LITIGATION RISKS AND MITIGATION OF LOSS: “MEDIATION IS A JUDGMENT CALL”: WHEN IS A REFUSAL TO MEDIATE REASONABLE?

The issue of whether a failure to mediate represented a failure to mitigate loss was considered by Judge Pelling QC (sitting as a High Court judge) in Orientfield Holdings Ltd -v- Bird & Bird [2015] EWHC 1963 (Ch).

Having embarked on litigation to mitigate the losses for which the defendants would otherwise be liable, it is not open to the defendants then to second guess the judgment of the claimant’s advisers after the event as to how they should have conducted the litigation other than perhaps in very clear and obvious circumstances”

THE CASE

The claimant was suing its former solicitor for damages. The claimant planned to buy a property and contracts were exchanged. However after exchange the claimant found out about planned developments near the property.  A notice to rescind was served.  There were subsequently proceedings between the claimant and the vendor in relation to the deposit. However these proceedings were settled the night before trial on the  basis that the deposit and interest would be split equally between the claimant and vendor, each side to bear its own costs.

The claimant brought this action against its former solicitors claiming the balance of the deposit (£1,287,500) together with fees and other losses.

KEY POINTS

  • There may be cases where a failure to mediate amounts to a failure to mitigate loss. However this was not one of them.
  • The burden is on the party alleging failure to mitigate. The claimant had brought an action and reduced the defendant’s liability substantially by settling that action. The claimant was not to be criticised unduly, or judged severely, on the steps and decisions it took in that litigation.
  • There was no evidence that mediation would have produced a settlement in any event.

THE MITIGATION OF LOSS ARGUMENTS

The judge found that the defendants were negligent.  One of the points that the defendants raised in relation to damages was that the claimant had failed to mitigate its losses by not mediating earlier.

“Mitigation.
  1. There are two points concerning mitigation made by the defendants. The first is that OHL failed to mitigate its loss by completing the transaction. The second is that it failed to mitigate the costs of the Plant proceedings by mediating the dispute at an early stage.
  2. The duty to mitigate is a duty not to expose a contract breaker or tortfeasor to additional expense by reason of the claimants not doing that what they ought reasonably to have done – see British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company [1912] AC 673 per Viscount Haldane at 689. As Lord Haldane makes clear, however, that principle is a qualified one for it:

“… does not impose on the plaintiff an obligation to take any step which a reasonable and prudent man would not ordinarily take in the course of his business…”

It is difficult to see how proceeding with a transaction that a claimant judges to be or to have become inopportune cannot come within the scope of this qualification. Lord Haldane continued in relation to the scope of the duty to mitigate in these terms:

“When in the course of his business he has taken action arising out of the transaction, which action has diminished his loss, the effect in actual diminution of the loss he has suffered may be taken into account even though there was no duty on him to act.”

Whether the claimant has acted reasonably is not to be judged too harshly against the claimant when the breach has placed the claimant in a difficult position – see Banco de Portugal v Waterlow & Sons Limited [1932] AC 452 (“Banco de Portugal“) per Lord Macmillan at 506 where he said this:

“Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment, the measures which he may be driven to adopt in order to extract himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticise the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult position by reason of the breach of the duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.”

  1. In my judgment the notion that Ms Chow was required by the mitigation principle to complete the purchase of the property by paying the balance of the purchase price of in excess of £22 million when in her judgment the transaction was no longer commercially attractive is unsustainable. It depends for its force on the suggestion that before deciding to rescind Ms Chow should have commissioned a valuation of the property in order to ascertain whether the property was worth the price that she was due to pay for it, taking account of any blight caused to it by the development. That is unreal in my judgment for the following reasons.
  2. The problem first surfaced about a week before completion was due. It is unreal to suppose that a formal valuation could have been obtained in that time. It is equally unreal to suppose that the present value of a property that on the defendant’s own case was being purchased as an investment to be refurbished and then sold on at a date to be fixed in the future was the sole consideration in deciding whether to proceed. I have discussed this issue already in relation to the causation issue.
  3. It was then submitted that it was unreasonable to rescind because cautious advice had been given about OHL’s ability successfully to rescind the contract. In my judgment, this submission lacks reality for precisely the reasons identified by Lord Macmillan in Banco de Portugal cited earlier in this judgment. Ms Chow had been placed in a difficult position as a result of the defendant’s breach of duty. She was faced with the prospect of having to decide to proceed with what, even for Ms Chow, was a very substantial investment involving a substantial portion of her personal fortune in circumstances where she did not want to proceed and would not have proceeded if she had known the true position, or rescinding the agreement notwithstanding legal advice that she might lose the deposit as a result. In those circumstances I do not accept that the duty to mitigate was one which required OHL to proceed with the purchase simply because that would have been less burdensome for the defendants.
  4. Ms Smith returned more than once to the point that Ms Chow should not have decided to rescind without taking valuation advice. Aside from the timing points I have already made, in my judgment this point ignores the fact that this was not about purchasing a property at what might be an overvalue. This was about buying a property that was to be refurbished and ultimately sold on. If the defendants are right in saying that the purchase was for investment purposes, as I have concluded was primarily the case, then Ms Chow was fully entitled to make her own business judgment, particularly given the limited window of opportunity to decide, and that the defendant did not suggest that she take valuation advice before deciding whether to proceed or not.
  5. I now turn to the other aspect of the mitigation argument – that is that OHL failed to act reasonably by seeking to mediate the claims between OHL and Mrs Plant before trial.
  6. It is perhaps necessary to remember that defending Mr and Mrs Plant’s claim that the deposit was forfeit and counterclaiming for the return of the deposit was a step that mitigated the losses for which the defendant would otherwise be liable. Thus, on the usual principles identified by Lord Haldane in the Westinghouse case quoted already, OHL would be entitled to recover as part of its damages the costs of those proceedings.
  7. There can be no doubt that the defence and counterclaim in the Plant proceedings was an appropriate step to take. Its effect was to reduce the claim in these proceedings in respect of the deposit alone by in excess of £1 million. Nonetheless, the defendants submit that OHL acted unreasonably in not exploring settlement until the eve of trial. It is common ground that neither party in the Plant proceedings thought that a mediation prior to the exchange of witness statements was an appropriate step to take. It is contended therefore that OHL acted unreasonably in not seeking mediation shortly thereafter and in consequence the fees incurred after the end of April should be held irrecoverable as damages against the defendants. In my judgment, this submission must be rejected for the following reasons.
  8. When and on what basis an approach is made by a party to mediate is a judgment call. It is a judgment to which the principle identified by Lord Macmillan in Banco de Portugal applies with full force. Having embarked on litigation to mitigate the losses for which the defendants would otherwise be liable, it is not open to the defendants then to second guess the judgment of the claimant’s advisers after the event as to how they should have conducted the litigation other than perhaps in very clear and obvious circumstances. Had it been the case that OHL was refusing to mediate in the face of advice from its solicitors that it should do, or perhaps if it could be shown that there was an outright refusal to mediate from an early stage in the litigation, then the failure to mediate might constitute a breach of the duty to mitigate. However, there is no evidence that OHL was refusing to take the advice it was given from its’ solicitors or that OHL’s solicitors were refusing outright to mediate. Notwithstanding that in the end the case was settled with relative ease, the correspondence after the exchange of witness statements did not suggest that this was likely. In any event the window of opportunity for mediation was a narrow one given the agreement of both parties that mediation was inappropriate until after the exchange of witness statements.
  9. In order to make good these conclusions, it is necessary that I refer to some of the inter-solicitor correspondence. On 9 May 2013, Wedlake Bell (OHL’s solicitors) had written two letters to Clyde & Co (the Plants’ litigation solicitors). In the first, open, letter they had said:

“In your letter of 5 February 2013, you request confirmation as to our client’s position in respect of a mediation after the exchange of witness statements. We explained in our letter of 1 February 2013 that our client’s concerns were that it was not obvious what benefits a mediation will have in this instance. We have discussed a possible mediation with our client again and this view is unchanged following the exchange of witness evidence. There are no issues as to quantum and the key question being whether the contract could have been rescinded is a matter of legal interpretation. Our client’s position is that it was entitled to rescind the contract. We are in agreement and this is supported by both leading and junior counsel. Our client’s belief that its case is watertight in this regard is an entirely reasonably held belief in the circumstances, particularly in light of your client’s evidence. We cannot therefore see there is any reasonable prospect of a mediation being successful, and if you disagree please explain why and our client will give the issue further consideration. If your clients are prepared to agree that the deposit monies be returned to our client and to then mediate in respect of our client’s counterclaim including interest, then this may be more attractive to our client. Otherwise our client has reached the stage where the case has progressed significantly and costs have been incurred as a result and when faced with a mediation that has in our client’s view no real prospect of a successful outcome, the situation remains unchanged.”

  1. On the same date, OHL’s solicitors made a part 36 offer by which OHL offered to settle for the full value of its claim and to forego its claim to interest. Whilst I accept that of itself the fact that a party considers its case a strong one is not a legally justifiable reason for refusing to mediate. However the position is much less clear cut if a party considers its case is a strong one, mediation has been delayed by agreement of all parties until a very late stage in the litigation process and that the prospects of success of the mediation are too low to justify the cost and inconvenience of embarking on a mediation process, particularly very close to the date when the trial is due to commence when inevitably mediation will divert attention from preparation for trial.
  2. Clyde & Co responded to this correspondence by a letter dated 6 June 2013 in which they set out in great detail what they perceived to be the weaknesses of OHL’s case. However, in that letter Clyde said this concerning mediation:

” For the record our clients remain willing to mediate and you will no doubt have explained to your client the implications in terms of costs of the position it has adopted. We do agree, however, that as you say a key issue, but not the only key issue, is a matter of legal interpretation, namely the scope of question 3.1 of the sellers’ property information form, and the extent to which the matters pleaded in paragraph 7 to 24(a) of your client’s amended defence require a different answer to that by our client. We set out our client’s position below …”

Clydes did not then or at any time thereafter make a CPR Part 36 offer (“part 36 offer”). Wedlake Bell responded to this by a letter dated 18 June 2013 in these terms:

“Your letter refers to mediation and we have considered that possibility. Our client fully expects to recover the deposit damages and costs. It is for that reason that we consider a mediation between our respective clients is unlikely to succeed. However, it occurs to us that as our client has issued proceedings against Bird & Bird and it is clear from Mr Plant’s witness statement that he is blaming Magrath, this is really a dispute about which of those two firms’ indemnity insurers should be picking up the bill and any mediation which does not include them is therefore a waste of time and money. We would be prepared to attend a mediation which includes our respective clients and their respective conveyancing solicitors and their insurers. If your clients agree with our proposal, then please contact the relevant solicitors and their insurers and put the suggestion to them. Please then inform us of their response.”

  1. Two things emerge from this correspondence in my judgment. First, each of the firms concerned was asserting the strength of their respective clients’ case in correspondence. Mr Golten had described this as posturing and to an extent it was. However, the point that emerges, even at this stage, was that Clydes considers OHL’s case to be weak and had not made an offer to settle. In my judgment Wedlake Bell were entitled to conclude on the basis of Clydes’ correspondence that the prospects of a satisfactory settlement at mediation were low and that no useful purpose would be served by it in those circumstances, particularly given the proximity of the trial, at any rate in the absence of it being attended by the respective conveyancing solicitors’ insurers. Plainly, there was a real prospect that either the solicitors acting for the Plants in the transaction, Magraths, or for OHL, the defendants, would end up meeting at least part of the claim, depending on how the Plant litigation was resolved. In those circumstances the presence of Magraths’ insurer and the defendant’s insurers at any mediation would enhance dramatically the prospects of settlement. OHL’s solicitors’ proposal in their letter of 18 June represented a realistic mechanism for attempting to resolve the dispute in the particulars circumstances of that case.
  2. Clyde responded to OHL’s solicitors’ letter of 18 June by a letter of 21 June 2013. In relation to mediation, they said this at paragraph 2.9:

“Finally in this section, we note your proposal of a mediation involving our respective clients Bird & Bird and Magrath. Our clients would have no objection to Bird & Bird attending a mediation if your client so wishes, but it is certainly not for our clients to put that suggestion to Bird & Bird since they have no relationship or claim against them. As for Magrath, we cannot see any way in which they and their insurers could be ready for a mediation before the trial date in this matter, but in any event our clients propose to deal with matters between them and Magrath following the outcome of this litigation, since that outcome will be pivotal in any claim against Magrath. If therefore you wish a mediation between our clients, your client and Bird & Bird, please let us have some suggested dates and mediators.”

It is to be remembered that the trial was due to take place on 8 July 2013. OHL’s solicitors responded to this by a letter of 25 June 2013 in these terms:

“We note your clients’ refusal to participate in a mediation attended by both sides and their respective insurers which is the only basis on which our client would be prepared to attend. On 17 May 2013 we asked your predecessor to confirm whether any claim had been issued or intimated by your client against Magrath LLP. We have received no reply to that question. Please confirm by return and provide us with all associated documentation. Any such material is clearly disclosable.”

  1. In my judgment that was, with due respect, an unfair summary of the Clydes’ position. Clydes had merely asserted their belief that Magraths’ solicitor and insurer could not be ready for a mediation before the trial in the Plant proceedings that was due to commence on 8 July 2013.
  2. By 1 July the position as described by Clydes in their letter of that date was:

“It is not open to your client to insist that Magrath attend a mediation. Your client has no claim against our clients’ solicitors and it is perfectly reasonable for our clients to deal with their claim against Magrath separately. In any event, as we explain, there is no realistic way in which Magrath could be ready for mediation before the trial of our client’s claim. As we also said in our letter dated 21 June, our clients would have no objection to Bird & Bird attending a mediation if your client wishes to arrange that. We have been in contact with Bird & Bird solicitors and it may be that we can support your client’s attempts to involve them in a mediation. Please let us know if you would like us to do that.”

This correspondence comes to an end with OHL’s solicitors’ response at 3 July 2013 which was in these terms:

“You have rejected our proposed format for a mediation. We do not see why Magraths’ insurers could not be ready for a mediation. Our view is that it is up to you to make a meaningful offer of settlement if you want to avoid a trial.”

  1. In my judgment this correspondence does not disclose any undue delay on the part of OHL’s solicitors in their approach to the mediation process. The only questionable element was their insistence that Magraths’ insurers be present. In my judgment the fact that OHL and its solicitors considered its case to be a strong one was not a good reason for refusing to mediate and was not of itself the basis on which in fact it refused to mediate. Initially Wedlake Bell suggested that agreement ought to be reached as to one part of the claim and mediation as to the balance, but by 18 June 2013 they had offered to mediate, but on the basis that all relevant parties were present. This was not sufficiently unreasonable conduct by OHL’s solicitors to constitute a failure to mitigate in my judgment, particularly when considered in light the principle identified in Banco de Portugal and of (1) the robust line Clyde were taking as to their client’s case, (2) the absence of any part 36 offer by Clyde, (3) the proximity of trial and (4) Wedlake Bells’ belief that OHL’s case was a strong one.
  2. These factors were ones that OHL’s solicitors were entitled to take into account in suggesting the approach to be adopted, and in my judgment, whatever the position might have been in relation to the litigation in which this conduct was taking place, it is very difficult to suggest that this constitutes a failure to mitigate tested against the principles as described above.
  3. Whilst it was apparent that at least a tripartite mediation could take place by no later than 25 June 2013, that was only about two weeks from trial. Given the proximity of trial, in my judgment, OHL’s solicitors were entitled to invite an offer to settle from Clydes in the alternative and this they did expressly on 3 July 2013. It was of course open to Clydes to make any offer that they considered appropriate prior to that. The truth is that no offer was forthcoming in response even to the express request made on 3 July 2013. In the end an offer was made by Clydes to settle which was accepted but not in response to that letter.
  4. In my judgment in these circumstances it is difficult to conclude from this chain of events that OHL had failed to mitigate by refusing to mediate. There was only ever a window of opportunity for mediation of about two months between the exchange of witness statements and the commencement of the trial in which Clydes were prepared to consider mediating at all. OHL’s solicitors made a part 36 offer coupled with a detailed explanation of their belief that OHL would succeed. Clydes responded with a lengthy critique which suggested very strongly that they had reached the conclusion that the Plants were likely to succeed, particularly given that no counter-offer was made. The case is one which turned very largely on legal interpretation.
  5. Thereafter, OHL’s solicitors suggested mediation involving insurers for the respective parties’ conveyancing solicitors. That position was reasonable, given the failure of Clydes to make an offer to settle. Whilst OHL’s solicitors might be criticised for not agreeing a tripartite mediation, that refusal was made only on 25 June by which time the parties were close to trial. No offer had ever been made by Clydes and was not until the eve of the trial, notwithstanding that they were expressly invited to do so, as I have said by the letter of 3 July. There is no evidence that it would have been possible to arrange a mediation between 21 June and the start of the trial on 8 July.
  6. More importantly there is no evidence that if a tripartite mediation involving the Plants, OHL and the defendants in these proceedings, that a settlement would have been probable. As I have said, Clydes were robustly asserting their client’s defence and had not made an offer of any sort. It is not suggested that the defendant’s solicitors would have made an offer either. In those circumstances I am not able to accept the defendant’s case that OHL should not recover part of its costs after the end of April 2013 on the basis that it failed to mitigate its loss appropriately.”

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Mediation

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