Mediation: an update
Mediation remains firmly at the forefront of the judicial radar. A new pilot mediation scheme has been set up in the Court of Appeal, in which its judges will normally refer appeals involving contractual, personal injury and clinical negligence claims with up to £100,000 at stake to mediation. Over the past 12 months, there have been a number of cases where the benefits of mediation have been rightly stressed. In Faidi v Elliot Corporation,1 LJ Elias reminded the parties that “before embarking upon full-blooded adversarial litigation, parties should first explore the possibility of settlement.” However, as we set out below, the road to mediation is not always straightforward.
The enforceability of mediation agreements
In Sulamerica CIA Nacionel De Seguros SA & Others v Enesa Engenharia SA & Others,2 a dispute arose about two all risk insurance policies covering the construction of one of the world’s largest hydro electric facilities, in Brazil. Conditions 11 and 12 entitled “Mediation” and “Arbitration”, stated:
“11 ...If any dispute or difference of whatsoever nature arises...the parties undertake that, prior to a reference to arbitration, they will seek to have the Dispute resolved amicably by mediation…”
“12 ... In case the Insured and the Insurer(s) shall fail to agree as to the amount to be paid under this Policy through mediation ..., such dispute shall then be referred to arbitration under ARIAS Arbitration Rules.”
The question arose before Cooke J as to whether the right to arbitrate only arose if the requirements to mediate in condition 11 had been complied with. What had happened here was that the insurers had not sought to mediate prior to commencing arbitration. The insured argued that the mediation and arbitration clauses 11 and 12 were part of a single dispute resolution regime and that mediation was a condition precedent to arbitration under that regime. This meant that the commencement of arbitration proceedings was premature.
Here the Judge thought that there were a number of major difficulties which stood in the way of the submission that condition 11 was an enforceable obligation. First, there was no unequivocal commitment to engage in mediation. The Judge referred to and accepted the decision Mr Justice Ramsey in Holloway v Chancery Mead,3 who expressed the view that an agreement to enter into a prescribed procedure for mediation is capable of giving rise to a binding obligation. However this was provided that matters essential to the process did not remain to be agreed.
However condition 11 did not meet those requirements, because it contained no unequivocal undertaking to enter into a mediation, no clear provisions for the appointment of a mediator and no clearly defined mediation process. The parties had agreed that “they will seek to have the Dispute resolved amicably by mediation” but did not bind themselves to do so in clear terms. The parties only agreed in general terms to attempt to resolve differences in mediation. There was no agreement to enter into any clear mediation process, whether based on a model put in place by an ADR organisation or otherwise. Finally, there was no provision for the selection of the mediator. This would all need to be agreed separately. Condition 11 by itself was not enough to establish what the parties had to do.
Therefore the court would not be able to determine whether or not a party had complied with the “obligations” allegedly imposed. If, for example, the parties were unable to reach agreement on a mediator or on the form of mediation and it was suggested that by one party that had not sought to have the dispute resolved by mediation, how would the court determine which party was in breach? Taken altogether, this meant that there was no condition precedent requiring the parties to mediate prior to any arbitration.
On appeal,4 the Court of Appeal accepted that the parties intended the mediation clause to be enforceable and the court should be slow to hold that they had failed to achieve that objective. Nevertheless, each case must be considered on its own terms and, in this case, the clause was not effective in law because it failed to define the parties’ rights and obligations with sufficient certainty. In particular, Lord Justice Moore-Bick noted that clause 11 did not set out any defined mediation process, nor did it refer to the procedure of a specific mediation provider. Finally, The Court of Appeal also rejected the insured’s argument that, at the very least, the insurer was required to show that, as a matter of fact, it had satisfied condition 11. The court held that if “mediation is not defined with sufficient certainty, the condition cannot constitute a legally effective precondition to arbitration.”
Failure to mediate (Part 1)
In the case of PGF II SA v OMFS Co & Anr,5 on 10 January 2012, the day before the trial was due to start, PGF accepted a Part 36 offer that had been made on 11 April 2011. This left the question of costs. PGF at the time OMFS made their Part 36 Offer proposed mediation. No response was received. PGF tried again in July 2011. Again no response was received. PGF relied on the Halsey principle which says that, as an exception to the general rule that costs should follow the event, a successful party may be deprived of its costs if it unreasonably refuses to mediate. PGF said that the case was well suited to mediation. The Judge, Recorder Furst QC, noted that the skill of a mediator lies in drawing out seemingly intractable positions. The costs of mediation would not have been disproportionately high nor would it have caused delay.
OMFS said that it was not unreasonable for it to have refused to mediate given what had occurred between these parties at a previous mediation which had taken place in 2010 in relation to another dispute. The Judge was provided with letters which referred to the conduct of that mediation. OMFS further said that it had to wait until autumn 2011 before receiving full disclosure and the expert evidence on air conditioning, one of the main issues dividing the parties, was only exchanged in November 2011. Therefore it would not been able to engage in a reasonable discussion as to settlement in April 2011.
The Judge held that it was it was unreasonable of OMFS not to respond to the suggested mediation. A party does not need to show that the mediation would have been successful, merely that it had a reasonable prospect of success. Here as in most cases, there was a reasonable prospect that well advised commercial parties, such as these, with the benefit of experienced lawyers would have been able to reach an accommodation. The Judge arrived at his decision without considering the conduct at the previous mediation. Mediations are covered by without prejudice privilege, which had not been waived by PGF.
Second, had PGF’s conduct been a reason for refusing to participate in mediation in relation to this matter then one would have expected that to have been put forward by OMFS in answer to the invitation to mediate. Again the absence of expert valuation evidence on diminution in value was not raised at the time. Further PGF offered to provide OMFS with a copy of its report. The Judge noted that:
“In general …the court should be wary of arguments only raised in retrospect as why a party refused to mediate or as to why it cannot be demonstrated that a mediation would have had a reasonable prospect of success. First such assertions are easy to put forward and difficult to prove or disprove but in this case unsupported by evidence. Secondly, and in any event, it is clear that the courts wish to encourage mediation and whilst there may be legitimate difficulties in mediating or successfully mediating these can only be overcome if those difficulties are addressed at the time. It would seem to me consistent with the policy which encourages mediation by depriving a successful party of its costs in appropriate circumstances that it should also deprive such a party of costs where there are real obstacles to mediation which might reasonably be overcome but are not addressed because that party does not raise them at the time. I have little doubt that that is the position here, namely that any such inhibitions to mediation could have been overcome at the time…”
Failure to mediate (Part 2)
In Mason and others v Mills & Reeve (A Firm),6 one of the issues that the Court of Appeal had to consider was an appeal by the successful party against the decision to impose a costs penalty for having refused to participate in a mediation. This refusal was despite the fact that proposals for ADR had not just been made by the claimants but also the trial judge. The position of the defendant was that the claim had no merit, a view that had been vindicated at the trial. The view, however, of the trial judge was that claimants’ prospects of success “was at variance with the result in the judgment in a number of respects.” He in particular noted that a successful mediation would have avoided the risk of “collateral reputational damage” to the defendant and also that mediation would have allowed both parties to gain a better understanding of the weaknesses of their cases something which might have encouraged a settlement. This led the trial judge to hold that:
“It seems to me that the Defendant’s attitude in simply refusing even to contemplate the possibility of mediation on the grounds that the claim was utterly hopeless was an unreasonable position to take. Accordingly, I consider that the Defendant’s attitude to mediation is a factor that should be brought into account in making an overall assessment of what costs order should be made.”
The Court of Appeal did not agree with this approach. Davis LJ stressed that the trial Judge had found that the defendant had been “vindicated” in its assessment of the strength of the claimants’ case which meant that its position, maintained throughout, had been shown to be justified. Further the Judge did not explain what “weaknesses” in the respective cases would have been revealed in a mediation. It was also not said that if identified, their revelation could have led to a mediated settlement. In addition Davis LJ did not understand why avoidance of “collateral reputational damage” to the defendant should have been considered a relevant factor, counting against the defendant. A settled professional negligence claim was capable, in some instances, of leaving behind reputational damage. Some professional defendants might, entirely reasonably, wish publicly to vindicate themselves at trial in respect of claims which will have been publicly aired by the commencement of proceedings. The Judge noted:
“It would be unfortunate if claimants in cases of this kind could be encouraged to think that such a consideration as identified by the judge could enhance their bargaining position.”
Davis LJ also had concerns in respect of the trial Judge’s assessment that the possibility of a mediated settlement was “not unrealistic”. At all stages the parties “in reality were a hundred miles apart.” The claimants had sought £750k and costs. The defendant’s best offer had never been more than a “drop hands” approach. It was therefore difficult to see how a mediation could have had reasonable prospects of success. Further, unlike many cases, nothing changed to necessitate a re-evaluation on the question of liability. Davis LJ concluded that:
“A reasonable refusal to mediate does not become unreasonable simply by being steadfastly, and for cause, maintained.”
The key historic decision in these types of cases is, of course, the Halsey7 case. Davis LJ noted that the Court of Appeal here was concerned to make clear that parties were not to be compelled to mediate, saying that ADR was not appropriate for every case. The Court of Appeal in Halsey also identified the situation where a party reasonably believes that he has a strong case as being the type of situation where ADR might not be appropriate, otherwise there was scope for a claimant to use the threat of costs sanctions to extract a settlement even where the claim is without merit. This was the situation here. The unsuccessful party (the claimants) was not therefore able to show that the successful party (the defendant) had acted unreasonably in refusing to agree to mediate. This lead the Court of Appeal to reassess the original costs order, that the claimants pay 50% of the defendant’s costs. This reassessment could only be done with what was described as a broad brush which lead the Court of Appeal to increase the percentage of costs awarded to the defendant to 60%.