appropriate “sanction” (his quotation marks) taking into account the unreasonable failure to mediate, but also the fact that the solicitors successfully resisted almost three quarters of the claimants’ claim and beat both of their Part 36 offers.
Given that an unsuccessful defendant can expect to find itself on the wrong end of an order for costs to be assessed on the standard basis, it would not be a stretch to conclude that, to the extent that the judge’s award was a sanction at all, it was a very mild one.
The stringent nature of the costs regime under Part 36 of the Civil Procedure Rules makes it easy to forget that, when it comes to costs more generally, the courts have a broad discretion. At a consequentials hearing, the court will have the opportunity to review the parties’ conduct of the proceedings as a whole to assist it in determining the basis on which to award costs.
This judgment is a useful reminder that a refusal to mediate will not necessarily of itself lead to punitive sanctions even if it is unreasonable. However, it should not be seen as giving parties to a dispute carte blanche to forge ahead to their day in court without making proper attempts to reach a commercial settlement. Unreasonably refusing to mediate as part of a litany of truculence carries the risk of serious costs consequences, and whilst it may not do so if it is justifiable in the context of a party’s conduct as a whole, a reasonable approach to settlement will always be in a litigant’s best interest.