The role of Alternative Dispute Resolution (ADR) in commercial litigation

Commercial disputes are inevitable in business. What’s changing is how these disputes are resolved.

The legal landscape in England and Wales is shifting towards Alternative Dispute Resolution (ADR), methods used to resolve legal disputes outside of traditional court litigation, as an integral part of the litigation process, not merely an optional diversion.

Recent court decisions and rule changes have transformed ADR from a choice into a near necessity for parties in commercial disputes. This evolution raises important questions for businesses engaged in litigation…

How has the legal framework changed? What practical implications does this have for your dispute strategy? And how can you navigate these new expectations effectively?

The Churchill decision: a turning point for Dispute Resolution

In February 2024, we reported on the landmark decision in Churchill v Merthyr Tydfil Borough Council [2023] EWCA Civ 1416 and the impact this case was likely to have on the litigation landscape in England and Wales. You can read our article here – ADR: mandatory participation in Commercial Disputes

A year on from this landmark decision, where are we?

While Alternative Dispute Resolution (“ADR”) is not yet compulsory, we have seen the civil procedure rules (the “CPR”) amended to place increased emphasis on the need for parties and legal practitioners to consider ADR at all stages throughout the litigation process and expressly empower the courts to compel the use of ADR in appropriate cases.

This has been described as a “sea-change in the approach of the courts to ADR” and parties who continue to ignore ADR now do so at their own peril.

We have also seen the first reported instance of a court ordering parties to participate in ADR, notwithstanding the objections of one party: DKH Retail Ltd and other companies v City Football Group Ltd [2204] EWHC 3231 (Ch).

From our own experience, we have continued to see courts at all levels encouraging participation in ADR. This includes the Court of Appeal (the “CoA”) taking the decision of its own volition to delay the listing of an appeal so that ADR can take place and referring the dispute to the Court of Appeal Mediation Scheme.

The CoA has made it clear that the parties should expect to face adverse costs consequences should they unreasonably refuse to mediate. While this form of judicial encouragement is not new, it is perhaps indicative of an increasing trend towards integrating the use of ADR as an integral part of the litigation process in this jurisdiction.

The Churchill case: a quick recap

In November 2023, the CoA issued its landmark judgment addressing the question of whether the English courts have the power to stay, or pause, court proceedings to allow for ADR to take place.

In Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, Lord Justice Dyson had previously expressed the view that the courts could encourage, but not compel, parties to mediate.

The Judge’s reasoning in that case was that to oblige unwilling parties to mediate would constitute an unacceptable restriction on their right to access the courts and potentially infringe on their rights to a fair and public hearing guaranteed by Article 6 of the European Convention on Human Rights.

The CoA found that Lord Justice Dyson’s reasoning in Halsey was not binding and that the English courts do have the power, in appropriate cases, to order parties to “engage in a non-court based dispute resolution process.”

Sir Geoffrey Vos found that that this power is not unfettered and should only be exercised “provided that the order made does not impair the very essence of the claimant’s right to proceed to a judicial hearing and is proportionate to achieving the legitimate aim of settling the dispute fairly, quickly and at reasonable cost.”

However, the judge did not consider it appropriate to lay down fixed principles as to what factors would be relevant in determining those questions.

What are the advantages of ADR?

ADR offers a number of potential advantages compared to litigation, which include:

Cost and time efficiency

One of the most significant advantages of ADR, as highlighted in Churchill, is the efficiency it offers in terms of both cost and time. Court cases can potentially drag on for months or even years, incurring substantial legal fees and leading to prolonged uncertainty for all parties involved.

ADR processes, by contrast, are generally much quicker and more affordable, providing a swifter resolution that benefits both the parties and the judicial system as a whole.

Preserving relationships

Another compelling argument for ADR is its ability to preserve relationships between parties. Litigation often results in an adversarial environment where one party “wins” and the other “loses”, potentially damaging both business and personal relationships.

ADR focuses on collaboration and finding mutually agreeable solutions, which offers the opportunity to preserve relationships and offer a more constructive resolution to a dispute.

Tailored solutions

ADR offers parties the flexibility to craft creative, customised solutions that may not be available through the courts. This is especially beneficial in complex disputes where the legal frameworks may not adequately address the specific needs of the parties.

ADR allows parties to have more control over the process and the outcome, providing a more tailored approach to resolving commercial disputes.

Judicial support for ADR

Post-Churchill, we are likely to see increasingly levels of judicial pressure to use or participate in ADR as a key part of the litigation process. This trend aligns with broader trends in other jurisdictions that emphasise the importance of reducing the burden on the court system.

By encouraging ADR, courts are able to actively manage their caseloads more efficiently and parties can achieve timely and more creative solutions.

Challenges

Despite the growing push towards ADR, it is important to recognise that ADR may not be appropriate in every dispute. There are likely to always be some cases, particularly those involving very complex legal issues or significant power imbalances between parties, that may not be suited to ADR.

In such cases, court proceedings may remain the most appropriate forum for resolving those disputes.

Furthermore, ADR ultimately relies on the willingness of both parties to cooperate and engage in the process in good faith. While the English courts have long recognised that an unreasonable refusal to engage in mediation, or participate in the process in good faith, may result in the imposition of an adverse costs order, the fact remains that engaging in ADR does not guarantee success.

Changes to the CPR post-Churchill

Five months after the date of judgement, the Civil Procedure Rules Committee took the decision to amend the CPR to reflect the importance of the decision in Churchill and provide a clear procedural framework for the use of ADR into the future. The new rules came into effect in October 2024.

In summary, the main changes are as follows:

• Part 1 of the CPR: Parties to litigation are required to help the court to further the overriding objective of the CPR, which is to ensure that cases are dealt with justly and at proportionate cost. To achieve that objective, the courts are now required, so far as practicable, to have regard to the promotion and use of ADR and actively manage cases by “ordering or encouraging the parties to use, and facilitating the use of, alternative dispute resolution.”
• Part 3 of the CPR: Rule 3.1, which sets out the courts’ general case management powers, now expressly includes the power to “order the parties to engage in alternative dispute resolution.”
• Part 28 of the CPR: Rules 28.7(1) and 28.14(1) make it clear that when deciding what case management directions should be ordered in cases allocated to either the fast track (the usual track for cases with a financial value between £10,000 and £25,000) or the intermediate track (the usual track for cases with a financial value between £25,000 and £100,000), the court is to have regard to “whether to order or encourage the parties to engage in alternative dispute resolution.”
• Part 29 of the CPR: Similarly for cases allocated to the multi-track (i.e. those cases with a financial value in excess of £100,000), the court, when giving directions, must “consider whether to order or encourage the parties to engage in alternative dispute resolution.”

These rule changes make it undeniably clear that the courts must not only consider ADR as part of their active management of cases, but can order parties to engage in ADR in appropriate cases. Parties should expect to see increasingly use of those power.

The DKH Retail case

The case involved a dispute between the owners of the Superdry clothing brand and the company operating Manchester City FC’s commercial operations. The players’ training kits displayed the words “Super” and “Dry” to promote its sponsor, Asahi Super Dry 0.0% lager.

It was alleged that this use infringed upon Superdry’s registered trade mark and constituted an act of passing off.

At the pre-trial review hearing, the claimants sought an order from the court that the parties be required to engage in mediation prior to trial. Relying on Churchill, the claimants argued that this was a case where the court should exercise its discretion to order mediation on the basis that:

• The issues in dispute were not complex.
• There were reasonable prospects of a settlement being concluded.
• Mediation offered the possibility of settling on grounds that could not be ordered by the court.
• If successful, it would enable the parties to avoid the substantial cost of preparing for and attending trial, in addition to saving court time and resources.
• It would assist the court in achieving the overriding objective.

The defendants argued that the court should only exercise its powers in cases where there was a realistic prospect of success and this was not one of those cases. Furthermore, given the proximity of the trial date, it would not be appropriate to now order mediation in circumstances where the parties had already incurred substantial legal costs preparing for trial.

Finally, it was argued that the parties’ position were diametrically opposed and the issues in dispute required judicial determination. The High Court disagreed and made an order that the parties mediate.

In reaching that view, Mr Justice Miles made the following observations:

• Even in cases where parties are diametrically opposed, experience shows that mediation is capable of “cracking even the hardest nuts.” In short, at a mediation everything is up for grabs, which offers parties solutions over and above what can be ordered by the court.
• Despite the claimant’s proposal for mediation having been made very late in the day, the parties benefited from the fact that their respective positions were now crystallised as a result of pleadings and witness statements having been exchanged. The Judge did not consider the proximity of the trial date to be a barrier to ordering mediation.
• The Judge acknowledged that there was some force in the defendant’s submission that the parties were commercial entities with the benefit of experienced legal advisors and that if there was a realistic prospect of settlement, one would have expected a deal to have materialised by this point. However, the Judge found that argument did not “do full justice to experience, which shows that bringing the parties together through mediation can overcome an entrenched reluctance of the parties to negotiate, even where sincere. The purpose of mediation is to remove roadblocks to settlement.”

Mr Justice Miles was clearly right, because it was subsequently reported that the parties had settled following a successful mediation.

This is the first reported case of the High Court exercising its powers to compel, rather than merely encourage, parties to participate in ADR.

What does the future hold for ADR?

In our last article (ADR: mandatory participation in Commercial Disputes), we concluded by asking the question ‘what next?’ following the Churchill case. Now the decision in the DKH Retail case offers a glimpse into the likely future.

We can expect see an increasing number of orders compelling parties to participate in ADR as a necessary gateway to trial. Whether or not we will get to a situation where ADR is compulsory in the majority of cases is more uncertain, but parties should now be in no doubt, if there was any remaining doubt, that ADR should be ignored at their own peril, no matter how hard the nut may initially be to crack.

How Morr & Co can help?

Our Dispute Resolution team have significant experience in all forms of ADR, including mediation, expert determination and arbitration, tailoring our approach to achieve the best possible outcome for your business. Our aim is to ensure that our clients’ commercial objectives are achieved as quickly and cost effectively as possible, and where appropriate, without the need for litigation.

If you have any questions or would like any further information on the content of this article, please do not hesitate to contact our Dispute Resolution team on 01737 854500 or email info@morrlaw.com and a member of our expert team will get back to you.

Disclaimer
Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.