Costs Consequences of refusing to mediate

One of the "underlying objectives" of the High Court and District Court rules, brought in by the Civil Justice Reforms, on 2 April 2009, is to facilitate the settlement of disputes.  These rules place a duty on the court to further the underlying objectives, by actively managing cases, including, where appropriate, encouraging parties to use Alternative Dispute Resolution ("ADR") procedures (i.e. alternative to litigation) and facilitating the use of such.  The parties and their legal representatives are also under a duty to assist the Court in discharging its duty.

A common form of ADR is mediation, a voluntary procedure, in which a trained and impartial third party (called a mediator) helps the parties settle their dispute.  The mediator helps the parties discuss the issues in dispute, identify their real needs and interests, explore possible settlement options and reach a settlement agreement.  If the mediation results in settlement, an agreement will be drawn up containing the agreed terms and, once signed by the parties, will be legally binding.  If the mediation does not result in a settlement, the parties can still litigate their dispute.

A court Practice Direction on Mediation ("the Mediation Practice Direction"), which came into effect on 1 January 2010, requires parties to legal proceedings to consider using mediation to resolve their dispute.  It requires each party's solicitor to file a Mediation Certificate with the court stating whether the party is willing to attempt mediation and, if not, why not.  If the court considers that a party has unreasonably refused to engage in mediation, it may make an adverse costs order against that party.  If, for example, a party refuses to engage in mediation and insists on litigating a matter to trial, even if that party wins at trial, the court may decline to award him his legal costs, if it considers that his refusal to mediate was unreasonable.

This article looks at some court decisions involving a party refusing to mediate and the consequence of such refusal.

What is the minimum level of participation required?

The Mediation Practice Direction provides that in exercising its discretion in relation to legal costs, the court takes into account all relevant circumstances, including any unreasonable failure by a party to engage in mediation.  It says that the court will not make any adverse costs order against a party on the ground of unreasonable failure to engage in mediation where:

(1) The party has engaged in mediation to the minimum level of participation agreed to by the parties or as directed by the court prior to the mediation; or

(2) A party has a reasonable explanation for not engaging in mediation, such as: –

(i) where active without prejudice settlement negotiations are progressing between the parties.  However, where such negotiations have broken down, the basis for such explanation will have gone and the parties should then consider the appropriateness of mediation; or

(ii) where the parties are actively engaged in some other form of ADR to settle the dispute.

In Resource Development Limited v Swanbridge Limited (HCA1873/2009), 31 May 2010, the court held that the whole purpose of having a "minimum level of participation" requirement is to ensure that the parties participate in mediation in a sincere manner.  The court said that it should not impose anything more than necessary for the parties to participate because mediation is voluntary and any party can decide to terminate it at any stage.  To make an inflexible direction in relation to the minimum level of participation, the court said, may generate other unnecessary disputes between the parties.  The court held that the minimum level of participation should be as stated in the Mediation Practice Direction i.e. "Agreement between the parties as to the identity of the mediator and the terms of his or her appointment, agreement as to the rules applicable to the mediation (if any) and participation by the parties in the mediation up to and including at least one substantive mediation session (of a duration determined by the mediator) with the mediator".

In Hak Tung Alfred Tang v Bloomberg L.P. (a firm) and Others (HCA 198/2010), 16 July 2010, the Plaintiff was concerned with the time involved in a mediation because he had to travel between Hong Kong and the Mainland for business.  He considered it unacceptable to allow the mediator unlimited power to call meetings for mediation from time to time, but said that he did not mind having three hours for mediation.  The court said that the "minimum level of participation" should not be construed as a number of hours for mediation and that the quality rather than quantity of mediation should count.  The court said that if the parties were sincere in resolving their dispute by mediation, the mediation may take a very short period of time and, on the contrary, if not sincere, the length of the mediation would not assist them.  The Plaintiff, the court said, should have confidence in the mediator to determine the length of the mediation.  As mediation was voluntary, a party who considered the mediation unhelpful or unable to assist the parties to settle, could terminate the mediation at any time and whether such decision to terminate was reasonable would be for the trial judge to decide.  The court again directed that the minimum level of participation should be as set out in the Mediation Practice Direction, as referred to above.

In Golden Eagle International (Group) Ltd v GR Investment Holdings Ltd (HCA 2032/2007), 24 May 2010, the parties had agreed on the judgment sum, but the Plaintiff sought an award of costs on an indemnity basis (i.e. on a higher basis than usual) for several reasons, one of them being the Defendant's unreasonable refusal to mediate.  The Defendant argued that:

• as the dispute concerned the construction of an agreement which turned on the background knowledge of the parties and factual matrix of the case, it was not a dispute that could be easily mediated;
• they reasonably believed they had a strong case;
• a settlement offer had previously been made to the Plaintiff; and
• the cost of mediation would be disproportionately high.

The court held that the burden was on the party refusing to mediate to provide a reasonable explanation for such refusal.  The burden was not on the willing party to show that mediation had a reasonable prospect of success.  In the present case, the court said that the Defendant had not provided any reasonable explanation for refusing to mediate and he should therefore pay the Plaintiff's costs on a common fund basis (i.e. on a higher basis of taxation than usual).

The court said that:-

(1) This was a case involving a simple, one-off contract dispute which did not raise any point of law, the determination of which would provide guidance for the future, whether for the parties or others in the trade.

(2) Nor was it a case where injunctive or other protective relief was sought.

(3) At its highest, the Defendant's defence could only be regarded as a "borderline" one.

(4) The Defendant's settlement offer had been "way off the mark", but the wide difference between the parties did not indicate that mediation would be a waste of time and effort.

(5) There was no factual basis for the submission that the cost of mediation would be disproportionately high.

In Ansar Mohammad v. Global Legend Transportation Ltd (HCPI 1037/2007), 23 November 2010, which was an action commenced before implementation of the Civil Justice Reforms, the Plaintiff's solicitors had written to the Defendant's solicitors (again, before implementation of the Civil Justice Reforms and the Mediation Practice Direction) proposing mediation.  The Defendant's solicitors did not respond to this proposal.  The court held that this amounted to a refusal to mediate and that the Defendant's explanation for refusal (that the Civil Justice Reforms and Mediation Practice Direction had not yet been implemented) did not amount to a reasonable explanation.  The court therefore reduced the costs awarded to the Defendant by 20%.  The court said that had the mediation regime been in effect at the time it had refused to mediate, the Defendant would very likely have been at risk of being deprived of its entire costs.

The above decisions show that the courts take a party's refusal to mediate very seriously and will have no hesitation in penalizing a party in costs where such refusal is deemed unreasonable. Further, there will be very few circumstances where the court will find that a party's refusal to mediate is reasonable.  Accordingly, in most cases, it will be wise for the parties to engage in at least the minimum level of mediation required or else face the risk of being penalized in costs.