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Recovery of Mediation Cost

There is a growing international trend to discourage parties from litigating disputes and to encourage them to use alternative means of dispute resolution and in particular mediation. Mediation is a non-binding method of structure negotiation facilitated by a third party neutral.

Behind this approach are a number of considerations, including the public policy consideration that it is desirable for parties to amicably resolving their own disputes rather than to have a resolution imposed by a third party (and perhaps enforced!. to reduce the demands upon the court system and to save the time and costs incurred by the parties in the conduct of court proceedings. One of the steps taken to encourage the use of mediation is for the refusal to mediate or to engage in the mediation process to be taken into account when costs are dealt with.

However, inevitably not all mediations are successful and the question arises whether the costs of an unsuccessful mediation might be recovered in a subsequent action. This issue was considered in Chun Wo Construction & Engineering Co Ltd v China Win Engineering Ltd. Chun Wo was the main contractor for a project and entered into a sub-contract with China Win. Disputes arose and legal proceedings were commenced with Chun Wo as the plaintiff claiming damages. China Win defended this claim and also counterclaimed damages.

Mediation was attempted, under the pilot scheme for mediation for cases in the Construction and Arbitration List. Unfortunately the mediation failed to bring about an immediate settlement; however it succeeded in narrowing issues in dispute. Following this partial resolution a subsequent settlement was achieved by which Ch un Wo agreed to pay a sum of money to China Win. The legal proceedings were then stayed. China Win also accepted Chun Wo's previous payments into court in satisfaction of its counterclaim. However, neither the settlement agreement nor the consent order dealt with China Win's costs.

One of the issues in this context was whether the costs of the mediation could be recovered. Section 52A of the High Court Ordinance empowers the court to determine the costs" of and incidental to" the proceedings. The question was therefore whether costs of the mediation were to be regarded as costs incidental to the proceedings.

The court, noted that is was accepted that costs incurred in respect of negotiations undertaken with a view to settlement were costs incidental to legal proceedings even though the process of negotiation was not part of the legal proceedings. However, it considered that it was a question of fact whether the mediation was so closely connected with the litigation, so as to make the costs of the mediation incidental to the litigation. For example, the court might be more reluctant to treat a mediation as incidental to the proceedings if it took place a long time before the proceedings were commenced or was an earlier stage in a multi-tiered dispute resolution provision. On the facts of the case, the court found that China Win's mediation cost were incidental to the proceedings and that it had the jurisdiction to make an order for their payment by Chun Wo.

The court then observed that. as with any other item of costs, the agreement of the parties should be taken into account. In this case the relevant agreement was the mediation agreement between the parties. This agreement adopted the Mediation Rules of the Hong Kong International Arbitration Centre. Clause 13(i) of these Rules provided that each party shall bear its own costs regardless of the outcome of the mediation or of any subsequent arbitral or judicial proceedings. The court did not see any justification for departing from such an agreement and therefore found that China Win's mediation cost was not recoverable.

Therefore whilst this decision supports the view that mediation costs can be costs incidental to the proceedings and therefore may be recoverable from the losing party, a contrary agreement in the mediation agreement would be given effect. It also suggests that where mediation is undertaken as a precursor to litigation or arbitration the parties are unlikely to be able to recover their costs. Parties are well advised to consider dealing expressly with the costs of the mediation before embarking on the mediation process, particularly where it is envisaged the mediation will involve a detailed examination of the case being advanced.