Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd (No 2)

In these Part 8 proceedings I gave judgment upholding BAE’s contention that on a true construction of the Licence Agreement, BAE was entitled to terminate that agreement for convenience under the provisions of Clause 10.4 of the Enabling Agreement which governed the Licence Agreement.

In relation to costs NGM accepted the principle that BAE was entitled to its costs to be assessed on a standard basis if not agreed, but contended that those costs should be reduced by 50% by reason of BAE’s unreasonable refusal to mediate the dispute. BAE challenges both the premise and the appropriateness of any reduction in its costs in this case.

When the court comes to consider costs and to exercise its discretion under CPR 44.2, it has regard to all the circumstances including the conduct of the parties before as well as during the proceedings: see CPR 44.2 (4) and (5).

That conduct includes conduct by which a party refuses to agree to alternative dispute resolution: see White Book Part 1 at paragraph 44x.3.21, Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 and PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288.

In Halsey the particular factors which the Court of Appeal identified as being relevant included the nature of the dispute, the merits of the case, the extent to which other settlement methods had been attempted, whether the costs of ADR were disproportionately high, whether any delay in setting up or attending the ADR would have been prejudicial and whether ADR had a reasonable prospect of success.

InPGF II the Court of Appeal referred to the Jackson ADR Handbook where, at paragraph 11.56, it sets out practical steps which a party should take if it considers it has reasonable grounds for refusing to participate in an ADR process following a request from the other party. Briggs LJ, giving the judgment with which the other members of the court agreed, commented on that paragraph and said at [30]:

“The ADR Handbook, first published in 2013, after the period relevant to these proceedings, sets out at length at para 11.56 the steps which a party faced with a request to engage in ADR, but which believes that it has reasonable grounds for refusing to participate at that stage, should consider in order to avoid a costs sanction. The advice includes: (a) not ignoring an offer to engage in ADR; (b) responding promptly in writing giving clear and full reasons why ADR is not appropriate at the stage based if possible on the Halsey guidelines; (c) raising with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR together with consideration of how that shortage might be overcome; (d) not closing off ADR of any kind and for all time in case some other method than that proposed or ADR at some later date might prove to be worth pursuing. That advice may fairly be summarised as calling for constructive engagement in ADR rather than flat rejection, or silence. It is apparent from the footnotes that the authors drew heavily on the first instance decision in the present case…”

Briggs LJ then concluded at [56]:

“Finally, as is recognised by the weight placed on the judge’s decision in the passage in the ADR Hand-book to which I have referred, this case sends out an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal, or the undertaking of some other form of ADR, or ADR at some other time in the litigation. To allow the present appeal would, as it seems to me, blunt that message. The court’s task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasise that message by a sanction which, even if a little more vigorous than I would have preferred, none the less operates pour encourager les autres….”

Chapter 11 of the Jackson ADR Handbook, dealing with sanctions for refusing to engage in ADR processes, usefully summarises the relevant principles to be derived from cases where a refusal to engage in an ADR process had been considered, to the date of publication of the book in early 2013.

On the application for costs NGM provided a witness statements from Jane Elizabeth Player of NGM’s Solicitors, who has been involved from an early stage. This was responded to, on behalf of BAE, by a witness statement from Michael Peter Stocks, a senior counsel with BAE Systems plc, who has had day-to-day responsibility for this dispute on behalf of BAE.

Ms Player says that NGM and BAE, together with other companies in the groups to which they belong, are major participants in the defence industry, with long-term contracts running into millions of pounds and with relationships which are significant to both companies. She says that, because of the longstanding and continuing relationship, NGM approached BAE on several occasions at management level to try and resolve the dispute amicably but she says these efforts were “spurned”, both by BAE and its legal representatives.

She says that, in essence, NGM’s claim was about money and that it considered BAE had obtained deployment licences at a price to which it was not properly entitled by purporting to terminate the Licence Agreement. She said that whilst it was necessary to construe the two agreements, the Licence Agreement and the Enabling Agreement, to arrive at conclusions as to what was payable for those licences and whether or not payment was due for the second tranche of deployment licences, the issue of interpretation did not alter the financial basis for the claim which she believed made the case suitable for mediation.

Mr Stocks says that he is convinced that if a mediation had taken place, the case would not have settled. He says that, if he had thought there had been a realistic possibility of there being a settlement which would have plainly been in the legal and commercial interests of BAE, he would have strongly recommended it. He says that BAE ultimately rejected mediation for proper and sensible reasons. He says that the dispute was about contractual interpretation so that the outcome was “all or nothing” in that if NGM were right it would recover in excess of £3 million, but if it were wrong it would receive nothing.

He says that, as a result of legal advice received from solicitors and leading counsel, BAE was confident of its legal position and was prepared to abide by the terms of the termination and pay NGM’s reasonable termination costs. However, he says that obtaining information from NGM about those costs proved to be a lengthy and difficult process. He says that BAE were aware that NGM was a successful company which could afford to litigate and could afford to lose and that this meant that it had no reason to settle the case for financial reasons.

Mr Stocks says that, each time NGM contacted BAE suggesting mediation, an assessment was made. That assessment identified whether BAE was in possession of what was necessary to analyse and assess NGM’s position properly; it considered the procedural requirements of a mediation and what the costs to BAE of a mediation were likely to be and it assessed whether mediation had any prospect of leading to a resolution of the dispute, all against the background of the parties’ commercial relationship.

He says that, on each occasion, BAE concluded that mediation did not have a prospect of leading to a resolution of the dispute. He says that BAE was not prepared to countenance paying a sum of money on the basis of the commercial relationship which, if anything, tended the other way. He says that, if BAE paid money on what it considered to be an un-meritorious claim, it had the prospect of leading to other un-meritorious claims and may have wrongly provided NGM and its parent and affiliated companies with the view that BAE and BAE Systems plc more widely, was not prepared to defend itself in cases where it had strong grounds for doing so.

In relation to information, he says that NGM was reluctant to provide an analysis of the costs that had been reasonably and properly incurred by it, on the basis that the termination was lawful. Although NGM did finally articulate a claim for some £2.6 million, its explanation of its termination costs, following a termination for convenience, in fact meant that no costs were payable and thus nothing could form the subject of a mediation.

Mr Stocks says that BAE thought that the mediation had been suggested on the basis that it would put BAE under some pressure to make a settlement payment with respect to a claim which BAE considered had no real prospect of success, as a matter of law and no merit, even in the abstract. He says that BAE therefore considered it unreasonable to expend resources on a mediation which was viewed as having no prospect of success. He says that NGM was not going to give up its claim, however speculative BAE viewed it, for anything other than a substantial payment and BAE was not prepared to pay because of its view and the advice it was getting that BAE had no liability for the sums claimed.

The correspondence exhibited to the witness statements included some without prejudice documents and it was confirmed that privilege was waived in relation to such documents. It is convenient to set out the course of that correspondence.

Following the letter from BAE, dated 29 November 2011, giving notice of termination and NGM’s letter of 1 December 2011 rejecting that letter and indicating it would continue to perform and seek £2.6 million, BAE wrote to NGM on 20 December 2011. In that letter BAE referred to agreeing a fair and reasonable settlement under the terms of the termination for convenience clause in Clause 10.4.

In its letter of 3 January 2012, in response, NGM said that whilst the parties were in disagreement with respect to the incorporation of Clause 10.4 of the Enabling Agreement, the outcome financially was the same. In the final paragraph Kevin Squibb, head of contracts at NGM, said as follows:

“It is evident that a protracted exchange of letters is unlikely to lead to early resolution of this matter and the likelihood of meaningful progress would be enhanced by a meeting of the Senior authorised Commercial Officers of [NGM] and [BAE]. [NGM] is prepared to make itself available in that regard, but due to prior commitments of David Taylor ([NGM] Managing Director) and I, the earliest this could be accommodated is during the week of 16^th January. We would invite you to our Fareham facility during that week and would ask you please advise a date and time suitable to you and who will attend on behalf of [BAE].”

There then followed some contact but no meeting occurred. The next letter put before me was dated 29 May 2012 and was a without prejudice letter from Mr Woodman in the legal department of NGM to BAE, following an open letter of the same date. He indicated that NGM was in the process of selecting solicitors for the purpose of preparing the matter for litigation and was confident that, should the matter go to court, it would be vindicated in its interpretation of the contract. He then added:

“Notwithstanding the foregoing, before legal costs are incurred, [NGM] is prepared to meet to discuss the matter in more detail to see if a resolution can be achieved or, failing that, to establish whether or not any form of alternative dispute resolution might be appropriate before the matter goes to Court.”

BAE responded to that letter with a without prejudice letter dated 11 June 2012 in which it stated:

“We confirm that we have no objection in principle to the in-house legal representatives of the parties meeting on a without prejudice basis. However, at a purely practical level, we can see no benefit in doing so until such time as [NGM] has first provided the requested substantiation for the costs arising from the termination and reasonable profit thereon”

Mr Woodman subsequently had a telephone conversation with Mr Smalldon, an in-house lawyer representing BAE. On 27 June 2012 he wrote a letter which, as agreed during the telephone call, provided some details of the legal basis of NGM’s claims, including their case that, even if Clause 10(4) of the Enabling Agreement was incorporated, the full remaining invoice value under the Licence Agreement of £2.6 million was payable. He said: “In the spirit of endeavoring to achieve amicable settlement and avoidance, to the extent possible, of legal costs, I am happy to set out the following arguments.”

He concluded the letter by saying that NGM was very confident in the strength of its position and proposed to pursue the matter vigorously unless it could be resolved by negotiations.

That letter was then responded to by Herbert Smith LLP, instructed on behalf of BAE, in a without prejudice letter of 6 July 2012. In the final paragraph they sought a statement from NGM of what costs it had reasonably and properly incurred which would not be recovered as a consequence of the termination, that being the costs recoverable under Clause 10.4.

On 19 July 2012 King & Spalding International LLP (“King & Spalding”), instructed on behalf of NGM, responded with a without prejudice letter in which they concluded as follows:

“Our client remains confident in its position, should this matter proceed to litigation and will have no hesitation in pursuing its rights should this prove necessary. However, we appreciate that our clients have a long term business relationship at many levels, which will not be assisted by such litigation. The facts are not in issue and are known to the parties. It is therefore a situation that lends itself to an early resolution. Accordingly we suggest that a mediation is agreed as a matter of urgency to allow both parties, with their advisers to constructively discuss how this matter may be resolved with the assistance of a suitably qualified neutral. We invite your firm to suggest dates within the next 6 weeks when you and your client are available and also the names of 3 mediators you would like considered. We will review the dates and names with our client and revert as a matter of urgency. We are happy to host the mediation here in our offices or for it to be held at any reasonable location which you might suggest.”

Herbert Smith LLP responded on 27 July 2012 with a without prejudice letter in which they stated that NGM had declined to provide particulars of costs properly and reasonably incurred and concluded: “Further, if your client is not even prepared to engage on the issues in correspondence, there can be little purpose in a mediation at this stage.”

On 6 August 2012 King & Spalding referred to the fact that there had been without prejudice correspondence and continued:

“The purpose of this letter is, in open correspondence, to request that your client considers seriously the option of mediation before significant costs are incurred by both parties in pursuance of this dispute. Failure to do so will mean that our clients will have no choice but to pursue recovery vigorously of its’ debt and, we reserve its right to put this letter to the court on the question of costs, should you continue to refuse to mediate.

We appreciate that there are differences of opinion between our clients as to the interpretation of the Licensing Agreement, but those options have been exchanged and that is an ideal point from which to mediate. Our firm’s and client’s view given the extensive relationship that NG and its wider group of companies has with the BAE group of companies is that mediation is a more sensible first step than now proceeding to litigation. We would be surprised if BAE did not see it in the same light. Kindly confirm that you have taken instructions from BAE on this point, as your response will be of interest to senior management of NG Group.”

Herbert Smith LLP responded in open correspondence on 9 August 2012 in which they referred to a claim under Clause 10.4 and said: “Our client has requested your client to provide a full statement of such costs, which has yet to be provided.”

A meeting then took place on 22 November 2012 between Mr Von Kumberg, European Legal Director of NGM and Mr Woodman of NGM and Ms Talbot of BAE Systems plc legal department, representing BAE. At that meeting Ms Player says that NGM reiterated its willingness to have a mediation but BAE rejected the offer of mediation on the basis that Ms Talbot did not consider that mediation would be useful in bringing the parties together.

Matters seem to have remained there until 11 February 2013, when King & Spalding wrote a letter to Herbert Smith Freehills LLP in accordance with the practice direction for pre-action conduct. In concluding that letter they referred to ADR and said as follows:

“Our client, including with the assistance of this firm, has attempted to resolve, without recourse to formal litigation, the dispute arising from your client’s refusal to pay for the Software Licences which were delivered to it more than a year ago. To date, these attempts have been unsuccessful. This is regrettable. That is so not least in the light of the long-term business relationship which exists, at many levels, between the businesses of which our respective clients are part.

Our client remains willing to consider ADR — particularly given that the facts relating to the dispute with your client do not appear to be in dispute. In these circumstances, we consider that a mediation to constructively discuss how this matter may be resolved would be the most appropriate forum. In the event that your client is willing to enter into a mediation please provide us with dates convenient to you and your client over the next two months.”

Herbert Smith Freehills LLP provided their client’s response to that letter on 4 March 2013 and in relation to ADR said this:

“In view of the weakness of the claim made, it is not reasonable to expect our client to incur the significant cost of a mediation.

However, our client has consistently stated its willingness to reach a fair and reasonable settlement with your client for costs reasonably and properly incurred in connection with the termination of the Licensing Agreement, including the reasonable profits thereon, pursuant to Clause 10.4 of the Enabling Agreement. To date, your client has declined to provide any evidence of such costs. We accordingly infer that all the associated development costs had previously been recovered and that no costs were incurred by your client in connection with the termination of the Licensing Agreement. We should be obliged if you would confirm that this is correct.”

In response King & Spalding said:

“We are disappointed to note that you have refused our client’s attempts to resolve this dispute without recourse to formal litigation and in particular its offer to enter into a mediation. The costs of a mediation are insignificant in comparison to the potential costs of litigation, for both parties and, if your contention is correct that our client’s claim is weak, then mediation gives your client an early opportunity to prove the same.”

They then set out NGM’s position as to its entitlement to £2.6 million if Clause 10.4 applied. They concluded by saying:

“We therefore accept the offer made in your letter of 4 March 2013 to meet and discuss your client’s termination of the Licensing Agreement on the basis of clause 10.4 of the Enabling Agreement in the hope of reaching a fair and reasonable settlement. If your client is not now willing to do so, despite your previous offer, please confirm your client’s position. We reserve our right to put this letter before the court on the issue of costs in due course, should that be the case.”

Herbert Smith Freehills LLP then responded on the 25 April 2013 and said this:

“We note that your client is not prepared to engage further in correspondence on the issues on the grounds that it is not necessary and/or cost efficient to do so. However, your client proposes a mediation.

We have some difficulty with this proposal because, to the extent that it is necessary further to debate the issues, it will be more cost efficient to do so in correspondence than through a mediation. If it is not necessary to do so, on the other hand, it is difficult to see what the purpose of a mediation would be.”

Proceedings were then commenced on 22 October 2013 and on 20 January 2014 Herbert Smith Freehills LLP wrote to King & Spalding in the following terms:

“This letter sets out the basis on which our client would be prepared to settle.

Our client will agree to a full and final settlement of the claim above and any other claims your client may have arising out of or in connection with the Agreement for Deployment Licences and Associated Software Support dated 15 December 2010 and associated agreements, on the basis that no payment is made by our client to your client, but that each party bears its own costs associated with the on-going claim. Please note that this offer is not subject to negotiation.”

This was then responded to by King & Spalding on 22 January 2014 in the following “without prejudice save as to costs” letter:

“Thank you for your letter of 20 January 2014. We regret that yet again our request for a meeting (made by our Jane Player during a conversation with your Tim Parkes on 15 January 2014) to explore potential settlement of this dispute and/or a mediation has been rejected by your client.

We have throughout this matter, for example on 6 August 2012, 11 February 2013 and 10 April 2013, suggested to your client, through your firm, that mediation would be the best forum to explore a sensible resolution to this matter, short of Proceedings or a Hearing. Yet again this suggestion has been ignored without an acceptable explanation. This offer to pay nothing at all for valuable licences provided to your clients and a mere compromise on the legal costs to date, is unreasonable given that our client clearly contemplated the validity of its claim prior to launching Proceedings in the first place. There is simply no meaningful offer for our client to even consider accepting.”

Mr Alex Charlton QC, who appears on behalf of NGM, made submissions dealing with each of the factors set out in Halsey. He submitted that the dispute was suitable for mediation as the essence of the dispute was about the payment of licence fees and support costs. He said that, whilst the underlying issue was whether BAE enjoyed a right to terminate the Licence Agreement for convenience, the object of the claim was payment of an invoice together with a minimum support payment of £300,000. He submitted that the fact that the dispute involved matters of construction did not make it unsuitable for mediation.

He referred to Halsey at [17] where reference was made to a Commercial Court Working Party on ADR which had stated in 1999 that some parts of Commercial Court work did not lend themselves to ADR. It said that the most obvious kind was where the parties wished the court to determine issues of law or construction which may be essential to the future trading relations of the parties, an ongoing long-term contract or were of general importance in a particular trade or market. He said this was not such a case as BAE’s contract with the Saudi Arabian client had been terminated and the licences and support were no longer required. He said that this was not a case where the issues of construction were essential to future trading relationships or were important in any wider context.

He said that, in any event, matters had moved on and the emphasis on and the perceived benefits of ADR had strengthened over the years and he referred to the Court of Appeal decision in PGF II at [24] to [30]. He said there was no objective reason why construction issues should not be amenable to mediation so that a skilled mediator could “hold up a mirror” to the parties’ respective arguments and identify the risks and merits involved as in any other case.

In any event he said that BAE did not refuse mediation on the basis that the dispute was unsuitable but either gave no reason for its refusal to engage or raised matters which had already been answered.

In relation to the merits of the case, Mr Charlton submitted that it is the reasonableness of a party’s belief that it has a strong case which is of importance. He submitted that in this case the argument was not all one way and, on matters of construction, tribunals can differ. He said that in Halsey at [19] Dyson LJ, as he then was, drew a distinction between cases that would have succeeded on an application or summary judgment and more borderline cases. He submitted that this was a case where the merits weighed in favour of ADR.

In relation to attempts to settle by other methods, he submitted that no other settlement methods had been attempted. He submitted that whilst BAE may say that it was prepared to reach a fair and reasonable settlement in accordance with Clause 10.4, it was not prepared to meet unless and until NGM provided it with details of the relevant costs which, as BAE knew, NGM could not do because no such costs were incurred. In relation to the “without prejudice save as to costs” offer, Mr Charlton said that this offer by BAE was made on a “take-it-or-leave-it” basis and does not constitute a settlement method.

In relation to the costs of ADR, Mr Charlton said that the combined costs for each side in relation to the two day action were believed to be well in excess of £500,000 in total. He said it was unlikely that the costs expended by both sides for mediation would have exceeded £40,000 and, with the amount of £2.6m licence fees plus £300,000 support costs plus VAT at stake, the claim justified that expense. He said that the costs of preparing evidence would have been avoided. He submitted that no prejudice would have been suffered in setting up or attending ADR.

In relation to the prospects of success of mediation, Mr Charlton referred to Halsey at [28] where Dyson LJ explained that the burden lay on the unsuccessful party to show how that there was a reasonable prospect that mediation would have been successful but that this was not an unduly onerous burden to discharge and he does not have to prove that a mediation would have in fact succeeded.

Mr Charlton submitted that mediation concentrates the mind and would have dispelled any misconceptions as to issues or arguments which were apparent from the correspondence. He submitted that the role of a mediator would have been to identify risks and test each side’s arguments. A skilled mediator would, he said, have also seen and explained NGM’s underlying grievance that BAE acquired licences at a price which would not have been available had it not taken the full quantity of the licences. He also emphasized the pre-existing and continuing relationship between the parties and the willingness on behalf of NGM to resolve the claim.

Mr Marcus Taverner QC, who appeared on behalf of BAE, submitted that BAE did not turn down mediation but rather requested information on NGM’s alternative case and at all times responded to suggestions of mediation. He said that King & Spalding did not reply to the response from Herbert Smith Freehills LLP to the pre-action letter of 11 February 2013 but as stated in King & Spalding’s letter of 18 October 2013 they said: “We clearly will not be able to agree the meaning of clause 5.1 of the licensing agreement dated 15 December 2010. We have therefore concluded that this matter must be put before the Court.”.

He submitted that, in the absence of agreement of the meaning of Clause 5.1, King & Spalding had reached the conclusion that the matter should be put before the court and this was a conclusion that BAE was also entitled, reasonably, to have reached. He submitted that NGM’s case developed and that significant costs were incurred and wasted in the dispute about NGM’s assertion that all of its witness statement evidence was relevant and admissible.

He submitted that had NGM accepted BAE’s offer of 20 January 2014 NGM would have avoided a significant part of the overall expenditure and substantial costs would have been avoided by BAE which it would not now be seeking to recover.

Mr Taverner submitted that, as could be seen from Mr Stocks’ Witness Statement, BAE is a sophisticated commercial client with in-house counsel who considered mediation and its likelihood of achieving settlement, saving time, costs and obviating risks and the possibility that a skilled mediator could achieve a solution. He then submitted that in relation to the Halsey factors, NGM’s case involved a relatively short point of contract interpretation on which a claim totalling over £3 million depended. He submitted that this was not a long running dispute and was not a dispute which cried out for mediation but one where a party could legitimately consider whether mediation was worthwhile and reasonably concluded that in all the circumstances it was not.

In relation to the merits of the case he submitted that BAE reasonably concluded that this was not a borderline case. BAE and its external lawyers considered that BAE was correct as a matter of law and also had commercial merits of not paying for licences it did not require. He submitted that BAE’s confidence was justifiable in the light of the case put in correspondence.

In relation to other settlement methods Mr Taverner submitted that NGM was unwilling to engage in detailed exchange of submissions concerning the merits and then rejected BAE’s offer of settlement. He submitted that it was plain that NGM was always looking for a significant sum and that BAE would not, on the basis of the case advanced and the express refusal to expand upon it, countenance paying any such sum.

In relation to the costs of mediation, he submitted that the costs were not small in comparison with the costs of the trial which could have taken half a day and, even with NGM’s witness statements, each party only estimated the trial to take one day. He submitted that delay in setting up or attending ADR was not a factor in BAE’s thinking.

In relation to whether ADR had a reasonable prospect of success, he submitted it was a dispute between two commercial enterprises which would take up relatively little court time which both parties could afford to fight. He submitted that there was an issue of contractual interpretation on which the claim depended and the parties could, and would, never agree the meaning and effect of Clause 5.1. In short, he submitted that the parties were poles apart on a single issue on which all the money turned and which the court could determine shortly and at relatively little cost one way or another.

He submitted that NGM had never suggested that it would have accepted anything other than a substantial payment and in correspondence set out its confidence in the strength of its position. He referred to and relied on passages from the Court of Appeal decision in Swain Mason v Mills & Reeve [2012] EWCA Civ 498 and in particular drew a parallel with what Davis LJ said in the Court of Appeal at [75] where the parties were “a hundred miles apart”. He said: “It is difficult to see, given the circumstances, how a mediation could have had reasonable prospects of success.”

It is convenient, first, to make some findings about the relevant factors identified in Halsey.

This was a case where, although NGM sought to make the same financial claim if they lost on contractual interpretation, there was a central issue of contractual interpretation as to whether there was a termination for convenience clause and, effectively, an overall sum of £3m depended on that interpretation. This was not a point of construction which would have affected the continuing relationship between the parties or their group companies or which either party had any interest in resolving except for the purpose of the financial claim. I regard this case as being like many cases, where points of construction are major issues at the centre of a financial claim. In all such claims a skilled mediator can assist the parties in resolving the dispute by finding a solution to disputes which each party would regard as incapable of being settled and would be unable to settle without such assistance.

I have come to the conclusion, after considering the arguments, that this was a strong case by BAE. I would not call it a borderline case nor one which was suitable for summary judgment. It was a case where BAE reasonably considered that it had a strong case. Both in Halsey at [18] and in Daniels v Commissioner of Police for the Metropolis [2005] EWCA Civ 1312, the Court of Appeal have indicated that where a party faces an unfounded claim and wishes to contest that claim rather than make a payment to buy it off, the court should be slow to characterise that conduct as unreasonable. As stated in Halsey, the fact that a party reasonably believes that it has a watertight case may well be sufficient justification for a refusal to mediate.

The authors of the Jackson ADR Handbook properly, in my view, draw attention at paragraph 11.13 to the fact that this seems to ignore the positive effect that mediation can have in resolving disputes even if the claims have no merit. As they state, a mediator can bring a new independent perspective to the parties if using evaluative techniques and not every mediation ends in payment to a claimant.

However, on the merits of the case, I consider that BAE’s reasonable view that it had a strong case is a factor which provides some but limited justification for not mediating.

This is not a case where there was an offer to mediate and no response or, where the parties did not have some communication with a view to settlement.

The correspondence shows that from December 2011 BAE said that it was willing to pay termination costs under Clause 10.4. It soon became clear that NGM’s claim under Clause 10.4, however strongly it was put, was a difficult claim to make so as to claim the same sum as it claimed for wrongful termination. There was then a degree of posturing by BAE in which it sought information from NGM on its costs under Clause 10.4 when it knew there were none. Equally, NGM continued to seek to argue the difficult case that there were substantial costs. It was in this context that NGM proposed mediation but each time BAE requested further information. That correspondence was ultimately unsuccessful in either party persuading the other party of its views. BAE continued to ask for information which was not going to be produced and NGM continued to propose mediation. Again it is a classic situation where a mediator could have cut through the positions taken by the parties.

There were also two occasions when attempts to settle were made. Although there is little evidence of what happened, perhaps because it was a without prejudice meeting, there was a meeting between in-house lawyers on 22 November 2012 at which mediation was suggested by NGM and rejected by BAE on the basis that it did not consider that mediation would be useful in bringing the parties together.

The more significant matter is the exchange of “without prejudice save as to costs” offers. BAE offered to settle on the basis of no payment, with each party bearing their own costs. This is an offer which, if it had been accepted by NGM, would have put NGM in a better position than it is in terms of the outcome of the hearing. It has received no payment and accepts that it will have to pay BAE 50% of its costs. This offer was rejected by NGM who referred to its offers of mediation.

On this basis, there was some attempt to settle the dispute by other means in terms of a face-to-face meeting and a “without prejudice save as to costs” offer. I think that, overall, this factor is neutral or marginally in BAE’s favour in its impact in assessing the refusal to mediate. I shall consider, separately, the important effect of the offer made by BAE.

I accept that the costs of mediation may well have been of the order of £40,000. This compares to the overall costs incurred by both parties which are said to total about £500,000. The claim was for some £3m. On this basis, I consider that the costs of ADR cannot be said to be disproportionately high. They would, at the very least, have saved some of the costs of the correspondence between the parties by avoiding the positions taken.

This is not a factor in this case. Mediation could have taken place without affecting the litigation.

In this case there were two parties who had a commercial relationship. One party, NGM, clearly felt aggrieved that BAE had terminated a contract for convenience when NGM had negotiated the Licence Agreement on the basis of the early commitment to buying licences at a lower price. The other party, BAE, clearly felt that it had the right to terminate in circumstances where it no longer needed any licences. I consider that this is just the situation where a mediator could assist the parties in resolving the dispute and avoid wasted management time and soured relationships even if, as large commercial entities, the effect will not be serious or long lasting.

This was a classic case where I consider that a mediator could have brought the parties together. In assessing the prospects of success I do not consider that the court can merely look at the position taken by the parties. It is clear that if BAE did not want to pay anything and if NGM would not settle without payment then there would not be a settlement. However this is the position in many successful mediations. It ignores the ability of the mediator to find middle ground by analysing with each party its expressed position and making it reflect on that and the other parties’ position. It allows the mediator to bring the necessary skills of evaluation and facilitation to find solutions which have not been considered. These may include such things as bringing other commercial arrangements or disputes into the discussion or, in this case, resolving the consequences of termination or finding future opportunities for the software or licences.

The published success rate of mediation (see para 13.03 of the Jackson ADR Handbook) shows that generally mediation is likely to be successful. In this case for the reasons set out above, I consider that this is a dispute between parties where a mediated settlement would have been likely. There were therefore reasonable prospects of success.

This is therefore a case where the nature of the case was susceptible to mediation and where mediation had reasonable prospects of success. However, BAE reasonably considered that it had a strong case. On that basis was it unreasonable for BAE to reject NGM’s offer to mediate? I have come to the conclusion that it was. Whilst BAE’s view of their claim provided some justification for not mediating, I consider that the other factors show that it was unreasonable for BAE not to mediate the dispute. Whilst BAE point out that the matter was resolved by a comparatively short Part 8 hearing, even that would have been likely to have been avoided by the use of mediation.

Where a party to a dispute, which there are reasonable prospects of successfully resolving by mediation, rejects mediation on grounds which are not strong enough to justify not mediating, then that conduct will generally be unreasonable. I consider that to be the position here.

However, the refusal to mediate is not the only factor to take into account in this case. CPR 44.2(4)(c) points out that one of the circumstances to be taken into account in deciding what order to make in relation to costs includes “any admissible offer to settle made by a party which is drawn to the court’s attention, and which is not an offer to which costs consequences under Part 36 apply”. The “without prejudice save as to costs” letter of 20 January 2014 was just such an admissible offer. Whilst the existence of the letter does not justify a refusal to mediate, it is independently a relevant factor that BAE made an offer which NGM was not successful in bettering. NGM’s conduct in not accepting that offer is similarly a matter to be taken into account.

The issue is how those two aspects of conduct should be taken into account where BAE has been, overall, the successful party. A refusal to mediate means that the parties have lost the opportunity of resolving the case without there being a hearing. A failure to accept the offer has equally meant that the parties have lost the opportunity of resolving the case without a hearing. Whilst mediation at an earlier stage might have avoided costs, if BAE had mediated even at a later stage, its conduct would not have been unreasonable.

Overall, in this case, I have come to the conclusion that the fair and just outcome should be that neither party’s conduct should be taken into account to modify what would otherwise be the general rule on costs.

Accordingly, the appropriate order is that NGM should pay BAE its costs, to be assessed on a standard basis, if not agreed, without any reduction.