Alternative Dispute Resolution (‘ADR’)

Alternative Dispute Resolution (ADR), has been in existence for many years now, in a number of formats, and several judicial ADR schemes have been in place since the 1990s.  Nevertheless, until the introduction of the Civil Procedure Rules in 1996, ADR was strictly a private matter between the parties to a dispute. 

The Civil Procedure Rules introduced the overriding objective (set out in the Introduction), ‘to deal with cases justly’, pursuant to which, the courts were given wide ranging powers to actively manage cases, and the parties are required to help the court to further that objective.   

By CPR Rule 1.4(e), active case management includes (amongst other things):

“encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure”

Over time, CPR Rule 1.4 has been supplemented by the introduction of additional case management powers, contained within the Protocol Practice Direction; within each of the Pre-action Protocols and within some Specialist Court Guides.

Risk

Litigation is inherently risky, a fact that is often not appreciated by potential litigants, particularly those who have not been through the process before.  One category of risk often follows on from another and risks are rarely capable of consideration in isolation.

The first risk is the litigation risk.  That is, litigation carries with it numerous inherent risks that make it difficult to predict the outcome of even the most apparently meritorious cases; such as the insolvency or disappearance of an opponent.

The second risk is that the claim will fail on its merits, in entirety, or in part.  Civil litigation cases may start as a dispute involving one area of law but may frequently give rise to issues involving many other areas of law or legal concepts, some of which may not be apparent at the outset of the case when the nature of the dispute seems straightforward. 

Inextricably linked to the merits risk is the costs risk.  The normal rule in relation to the costs of most types of litigation is that costs follow the event.  That is, the loser must pay the winner’s costs in addition to being responsible for their own costs.  Where there is no outright winner and loser, the costs of the case may be apportioned between the parties, but in either case, those costs will be carefully scrutinised to ensure that they are proportionate to the issues.

For some types of case, the ‘normal’ costs rules do not apply. Some others are subject to rules that ‘fix’ the costs that may be recovered from an opponent.

Beyond the ‘risks’ of litigation are other burdens which again, may not be appreciated by litigants at the outset of the case.

Time

The most under-appreciated burden is the time that each stage of the case will consume.  Key stages of a case, such as pre-action investigations, the disclosure process and preparation of witness statements, will take up many hours of time and effort for litigants and lawyers alike.  These processes are particularly disruptive where they impede what would otherwise be productive working hours for the parties.  If a case does go to trial, the witnesses may wait for hours or days to be called to give their evidence.

Litigation is stressful for all of the parties involved and it is not unusual for litigants to feel unsettled throughout the life of the case because the litigation process can be a continual distraction or source of anxiety. 

Then there are the costs of funding litigation.  Leaving aside the costs risks, if the case is being privately funded, the litigant will usually be expected to pay their legal costs as and when they arise.  This can be very burdensome, particularly where the case is complex.

For all of these reasons, in most cases, it is in the parties interests to consider whether ADR may assist them to settle their dispute; minimise their costs exposure and move on with their lives.  Another benefit of most types of ADR (save for those that rely on a third party decision), is that the parties are able to agree terms of settlement that the courts may have no jurisdiction to order.  This means ADR is a much more flexible means of settlement than a judgment.

There are several types of ADR available, but the more judicial types, such as arbitration and adjudication, (where a professional third party is asked to decide the case), are generally only relevant to certain types of commercial dispute and are not summarised here.

Negotiation

Negotiation is such an integral part of social discourse that it is frequently overlooked as a form of ADR, but that is exactly what it is. Negotiation is also the most common way for the parties to reach a settlement of their dispute.  Negotiated settlements may be reached between parties to a dispute before it is necessary to involve solicitors.  Even where solicitors do become involved, the majority of disputes are settled this way. 

Negotiation will take any form that the parties prefer; frequently negotiation is conducted through informal discussion between the parties, but where both parties are represented, negotiation will usually take place in correspondence but may be conducted through discussion.

Mediation

Mediation is, essentially, a more formal means of achieving a negotiated settlement and involves the appointment of a professional mediator to act as a ‘go-between’ and assist the parties to reach a settlement.   Where a professional mediator is appointed, the process is generally more formal, as each party is normally required to provide the mediator with a Position Statement, which outlines their case, and their representative may be asked to summarise their client’s case before the mediation gets underway.  The parties are segregated to allow the mediator to have full and frank discussions with both sides as to the merits of their case, the aim being to encourage the parties to reach their own terms of settlement.

The Court Service has recently introduced its own mediation scheme, which appears to offer a cost competitive option for mediating a dispute, indeed, some courts offer the service free for small claims.

Early Neutral Evaluation

A neutral third party with sufficient understanding of the legal issues, reviews each party’s case at an early stage in the proceedings and evaluates the overall merits of the case.  The evaluation is not binding but its greatest benefit is in concentrating the minds of the parties about the potential final outcome of the case.

Early Neutral Evaluation is a relatively new concept in ADR (at least in the UK), but is a feature of some specialist courts and tribunals where its use is encouraged, to the extent that in some cases, a judge in a specialist court may be asked to carry out an evaluation of the case or any specific issues within it, thereafter, taking no part in the proceedings. 

Some professional organisations, such as RICS, now offer a neutral evaluation scheme for disputes where their professional discipline is relevant.

Early Neutral Evaluation will often be the basis upon which the parties may subsequently negotiate or mediate a settlement as the evaluation will tend to concentrate the minds of the parties on the strengths and weaknesses of their own case and that of their opponent.

The normal rule in relation to the costs of most types of litigation is that costs follow the event.  That is, the loser must pay the winner’s costs in addition to being responsible for their own costs. 

Whilst the Courts cannot compel the parties to participate in ADR, it does have the power to impose costs sanctions against a party who it finds has unreasonably refused to do so.  As such, this power operates as a departure from the normal rule that costs follow the event and there have been cases where a winning party has not been able to recover any of their legal costs from their opponent because the court has found that they have unreasonably refused to try and settle their claim through the use of ADR[1]

CPR Rule 44.5 sets out the factors that the court is to consider in deciding whether costs were reasonably and proportionately incurred (by the receiving party).  Rule 44.5(3) specifically provides that the court must have regard to the conduct of the parties, and the efforts made, if any, before and during the proceedings in order to try to resolve the dispute.

When might it be reasonable to refuse ADR?

A party that unreasonably refuses ADR therefore faces a real costs risk unless they can show that a refusal to mediate was based upon reasonable grounds.  The question then arises as to when it may be reasonable to refuse an invitation to participate in ADR.  Case law[1] has established a number of factors that may be relevant to a consideration of whether refusal to do so would be reasonable, though this falls short of a check list and should not be considered exhaustive.  A refusal to mediate has been described as of itself, “a high risk strategy”[2] and a refusing party should be well prepared to justify their position if necessary. The courts are encouraged to take account of the following common factors:

1) The nature of the dispute 

This will rarely apply in practice, but will most likely relate to a point of law or conduct that requires nothing less than a judge’s decision.

2) The merits of the case.

If one party has a very strong case then this may be grounds for reasonably refusing to use ADR. However, caution is required when considering whether the merits of a case afford good grounds to refuse. Most parties who become involved in litigation will feel that the merits of their own case are strong and may not give any consideration to the merits of their opponents’ case or their own risks of litigation.

3) Whether other methods have been attempted.

Say, for example, if written offers to settle have been made but rejected. Again, the terms upon which settlement is proposed may be relevant in determining whether those attempts were a reasonable alternative to ADR.

4) Proportionality of the costs of mediation.

This may be relevant where the costs of ADR in the dispute are disproportionate to the value of the claim. This would be most likely to apply where the costs of a day in court are about    the same as for mediation of the same duration.  In those circumstances, it would be reasonable to pay for court time rather than for mediation, particularly because such cases are normally allocated a limited amount of time for a judge to hear the dispute. However, the new HM Court Service Mediation Scheme is competitively priced (free in some cases), and its availability would appear to reduce the likelihood of a refusal on proportionality grounds being justifiable.

5) Delay.

Timing is everything and each case is different.  ADR is less likely to be successful if it takes place too early, when the parties do not know the strength of their opponent’s case, although if it is left too late then most of the costs will already have been incurred and in such cases the same argument will apply about delay as applies to proportionality in lower value disputes.

The promotion of ADR as a means of settlement is stymied if the parties do not know it exists or do not know the possible consequences of either failing to consider, or unreasonably refusing to take part in ADR.

For parties who are legally represented, solicitors are obliged, by the Code of Professional Conduct, to advise their clients about the options that may be available to assist them to settle their dispute.  The guidance notes which supplement the Rules make clear that complying with the Code will mean discussing ADR as a more appropriate means of resolution than litigation.

However, just to make that obligation quite clear, the Allocation Questionnaire Form now requires solicitors representing parties to tick a box on the form to confirm they have advised their client of the need to try and settle, the options available, and the possibility of a costs sanction if they refuse to settle.

Part A of the Allocation Questionnaire asks the parties if they want to try and settle the claim, offers a stay and offers to arrange mediation through the Court Mediation Service.  If a party answers ‘no’ to these questions, they then have to complete another box and state their reasons.

As these are the first questions on the Allocation Questionnaire, the parties and their representatives can be in no doubt about the court’s expectation of the parties in considering ADR.  In turn, the court will have an early indication of the parties’ attitude to ADR based on the responses contained in the Allocation Questionnaire.

It is clear that, whilst the Courts cannot compel the parties to resolve their dispute using ADR, the case management powers that it has and the ability to penalise an unwilling party in costs will act as an ‘encouragement’ to the parties to do so.  This has led to the development of the offer of ADR as a tactical device, that is, one in which (usually one of) the parties seeks to provide the court with evidence that it has been willing to participate in ADR, but where, in reality, it has no intention of actually doing so. All ADR is conducted on a ‘without prejudice’ basis and so the reasons for any failure to settle are not communicated to a judge who has to determine whether any party should face a costs sanction.

Tactical devices are many and varied. For example, one party may offer to mediate but make clear the terms on which it will settle where those terms are known to be likely to be unacceptable to their opponent.  Or, the offer may be made too early, or too late in the proceedings to be realistic as a means of settlement. Similarly, the parties may convene a mediation scheduled to last for a day and then find that their opposite number is in discussion and not ready to put an offer forward until after 5pm when their opponent may be under time pressure to leave.

Tactical ADR devices are an unwelcome aspect of the ADR process, and can be difficult to recognise. Therefore, whilst there are always risks in refusing, provided the reasons for refusing to mediate in those circumstances are based on reasonable grounds that have been carefully considered, then they are more likely to be accepted as such by a court.