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Mediation and costs management – part 2

In April 2013, I wrote about mediation and costs management, which were hot topics as a result of the new Civil Procedure Rules. Since that blog, there have been three cases of particular interest in relation to mediation and costs management.

Elvanite Full Circle Ltd v AMEC Earth & Environmental (UK) Ltd

Elvanite v AMEC acts as a stark reminder to all about the preparation and monitoring of costs budgets.

Here, a costs management order (CMO) was made under the pilot costs management scheme in respect of the defendant’s costs of £264,708. It was subsequently revised to £268,488 at the PTR. Other than this, neither party applied to increase its budget. However, just a few weeks after the PTR and a month before trial the defendant sent the claimant a copy of a budget showing its costs in the sum of £531,946.

After trial, the claimant accepted that it was liable to pay the defendant’s costs. By this point, the defendant was seeking costs of £497,593. The defendant applied for its costs on an indemnity basis and to either amend the costs budget of £268,488 after judgment or for a departure from the budget for a good reason.

Although, as indemnity costs were not allowed, the issue of the extent to which a CMO is relevant to an assessment of costs on an indemnity basis did not arise, Coulson J set out his conclusions on this point. These were that, despite the wording of (what now is) CPR Part 3.18 (which refers to costs being assessed on a standard basis), as a matter of logic the CMO should also be the starting point of an assessment of costs on an indemnity basis. One reason for this was that it would encourage a “costs free-for-all” if an order for indemnity costs led to an abandonment of the CMO and:

“A paying party will have fought the trial assuming that, even if it loses, its opponent will be unlikely to recover more than the amount recorded in the costs management order, unless there is good reason for any departure. That is the certainty that new regime provides.”

Coulson J did however recognise that, in particular factual circumstances, it might be said that an award of indemnity costs (which does not require any assessment of proportionality) might be a “good reason” to depart from the court approved costs budget. However, he said that would be fact-specific, and would not detract from the principle of at least starting the costs assessment by reference to the approved budget.

Further, Coulson J did not allow the defendant to amend its approved budget, holding:

“… an application to amend an approved costs budget after judgment is a contradiction in terms. First, it would mean that the exercise would no longer be a budgeting exercise, and would instead be based on the actual costs that have been incurred. Secondly, it would encourage parties to ‘wait and see’; only applying to increase the budget costs if it was in their interests. Thirdly, it would make a nonsense of the costs management regime if, at the end of the trial, a party could apply to double the amount of its costs budget. The certainty provided by the new rules would be lost entirely if the parties thought that, after the trial, the successful party could seek retrospective approval for costs incurred far beyond the level approved in the costs management order.”

The court also considered whether, under CPR Part 3.18, there was a good reason to depart from the approved budget. In relation to the main reason for the increase, it held there was not.

Certainty of budget is important

Certainty of what the other side’s budget is – as well as what your budget is – allows approved or agreed budgets to perform one of their most important functions, namely informing the parties about their costs and exposure going forward. If any budget is inaccurately too low, parties may not be inclined to attempt ADR or settle their case because they are comfortable with their exposure. By the time the true cost is known, it may be too late to do a deal. Also, if budgets are not thought to be accurate, they will lose their credibility and utility as essential negotiating tools and, potentially, lead parties to lose trust in each other.

Indeed in Elvanite, Coulson J considered that the claimant would be prejudiced if the defendant was allowed to amend its budget after trial. This was because it had fought the trial knowing that the additional amount for which it might be personally liable beyond its ATE cover of £250,000 was £18,488; not (as much as) £250,000.

That the approved budget has now been said to be the starting point, even when assessing costs on an indemnity basis, provides further assurance to the parties.

Troy Foods v Manton

On the flip side, negotiating parties should also remember that an approved budget (containing the various approved phases or ‘mini-budgets’) does not guarantee an award of that sum for that phase.

In Troy Foods v Manton, the defendant appealed a CMO made at a CMC on the basis that the judge adopted the wrong approach and was too generous in approving the amounts allowed in the claimant’s budget. It was concerned that:

  • The judge approved elements in the budget despite having doubts about whether the figures were reasonable.
  • On a detailed assessment, costs judges are likely to treat the approval of a budget, or any relevant part of it, as ipso facto establishing that the costs incurred in respect of the matter generally, or that particular element of it, are reasonable if they fall within the approved budget.

Moore Bick LJ said (allowing permission to appeal):

“I do not accept that costs judges should or will treat the court’s approval of a budget as demonstrating, without further consideration, that the costs incurred by the receiving party are reasonable or proportionate simply because they fall within the scope of the approved budget.”

Advising at a mediation

Mediators who practise facilitative mediation do not advise parties at the mediation; instead that is the role of the parties’ advisors. Frost v Wake Smith and Tofields Solicitors questioned what the duties of a party’s advisor were at the mediation.

In Frost, a solicitor who represented his client at a mediation in 2003 was sued by his client. The complaints included that the solicitor drafted the first settlement agreement so that it was unenforceable. However, the Court of Appeal held that the solicitor:

“…could not have produced an enforceable agreement when the parties had not themselves made one and were in no position to do so.”

Tomlinson LJ said, obiter, that a more plausible complaint was that the solicitor was negligent in failing to warn or to advise his client that the outcome of the mediation was not a final and binding agreement from which the other party to the mediation could not resile. However, this point was not pleaded or pursued.

Tomlinson LJ also said:

“A failure to warn or to advise in this manner could at best lead only to the recovery of expenditure wasted in attempting to explore the enforceability of the first agreement, if any costs can properly be regarded as ‘wasted’ in that endeavour.”

Practical points for advisors and further promotion of mediation

In Frost, Tomlinson LJ continued the Court of Appeal’s recent promotion of mediation by concluding with this:

“It should be a cause for neither surprise nor dismay that the process of mediation did not in this case at the first session result in an immediately enforceable agreement. Mediation has proved a flexible and immensely valuable process of dispute resolution. No doubt in some situations immediate and binding agreement is possible, whereas in others, of which this was a paradigm, flesh will need to be put upon the bones. It would be regrettable if any decision of this court were to cause practitioners to approach the process of mediation with anything other than maximum flexibility, although I need hardly emphasise that it will be normally be part of a solicitor’s duty to advise his client, especially a lay client as opposed to a professional litigator such as a liability insurer, of the nature of the process and of the status of any agreement reached as a result.”

In terms of what to do to inform clients about the process of mediation, reference can and should be made to the Jackson ADR Handbook.

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