Under Lord Justice Jackson’s costs reforms, the multi-track costs budget (Precedent H) requests details of the costs of ADR/settlement discussions. This has prompted the question whether Precedent H creates a presumption that the costs of a failed or aborted mediation form part of standard recoverable costs.
Reasonable and proportionate costs incurred in seeking settlement or engaging in negotiation are recoverable in the usual way (Civil Procedure Rules PD 47 para 5.12(8)), and the court has jurisdiction to make an order in relation to the costs of a failed mediation (Chantrey Vellacott v The Convergence Group Plc & Others  EWHC 1774). In addition, costs (including pre-action costs) may be “costs of and incidental to the proceedings” under section 51 of the Senior Court Act (however, costs incurred in a pre-action mediation which took place over two years before proceedings were issued did not fall within section 51 (Lobster Group v Heidleberg Graphic Equipment Ltd and Close Asset Finance Ltd  EWHC 413 (TCC)).
Despite the above rules providing for the recovery of mediation costs, these are usually explicitly split between the parties in the mediation agreement, and the courts will not look behind such agreements and make a different order. If the agreement is silent, there may be scope to argue that such costs are recoverable. If the parties agree that mediation costs should be costs in the case (or the court orders this), they will be recoverable. The parties’ intention will be paramount.
The recent case of Northern Oxford Golf Club v A2 Dominion Homes Ltd  EWHC 859 was heard on 9 April 2013. Pursuant to the mediation agreement, the mediator’s fees were to be borne equally between the parties, and the claimant’s solicitors had written to the defendant’s solicitors suggesting that the parties agree to share equally “the costs of the main room and any costs attributed to the mediator”. On detailed assessment, the claimant argued that the costs of the mediation were part of the inter-partes costs, whilst the defendant argued that the mediation was entirely separate. The Costs Master ruled that, on the facts, there was a distinction between the participation costs (the mediator’s costs, hire of room etc) and the costs of preparation and presentation of the mediation borne by the parties and their lawyers. The Costs Master disallowed the former and allowed the latter. In a written judgment handed down on 24 April 2013, the judge hearing an application for appeal in the case said that in his view the Costs Master had probably been right but the authorities did not provide a clear answer on this.
It is clearly advisable for parties to give thought to mediation costs upfront and to state in writing whether they should be split, or treated as “costs in the case”. Most mediators will push in their standard terms for the mediator’s fees to be borne equally and paid before the mediation. However, this does not preclude the parties from stipulating that these and other costs should ultimately be treated as costs in the case (or at least as reserved costs so that the judge can be addressed later on the options open to him/her).
ADR institutions are increasingly providing for the recoverability of costs in their standard agreement/terms (see CEDR’s model mediation agreement 13th edition (clause 9)). Indeed, there is no reason why the parties have to agree to share the costs of the mediation and a party who believes they are likely to succeed in the underlying litigation should certainly think twice before doing so.
Parties should ensure that the costs provisions in an applicable ADR clause, mediation agreement, or settlement agreement do not conflict (or make clear which takes precedence if they do). It was held in Nat West Bank v Feeney EWHC 90066 (Costs), affirmed on appeal, [No 9 of 2007] (unreported)) that the costs provisions of a settlement agreement should be explicit and make clear that they supersede the terms of the mediation agreement.
Ultimately, whilst Precedent H supports the argument that failed mediation costs are recoverable, nothing will overrule the parties’ intention, which should be made clear in writing
Finally, and from a practical point of view, it will be difficult for a costs judge to rule whether mediation costs should be recoverable or not, given without prejudice privilege attaches to mediation. Unless the parties are willing to lift the without prejudice veil over the mediation, the judge will not be able to look at the circumstances surrounding the mediation to determine whether it is just to include mediation costs.