Do Mediate, but Don't Exaggerate

As many litigators are only too aware, there have been many cases over recent years addressing the principle that if a party to a dispute unreasonably refuses to mediate, such conduct is likely to have a negative impact on that party in any eventual costs award. However, these cases had not properly dealt with the likely repercussions of a party agreeing to mediate, but subsequently adopting an unreasonable stance during mediation. This now seems to have changed, with the recent case of Earl of Malmesbury and others v Strutt and Parker [2008 EWHC 424 (QB)], appearing to be the first reported case which goes some way to showing how conduct of this sort will be treated by the courts.

In this case, the Claimants succeeded in proving negligence against the Defendants, who were negotiating leases on their behalf. Mediation on quantum then followed. Unfortunately, it was unsuccessful, the parties being far from reaching an agreement, with the Claimants requesting £9 million, but the Defendants only offering a vastly smaller sum. At trial, the Claimants were only awarded £900,000, a tenth of what they had been seeking at mediation, but they nevertheless sought an order for costs in the amount of approximately £1.85 million. The Defendants sought to resist this, arguing that (i) the Claimants should not be considered the winners as they had only recovered 10% of their claim; (ii) the Claimants had exaggerated their claim thus making mediation impossible, (iii) the Defendants had actually won on various discrete issues, so in relation to those they should have their costs paid by the Claimants, and (iv) there should be no order for costs.

Concluding that the Claimants had indeed adopted an unreasonable stance during mediation, the Judge, Mr. Justice Jack, held that:

"A party who agrees to mediation but then causes the mediation to fail by reason of his unreasonable position in the mediation is in reality in the same position as a party who unreasonably refuses to mediate".

In assessing the apparent exaggeration of claim, the court described the importance of considering "how the exaggeration has come about". Listed in descending order as to the impact it would have on costs, it was held that the appropriate costs order depended on the circumstances and whether the exaggeration was (i) deliberate and involved dishonesty, (ii) through unreasonable exaggeration, or (iii) without fault. Clearly if it was deliberate or dishonesty was involved, this would have a greater impact on costs than if there was no indication of intention by the party to exaggerate. Unreasonable exaggeration can logically be placed in the middle bracket.

The Claimants were subsequently penalised with various costs sanctions in relation to both liability and damages.

Costs sanctions in relation to liability

The Claimants were firstly denied recovery of 15% of their costs in relation to some of the discrete issues on which they had lost and, in addition, were requested to pay a proportion of the costs incurred by the Defendants. The Judge said:

"I have to bear in mind that I have already decided that the claimants should bear part of the defendants' costs and should not recover the same part of their own costs because they lost on discrete issues……I do not think that an order that there be no other order for costs would do justice to the claimants. For they have succeeded in the manner I have described. But equally I do not think that in the circumstances they should have the whole of the balance of their costs. Something should be deducted to reflect the fact that they claimed so much more than they recovered. I have simply to balance the various factors which I have referred to and to decide what is appropriate: there is no formula to be applied or any more logical process. I consider that it will do justice in the circumstances to order that in respect of their liability costs the defendants pay the claimants 70 per cent of their costs after deducting their costs incurred in respect of the discrete issues."

This amounted to recovery for the Claimants of 70% of a reduced figure (i.e. a total of 60% of their total costs incurred in connection with liability), being penalised for exaggerating their claim.

Costs sanctions in relation to damages

Similarly, in respect of costs relating to damages, the Judge deducted 15% of the Claimants' costs "by reason of the loss of earnings assessment", and of the sum remaining, only 80% was deemed to be recoverable specifically due to the Claimants' attitude at the mediation:

"I have to take account of the mediation on 12 October 2007. By this point substantial costs had already been incurred in relation to damages, in particular in the preparation of reports. The defendants were able to protect themselves here by a timely offer – liability had been decided. I consider that justice will here be done to order that the claimants have 80 per cent of their costs relating to damages."

In total therefore, only 68% of costs relating to damages were recoverable.

To sum up, the Judge attempted to clarify the order by stating:

"For the avoidance of any doubt, I should state that in assessing these figures of 70 and 80 per cent, I have taken into account that I am not conversely ordering the claimants to pay 30 and 20 per cent respectively of the defendants' liability and damages costs. I consider to make such an order would favour the defendants more than is appropriate in the circumstances."

Comments

This judgment is useful as a guide to any parties involved in or facing the possibility of mediation, as it clearly indicates the extent to which a party who behaves unreasonably in a mediation by exaggerating their claim which results in the mediation failing can expect to be penalised as to costs by the court.

It is important to note that the Claimants in this case had actually waived privilege to all of their "without prejudice" matters. The court therefore had access to a large amount of evidence which highlighted the conduct of the Claimants in great detail. This in all likelihood was a large factor in penalising and reducing the Claimants' costs award. In future, parties who face possible costs sanctions on the basis of their conduct in mediation, may well choose to refuse to waive privilege so as not to add to the evidence which the court may consider against them. In such cases where privilege is not waived, evidential difficulties may well arise, but given the judgment in this case, one must be aware of the risks involved and act accordingly.