Pays to be reasonable

parties to litigation know they need to consider Alternative Dispute Resolution (ADR) or face potential costs consequences even if successful at trial. However, a residual concern remains that a party may mediate with no intention of settling the matter or maintaining an unrealistic claim. Earl of Malmesbury & Ors v Strutt & Parker [2008] EWHC 616 shows that a party who adopts an unreasonable position at mediation could be equated with a party who unreasonably refused to mediate in the first place.

The claimant landowners alleged professional negligence against their surveyors following negotiations to lease land for use by an airport as a car park. The claimants alleged the surveyor should have negotiated leases linked to turnover, receiving a split of net car park income of up to 93.4 per cent. The claimants largely succeeded on liability.

Despite claiming up to £87.8m the claimants recovered only £915,139. This was for a number of reasons but principally because the income split awarded was 10 per cent and not up to 93.4 per cent as claimed.

Pyrrhic victory?

Costs totalled £5.38m for both parties. This was described as 'a horrendous figure'¦ wholly disproportionate to the sum actually recovered by the claimants'. Having made a recovery, the claimants wanted their costs as winners. The defendant said the claimants could not be declared winners, having recovered so little. Alternatively the defendant said mediation had been made impossible because the claimants exaggerated their claim making it 'the elephant in the room'.

Mr Justice Jack considered the provisions of CPR 44.3 and the principle that costs follow the event. However, who was the winner? The claimants had made a recovery but the defendants had succeeded in knocking down the figure to a fraction of that claimed.

A long line of authorities on alleged exaggerated claims gave no clear guidance on costs apportionment. Naturally, each decision was largely fact-specific, with the court seeking to do justice in accordance with the overriding objective.

A claim may be exaggerated deliberately or it may be exaggerated through unreasonable conduct. It may simply occur without fault. There was no suggestion that the claimants had deliberately exaggerated their claim. It was brought on expert advice.

However, the claimants only once contemplated an income split closer to that awarded. Having failed to fully take into account other factors, the claimants' belief in the claim for damages should have diminished until they realised that it had no real chance of success.

The judge said he had to consider what happened in relation to mediation. Privilege was waived in respect of all 'without prejudice' matters including letters referring to offers made. Mediation failed, not simply because of the claimants' position, but because of obduracy on both sides. As such the defendant should not be able to say that the claimants' 'failure' should be taken into account on costs.

However, the judge considered he still had to take into account that the claimants only recovered a fraction of their claim.

Given his concerns that the claimants should have realised their initial claim would not succeed, he considered their position to be plainly unrealistic and unreasonable. There was no guidance on how to approach the question of costs in these circumstances. The courts had previously only given guidance where a party unreasonably refused to mediate in the first place. He determined that a party who agrees to mediation but then causes the mediation to fail by reason of an unreasonable position is in reality in the same position as a party who unreasonably refuses to mediate. It is something the court should take account of following the principles of Halsey v Milton Keynes General NHS Trust. As such the claimant was awarded 70 per cent of its liability costs.

It remains to be seen if the decision will be appealed. Does this case now mean that a court will consider closely what was said and done at mediation? Perhaps not,as events at mediation are usually confidential. Dyson LJ noted in Halsey that parties could adopt whatever position they liked at mediation. If the matter did not settle then it was not for the court to investigate why. In this case privilege was waived. Therefore the case may simply be viewed as reiterating that if a party unrealistically maintains its claim then it may be penalised in costs.

However, the courts may in future be more willing to look at not only the parties' consideration of mediation in the first place but the stance they then adopt. As such, parties must continually assess the merits of their claims. A party that has a strong belief in its claim and vigorously pursues it may end up being penalised in costs if it does not continue to assess its chances of success.

Litigation is unpredictable. What may seem like a strong claim at the outset may not be so as the case develops. If parties do not do so, then agreeing to mediate may not protect them on costs if the court considers the position adopted in pursuing an unrealistic claim was unreasonable.

Recent changes to the CPR and Allocation Questionnaires reiterate the need to consider in detail with clients the possibility of ADR. This decision highlights that parties must continually assess the merits of a claim because simply agreeing to mediation may not protect a party on costs if the j considers the position adopted at mediation to be unreasonable.

If a defendant considers a claim to be exaggerated the best form of protection still appears to be to make a without prejudice offer at the figure it considers to be appropriate to protect itself on costs.