New rules encourage negotiation as an alternative to litigation to solve contractual disputes, but uncertainty about recovering costs is hampering take-up of it.
The new Civil Procedure Rules were designed to make alternative dispute resolution rather than the courts the first port of call for warring parties.

Indeed, the Centre for Dispute Resolution has reported that 160 mediations were started in a single month after the introduction of the Woolf reforms, compared with 257 in the whole of the previous year. It sounds as if ADR is coming of age, but inadequate guidance as to who bears the costs is limiting its take-up.

The CPR rules encourage ADR and settlement negotiations. But there are concerns – such as whether the process could leave a claimant with an irrecoverable costs burden. ADR, while cheaper than a full trial, is still a costly process.

So what happens to those costs – especially when the other party is only testing the strengths and weaknesses of a case or is prevaricating without a real intention to settle the dispute? ADR costs can be dealt with by an agreement between the parties concerning the resolution process. The agreement may say that costs lie where they fall. Where the encouragement comes from the court, a party believing it has a good case won’t want to incur ADR costs without being able to recover the expenditure.

It is unclear under the new rules whether the court can deal with costs incurred this way, and whether a party would be unreasonable to refuse ADR purely because there was no costs provision.

When rules are effectively structured to encourage parties to enter settlement negotiations, the courts ought to be sympathetic to a party that incurs costs but then ultimately has to resort to litigation to obtain a judgment.

The CPR provide that a party can be ordered to pay costs “incurred before proceedings have begun” or “relating to particular steps taken in proceedings”. The rules’ costs practice direction requires partners to identify costs for “work done in connection with mediation, alternative dispute resolution and negotiations with a view to settlement“.

  •  It is unclear whether costs incurred in relation to ADR are recoverable
  •  Costs not being recoverable will militate against the take-up of early dispute resolution

What is unclear from these statements is whether costs incurred in relation to ADR are recoverable. Merely because an item should be identified does not mean that it is recoverable – identification may be necessary so that the item can be disallowed.

What is clear is that the old law before the CPR regime – which came into force on 26 April this year – did not allow recovery of costs incurred in “unsuccessful” without-prejudice negotiations.

The reasoning was that only costs “ultimately proving of use and service in the action” are recoverable. Work done in connection with unsuccessful without-prejudice negotiations, such as the conduct of an ADR process, is unlikely to be “ultimately proving of use”.

Case law in relation to aborted ADR before the CPR cannot be a conclusive guide to the court’s approach now that the rules are in place.

Costs of “unsuccessful” negotiations not being recoverable will militate against the stated aim of the CPR, which is to encourage the early take-up of alternative dispute resolution. The inability to recover ADR costs may put off the very parties who should use ADR to keep their disputes out of the courts – those with good claims that ought to be capable of a quick, negotiated conclusion.

In aborted ADR cases, it might be possible to argue that it was reasonable to use ADR to attempt to resolve the dispute. It is a moot point whether a party that embraces the spirit of the CPR by using ADR to resolve a dispute should be left to fall back on such a conduct argument to recover costs.