Sternberg Reed Solicitors v Andrew Paul Harrison

Communications made in an attempt to settle a live dispute are impliedly without prejudice for the substantive dispute even if they are not expressly labelled. They may, however, be considered on costs after the substantive dispute has been determined. Expressly marked without-prejudice communications remain inadmissible on costs unless marked without prejudice save as to costs, or the right to use them on costs is otherwise expressly reserved. On an appeal under section 69 of the Arbitration Act 1996, the court intervenes in an arbitrator’s costs decision only for an error of law, reliance on impermissible matters, or a failure to exercise the discretion. An evaluative costs decision within the arbitrator’s broad discretion will not be disturbed merely because another view is possible.

The claimant firm appealed under section 69 of the Arbitration Act 1996 against an arbitrator’s revised costs award arising from a dispute with a former partner. The substantive arbitration concerned the former partner’s entitlement to payment for his partnership share and, ultimately, the effect of work in progress in a conditional-fee case.

The arbitrator initially awarded the claimant most of its costs after it succeeded on the only live issue at the hearing. He later reconsidered costs after being shown settlement correspondence, including an offer made on 12 November 2015 that was not expressly marked without prejudice. He ordered each party to bear its own costs.

The issues were whether the correspondence was admissible on costs and whether the arbitrator had misdirected himself in concluding that there was no real overall winner.

1. The appeal was dismissed. The arbitrator’s revised order that each party bear its own costs was upheld.

2. Communications expressly made on a without-prejudice basis are inadmissible even on costs, unless they are expressly marked without prejudice save as to costs or the right to refer to them on costs is otherwise expressly reserved. The arbitrator was wrong to suggest that the law had moved on from the restriction stated in Computer Machinery Co Ltd v Drescher [1983] 1 WLR 1379. Reed Executive Plc v Reed Business Information Ltd [2004] EWCA Civ 887 confirmed the rule.

3. Where settlement communications are not expressly labelled without prejudice, the court may infer that they are protected from use on the substantive dispute where they form part of an attempt to compromise actual or impending litigation. That protection does not extend to costs after the substantive dispute has been determined. The 12 November 2015 email was therefore admissible on costs, although later correspondence was expressly without prejudice.

4. The approach was consistent with Chocoladefabriken Lindt & Sprungli AG v The Nestlé Co Ltd [1978] RPC 287, Rush & Tompkins Ltd v Greater London Council [1989] 1 AC 1280, and Cutts v Head [1984] Ch 290. The Calderbank-offer decision in Centreland Management Limited v HSB Pension Trust (UK) Limited [2013] EWHC 3238 (Ch) was distinguishable.

5. Under section 69, the court asks whether the arbitrator made an order which was unlawful in law, relied on matters which could not properly be taken into account, or failed to exercise the discretion. The circumstances warranting intervention are extreme and rare. Applying SOS Corporación Alimentaria SA v Inerco Trade SA [2010] EWHC 162 (Comm), the arbitrator had considered the admissible offer, the outcome of the arbitration, payment contingencies and the parties’ respective advantages. His conclusion that there was no real overall winner was evaluative and fell within his broad costs discretion.

6. The respondent was awarded his appeal costs, summarily assessed at £9,417.40, payable within 14 days. Permission to appeal was refused under section 69(8), because although the point was of general importance, there was no real prospect of success.

• High Court (Chancery Division): permission to appeal the arbitrator’s costs award was granted by Norris J on specified questions of law. The appeal was dismissed, and permission for a further appeal was refused.
• Arbitration: the arbitrator initially awarded the claimant 70% of its costs up to the experts’ joint report and all costs thereafter. On reconsideration, he ordered each party to bear its own costs.