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The Use of mediation to settle construction disputes

By Nicholas Gould
Paper given to supplement an Einstein Network television programme
December 2003

1.1 Historical background

The term ‘ADR’ has attracted some considerable attention in the legal and related fields since around the mid-1980s. The term is most frequently taken to mean ‘alternative dispute resolution’, although some suggested it should mean ‘appropriate dispute resolution’ (in selecting the most sensible course of action) or ‘amicable dispute resolution’ (insofar as it relates to the parties reaching settlement by way of ‘round table talks’). The concept of a range of dispute resolution techniques available as an alternative to the court system, or indeed arbitration, is not new. The more recent advent of the term ‘ADR’ is usually taken to mean a voluntary, consensual dispute resolution process. The most frequently encountered process is that of mediation. Mediation involves the use of a third party mediator who assists the parties to arrive at a voluntary negotiated settlement. The origins of mediation can be traced back to ancient China, however the more formalised technique of commercial mediation was principally developed in the United States. In the UK, mediation was initially taken seriously in the resolution of family disputes, but has since expanded into all commercial areas.
Much literature has been published on the subject of ADR and, in particular, mediation. The purpose, therefore, of this paper is not to rehearse those arguments, but to provide an update in respect of recent events in the area of ADR and, in particular, mediation. The purpose of this paper is threefold:

  • To consider the approach of the courts to mediation in the light of recent case law;
  • To outline the relatively new process of ‘contracted mediation’ – sometimes referred to as ‘project mediation’; and
  • To outline the developments of the Construction Conciliator’s Group with regards to residential disputes.
    Before turning to these three main issues, this paper briefly sets out a reminder of the general principles of mediation.

1.2 The general principles of mediation

Mediation is essentially an informal process in which the parties are assisted by one or more neutral third parties in their efforts towards settlement. Mediators do not judge nor arbitrate the dispute. Essentially, they do not make a decision about how the parties should settle their dispute. The power to settle the dispute remains with the parties. Mediators advise and consult impartially with the parties in order to assist in bringing about a mutually agreeable solution to the problem. Some definitions of ‘mediation’ include the following:

‘Mediation is negotiation carried out with the assistance of a third party. The mediator, in contrast to the arbitrator or a judge, has no power to impose an outcome on disputing parties’.(1)

1. Goldberg, S B et al, Dispute Resolution: Negotiation, Mediation and Other
Processes, Second Edition, Little Brown & Co, Boston, 1992, p 103

There are two common threads to mediation. First, the form of the third party intervention. The primary role of this neutral third party is to facilitate other people’s decision making. The process builds on negotiation, and the mediator reviews the situation with the parties. Second, the third party mediator must be independent of the parties in dispute. The essence of mediation is that the mediator is impartial. The trust that develops during the process allows the mediator to perform a bridging role between the parties.

There is some debate about how interventionalist or evaluative a mediator should be. There is no internationally agreed law. It is perhaps more useful to make a distinction between a facilitative and evaluative technique. A facilitative mediator merely tries to aid communication between the parties. Such a mediator will call on many techniques, such as reality testing, in order to persuade the parties to critically review the strengths and weaknesses of their position in order to reach a settlement.

The Centre for Effective Dispute Resolution (CEDR) advocates the facilitative approach to mediation. At the other end of the scale is the evaluative approach. An evaluative mediator comments on the subject matter and makes recommendations as to the outcome. Some argue that the danger with the evaluative approach is that one party may feel that the mediator is ‘finding’ against them and in those circumstances the mediator will compromise his or her neutrality. In summary, the main elements of mediation are therefore:

  • It is a voluntary process in the sense that the parties participate of their own free will. They are free to leave the process of mediation at any time;
  • A neutral third assists the parties towards settlement. The parties do not try to settle the dispute on their own;
  • The process is non-binding unless an agreement is reached. If an agreement is reached and signed, then that agreement becomes binding and enforceable in court; and
  • The process is private, confidential and conducted on a without prejudice basis. Therefore, if the parties do not manage to settle their dispute then they have not prejudiced their legal position should the matter proceed to
    arbitration or litigation.

1.3 The court’s approach to mediation

The initial development of mediation for the resolution of commercial disputes and, in particular, construction industry disputes developed from the industry, its consultants and new organisations such as CEDR. The growth of ADR and
mediation in practice was slow during the 1990s. A much greater awareness had developed by the end of the 1990s. The increased use of ADR and mediation in practice was assisted by the new Civil Procedure Rules that embraced ADR principles.

1.4 The Civil Procedure Rules

ADR and its principles are now embodied at the heart of the Civil Procedure Rules (‘CPR’). These Rules govern litigation in the courts. The overriding objectives of the CPR is set out at CPR part 1: ‘Rule 1.1 The overriding objective

  1. These Rules are a new procedural code with the overriding objective of
    enabling the court to deal with cases justly.
  2. Dealing with a case justly includes, so far as is practicable –

    (a) ensuring that the parties are on an equal footing;

    (b) saving expense;

    (c) dealing with the case in ways which are proportionate –

    (i) to the amount of money involved;

    (ii) to the importance of the case;

    (iii) to the complexity of the issues; and

    (iv) to the financial position of each party;

    (d) ensuring that it is dealt with expeditiously and fairly; and

    (e) allotting to it an appropriate share of the court’s resources, while taking into account the need to allot resources to other cases.


Rule 1.2 Application by the court of the overriding objective
The court must seek to give effect to the overriding objective when it –

(a) exercises any power given to it by the Rules; or

(b) interprets any rule.

Rule 1.3 Duty of the parties
The parties are required to help the court to further the overriding objective’. Essentially, the courts are to deal with cases justly, ensuring that cases are dealt with expeditiously and fairly. However, this is not to be done at any cost, and the courts are expected to ‘save expense’ if reasonably possible. In order to achieve this goal, the courts are to proactively manage cases and encourage parties to use ADR.
All parties to litigation have an obligation to assist the court to further the overriding objective (CPR 1.3). Assistance includes clearly setting out the issues in dispute, identifying key documents and, in particular, attempting to avoid litigation by settling the dispute (see Practice Direction – Protocols 1.4(2)).
This assistance is expected from the parties even before proceedings are commenced in the court by the requirement for the parties to follow pre-action protocols. For building and engineering disputes, the applicable protocol is the Pre-action Protocol for Construction and Engineering Disputes.

1.5 The Pre-action Protocol for Construction and Engineering Disputes

The Pre-action Protocol for Construction and Engineering Disputes applies to all disputes in that category, including professional negligence claims against architects, engineers and quantity surveyors. A claimant must comply with the protocol before commencing proceedings in the court, subject to some exceptions.

Paragraph 1.4 relates to compliance and states that:
‘The court will look at the effect of non-compliance on the other party when deciding whether to impose sanctions’.

Non-compliance with the Construction and Engineering Pre-action Protocol is considered in the case Paul Thomas Construction Limited v Hyland & Anor (8 March 2000). In that case, the defendants had employed the claimant as a building contractor. A dispute arose over the quantification of the final account.

The defendants offered to submit to a form of adjudication, but the claimant refused unless the defendants paid the entire costs of that process.The claimant then issued proceedings in the High Court, and made unsuccessful applications under CPR Part 24 (summary judgment) and Part 25 (interim payments).

His Honour Judge Wilcox considered whether the claimant was justified in issuing proceedings. He came to the conclusion that it was not and that it had conducted itself in an unreasonable manner and in breach of the pre-action protocol. The appropriate sanction was for the claimant to pay the defendants’
costs of the action on an indemnity basis. The Judge stated that the conduct of the claimant had been exceedingly heavy-handed. He stated:

Culpability here means wholly unreasonable behaviour. That must be measured against the reasonable conduct of reasonable solicitors at the time and must be informed by the current rules and, in particular, paragraph 4 of the pre-action protocol. I take the view that it was wholly unnecessary to commence this litigation. It was wholly unreasonable. It is clear that there could have been and should have been explored alternative dispute resolution. That may include sensible discussions between the parties not necessarily involving a third party. In my judgment, there is in those terms some culpability in this case. In my judgment, indemnity costs are warranted’. Therefore, failure to comply with the pre-action protocol can lead to cost sanctions. Unreasonable heavy-handedness of a claimant and failure to comply with the pre-action protocol will mean paying the defendant’s costs on an indemnity basis.

For parties that follow the pre-action protocol procedure, s 5 requires the parties to attend a pre-action protocol meeting. At that meeting, the parties are expected to consider whether some form of alternative dispute resolution procedure would be more suitable than litigation. If so, the parties should endeavour to agree which form of alternative dispute resolution to adopt. In this respect, the pre-action protocol is simply emphasising and extending the requirement for the parties to consider alternative dispute resolution in line with the requirements of the Civil Procedure Rules considered above.

1.6 The impact of ADR on litigation

1.6.1 Costs

There have been several highly significant decisions regarding costs orders against successful litigants on the basis that those litigants failed to seriously consider mediation. The first of these was Susan Dunnett v Railtrack Plc [22 February 2002] in the Court of Appeal. Susan Dunnett’s three horses had been killed when the gate to her paddock, which had been replaced by Railtrack, had been left open, allowing the horses onto the line. The gate was not padlocked, nor was there any mechanism for automatically closing the gate, despite the fact that Susan Dunnett had warned Railtrack that people left the gate open. There was an appeal and cross-appeal from the first instance decision, and in granting permission to appeal the Lord Justice stated that mediation or a similar process would be highly desirable in this particular case because of its inherent flexibility.

Regardless of the court’s suggestion, Railtrack refused to engage in mediation. Railtrack effectively won the appeal, but the Court of Appeal found that as Railtrack had refused to mediate, a costs order should not be made against the unsuccessful claimant – paragraph 14 of the costs judgment:

My Lord, when asked by the court why his clients were not willing to contemplate alternative dispute resolution, said that this would necessarily involve the payment of money, which his clients were not willing to contemplate, over and above what they had already offered. This appears to be a misunderstanding of the purpose of alternative dispute resolution. Skilled mediators are now able to achieve results satisfactory to both parties in many cases, which are quite beyond the power of lawyers and the courts to achieve. This court has knowledge of cases where intense feelings have arisen, for instance in relation to clinical negligence claims. But when the parties are brought together on neutral soil with a skilled mediator to help them resolve their differences, it may very well be that the mediator is able to achieve a result by which the parties shake hands at the end and feel that they have gone away having settled the dispute on terms with which they are happy to live. A mediator may be able to provide solutions, which go beyond the powers of the court to provide … .

The point was then made that a party who dismissed the opportunity for mediation without proper thought would suffer uncomfortable consequences. The Court of Appeal was in effect following the view of Lord Woolf in Frank Cowl v Plymouth City Council [The Times 8 January 2002]. In that case, Lord Woolf emphasised the need for parties in dispute with public bodies to consider ADR. Lord Woolf said that ‘today sufficient should be known about ADR to make the failure to adopt it, in particular where public money is involved, indefensible’. In that case, the defendant offered to submit the dispute to a complaints procedure chaired by an independent chairman. The claimant refused, and that refusal led to an adverse costs order against the claimant.

Given that the CPR requires the parties to consider ADR, and that obligation is extended into the pre-action protocols, there is now clear obligation on the parties to seriously consider some form of mediation or other ADR process. It seems that that obligation will, if ignored, lead to cost consequences, even if the party concerned is successful. However, there may be some circumstances when a failure to mediate is justified.

1.6.2 Refusing to mediate

The case of Hurst v Leeming [9 May 2002] gives some guidance as to when a refusal to mediate might be justified. The case concerned the dismissal of an action against a barrister, Leeming. The claimant argued that despite the dismissal of the action he should still receive his costs as Leeming had refused to mediate. Leeming raised five reasons as to why he had refused to mediate:

  • The legal costs already incurred were high;
  • The seriousness of the allegation, as it related to professional negligence;
  • The total lack of substance of the claimant’s claims;
  • The lack of any prospects of successful mediation; and
  • The obsessive character and attitude of Hurst, and his history of litigation.

Lightman, J in the Chancery Division considered each of these grounds and decided that the first three were insufficient. Therefore, the matter of legal costs already incurred, the seriousness of the allegation and the fact that there is no substance to the claim does not give valid reason for refusing to mediate. However, lack of any prospects of a successful mediation, given the obsessive character and attitude of the claimant and his repeated history of litigation, which
demonstrated that it was highly unlikely that the claimant would make any serious attempts to settle during mediation, was sufficient. Therefore, Leeming was not deprived of his full entitlement to costs.

The Court of Appeal has also recently held that there are circumstances within which it is reasonable to refuse to mediate. In the case of Alan Valentine v (1) Kevin Allen (2) Simon John Nash (3) Alison Nash (29 July 2003) the respondents had put before the court considerable correspondence which made it clear that real efforts to settle the dispute had been made, and that the offers were reasonable and generous. The respondents had also tried to arrange a ‘round the table’ meeting. Those offers were refused by Valentine who sought the payment of a large sum of money in settlement. The Court of Appeal therefore distinguished this case from the case of Dunnett v Railtrack Plc even though the respondents had refused Valentine’s offer of mediation. The Court of Appeal held that their refusal to mediate was reasonable, and so Valentine would pay the respondents’ costs in resisting the appeal.

1.6.3 Must a party always submit to mediation if offered by the other side?

The case of Hurst v Leeming makes it clear that the court might not penalise a refusal to meditate, but only in very limited circumstances. The courts have now considered further instances, and also whether mediation is the only option. Park J held in Societe Internationale De Telecommunications Aeronautiques SC v Wyatt Co (UK) Limited and others v Maxwell Batley (A Firm) part 20 defendant)(2) that a party that was successful in the litigation should not be deprived of its costs because it reasonably refused to mediate. In Societe, the claim against Maxwell Batley failed completely. The judge considered that Watson Wyatt Sarl’s motive for claiming against and seeking to mediate with Maxwell Batley was to pressure them to make a large contribution that could then be used to settle the main action. The case was distinguished from Dunnett. In the Court of Appeal case of Leicester Circuits Limited v Coates Brothers Plc(3) the parties agreed (after delivery of the first instance decision) on 4 January 2002 to mediate. A mediator was appointed and position statements exchanged. Coates withdrew from the mediation. Coates then won the appeal and asked for its costs. Leicester were ordered to pay Coates cost to 1 January 2002, with no order as to costs thereafter. Leicester were also to pay costs of the appeal.

 

2. Societe Internationale De Tele-communications Aeronautiques SC v Wyatt
Co (UK) Limited and others v Maxwell Batley (A Firm) part 20 defendant)

[2002] EWHC 2401 (Ch)

3. Leicester Circuits Limited v Coates Brothers Plc [2003] EWCA Civ 333

1.6.4 When might the court make no order as to costs?

On 9 June 2003 the Court of Appeal delivered its judgment in Dearling v Foregate Developments (Chester) Limited.(4)

The claimant, Mr Dearling, had alleged that the house which the defendant had contracted to build for him had not been constructed in accordance with their contract. An initial application to court was settled on the basis that an expert be appointed to determine the dispute (‘the ADR proceedings’).

The expert allowed some, but not all, of the claimant’s claims, and decided that the cost of the ADR proceedings should be split 50/50 between the parties. The claimant subsequently issued further proceedings claiming damages for breach of contract, but when the matter came to trial, the Judge again encouraged the parties to attempt to settle the matter. The parties duly settled, but left the matter of costs to the Judge, who ordered that the defendant should pay all the claimant’s costs apart from its half share of the costs of the ADR proceedings.

The defendant appealed on the basis that the Judge should not have allowed the claimant its costs after the last date on which the defendants final Part 36 offer could have been accepted. They cross-appealed on the basis that the Judge should have awarded him his costs of the ADR proceedings. The Court of Appeal allowed the appeal and dismissed the cross-appeal. The court affirmed previous authorities to the effect that in the absence of a good reason to make any other order, the fall back was to make no order as to costs. The parties had reached a commercial settlement, which did not reflect the merits of the case, and the judge had not looked into these. The costs of the ADR proceedings awarded by the expert reflected the defendant’s success in reducing an initially exaggerated claim and were upheld. Under the Civil Procedure Rules, the court has the power to make an award of costs where parties have settled without a trial. In two previous cases considered and approved by the Court of Appeal, Brawley v Marczynski (2002) and Boxall v Waltham Forest LDC (2001), costs orders were made because the Judge concluded that it was obvious which side would have won had the substantive issues been brought to trial. These cases therefore offer no encouragement to litigants to defend a hopeless case up to the door of the court in the expectation of no order being made as to costs by the court if a commercial settlement is reached then. The amounts in issue in Dearling were small, and the conduct of the parties reasonable in attempting ADR and making Part 36 offers, so the Judge had been justified in not looking into the substantive issues. In different circumstances, it would have been proper for him to do so and then an award of costs could have been made. As there had been an award of costs in the ADR proceedings and not an agreement between the parties to split them or bear their own costs, the court had the discretion to review the award, but in upholding the expert’s award of costs, the court bore in mind the principle of proportionality and penalised the claimant as the expert had done for bringing an exaggerated claim.

 

4. Dearling v Foregate Developments (Chester) Limited (9 June 2003, Court of
Appeal, Civil Division)

1.7 How have the courts approached contractual ADR provisions?

In Cable & Wireless Plc v IBM United Kingdom Limited,(5) the Court of Appeal held that a contractual agreement to refer disputes to a dispute escalation ADR procedure was binding and enforceable. Clause 40 of the contract between the parties stated:

‘Any question or difference which may arise concerning the construction, meaning effect or operation of the agreement, any local services agreement or any matter arising out of or in connection with this Agreement or any Local Services Agreement shall in the first instance be referred to the C&W Project Executive and the IBM Project Executive (both as defined in Sch 13 (Governance)) for discussion and resolution at or by the next review meeting. If the matter is not resolved at such meeting, the matter shall be referred to the next level of C&W’s and IBM’s management who must meet within five working days or such other period as the parties may agree to attempt to resolve the matter. If the matter is not resolved at that meeting, the escalation shall continue with the same maximum time interval through one more level of management. If the unresolved matter is having a serious effect on the services, the parties shall use every reasonable endeavour to reduce the elapsed time in completing the process. Neither party nor any local party may initiate any legal action until the process has been completed, unless such party of local party has reasonable cause to do so to avoid damage to its business or to protect or preserve any right of action it may have. The levels of escalation referred to in Clause 40.1 above are:

IBM 
C&W
First level – regional executive
First level – global executive
Second level – executive sponsor
Second level – executive sponsor

If any of the above are unable to attend a meeting, a substitute may attend provided that such substitute has at least the same seniority or reasonably comparable managerial or directional responsibility and is authorised to settle the unresolved matter.

If the dispute is not resolved by escalation in accordance with Clause 40.1 the parties shall seek to resolve disputes between them pursuant to Clause 41.2’.

Clause 40 is in effect a dispute escalation clause. Any differences between the parties are referred to management in an attempt to discuss and settle the matter. Unresolved matters are then referred up to senior management. The parties are not to commence any legal action until this process has being completed. The clause 41 then provides:

The parties shall attempt in good faith to resolve any dispute or claim arising out of or relating to this agreement or any local services agreement promptly through negotiations between the respective senior executives of the parties who have authority to settle the same pursuant to Clause 40.If the matter is not resolved through negotiations, the parties shall attempt in good faith to resolve the dispute or claim through an alternative dispute resolution (ADR) procedure as recommended to the parties by the Centre for Dispute Resolution. However, an ADR procedure which is being followed shall not prevent any party or local party from issuing proceedings.

The dispute resolution procedure set out at clause 41 provides that the parties must attend good faith negotiations in accordance with clause 41, before then attempting to resolve the dispute through some form of ADR as recommended by CEDR. The application to stay the legal proceedings was based upon the clause 41. The Honourable Mr Justice Coleman in the commercial court held that the contractual agreement to mediate was enforceable. He also held that the dispute escalation clause was clear and operable such that that would also be enforced.

At the other end of the scale is the conclusion of a mediation. If successful, the parties will then set out their settlement agreement in writing and sign it. It is at this stage that the ‘non-binding’ mediation process comes to and end with a binding settlement agreement. If the parties had commenced litigation then they will usually bring the court proceedings to an end with a consent order. These orders are often called ‘Tomlin orders’, after the judge who initially recognised the concept. A consent order is quite simply a court order that confirms that the parties have settled the litigation. The terms of the settlement are then set out in a schedule attached to the order. In the case of Thakrar v Thakrar, Sir Andrew Morritt QC held that a Tomlin Order (agreed at a mediation) was not adequate and so would not be enforced. The Court of Appeal reversed the decision. ‘There were a complicated series of applications in respect of the CIRO Citterio Menswear Plc administration. This appears to be the main reason why the Consent Order was not approved at first instance. On appeal, the Vice Chancellor held that a genuine compromise has been reached, even if some of the facts were doubtful. He therefore found that the mediation settlement agreement was unconditional and was enforceable’.

5. Cable & Wireless Plc v IBM United Kingdom Limited [2002] EWHC 2059

1.8 The Government’s ADR pledge

On 23 March 2001, the Lord Chancellor’s department issued a formal written pledge that it and all of its departments would attempt ADR before resorting to litigation. The pledge stated:

Government departments and agencies make these commitments on the resolution of disputes involving them. Alternative dispute resolution will be considered and used in all suitable cases wherever the other party accepts it.

The pledge states that all government departments and their agencies will seek to use ADR wherever possible in order to avoid litigation. This pledge was recently considered in the Royal Bank of Canada v Secretary of State for Defence.(6)

 

6. Royal Bank of Canada v Secretary of State for Defence, 14 May 2003, High
Court, Chancery Division, Lewison J

The claimant was a landlord seeking to determine whether or not notices served by the tenant to terminate a lease were valid. At trial, the tenant’s first notice was held to validly terminate the lease, except in respect of an area known as the store room. The tenant therefore argued that it had effectively won and was entitled to its costs.

The landlord had expressed on a variety of occasions a willingness to mediate the claim, but the tenant had refused. A large part of the dispute related to the factual question as to whether vacant possession was required under the lease, and the tenant had effectively lost the factual argument. Further, the Lord Chancellor’s Department on 23 March 2001 issued a formal pledge that all Government departments should settle cases using alternative dispute resolution wherever possible. The issue, therefore, was whether the tenant Secretary of State for Defence was entitled to its costs for winning the issue in respect of the notice when it had lost the factual position, and refused to mediate in the light of the Lord Chancellor’s press notice.

The Judge held that the key factor in the issue of costs was the landlord’s willingness to mediate which was refused by the tenant. The formal pledge given by the Lord Chancellor’s Department was to be taken seriously and the tenant should have abided by that pledge. As the tenant had not abided by the pledge it was not entitled to recover its costs from the landlord. In conclusion, no order was made as to costs.
This is another case that follows the reasoning in Dunnett v Railtrack that the winning party was not awarded their costs because of their unreasonable refusal to mediate (see above). However, this case also highlights the importance of the Lord Chancellor’s formal ADR pledge that was issued on 23 March 2001.

More recently the Government’s draft circular on Best Value and Performance Improvement states, at paragraph 49:(7)

It is in everyone’s interest to work at avoiding contractual disputes in the first place and this is mirrored in the emphasis above on improving relationships between the client and contractor through team work and partnering. However, when disputes do occur it is important to have a fast, efficient and cost effective dispute resolution procedure. Local authorities should seek, wherever appropriate, to provide clauses in their contracts on the useful alternatives to litigation (commonly termed “alternative dispute resolution”) which can achieve this.

7. July 2002, Office of the Deputy Prime Minister

As a result of this case and the recent pledge it is clear that all of the government departments and their agencies must now seriously consider ADR in order to avoid adverse cost consequences.

1.9 Late offers to settle

Lawyer to lawyer settlement negotiations and CPR Part 36 offers to settle were considered in the case of Corenso (UK) Limited v Burnden Group Limited (1 July 2003, Queens Bench Division, High Court) by His Honour Judge Reid QC. The claimant, Corenso (UK) Limited (‘Corenso’) supplied the defendant (‘Burnden’) with coreboard from its French factory. Burnden received a number of complaints from its customers about the quality of the coreboard, which led to them making a complaint to Corenso in September 2000. Corenso’s solicitors responded to the complaint and proceedings were issued by Corenso in February 2001. Burnden made a Part 36 offer by way of payment into court in March 2001 of £64,000 and increased this to £90,000 shortly before trial. As there were less than 21 days to go until trial, the claimant had to obtain the permission of the court to accept the Part 36 offer and in so doing had to seek an order from the court as to costs. Burnden had made offers to attempt to resolve the dispute by mediation during correspondence which preceded its Part 36 offer which was eventually accepted.

Burnden submitted that Corenso should be liable for its own and some of Burnden’s costs because of its refusal to attempt mediation. While Corenso maintained that it had substantially succeeded in the action, which had included a £300,000 counterclaim by Burnden, and that it should therefore have its costs up to the date of its acceptance of the Part 36 offer in the usual way. The court held that the parties had shown a genuine and constructive willingness to resolve the issue between them and neither of them deserved to be penalised for not having gone along with the particular form of ADR proposed by the other side. Corenso was therefore awarded its costs on the basis that it had succeeded in the action.

This case is the latest in a series of cases in which an unsuccessful party has sought to resist a costs order against it on the strength of a refusal to attempt mediation by the successful party. Since the decision of the Court of Appeal in Dunnett v Railtrack, the courts have given significant weight to the willingness or otherwise of parties to attempt alternative dispute resolution when assessing the conduct of the parties for the purposes of making a costs order under CPR 44.3. Part 44.3 states:

Rule 44.3 Court’s discretion and circumstances to be taken into account when exercising its discretion as to costs

  1. The court has discretion as to –

    (a) whether costs are payable by one party to another;
    (b) the amount of those costs; and
    (c) when they are to be paid.

  2. If the court decides to make an order about costs –

    (a) the general rule is that the unsuccessful party will be ordered to pay the
    costs of the successful party; but
    (b) the court may make a different order.

  3. The general rule does not apply to the following proceedings –

    (a) proceedings in the Court of Appeal on an application or appeal made in
    connection with proceedings in the Family Division; or
    (b) proceedings in the Court of Appeal from a judgment, direction, decision
    or order given or made in probate proceedings or family proceedings.

  4. In deciding what order (if any) to make about costs, the court must have regard
    to all the circumstances, including –

    (a) the conduct of all the parties;
    (b whether a party has succeeded on part of his case, even if he has not been wholly successful; and (c) any payment into court or admissible offer to settle made by a party which is drawn to the court’s attention (whether or not made in accordance with Part 36). (Part 36 contains further provisions about how the court’s discretion is to be exercised where a payment into court or an offer to settle is made under that Part.)

  5. The conduct of the parties includes –

    (a) conduct before, as well as during, the proceedings, and in particular the
    extent to which the parties followed any relevant pre-action protocol;
    (b) whether it was reasonable for a party to raise, pursue or contest a
    particular allegation or issue;
    (c) the manner in which a party has pursued or defended his case or a
    particular allegation or issue;
    (d) whether a claimant who has succeeded in his claim, in whole or in part,
    exaggerated his claim.

  6. The orders which the court may make under this rule include an order that
    a party must pay –

    (a) a proportion of another party’s costs;
    (b) a stated amount in respect of another party’s costs;
    (c) costs from or until a certain date only;
    (d) costs incurred before proceedings have begun;
    (e) costs relating to particular steps taken in the proceedings;
    (f) costs relating only to a distinct part of the proceedings; and
    (g) interest on costs from or until a certain date, including a date before
    judgment.

  7. Where the court would otherwise consider making an order under paragraph (6)(f), it must instead, if practicable, make an order under paragraph (6)(a)
    or (c).

  8. Where the court has ordered a party to pay costs, it may order an amount to be paid on account before the costs are assessed.

  9. Where a party entitled to costs is also liable to pay costs the court may assess
    the costs which that party is liable to pay and either;

    (a) set off the amount assessed against the amount the party is entitled to be paid and direct him to pay any balance; or
    (b) delay the issue of a certificate for the costs to which the party is entitled until he has paid the amount which he is liable to pay.

The overall circumstances of the case clearly favoured the claimant. The defendant had significantly increased its Part 36 offer very close to trial, despite a disclosure exercise, which, if anything, strengthened its position. The court therefore took the view that the defendant could just as well have increased its offer sooner when the claimant would have been entitled to its costs up to the date of acceptance as of right under Part 36 and so the court should not make a different costs order.

The court nevertheless acknowledged the force of recent authorities for costs penalties following a refusal to attempt ADR. The court characterising the negotiation engaged in by the parties, at without prejudice meetings with lawyers present, as a form of ADR. Such an approach is consonant with cases such as Cowl & Others v Plymouth City Council (2001) in which Lord Woolf characterised the defendant Council’s ad hoc complaints procedure as a form of ADR, but is perhaps unnecessary given the power in CPR 44.3(5) to consider various factors in assessing the overall conduct of the parties. The conduct of the defendant in failing to make a realistic offer to settle until very late on was more significant than the conduct of the claimant in preferring without prejudice negotiations to a process of dispute resolution involving a third party.

So, a party need not always submit to mediation, but must show a genuine willingness to settle the dispute. However, a failure to make a realistic offer to settle at an appropriate stage would be given more weigh that offers to negotiate when considering costs orders.

2 Project mediation

2.1 Background

The construction industry benefits from a wide range of dispute resolution techniques. The traditional processes of arbitration and litigation have in part made way for mediation and, more recently, adjudication under the Housing Grants, Construction and Regeneration Act 1996. Mediation has developed slowly since around the start of the 1990s. Hybrid and multi-stage processes such as dispute review boards or dispute escalation clauses have become more widely used on some projects. At the other end of the scale, management techniques such as partnering are attempts to avoid disputes arising.

2.2 The process

‘Contracted mediation’ or ‘project mediation’ attempts to fuse team building, dispute avoidance and dispute resolution in one procedure. A contracted mediation or project mediation panel is appointed at the outset of the project. The impartial contracted mediation panel consists of one lawyer and one commercial expert who are both trained mediators.The panel assists in organising and attends an initial meeting at the start of the project and may conduct one or more workshops at the outset of the project or during the course of the project as necessary. The panel may also visit the project periodically during the life of the project. In this respect, the panel therefore has a working knowledge of the project and, more importantly, the individuals working on that project. That knowledge allows the panel to resolve contractual differences before they escalate, because the panel provides an immediate forum for the confidential discussion and potential mediation of differences or disputes.

2.3 Project mediation in practice

Experiences with contracted mediation in practice are limited. However, contracted mediation was used on Jersey Airport.
The only publicly reported project where contracted mediation has been used was Jersey Airport taxiway. The contract sum was approximately £15m, and the contracted mediation panel cost approximately £15,000. According to the article in Construction Manager, a variety of disputes were resolved and the project finished one day ahead of schedule and approximately £800,000 below budget. Much of the projects success has been attributed to the use of the contracted mediation process.

The parties to the construction contract have recognised that there is a risk that they might have disputes during the course of the building work but they have also recognised that a standing mediation panel can help to avoid those disputes during the course of the work. This is because the parties to the construction contract will get to know the individual mediators, and those mediators will not only have an understanding of the project, but will get to know the individuals. There is therefore the potential for the contracted mediation panel to become involved not just in disputes, but also in the avoidance of disputes before the parties become entrenched and turn to adjudication, arbitration or litigation.

The experience at Jersey raises an important observation and that is the amount of the contract sum by comparison to the cost of the contracted mediation process. Most of the structured ADR procedures such as dispute review boards are only economically viable because they are used on substantial projects. This is because of the costs associated with establishing and running a threeman dispute review board. A dispute review board is established at the start of the project, and then follows the project by making site visits. Disputes are then referred to that board, which will make recommendations only or binding decisions depending upon the drafting of the contract between the contractor and the employer.

However, a contracted mediation panel is viable for projects with a much lower contract sum. Statistics indicate that around 80% of construction work carried out in this country has a contract sum in £10s of millions rather than £100s of millions. Therefore, the contracted mediation has the potential for use on around 80% of the construction projects carried out in this country.

3 Construction Conciliation Group

3.1 Launch

The Construction Conciliation Group (‘CCG’) was launched on 1 May 2003. The CCG’s aim is quite simply to provide a cost effective dispute resolution procedure principally aimed at disputes concerning residential occupiers and their builders (or disputes between residential occupiers and their architects or other professionals).

3.2 Background

The adjudication legislation does not cover disputes involving residential occupiers. In the absence of a contract, such as the JCT Minor Works Agreement 1998 which contractually provides for adjudication, disputes between residential householders and the builders end up in the County Court. These disputes are often (although not always) of low value, such that the legal fees are disproportionate to the amount in dispute. However, legal fees are not the only issue in respect of these types of disputes. The Chairman of the CCG, David Miles, states ‘such disputes are often highly emotionally charged. They have the capacity to absorb considerable time and costs which frequently end up exceeding the sums in dispute’.

 

3.3 Process

The essentials of the CCG procedure provide:

  • A pre-agreed, fixed period with a fixed price process;
  • A fixed period of 28 days within which a fixed duration mediation is to be held. If an agreement cannot be considered at the mediation, then a binding enforceable recommendation is made by the conciliator (subject to later litigation/arbitration); and
  • The amount of documentation is severely limited.

The parties can simply log onto the website (www.ccgroup.org.uk) in order to choose a conciliator. The rules can be downloaded for free. If the parties cannot agree upon a conciliator then the Group will appoint one for a fee of £50. The fixed timescale and fixed fee is aimed at introducing and economical manner for the resolution of these disputes. Further, in the absence of a mediated settlement, the parties know that a recommendation will be made based upon the documents, submissions and representations made. If one of the parties does not wish to accept the recommendation, then that party must issue a notice of dispute within 28 days of the recommendation and also take steps to commence either legal proceedings or arbitration within three months, otherwise the recommendation will become finally binding.

The CCG hope that the procedure will provide an economic manner within which to resolve constructions disputes with homeowners. The procedure can of course be used for any construction dispute should the parties wish to adopt the CCG’s conciliation rules.

An interesting aspect of the CCG’s Conciliation Procedure is the ability for the conciliator to make a recommendation if a settlement cannot be reached during the conciliation. The first stage of the procedure requires the conciliator to chair the conciliation in order to try to get the parties to reach a settlement. If a settlement can be reached, then the conciliator may even assist in preparing the terms of the settlement. If settlement cannot be reached, then the conciliator shall, within seven days after the conciliation, produce a written recommendation. This recommendation is not necessarily based upon any principles of law, and shall not contain reasons. Clearly, a conciliator will not have heard full argument on the issues in dispute. However, this procedure has been adopted because the majority of householder disputes are low in value, and the costs of taking the claim to the county court will most usually far exceed the amount in dispute. The procedure is therefore offered as an economic way of providing an opportunity for the parties to reach a settlement, but then for the conciliator to make a recommendation as to how to settle the dispute if the parties fail to agree.

The recommendation is binding, in that it is to be implemented immediately and the parties will be entitled to summary enforcement of the recommendation. If a party intends to commence legal proceedings in connection with the dispute, then that party must within 28 days of the recommendation serve notice on the other party, and also commence proceedings within three months of the recommendation. Therefore, if a party is serious about continuing the dispute, then steps must be taken immediately in order to avoid the recommendation becoming final and conclusive.

4 Conclusion

In conclusion, the CPR and pre-action protocols require parties to endeavour to settle their disputes by negotiation, mediation or some other form of ADR. The courts are now enforcing those requirements by upholding contractual ADR procedures and penalising parties that unreasonable refuse to mediate in the form of adverse cost orders.

Parties may agree to mediate at any time, or may include their agreement to mediate in their contract. The parties could include a dispute escalation clause in their contract. The court will enforce agreements to negotiate and mediate (or follow any form of ADR procedure) (IBM) providing those processes are conducted within a reasonable time frame (Balfour Beatty v TML, HL). This does not mean that the court will insist that the parties settle the dispute, but the court will insist that reasonable attempts are made to follow the ADR procedure. A party that unreasonably refuses to mediate will receive an adverse costs order (Dunnett v Railtrack). An unreasonable refusal to engage in any ADR process such as an independent complaints procedure (Frank Cowl) or settlement negotiations will be penalised by an adverse cost order. Basically, ADR does not just mean mediation, but any form of ADR. A winning party will not get its costs. A losing part will be ordered to pay costs on an indemnity basis.

Reasons for unreasonably refusing to mediate include: costs already incurred; type of issues in dispute; or the claim being misconceived (Hurst v Leeming). Reasons for refusing to mediate include: the nature of the other party is such that settlement is extremely unlikely (Hurst v Leeming); generous offers have been made; or offers to negotiate are being made instead of mediation. In addition, the development of the CCG in the area of home owner disputes and contracted mediation or project mediation for larger projects demonstrates that mediation-based processes are readily available in the construction industry.


 
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