Unsuccessful Party's Reasoned Refusal To Mediate Did Not Merit Indemnity Costs

CHASSY V LEFT SHIFT IT LIMITED & OTHERS [2025] EWHC 1701 (KB)

In Chassy v Left Shift IT Limited & Others the court considered whether the Defendants’ conduct regarding mediation justified an award of indemnity costs. The Claimant had succeeded against the First Defendant but failed in claims against the Second and Third Defendants, with unresolved costs disputes including the Defendants’ alleged refusal to mediate in June 2022. The Claimant argued their refusal warranted indemnity costs, while the Defendants contended they had not outright refused but deferred mediation pending resolution of a default judgment application. The Deputy Judge declined to award indemnity costs, finding the Defendants’ position did not amount to an unreasonable refusal, particularly as the parties’ settlement positions were far apart, making mediation unlikely to succeed. The court found that a mere delay or conditional approach to mediation, without outright refusal, did not automatically justify indemnity costs, especially where the case’s complexity and divergent positions reduced the prospects of settlement. The outcome reinforced that while parties are encouraged to mediate, tactical delays or conditional engagement do not necessarily attract adverse costs consequences unless accompanied by clear unreasonable conduct. The Claimant’s request for indemnity costs on this basis was refused, with costs awarded on the standard basis.

“All of this perhaps supports the suggestion made by Mr Innes that, in any event, this was never a case that was likely to settle as a result of mediation given the significant gap between the parties both as to the amount of any award and against whom it might be recovered.”

Citations

Re IT Protect Limited [2020] EWHC 3001 (Ch) A claimant who beats a joint Part 36 offer against multiple defendants but only succeeds against one may still trigger CPR 36.17 consequences, but such consequences may be deemed unjust where acceptance would have imposed liability on a defendant ultimately found not liable.

Track allocation housing disrepair CPR 46.13 settlement sum costs restriction SCCO

MRO fee markup cap 25% detailed assessment personal injury Senior Courts Costs Office

Security for costs refused CPR 25.27 very high probability success excessive estimate King's Bench

IPEC scale costs transfer Patents Court PD 30 para 9.2 costs caps Court of Appeal

Costs budget variation CPR 3.15A promptness significant development unfair prejudice Chancery Division

Costs budgeting inter partes proportionality high hourly rates AI disclosure Patents Court CPR 3E

Beneficiary personal liability section 71(3) Solicitors Act 1974 indemnity costs VAT self-supply SCCO

Summary assessment indemnity costs unless order payment on account disclosure default Chancery Division

Provisional assessment set aside CPR 3.1(7) points of dispute filing duty PD 47 para 14.3 SCCO

Fixed recoverable costs police claims CPR 26.9(10)(e) intentional tort exemption

Key Points

A refusal to mediate may justify awarding indemnity costs if the refusal was unreasonable and the case was otherwise amenable to settlement. However, the court will take into account whether mediation was realistically capable of leading to settlement given the state of the dispute. [15]
The availability of a Part 36 offer does not automatically trigger the Part 36.17(4) costs consequences where the offer was made jointly to multiple defendants without differentiation and the claimant only succeeded against one of them. The court retains discretion to assess whether applying Part 36.17(4) consequences would be unjust. [12-14]
When assessing whether CPR 36.17(4) consequences should apply where an undifferentiated offer was made to multiple defendants, the court will consider whether acceptance would have unjustly exposed unsuccessful defendants to costs or damages liability they should not bear. [13-14]
Where a defendant delayed engagement with mediation pending resolution of a related procedural application, such deferral may not amount to an unreasonable refusal to mediate depending on the context and timing of the proceedings. [15]
The court may decline to penalise a party for non-engagement with mediation if there is evidence that the matter was unlikely to settle due to fundamental differences on liability or quantum that mediation could not realistically have bridged. [15]

“As to the issue of mediation, Ms Grossman makes the assertion that mediation was first proposed in June 2022 and the Defendants refused to engage. Mr Innes’ response is to suggest that in their letter of 8 August 2022, the Defendants did not refuse point blank to mediate but stated that this could only happen once their application to set aside default judgment had been dealt with.”

Key Findings In The Case

The Defendants did not categorically refuse to mediate; rather, in correspondence dated 8 August 2022, they indicated a willingness to consider mediation, but proposed that it be deferred until their application to set aside the default judgment had been resolved [15].
The Claimant asserted that the Defendants had refused mediation in June 2022, but the judge found that there was no outright rejection; instead, the Defendants’ response referred to procedural issues that needed to be addressed first, undermining the claim of unreasonable refusal [15].
The court found that Freeths, on behalf of the Defendants, made attempts to settle the dispute in letters dated 21 September 2023, including a proposal from the First Defendant alone for settlement and discontinuance against the Second and Third Defendants [15].
The court concluded that the case was unlikely to have settled through mediation given the significant disparity between the parties’ positions, both in terms of quantum and on which defendant(s) liability should fall, making an order for indemnity costs inappropriate [15].
The judge determined that the First Defendant’s conduct with respect to mediation did not amount to an unreasonable refusal such as to warrant indemnity costs, based on the timing, the nature of the disputes, and the procedural context in which mediation was proposed [15].

“In any event, I am not persuaded in the circumstances that the position taken by the Defendants in relation to mediation was so unreasonable as to justify an award of indemnity costs – even had there been a refusal, it would need to be shown that this was wholly unfounded or obstructive, which I do not consider it to have been on the facts of this case.”

Background

The substantive judgment in this matter was handed down on 4 February 2025, following which Mr Mark Chassy had succeeded in his claim against Left Shift IT Limited (the First Defendant) and was awarded damages of £236,601.91, subject to potential grossing up for tax liabilities. The claims against Mr David Silverstone (the Second Defendant) and Mr Mark Smith (the Third Defendant), both brought in their capacity as directors of the First Defendant, were dismissed. The First Defendant’s set-off defence based on alleged deliberate destruction of confidential information also failed.

Following judgment, the parties were invited to provide written submissions on the tax treatment of the award and to attempt agreement on the terms of a draft order. By 8 April 2025, the parties had effectively agreed the tax consequences, resulting in a final award of £275,397.65. However, substantial disagreement remained regarding the costs consequences of the judgment.

The parties’ positions on costs were so far apart that the Deputy Judge directed a further round of written submissions, which were received on 16 May 2025. The costs dispute centred on several distinct issues: the extent of the Claimant’s recoverable costs against the First Defendant, whether costs should be awarded on an indemnity basis, the appropriate payment on account, and the Second and Third Defendants’ entitlement to their costs of defending the unsuccessful claims against them.

Costs Issues Before the Court

The court was required to determine five principal costs issues arising from the split outcome of the proceedings. First, the extent to which the Claimant could recover his costs of the action from the First Defendant, given that he had succeeded against only one of three defendants. This raised the question of apportionment and whether the court should make a percentage order or leave the matter to detailed assessment.

Second, whether the Claimant’s costs should be awarded on an indemnity basis pursuant to CPR 36.17, following a Part 36 offer made on 5 June 2023 for £178,491.51. The offer had been made jointly to all three defendants without distinction, and the First Defendant’s liability at trial exceeded this sum.

Third, whether the Defendants’ alleged refusal to mediate in June 2022 justified an order for indemnity costs. This involved consideration of the mediation history and the parties’ respective positions on alternative dispute resolution.

Fourth, the appropriate sum for a payment on account of costs by the First Defendant, which required the court to consider the Claimant’s total costs of £328,800 (inclusive of VAT) and make a reasonable assessment of the likely recovery on detailed assessment.

Fifth, the Second and Third Defendants’ entitlement to their costs of successfully defending the claims against them, including whether any payment on account should be ordered. This raised particular difficulties regarding the Third Defendant, who had not participated in the trial and was an undischarged bankrupt.

The Parties’ Positions

Ms Grossman, for the Claimant, submitted that the First Defendant should pay “the Claimant’s costs of and occasioned by the action (i.e. the combined costs of the claim and the counterclaim)” without any reduction for the unsuccessful claims against the individual defendants. She argued that costs should be awarded on an indemnity basis for two reasons: first, the Defendants’ refusal to engage with mediation when proposed in June 2022, and second, the First Defendant’s failure to beat the Part 36 offer of £178,491.51.

On the payment on account, Ms Grossman sought 90% of the Claimant’s total costs of £328,800, producing a figure of £295,920. She further submitted that the Second Defendant should be jointly liable for half of the costs awarded against the First Defendant, based on the Claimant’s success on the equitable set-off defence and the mediation issue. She described any payment on account to the Second Defendant as “an affront to justice” given the uncertainties about whether he had actually incurred any costs in defending the personal claim.

Mr Innes, for the First and Second Defendants, contended that the costs order should explicitly limit recovery to the Claimant’s costs “of the action against that Defendant only (i.e. excluding the costs of the claim against the Second and Third Defendants)”. He relied on Re: IT Protect Limited [2020] EWHC 3001 (Ch) to argue that the Part 36 offer’s joint nature, requiring acceptance by all defendants including those with no liability, rendered it unjust to apply CPR 36.17 consequences.

Regarding mediation, Mr Innes submitted that the Defendants had not refused outright but had indicated in their 8 August 2022 letter that mediation could only occur after determination of their application to set aside default judgment. He highlighted that Freeths’ letter of 21 September 2023 had proposed settlement by the First Defendant alone with discontinuance against the individual defendants, demonstrating the significant gap between the parties’ positions.

For the payment on account, Mr Innes proposed £128,232, reflecting the uncertainties in detailed assessment. He sought the Second Defendant’s costs limited to those specifically incurred in defending the personal allegations, with a payment on account of £22,780.

The Court’s Decision

The Deputy Judge determined that the Claimant should recover 75% of his overall costs from the First Defendant, representing a 25% reduction for the unsuccessful claims against the Second and Third Defendants. The court preferred to make this assessment rather than leaving it entirely to the costs judge, noting that significant court time had been spent on cross-examination and submissions directed specifically at establishing director liability. The judge considered himself better placed than a costs judge to make this “broad-brush assessment”.

On the indemnity costs issue, the court declined to apply CPR 36.17 consequences despite the First Defendant’s liability exceeding the Part 36 offer. Following Re: IT Protect Limited, the judge found it would be unjust to apply the enhanced consequences where the offer was made jointly to all defendants. The court particularly noted that acceptance would have rendered the Second and Third Defendants liable for damages and costs despite having no liability, potentially exposing them to enforcement action given doubts about the First Defendant’s solvency.

Regarding the mediation issue, the court was not persuaded that the Defendants’ conduct justified indemnity costs. The judge accepted that the Defendants had not refused point-blank but had indicated mediation could follow resolution of the default judgment application. The significant gap between the parties’ positions suggested the case was unlikely to settle through mediation in any event.

For the payment on account, the court ordered £175,000, roughly splitting the difference between the parties’ positions. This reflected the 75% recovery rate applied to the Claimant’s total costs and allowed for uncertainties in detailed assessment. The court rejected any joint liability of the Second Defendant for the First Defendant’s costs liability, finding the set-off defence was solely the First Defendant’s claim.

The Second Defendant was awarded his costs limited to those incurred specifically in defending the personal allegations against him as a director, with these to be determined on detailed assessment if not agreed. A modest payment on account of £5,000 was ordered, significantly less than the £22,780 sought, reflecting the uncertainties about the extent of recoverable costs. The Third Defendant was also entitled to his costs in principle, but no payment on account was ordered given his non-participation in the trial and status as an undischarged bankrupt.

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