Dispute resolution: how to avoid a hefty legal bill

Mediation remains an effective tool to resolve disputes, providing a forum where parties can speak freely, writes Shy Jackson, senior associate, UK construction and engineering, Pinsent Masons

Mediation is promoted in the construction industry as a quick and cost-effective way of resolving disputes. It helps to avoid the costs of adjudication or litigation and, importantly, it can be used to preserve a working relationship and reach a compromise on the basis of the wider commercial position.

One of mediation's great advantages is its confidential and privileged status, which means that parties can discuss matters freely on the basis that nothing said or done will be used outside the mediation. This does not, however, allow a party to apply illegitimate commercial pressure during the course of the mediation, and a recent case shows that such conduct may not be protected by the confidential and privileged nature of mediation. Indeed, an agreement reached in such circumstances will be set aside.

Under pressure

In Farm Assist Limited -v- the Secretary of State for the Environment, Food and Rural Affairs [2009] EWHC 1102 (TCC), the Claimant challenged a settlement agreement reached in a mediation in 2003 on the basis of economic duress. Such allegations are difficult to prove and depend very much on what was said and done. The Defendant therefore wanted the mediator to give evidence about what in fact happened at the mediation.

However, the mediator said that she could not remember very much and did not have any notes. She also relied on the original mediation agreement, which provided that the parties would not call the mediator as a witness. The mediator therefore applied to set aside the witness summons served on her.

The judge accepted that there was an overall confidentiality obligation on all parties. This also benefited the mediator and could not be waived without her agreement. However, the protection of the "without prejudice" privilege existed only between the parties and they could waive it regardless of the mediator's position.

The judge also found that the express term that the parties would not call the mediator to give evidence only applied to evidence in relation to the underlying dispute. It did not apply to a dispute about whether the settlement agreement was entered into under duress.

In any event, the judge made it clear that even if there was a confidentiality obligation, the Court could still consider whether it is in the interests of justice that a witness should be called. On the facts of this case, he held that the mediator should give evidence. This was because evidence as to what was said and done during the mediation was central to the claim.

Although the mediator said she could not remember anything, the judge observed that memories were frequently jogged when giving evidence and reviewing documents relating to past events. The lack of recollection was therefore not a sufficient reason not to call the mediator to give evidence. The Judgment helpfully sets out in detail the principles behind confidentiality, privilege and the without prejudice rule in mediation.

Rare cases

This case raises a few interesting points. The first is the attempt to challenge the settlement on the basis of economic duress. The decision does not explain what was actually said to have taken place at the mediation, but economic duress is generally regarded as illegitimate pressure where there is no realistic alternative but to agree. Agreements reached on that basis can be set aside by the Court.

Raising such an allegation about a settlement reached in a mediation is very unusual and such cases are rare because it is usually difficult to show conduct which goes beyond legitimate commercial pressure. Nonetheless, the recent case of Adam Opel GmbH, Renault S.A. -v- Mitras Automotive (UK) Limited is an example of a successful claim based on economic duress. In this case it was held that threats to stop supplies unless demands for payment of compensation and increase in price were accepted did amount to economic duress and the agreement reached was set aside.

The main point of this decision concerns the limits on the confidentiality of mediation, which in this case meant that the mediator could be compelled to give evidence and mediators will no doubt be very aware of this decision. However, the potentially wider principle is that the confidential and privileged status of mediation is not absolute. Although a Court will be reluctant to go behind the protection of the without prejudice rule (unless both parties agree, as was the case here), a Court may be willing to do so in the interests of justice in the right circumstances - and economic duress appears to be one such exception.

Mediation is and remains a highly effective tool to resolve disputes and provide a forum where parties can speak freely. This case does however show that, even when mediating, certain conduct will be unacceptable. Privilege or confidentiality will not hide unacceptable commercial pressure and parties engaging in such conduct risk their settlement agreement being set aside.