ADR Across the Pond: The Right to Refuse

There has been a great deal of debate recently in the English courts and legal press about two key issues relating to Alternative Dispute Resolution (ADR). First, whether the court has the power to order unwilling parties to undertake ADR. Second, whether a successful party should be penalized in costs if it has refused ADR.

The Court of Appeal handed down its judgment in the cases of Halsey v. Milton Keynes General NHS Trust and Steel v. Joy and Halliday [2004] EWCA (Civ) 576 on May 11, 2004, and shed some light over these issues.

The term ADR includes a number of methods of resolving disputes other than through the normal trial process, such as early neutral evaluation and expert determination. However, in practice, references to ADR are usually references to mediation.

Can the Court Make Reluctant Parties Mediate?

No. In Halsey, the Court of Appeal said that to oblige “truly unwilling parties to refer their disputes to mediation would be to impose an unacceptable obstruction on their right of access to the Court,” and it would therefore be a violation of Article 6 of the European Convention on Human Rights. The role of the court is to encourage the parties to mediate, not to compel them, although the form of encouragement can be very strong.

When is a Successful Party Likely to be Deprived of Some or all of Its Costs on the Grounds that It Refused ADR?

The common rule is that costs should follow the event. Depriving a successful party of its costs is an exception to that general rule and, therefore, the Court of Appeal in Halsey said that the burden should be on the unsuccessful party to show why there should be a departure from the general rule. Previously, it had been considered that the successful party had to prove that it had not acted unreasonably in refusing ADR.

Whether a party has acted unreasonably in refusing ADR must be determined having regard to all the circumstances of the particular case. The Court of Appeal gave non-exhaustive guidance on the factors that the Law Society (which appeared in the case as an interested party) suggested should be considered in deciding whether a refusal to agree to ADR was unreasonable. No single factor is likely to be decisive.

The factors that should be taken into account include the following:

1) The nature of the dispute. The subject matter of some disputes makes them unsuitable for ADR. Some examples: when an injunction is essential to protect one of the parties; to determine issues of law or construction, which are essential to the future trading relationship of parties under a long-term contract; or when the issues are generally important for those in a particular trade or market.

However, most franchise disputes are not by their nature unsuitable for ADR. On the contrary, they are normally very suitable as they do not tend to be too legally complex, and the amounts in dispute can be fairly low, so that the costs of going to trial can outweigh the amount of the claim. Also, they do not tend to involve new areas of law for which a court judgment is needed.

2) The merits of the case. If a party reasonably believes that it has a strong case, this can be a relevant factor. Otherwise it would be open to claimants to use the threat of costs penalties to obtain settlement from a defendant even when the claim is hopeless. Franchisors can be particularly vulnerable to pressure from former franchisees to offers of mediation as a tactical ploy even when they have weak cases.

If a party unreasonably believes that its case is watertight, that is no justification for refusing to mediate. However, if a party reasonably believes that its case is watertight, that may be sufficient justification. If a party would have succeeded on an application for summary judgment, then its case is likely to be sufficiently strong to justify a refusal to mediate. In borderline cases, the fact that a party refused to mediate because it thought that it would win is not sufficient justification.

3) Other settlement methods have been attempted. If settlement offers have been made but rejected, this may show that one party is making an effort to settle but the other party has unrealistic views of the merits of its case. Franchise disputes are usually charged with emotion, particularly on the side of the franchisee, which can make negotiations very difficult. However, with the impartial intervention of a skillful mediator, the mediation process may succeed in making the franchisee look rationally and objectively at its case and agree to settle where direct negotiations have failed. In reality, this factor is relevant to whether a refusal to mediate is reasonable and is therefore only an aspect of factor six below.

4) The cost of mediation would be disproportionately high. This factor is of particular importance when the amount in dispute is comparatively small, as the mediation process itself can be as expensive or more expensive than taking the matter to trial.

5) Delay. If mediation is suggested very late in the day, it may delay the trial; this could be a relevant factor.

6) Whether the mediation has a reasonable prospect of success. The unsuccessful party does not have to prove that a mediation would have in fact succeeded. It needs to prove that there was a reasonable prospect that it would have succeeded. The Court of Appeal said that the burden of proof should be on the unsuccessful party, as in most cases it would be difficult for the successful party to prove that a mediation had no reasonable prospect of success. The court thought that the burden on the unsuccessful party is not “unduly onerous,” although in practice it may be difficult to prove that a mediation had a reasonable prospect of success. However, this, and the other factors set out above, may not be relevant if the court orders the parties to consider mediation, as explained below.

Encouragement from the Court

One additional factor ' encouragement from the court ' was not in the Law Society's suggested list of factors, but could be a decisive factor on its own. The Court of Appeal said that if a successful party refuses to agree to ADR despite the court's encouragement, that will be taken into account when deciding whether the party's refusal was unreasonable. The stronger the encouragement from the court, the easier it will be for the unsuccessful party to show that the successful party's refusal was unreasonable.

An ADR Order made in the form used in the Admiralty and Commercial Court is the strongest form of encouragement. It requires the parties to take “such serious steps as they may be advised to resolve their disputes by ADR procedures,” although it stops short of ordering the parties to undertake ADR.

The Court of Appeal said that if a party refuses to embark on an ADR process in the face of an ADR Order, it would run the risk that, for that reason alone, its refusal to try ADR would be unreasonable. It would be assumed that the court would not make such an Order unless it was of the opinion that the dispute was suitable for ADR. The vast majority of franchise disputes in the High Court will be in the Queen's Bench Division rather than the Admiralty and Commercial Court, but it is quite possible that the Queen's Bench Judges will start using a similar form of order to encourage parties to use ADR. A less strong form of encouragement maybe used in other courts, and the Court of Appeal referred to a standard form of order devised by Master Ungley widely used in clinical negligence cases. This type of order recognizes the importance of encouraging parties to at least consider whether their case is suitable for ADR and reminds them that, if they refuse even to consider the question, they could be at risk on costs even if they are successful.

Lessons to be Learned

In sum, the court's decisions lead us to make the following recommendations:

1) All parties should consider whether a case is suitable for ADR. A solicitor may well be negligent if he or she fails to do so.

2) Do not think that you have to agree to ADR or suffer costs consequences, particularly if it is being used as a tactical ploy by a former franchisee to extract payment, as referred to in factor two above.

3) If you decide to refuse ADR, make it clear to the other party the reasons for the refusal ' bearing in mind the factors set out above.

4) If the court encourages the parties to use ADR by making an Order similar to those used in the Admiralty and Commercial Court, it will be difficult to justify a refusal to use ADR.

5) Franchise disputes are usually suitable for ADR; particularly, mediation can be a useful way of resolving a difficult dispute, as an impartial mediator may well succeed where direct negotiations have failed.

There has been a great deal of debate recently in the English courts and legal press about two key issues relating to Alternative Dispute Resolution (ADR). First, whether the court has the power to order unwilling parties to undertake ADR. Second, whether a successful party should be penalized in costs if it has refused ADR.

The Court of Appeal handed down its judgment in the cases of Halsey v. Milton Keynes General NHS Trust and Steel v. Joy and Halliday [2004] EWCA (Civ) 576 on May 11, 2004, and shed some light over these issues.

The term ADR includes a number of methods of resolving disputes other than through the normal trial process, such as early neutral evaluation and expert determination. However, in practice, references to ADR are usually references to mediation.

Can the Court Make Reluctant Parties Mediate?

No. In Halsey, the Court of Appeal said that to oblige “truly unwilling parties to refer their disputes to mediation would be to impose an unacceptable obstruction on their right of access to the Court,” and it would therefore be a violation of Article 6 of the European Convention on Human Rights. The role of the court is to encourage the parties to mediate, not to compel them, although the form of encouragement can be very strong.

When is a Successful Party Likely to be Deprived of Some or all of Its Costs on the Grounds that It Refused ADR?

The common rule is that costs should follow the event. Depriving a successful party of its costs is an exception to that general rule and, therefore, the Court of Appeal in Halsey said that the burden should be on the unsuccessful party to show why there should be a departure from the general rule. Previously, it had been considered that the successful party had to prove that it had not acted unreasonably in refusing ADR.

Whether a party has acted unreasonably in refusing ADR must be determined having regard to all the circumstances of the particular case. The Court of Appeal gave non-exhaustive guidance on the factors that the Law Society (which appeared in the case as an interested party) suggested should be considered in deciding whether a refusal to agree to ADR was unreasonable. No single factor is likely to be decisive.

The factors that should be taken into account include the following:

1) The nature of the dispute. The subject matter of some disputes makes them unsuitable for ADR. Some examples: when an injunction is essential to protect one of the parties; to determine issues of law or construction, which are essential to the future trading relationship of parties under a long-term contract; or when the issues are generally important for those in a particular trade or market.

However, most franchise disputes are not by their nature unsuitable for ADR. On the contrary, they are normally very suitable as they do not tend to be too legally complex, and the amounts in dispute can be fairly low, so that the costs of going to trial can outweigh the amount of the claim. Also, they do not tend to involve new areas of law for which a court judgment is needed.

2) The merits of the case. If a party reasonably believes that it has a strong case, this can be a relevant factor. Otherwise it would be open to claimants to use the threat of costs penalties to obtain settlement from a defendant even when the claim is hopeless. Franchisors can be particularly vulnerable to pressure from former franchisees to offers of mediation as a tactical ploy even when they have weak cases.

If a party unreasonably believes that its case is watertight, that is no justification for refusing to mediate. However, if a party reasonably believes that its case is watertight, that may be sufficient justification. If a party would have succeeded on an application for summary judgment, then its case is likely to be sufficiently strong to justify a refusal to mediate. In borderline cases, the fact that a party refused to mediate because it thought that it would win is not sufficient justification.

3) Other settlement methods have been attempted. If settlement offers have been made but rejected, this may show that one party is making an effort to settle but the other party has unrealistic views of the merits of its case. Franchise disputes are usually charged with emotion, particularly on the side of the franchisee, which can make negotiations very difficult. However, with the impartial intervention of a skillful mediator, the mediation process may succeed in making the franchisee look rationally and objectively at its case and agree to settle where direct negotiations have failed. In reality, this factor is relevant to whether a refusal to mediate is reasonable and is therefore only an aspect of factor six below.

4) The cost of mediation would be disproportionately high. This factor is of particular importance when the amount in dispute is comparatively small, as the mediation process itself can be as expensive or more expensive than taking the matter to trial.

5) Delay. If mediation is suggested very late in the day, it may delay the trial; this could be a relevant factor.

6) Whether the mediation has a reasonable prospect of success. The unsuccessful party does not have to prove that a mediation would have in fact succeeded. It needs to prove that there was a reasonable prospect that it would have succeeded. The Court of Appeal said that the burden of proof should be on the unsuccessful party, as in most cases it would be difficult for the successful party to prove that a mediation had no reasonable prospect of success. The court thought that the burden on the unsuccessful party is not “unduly onerous,” although in practice it may be difficult to prove that a mediation had a reasonable prospect of success. However, this, and the other factors set out above, may not be relevant if the court orders the parties to consider mediation, as explained below.

Encouragement from the Court

One additional factor ' encouragement from the court ' was not in the Law Society's suggested list of factors, but could be a decisive factor on its own. The Court of Appeal said that if a successful party refuses to agree to ADR despite the court's encouragement, that will be taken into account when deciding whether the party's refusal was unreasonable. The stronger the encouragement from the court, the easier it will be for the unsuccessful party to show that the successful party's refusal was unreasonable.

An ADR Order made in the form used in the Admiralty and Commercial Court is the strongest form of encouragement. It requires the parties to take “such serious steps as they may be advised to resolve their disputes by ADR procedures,” although it stops short of ordering the parties to undertake ADR.

The Court of Appeal said that if a party refuses to embark on an ADR process in the face of an ADR Order, it would run the risk that, for that reason alone, its refusal to try ADR would be unreasonable. It would be assumed that the court would not make such an Order unless it was of the opinion that the dispute was suitable for ADR. The vast majority of franchise disputes in the High Court will be in the Queen's Bench Division rather than the Admiralty and Commercial Court, but it is quite possible that the Queen's Bench Judges will start using a similar form of order to encourage parties to use ADR. A less strong form of encouragement maybe used in other courts, and the Court of Appeal referred to a standard form of order devised by Master Ungley widely used in clinical negligence cases. This type of order recognizes the importance of encouraging parties to at least consider whether their case is suitable for ADR and reminds them that, if they refuse even to consider the question, they could be at risk on costs even if they are successful.

Lessons to be Learned

In sum, the court's decisions lead us to make the following recommendations:

1) All parties should consider whether a case is suitable for ADR. A solicitor may well be negligent if he or she fails to do so.

2) Do not think that you have to agree to ADR or suffer costs consequences, particularly if it is being used as a tactical ploy by a former franchisee to extract payment, as referred to in factor two above.

3) If you decide to refuse ADR, make it clear to the other party the reasons for the refusal ' bearing in mind the factors set out above.

4) If the court encourages the parties to use ADR by making an Order similar to those used in the Admiralty and Commercial Court, it will be difficult to justify a refusal to use ADR.

5) Franchise disputes are usually suitable for ADR; particularly, mediation can be a useful way of resolving a difficult dispute, as an impartial mediator may well succeed where direct negotiations have failed.