Failure by a party to a dispute to reasonably consider alternative dispute resolution procedures (ADR), including mediation, can result in severe cost sanctions being imposed by the court. It is not difficult to see why the court encourages mediation:

• It can save costs and management time if settlement is achieved at an early stage;
• It is a confidential process. Nothing said at the mediation can be used in any subsequent litigation proceedings;
• The terms of a mediated settlement can go well beyond the terms capable of being imposed by a court following trial; and
• A successful mediation can take away the substantial costs risk of defeat at trial.

The costs of preparing for mediation can, however, be substantial. However, clarity has recently been provided by the court confirming that the costs arising from a failed mediation do fall within the definition of recoverable costs of litigation and so can be recovered by the "winner" from the "loser" after trial. The parties can still, however, specifically provide that the costs incurred are to remain separate and outside the scope of recoverable costs.

National Westminster Bank v Feeney

The parties' mediation agreement contained the standard provision that each party would pay its own legal costs of the mediation and would bear the mediation costs, such as the costs of the mediator and venue, jointly.

On appeal the court held that in principle such costs are prima facie recoverable costs of the litigation unless the terms of the mediation agreement specifically provides otherwise. Any terms as to payment of costs in the mediation agreement bind the parties unless altered by specific wording in any subsequent settlement. The court will not, at trial, interfere with what the parties have previously agreed. If the agreement is silent as to costs, they will form part of the recoverable costs of the litigation when generally the "loser" will pay them.

However, on the facts of this case, neither the mediation costs nor the legal costs were recoverable by the defendants due to the specific wording of the mediation agreement.

Conclusion

The issue of costs of mediation – whether the parties are to bear the costs themselves, or they are to become part of the litigation costs - should be specifically addressed and agreed before the mediation takes place and recorded in the mediation agreement. The parties then know exactly where they stand. The fact that parties can agree that the costs can be recovered, if settlement is not achieved, from the ultimately losing party may also help focus the minds of those involved in achieving a resolution at the mediation stage.

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For further information about this published aticle, contact Kathryn Hobbs on +44 (0)121 213 2397, Alexa Highfield on +44 (0)121 213 2396 or Matthew Purcell on +44 (0)121 213 2360

This published article may contain information of general interest about current legal issues, but does not give legal advice.