Can Accountants refuse ADR and avoid the own goal of a costs penalty?

Published 21 julio 2021

The Court’s wide discretion on costs in litigation (under CPR Part 44) means a successful litigant can be penalised in costs if they unreasonably refuse to engage in mediation.  ADR may be proposed (and adverse costs consequences threatened, if it is unreasonably refused) purely for tactical reasons, to prompt settlement proposals.  This is often in our experience born out in practice, with pressure exerted on parties to make some kind of offer at mediation.

With claims against accountants feared to be on the increase, we consider below how a litigant can legitimately refuse ADR, and avoid the risk of costs sanctions when they are ultimately successful in the litigation.

Beattie Passive Norse Ltd and another v Canham Consulting Ltd

The Court considered this issue following the liability judgment in Beattie Passive Norse Ltd and another v Canham Consulting Ltd.  Beattie was a £3.7M construction claim against consulting engineers for negligent design of the foundations at a residential development site. The claim was largely unsuccessful: the Claimants were awarded £2,000, but the vast majority of the claim failed on causation grounds. Whilst the buildings on the site had been demolished, this was not due to issues with the foundations.

Costs: the arguments

The Defendant sought its costs of the claim on the - more generous - indemnity basis. The Defendant argued the £2,000 recovered was derisory when compared with the £3.7M claimed, and the Claimant ignored/refused opportunities to narrow the issues and sought to disguise their causation difficulties.

However, the Claimants argued that the Defendant had unreasonably refused to mediate during 2020, and then belatedly agreed to a very narrow style of mediation in 2021, so it should be penalised in costs.

Costs: the decision

In the costs judgement^[1] handed down on 28 May 2021, the Judge found that the refusal to mediate in 2020 was reasonable given that the Claimants were advancing a factually untruthful case. The Judge also declined to criticise the form of ADR adopted (blind bidding), nor the stage at which it was used.

The Judge described the claim as exaggerated and opportunistic, and criticised the Claimants for failing to properly respond to a Notice to Admit Facts. However, the Judge was mindful of the fact that the Defendant was found to have been negligent and some damages were awarded.

The Judge decided there should be no order as to costs up to the date on which the Claimant responded to the Defendant’s Request for Further Information in March 2020. However, thereafter the Defendant was awarded its costs on the indemnity basis, to reflect that from that point the Claimants were conducting the claim on a wholly false factual basis. The Claimants were ordered to make a payment on account of costs to the Defendant of £500,000.

Implications

Deciding to decline a proposal to engage in ADR can be finely balanced with the risk of costs sanctions if a Court ultimately finds that decision unreasonable. The facts in Beattie are fairly unusual and a refusal to mediate may be more difficult to justify in other circumstances. It is often not until trial that the full story emerges, and it is a gamble to refuse any form of ADR. As an alternative to refusing, to try and protect against the risk of costs sanctions, it may be advantageous to suggest a different – cheaper - mode of ADR, for example the blind bidding process used in Beattie, or a time limited telephone mediation. Arguments on costs are often very fact sensitive, and we recommend seeking advice before making a final decision on refusing ADR.

The Civil Justice Council’s report in June 2021 considered the issue of whether ADR can be made compulsory. It concluded that parties to litigation can be lawfully compelled to participate in ADR, and discusses the conditions in which it may be desirable to make ADR compulsory. It remains to be seen if ADR is to be made compulsory in the future, and how that decision may be implemented.

What is Blind Bidding? This is a quicker and cheaper ADR process, compared to conventional mediation. There are no position papers or joint sessions. The parties agree in advance on the number of bidding rounds. In each round the parties make a blind offer (bid). If there is a match, the claim is then settled. At the end of the final round, if there is no match, but the final offers are sufficiently close (within a pre-agreed range), then the parties are informed that they are close. The parties may then go on to settled outside of the process, or at least leave the process better informed.

 ^[1] [2021] EWHC 1414 (TCC)