Practical Law

In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4i) Ltd, BAE successfully argued that its interpretation of a licensing agreement was correct. Northrop then argued that BAE’s costs should be reduced by 50% because BAE had unreasonably refused to mediate. While Ramsey J found that BAE had unreasonably refused to mediate, for other reasons, the court awarded BAE its costs on the standard basis without any reduction.

This decision is important because:

• It re-emphasises the danger of refusing to mediate.
• It directs parties (again) to the guidance in the ADR Handbook.
• It says that when considering the “prospects of success” of an ADR process, the court should not just look at the positions taken by the parties.

The test applied for unreasonable refusal to mediate

In considering whether there had been an unreasonable refusal to mediate, the court looked at:

• The factors the Court of Appeal set out in Halsey v Milton Keynes General NHS Trust.
• CPR 44.2 (in particular, the regard to be had to all the circumstances, including the conduct of the parties before as well as during the proceedings, which included a party refusing to agree to ADR).
• PGF II SA v OMFS Company 1 Ltd.
• The ADR Handbook, citing those parts referred to in PGF (looking at what parties should do when asked to participate in ADR) and chapter 11 (which is concerned with sanctions for refusing to engage in ADR processes). The court noted that chapter 11 usefully summarises the relevant principles to be derived from cases where a refusal to engage in an ADR process had been considered.

The court also cited Briggs LJ’s closing remarks in PGF:

“…this case sends out an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal, or the undertaking of some other form of ADR, or ADR at some other time in the litigation.”

Were the Halsey factors satisfied?

Ramsey J considered the Halsey factors on when it may be reasonable to refuse ADR in turn.

On the nature of the dispute:

• Northrop said the dispute was suitable for mediation and there was no objective reason why issues of construction should not be amenable to mediation so that a skilled mediator could “hold up a mirror” to the parties’ respective arguments and identify the risks and merits involved.
• BAE said the case concerned a relatively short point of contract interpretation and that it was not a dispute that cried out for mediation, but was one where a party could legitimately consider if mediation was worthwhile, which BAE had reasonably concluded it was not.

The court said:

“I regard this case as being like many cases, where points of construction are major issues at the centre of a financial claim. In all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution to disputes which each party would regard as incapable of being settled and would be unable to settle without such assistance.”

On the merits of the case:

• Northrop said the argument was not all one way, that on matters of construction tribunals can differ and that the merits weighed in favour of ADR.
• BAE said it reasonably concluded that this was not a borderline case, but a case where BAE and its advisers considered that it was correct as a matter of law.

The court said BAE’s case was strong and that BAE reasonably considered it had a strong case. However, the court referred to chapter 11.13 of the ADR Handbook which, it said, properly said that refusing mediation where a party considers it has a watertight case:

“…seems to ignore the positive effect that mediation can have in resolving disputes even if the claims have no merit. As [The ADR Handbook states], a mediator can bring a new independent perspective to the parties if using evaluative techniques and not every mediation ends in payment to a claimant.”

Overall, on this factor, BAE’s reasonable view was held to provide “some but limited justification for not mediating.”

On whether other settlement methods were attempted:

Although there had been a face-to-face meeting and a “without prejudice save as to costs” offer, overall the court said this was “neutral or marginally in BAE’s favour in its impact in assessing the refusal to mediate.”

On the costs of ADR:

• Northrop said that the parties’ combined costs were well in excess of £500,000, but that the parties’ costs of a mediation were unlikely to have exceeded £40,000.
• BAE said that the costs of ADR were not small in comparison with the costs of the trial.

The court accepted that a mediation may have cost £40,000, but said that compared to the incurred costs of £500,000, this was not “disproportionately high”. Further, it said that the parties would have “saved some of the costs of the correspondence between the parties by avoiding the positions taken”.

On prejudicial delay caused by ADR:

The court said this was not a factor as “mediation could have taken place without affecting the litigation”.

On the prospects of successful ADR:

• Northrop said that mediation concentrates the mind, it would have dispelled any misconceptions as to issues or arguments and that the mediator would have identified risks and tested each party’s arguments.
• BAE said these two commercial enterprises were poles apart on a single issue on which all the money turned, and which the court could determine shortly and at relatively little cost. BAE also said that Northrop had never suggested that it would have accepted anything other than a substantial payment and that, in correspondence, Northrop set out its confidence in the strength of its position.

The court said that there was a commercial relationship here where one party felt aggrieved about a contract being terminated and the other felt it had the right to terminate. The court said this was a classic case where a mediator could have brought the parties together to:

“…assist the parties in resolving the dispute and avoid wasted management time and soured relationships even if, as large commercial entities, the effect will not be serious or long lasting.”

Crucially, the court said it could not “merely look at the position taken by the parties”. Here, this meant that it could not just look at BAE not wanting to pay anything and Northrop not settling without payment. This may be the position in many successful mediations, but the court said:

“It ignores the ability of the mediator to find middle ground by analysing with each party its expressed position and making it reflect on that and the other parties’ position. It allows the mediator to bring the necessary skills of evaluation and facilitation to find solutions which have not been considered. These may include such things as bringing other commercial arrangements or disputes into the discussion or, in this case, resolving the consequences of termination or finding future opportunities for the software or licences.”

In other words, the wider discussions and range of solutions that mediation may allow (but litigation could not) should also be considered when looking at the likely prospects of success of the ADR process.

The court also referred to the success rate of mediation published in chapter 13.03 of the ADR Handbook, which it said “shows that generally mediation is likely to be successful”.

Conclusion on reasonableness of refusal to mediate

Overall, the court held that this case was susceptible to mediation and that mediation did have reasonable prospects of success.

Despite BAE’s reasonable view that it had a strong case (which did provide some justification for not mediating), the other factors showed it was unreasonable for BAE not to mediate the dispute. The court said that even the comparatively short Part 8 hearing was likely to have been avoided by the use of mediation. More generally:

“Where a party to a dispute, which there are reasonable prospects of successfully resolving by mediation, rejects mediation on grounds which are not strong enough to justify not mediating, then that conduct will generally be unreasonable. I consider that to be the position here.”

Overall conclusion on costs

However, this was not the end of the story.

BAE had sent a without prejudice save as to costs letter, where it had offered a drop hands settlement. If Northrop had accepted that offer, it would have been in a better position because, as a result of the decision in the Part 8 proceedings, Northrop had no payment and (on its own case) had to pay BAE 50% of its costs.

This letter did not justify BAE’s refusal to mediate. However, independently the letter showed that BAE had made an offer that Northrop had not bettered. Northrop’s conduct in not accepting the offer was therefore taken into account when deciding costs.

The court said that the refusal to mediate and the separate failure to accept the offer each, to an equal extent, meant that the parties had lost the opportunity of resolving the case without a hearing. Overall, it was held that a fair and just outcome was that neither party’s conduct should be taken into account to modify what would otherwise be the general rule on costs. The result was therefore that Northrop was ordered to pay BAE’s costs on a standard basis without any reduction.

Points to take away

As set out above, the message from this decision is important, particularly for parties who consider that they have a strong case that they want to take to trial. Even in such circumstances, the dangers of refusing to mediate must be firmly kept in mind.

Further, parties need to be aware of the warning given in PGF II SA v OMFS Company 1 Ltd about unreasonably refusing to participate in ADR, as well as the need to read and consult the ADR Handbook (which parties should also note they are “advised” to refer to in section 7 of the TCC Guide).