Disputes in Perspective

In the U.S. and UK, issues relating to ESG risks are expanding and evolving rapidly and continually for commercial entities. Organizations have a part to play in promoting good ESG conduct, but this comes with the responsibility of managing potential liability and litigation. In this podcast, Tom Webley, partner in our Global Commercial Disputes Group in London, Mark Goldstein, partner in our Labor and Employment Group in New York, and Mark Pring, partner in our Insurance Recovery Group in London, discuss topical issues relating to ESG risks and steps directors can take to mitigate these risks in both the UK and U.S.

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Intro: Welcome to Disputes and Perspective, a Reed Smith podcast. This podcast series will discuss disputes related trends, hot topics and developments occurring in the global legal landscape, and hopefully provide you with some helpful insights and practical tips. If you have any questions about any of the episodes, please feel free to contact our speakers.

Mark P: Welcome back, everyone, to Disputes in Perspective. My name is Mark Pring and I'm a partner in our global commercial disputes and insurance recovery teams. I'm delighted to be joined by my partners and colleagues, Mark Goldstein, a labor and employment lawyer in our New York office, and Tom Webley, a commercial disputes and regulatory lawyer in our London office with extensive experience, particularly in the financial services sector. In this short podcast, we'll be addressing some topical issues relating to disputes arising out of ESG risks. We think it's fair to say that people have long been aware of the risk of litigation in the ESG context, but we're starting to sense that the litigation landscape and indeed the regulatory landscape is changing in a number of jurisdictions, including the UK and the US in relation to litigation. The focus of attention previously was on class action claims against the likes of polluters and governments directly responsible for environmental damage or impacts on communities, but now there are myriad other risk exposures. Tom, if we can start with you. Do you get the sense that the UK risk landscape is changing?

Tom: I do. Mark, I mean, I think it's not just changing, but it's fair to say that in relation to ESG risks and litigation risks, it's probably expanding and expanding quite rapidly and continually. You mentioned that a lot of the previous claims were against what we probably could look at as primary infringes. So for example, anyone who's directly responsible for any pollution or emissions or environmental harm. But that certainly isn't what we are seeing claims limited to now and probably increasingly so, ESG and particularly the E. So if we think about climate change, this is seen as something for which all commercial entities have some sort of responsibility to drive change for the good, to improve their own conduct in their own performance in that sphere. And I think the net result of that is likely to be an increased amount of claims against a much wider range of potential defendants, almost to the point where actually any single commercial entity could be in the firing line. And if we take an example of how this has manifested in practice, you could look at the action that's been taken by organizations like ClientEarth. You may well be aware a lot of people will. That client brought a claim against directors of Shell. Again, that's much more focused on the more primary infringer type claims, but they've also been writing to wider organizations like trustees of pension funds, reminding those trustees that people investing money also have an obligation to the wider community to ensure that the investments drive change in a positive way. So that's an example of the expansion away from the original target for those claims into something completely different. And it's likely not just to be pension funds and the asset managers and people with large amounts of money to invest banks and lenders have really been put on a pedestal as an industry, which is at the forefront of change, forefront of promoting good practice and ensuring that all organizations are moving in the right direction. And with that responsibility comes potential liability as well. So I mean, I think the scope really has expanded dramatically from only those directly involved in certain industries, certain sort of higher risk industries being the potential targets to actually it being much broader. And I think it's almost fair to say, Mark, that it's difficult to imagine any sort of commercial entity or organization these days that doesn't have a part to play in promoting good ESG conduct and therefore takes on some responsibility and potentially some sort of liability for doing so.

Mark P: Yeah, yeah, no, I agree. Can we explore a little bit further what might actually be driving a lot of those claims? Maybe not all of them, but from a sort of social context, what do you see in terms of underlying currents that might be driving a lot of those claims?

Tom: I think in its most basic market, a lot of them are driven by genuine passion and desire and a really strong sense of feeling. I mean, if you look at compared to Mark Goldstein compared to the US where class actions are very well established practice, we have only had a few class actions group litigations strike claims being brought over here by comparison, but a lot of them are financially driven, whereas the sense that I think we're getting particularly again going back to the environmental side of the ESG claims is that people feel very, very strongly about this. I mean, all you have to do is look at some of the other activities that people do, the activist activities such as people who are going out of their way to take physical steps to stop certain types of what they see as harmful activities and risking prison sentences increasingly in the UK as well, that people do feel strongly about this and they feel that litigation is a very powerful tool which can be used to change how people behave to hold wrongdoers to account and promote good conduct. And so therefore, I think part of this is being driven by that real genuine desire for change and seeing that litigation be a part of that. Social media as with so many other things, plays an important part as it means people can combine together, they can unify, there's a real sense of power in numbers as people can coordinate activities, which makes these sort of claims much easier to bring rather than individuals trying to do it themselves. And I think also there's a wider opportunity for there to be causes of action. And I think there are a number of reasons for this. One is an increase in legislation. There's much more pro ESG legislation that's being brought out. That means that companies and organizations are under more legal pressure and legal obligations, which the more obligations you have, the easier it is to breach them. So that can trigger causes of action. And there's also the greater ability for claimants to actually bring the claim. If you go back, Mark, to the sort of the primary infringer point that you raised earlier, often any action or any negative action would really affect relatively small communities. They could have catastrophic effects, but they would still be quite localized. For example, in oil spill emissions, something that came out of a particular factory or mine, whatever it is. But because the focus on climate change is such a global one and everyone sees it as now an issue that's affecting absolutely everybody. On the one hand you have this being looked at as almost a human rights issue, which gives everyone the ability to bring a claim because they've been affected by it or more narrowly. If you take a look at, for example, anyone who's choosing which companies to use, who to invest in whatever it is, consumer behavior is being much more driven by ESG related criteria. And that means people are being induced or people are being convinced to take certain action to buy certain goods, to invest in certain companies on the back of their ESG credentials. And that means that there's much more opportunity to argue that there was, for example, a misrepresentation which caused you to take certain steps, which meant you suffered loss. So that I think is increasing the opportunity for claims to be brought as well. As I mentioned above, there's a much wider pool of potential defendants out there against whom to bring the claims, but none of that would be possible without the funding to bring them. I mean, I think it's fair to say that litigation, particularly in the UK, is incredibly expensive. It's very, very challenging to get enough money to get these claims off the ground, let alone run them to completion. And that's where litigation funders come in and they've been very vocal as an industry, I think in promoting ESG claims as a potential source of their funding or potential home for their funding. And they do see this as a big growth market for that sort of investment. And that will very much help drive these claims as well, I would've thought. So what it really is is a combination of a groundswell of genuine feeling added to more opportunities to bring the claims and then the available funding in order to be able to bring them and take them through. And that I think has created a potential perfect storm in relation to the growth and development of ever increasing ESG related litigation.

Mark P: Yeah, lots of food for thought there, Tom, and we'll pick up on one or two of those strands. I think later on. I'm very conscious we want to bring Mark in on the US side as well. But just briefly alongside and perhaps interlinked with the litigation risk, there's a perception of greater, if I can put it, regulatory risk as well. And how are the regulators from the UK context at least behaving and responding to this new litigious environment or landscape? And two, those systemic ESG related pressures that you talked about as well. What's the regulatory response?

Tom: Well, I think it's very much, again, seen as part of the process for change. I think certainly in the UK there's a huge governmental pressure towards things like net zero towards improving behaviors, and the regulator has to be a key part of that as the custodian of good conduct, if you like. So they're very much part of that process. I think there's a greatly increased amount of regulation, a growing amount of regulation in this area to try to encourage good conduct. But again, particularly on the environmental side, but certainly not uniquely and they're likely with everything as with the legislation, the more regulation there is and the more regulatory activity and keenness for the regulators to do something about it, the more chances there are of companies falling foul, there've been breaches, sanctions, fines, any sort of adverse regulatory finding. And Mark, you talked about the interconnectivity between the regulatory side and the litigation, and that I think is an incredibly important point and a very strong driver potentially for future ESG related claims. Historically, in relation to other areas, what we saw was a huge connection between adverse or negative regulatory findings and litigation, particularly on the almost quasi class actions or group litigation coming through. Because a negative finding by regulator is almost doing part of the work for a claimant already. There's already been a finding of wrongdoing. So all the claimant then has to shoot is go on to show that they've got standings to bring a claim and that they suffered loss, but they're starting from a very strong position. So if we start to see a lot more negative findings on organizations such as their disclosure obligations or if they do disclose certain ESG related information that shows that they've fallen short of where they should, I think that is a really potentially good source for the real claimant driving firms or the funders or anyone else to bring litigation against those organizations that there always has been a very strong connection there. And I can't see why it would be any different with ESG, but I mean that's certainly very much coming from a UK centric focus. And Mark G. I mean, I know that particularly on the class action side and on the regulatory side, the US is probably a much more advanced market than we are. I don't know if you are seeing the same sort of trends there or you think you're likely to see similar sort of trends in the future.

Mark G: It is interesting when you talk about the US I do think there is somewhat of a contrast between the governmental approach, but even just the more public perception to ESG compared to the US, compared to Europe and the United Kingdom specifically. Historically, ESG matters and efforts have been largely voluntary. And while there may have been some best practices promulgated by regulators, they weren't much more than that. It's only in the last few years where we have seen a substantial increase in public awareness and corporate awareness of ESG related matters and started to see some regulations come into form their admittedly early stages regulations, for example, from the US Securities and Exchange Commission. But a lot of the regulation has been taken on by state lawmakers, California in particular, but several other states as well. And then talking about measures relating to things like board diversity, climate related issues, I think the focus of the E, the S and the G and the US, if you had to pick one, would be the S. As I think over the past decade or so, we've seen a substantial rise in corporate DEI efforts and social responsibility efforts in the US and that's eventually kind of heading towards the litigation realm. And what's happened is in last summer, the US Supreme Court issued a decision that the long and short of it, and it does not have direct applicability in the ESG context, but I'll explain in a moment why I'm raising it basically determined that admissions to Harvard and University of North Carolina could not consider race-based factors, so-called affirmative action, it undid about four decades of Supreme Court precedent. And now in the wake of that, what some partisan groups are doing is filing suits against businesses that have and their DEI efforts claiming that they amount to some sort of quota or similar system that violates the concepts that the US Supreme Court struck down in that Harvard USC about a year ago. So I would say that's been the focus really here in the US is corporate DEI programs, making sure they're structured in such a way that they're permissible and seeing how it plays out in the courts challenges to those programs. For instance, there was a recent business down in Georgia that was sued, that gave grants out only to black owned companies and a recent federal court decision. The challenge is brought again by one of these groups, at least federal court decision did come down and say that that was impermissible and violates the law. So that's I think where we have a very robust dichotomy right now is on the S aspects of ESG. And that's where the litigation, I think is primarily focusing on as more states consider and adopt regulations, California continues to be at the forefront of that, but as that spreads to places like New York and Illinois and other states around the country, especially in the absence of real meaningful federal regulation in that regard, I do think that the litigation will correspondingly expand. But that's where we are for right now.

Tom: Thanks. That's sort of incredibly interesting point. It shows the difference I think between the two reasonably similar jurisdictions, but with a slightly different focus. But I mean, from my point of view, I think one thing that seems to have sort of cut across both the E and the S of the ESG, I mean obviously this impacts organizations and commercial entities themselves, but a lot of this seems to come down to the people within those who are actually making the decisions. And from that point of view, I mean there seems to be some potential risk and liability at the very least there. Not just for the organizations themselves, but for individuals. I mean, I'm thinking in particular for a lot of organizations in relation to the directors, and I mean on that basis, Mark Pring, can you think of any particular risks that those sort of management individuals, directors, partners, whoever they are, might be facing, and if there are risks that they do have to deal with at the moment, based on what Mark just said on the potentially increased risk of ESG litigation, is there anything they can be doing to mitigate those risks or prepare for them in advance?

Mark P: Broadly, in terms of risks, we're certainly seeing, to your point, increased scrutiny of directors in many sectors, both from applicable regulators and from other stakeholders in particular investors as you were flagging earlier. It's noteworthy for instance that all UK public and larger private companies have reporting requirements that include what's referred to as a section 1.72 statement in their annual director's report. And that statement includes reporting on the impact of the company's operations on the community and environment. So reference to the community there, but again, that focus we have maybe more here on the environment. I'd also note in passing the significance, particularly in the financial services sector of the so-called anti-green washing rule that applies to all firms authorized by the financial conduct authority who make sustainability related claims about financial products and services. And as a result of those requirements and others, there's certainly an increased risk of claims targeting directors and officers in circumstances where companies may have failed to deliver, for instance, on their ESG targets. So in the UK, without bearing into the detail, it's expected that what we refer to as sections 90 and 90A of the Financial Services and Markets Act or FSMA may increasingly become prevalent tools in the context of climate litigation. In particular, shareholders may claim that they've suffered losses arising from untrue or misleading statements made either under Section 90 in a prospectus or under 90A in other published information such as, again, director's reports. Those are just by way of example really. But I think prominent examples, you asked about mitigating risks. How much time have you got? But in any event, certainly directors should assess whether corporate governance could be improved in the ESG arena, whether their company has performed an up-to-date risk profile assessment, whether mitigants in particular insurance are adequate in view of, among other matters, the increased costs associated with the sort of litigation and regulatory investigation we've been touching on. And for the directors, whether they have access to specialist and early legal and accounting advice when considering reporting obligations, I think these lessons as it were, or these thoughts apply across the Atlantic, either side of the Atlantic. And it goes without saying that directors should always ensure that all decision-making is appropriately recorded. So I think those would be the initial thoughts, Tom.

Tom: No thanks, Mark. I mean I completely agree with that, particularly in relation to not just the mitigation steps, but the potential risks of statements being made, which are then used against directors and companies if they're proven not to be true. And it's interesting what you were saying about the decision making process and also the actual strict obligations on directors to consider the community at large and issues outside their organization. But I suppose that raises the question, well, what are the competing liabilities and responsibilities of directors and could that cause any problems? So for example, if a director in an organization was absolutely compliant with ESG related criteria is living up to the standards that it placed on itself and its wider obligations, is that enough or is there any sort of other risk that in doing so it is failing to fulfill another obligation or it's wider purpose or IT sort of focus to shareholder investor or that sort of thing? I mean, Mark G., can you see any risk that even an organization which is very, very good with its ESG compliance might still end up facing some sort of liability?

Mark G: Yeah, I still think that's absolute possibility that the US happens to be an extremely litigious atmosphere and our courts are always overburdened with cases. So I think that's entirely possible. I think you could do everything the right way and still find yourself ending up in court regardless of that.

Tom: No, I mean, so it really sort of emphasizes the difficulty of the type rape, doesn't it Mark mean how to balance those competing factors? I mean, just sort of anecdotally, I know that certain organizations in the financial services sector are pulling out of lending to certain industries because it's seen as too high risk. It's seen as against their ESG criteria and obligations. But at the same time, other funds are going into oil and gas into other what are seen as the less popular areas because they're under an obligation to make the best possible return for their investors. So it is a very difficult balance to hit, isn't it? And tricky to get that right.

Mark G: That's an exactly right point. And because there's a fiduciary obligation, you do have to strike that balance. I do think there's been some interesting polling in the US suggesting that most Americans do not care if ESG factors into investment decisions. So I just think that's an interesting starting point. But certainly we've seen a rise of social impact investing and socially conscious investing, but for businesses that issue opportunities that to so-called vice opportunities or vice stocks, you do have the potential of breaching your fiduciary or at least being alleged to have fiduciary for fiduciary obligations to the shareholders, to the investors by not pursuing the opportunities that could maximize the return. And so if you are trying to be socially or ESG conscious can be caught in a bit of a catch-22.

Tom: And Mark Pring, I mean Mark mentioned that the US is particularly litigious jurisdiction, but I imagine there'd be similar pressures on directors in the UK.

Mark P: Yes, Tom, I was just thinking through this in terms of competing risks. I mean, certainly we may be operating slightly different environment in terms of at least historical pressures caused by class or collective actions, but in theory, I think we'll see actions being possible, even the sort of vice stock type actions depending upon the nature of representations made to investors by directors. So we can see some of those sort of countervailing pressures potentially. It's certainly the case that directors are under potentially competing pressures thinking about, again, regulatory position, reputational risk duties to shareholders, expectations of insurers and so on. And we know that the investors and their lawyers are increasingly creative, so directors and their advisors have to keep pace with these creative arguments.

Tom: Mark, in circumstances where based on all of that, a director could be at risk no matter what they do. I mean, because there are two competing groups and sets of obligations. You've mentioned a number of things that they can do to mitigate that risk, particularly the mapping through the decision making process. But given your background and area of expertise as being insurance, is there something on the insurance side that they should be thinking about as well?

Mark P: Yeah, I mean, absolutely right. I mean, briefly again, as you say, without repeating some of my earlier comments in the first instance, directors should ensure that their companies implement robust policies and procedures to address any risks identified in proactive risk assessments. And not only should they do that anyway, but they should do that prudently in order to satisfy that they satisfy their various insurers that they are what we would call prudent uninsured as well. They should at the same time, as you've hinted, be identifying affordable insurance options with the help of their specialist professional insurance brokers. And that applies potentially to their companies in terms of their insurance program and the individual directors. So along with D&O liability insurance, for instance, they should look at the availability and scope of employment practices liability cover, depending which arena they operate in environmental liability covers for instance as well. There's a myriad of insurance options they should be considering, depending which sector they're involved in, Tom.

Tom: Yeah, no, very good advice and important for people to be considering that. And Mark G., I mean, the risks are fairly common across both sides of the Atlantic. So typically you guys in the US would see things probably before we did, but it'd be similar trends coming across. But is there anything particularly US specific in relation to risk identification and mitigation in this area, or is it much the same as we'd expect to see over here?

Mark G: It's much the same. And the steps should really focus on any types of social programs, corporate DEI programs, and anything should be focused, the steps should be focused on that. We haven't quite caught up on the E to the UK yet. And so really focusing on what are your goals, what do you do as a company want to stand for, and trying to tailor that in a way that complies with what is an evolving area of the law.

Tom: And I think that last point is a crucial one, isn't it, Mark? I mean, it is constantly evolving. So we talk about risk assessment and analysis and try to work out what the potential risks are, but they are constantly changing and both just legislatively regulatory, but also just more widely socially. This isn't something where you can just put a policy in place, stick it in a drawer and forget about it. I mean, this is something which does need constantly monitoring, updating, and assessing.

Mark G: That's absolutely right. That's absolutely right. At least in the US I think we are at early stages of all these things for the most part. And so what the landscape is going to look like in five and 10 years may both be drastically different. So you need to be staying abreast of the developments consulting with council on a fairly frequent basis to make sure that you're up to date on the latest developments.

Tom: No, completely agreed and conscious that time is running away from us. And this is obviously a huge topic we could talk about for many hours, but Mark P. in conclusion, I mean, is there any concluding thoughts or calls for action that you think would be a good takeaway for the listeners?

Mark P: Well, it would be selfish of us to start with consult a lawyer, but obviously whenever risks are involved, then lawyers are involved from one angle or another. I mean these areas, and it's interesting again to hear of the different perspectives from the US and the UK. These areas are clearly a minefield and a careful balancing act for companies and for their directors is required. They're going to need to consider all competing ESG pressures when setting strategies. Directors in particular will need to address carefully the tension between their traditional duties as directors, if you like, with increasing obligations to advance an ESG agenda with elements of the ESG that they need to advance maybe varying between jurisdictions like the US and the UK. So they've got to look at it from every angle.

Tom: They're absolutely right. And again, it goes back to that global point, doesn't it? Where these things affect so many different people nowadays. You can't just look at it, it's very much in one jurisdiction, it has to be across the globe. Mark G, anything in particular from you as a final takeaway?

Mark G: I think the jurisdiction specific point is a good one because in the US for many years until recently, we just had corporations really focusing on having robust DEI programs, social responsibility programs, and that was great. And then all of a sudden, a few years ago in particular, we started seeing certain states like Florida and take on, try to counterbalance that with certain types of regulations that corporations can't have certain types of information in their training and their workplace trainings and things like that. So being cognizant of the rules in the jurisdiction that you're operating in, which may differ from two states that border each other, may take two very different approaches. But as with many things in the US, this is very much a state specific thing. US law, while everybody looks to the federal government, obviously much of US law, probably the most important aspects of US law really comes down to state law. And we've got 50 different states, which means potentially 50 different approaches. And while there really aren't 50 different approaches, there are different approaches taken based on a whole set of factors. So if you're operating in California versus Florida, you have to have a whole different strategy and approach. And if for an operating in both California, Florida, you have to think about precisely those things. So I completely agree. And second, the suggestion to consult with counsel.

Tom: Thanks. It is just sort of hugely challenging, isn't it? Dealing with so many competing jurisdictions even within one country, let alone within various different continents. From my point of view, I think it's the final point I'd emphasize is again, going back to that issue that the legal landscape is changing so fast, you just got to keep monitoring it, particularly going, you just said Mark G. about the various different jurisdictions, but even within one jurisdiction, things change so quickly that everyone's just got to keep on top of it. And one thing in particular, going back to something that Mark Pring said earlier on is it's important as part of that to monitor what statements any organization is making and ensure that they are accurate and you're still living up to them because it's such an easy source of litigation for claimants to pick up on things which have been said, but the action doesn't quite match up to that, that it's just so important to just keep an eye on that and make sure everything is up to date and everything is accurate. And that as much as anything else is a good way to mitigate any potential risks. And as we've seen, there are increasing and ever-growing risks out there. So I do think that's important, but unfortunately I think we are very much out of time as a result of that. But as I say, this is a huge topic and one that we could carry on talking about for a very, very long time. Unfortunately, we don't have the opportunity to do so now. So all it leaves me to do is to thank both Marks, Mark Goldstein and Mark Pring for their time, and also to thank the listeners for listening. We hope you enjoyed it. If you have any questions or if there are any issues coming out of this that you'd like to discuss further with us, obviously please do not hesitate to get in touch.

Outro: Disputes in Perspective is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's litigation and dispute resolution practice, please email [email protected]. You can find our podcast on podcast streaming platforms, reedsmith.com and our social media accounts at Reed Smith LLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith's LLP or its individual lawyers.

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Parties have always been encouraged to explore ways to resolve their disputes outside litigation. There has been a significant shift in how litigation is pursued in England and Wales, with the move to integrate alternative dispute resolution (ADR) into the process to help facilitate resolution at the earliest opportunity.

In this podcast, Oliver Rawkins, Catherine Lewis and George Pissarro discuss the recent shift in the move to more formally integrate ADR into the proceedings, including the impact of the Court of Appeal’s decision in Churchill v. Merthyr Tydfil County Borough Council in 2023 and further recent jurisprudence on ADR issues.

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Intro: Welcome to Disputes in Perspective, a Reed Smith podcast. This podcast series will discuss disputes-related trends, hot topics, and developments occurring in the global legal landscape, and hopefully provide you with some helpful insights and practical tips. If you have any questions about any of the episodes, please feel free to contact our speakers.

Ollie: Welcome to the Disputes in Perspective podcast series. My name is Ollie Rawkins. I'm a partner in Reed Smith's Global Commercial Disputes Group in London. And today I'm joined by two colleagues, Catherine Lewis and George Pissarro, to discuss recent developments in the approach to Alternative Dispute Resolution, or ADR, here in England. So I just wanted to sum up first the ground we're going to cover today. First, we're going to give a brief overview of ADR itself. We're then going to look at one of the most significant decisions in ADR in recent years. This is the Churchill and Merthyr Tydfil County Borough Council case from 2023. We're going to look at some procedural changes that are either going to be implemented or in fact have been implemented already. Then we're going to look at a couple of court decisions from 2024 and how they reflect or illustrate the approach to ADR here in England and in English courts. Finally, we're going to look to the future and see what trends or themes in relation to ADR might be on the horizon. So first, I'm going to give a very brief overview of ADR. This is a bit of initial background to those listeners who may be less familiar with ADR as a concept. So it encompasses a variety of methods which were designed to resolve disputes. Without resorting to litigation or where proceedings are already on for bringing that litigation to a consensual resolution. So, just to be clear, we're looking at the types of ADR in play in the context of court proceedings. ADR processes can be binding, meaning that the outcome is final and can be enforced, or alternatively they can be non-binding, which means that the parties can proceed with litigation to resolve the dispute if they're not satisfied with the outcome of the process. Non-binding ADR processes may involve third-party intervention, but do not have to. So the most commonly used methods of ADR include mediation and negotiation, early neutral evaluation and expert determination. The pros and cons of ADR depend to a large extent on the specific mechanism in question and may not apply across the board. However, generally speaking, the benefits are seen to be that it saves time, it saves costs, offers flexibility and choice, confidentiality, and it can help maintain positive business relationships. And even if the ADR process in question doesn't itself result in settlement it might produce or have other benefits for the parties. It might narrow the issues of dispute, test the strengths and weaknesses of each party's case and establishing an ADR process and one that the parties can agree to and then engaging in it can also build or re-establish lines of negotiation or dialogue between the parties and ultimately increased the prospects of settlement being reached before trial. As a general principle, mediation is heavily endorsed and encouraged by the English legal system. However, until recently, the case law indicated that the courts would not compel parties to mediate. It was a matter of discretion for the parties involved. Now, to a certain extent, that has changed. I'm going to hand over to George, who's going to talk us through the a relatively recent decision from the Court of Appeal that has changed this position.

George: Thanks, Ollie. So, as you mentioned, on the 29th of November 2023. The Court of Appeal handed down its judgment in the case of Churchill and Merthyr Tydfil County Borough Council, and the judgment is a landmark in the context of ADR. So, the headline questions were whether a court can lawfully order the parties to court proceedings to engage in a non-court-based dispute resolution process? And if so, in what circumstances it should do so? The underlying claim was for nuisance allegedly caused by Japanese knotweed brought by Mr Churchill against the council without using the council's internal complaints procedure first, a procedure to which Mr Churchill was not contractually bound. The council argued that Mr Churchill had refused to engage in a form of ADR and sought a stay of proceedings to allow him to go through its complaints procedure. That application was dismissed by the Deputy District Judge at first instance, who followed the guidance in the 2004 Court of Appeal case of Halsey and Milton Keynes General NHS Trust. In that case, Lord Justice Dyson stated that to oblige truly unwilling parties to refer their disputes to mediation would be to impose an unacceptable obstruction on their right of access to the court. Following the dismissal of the council's application, it appealed and the case was leapfrogged to the Court of Appeal, with several interveners joining the proceedings, including the Bar Council, the Law Society, and numerous dispute resolution groups.

Ollie: So if I can just jump in here, George. So before Churchill, Halsey was viewed as a barrier to court-mandated ADR in circumstances where one party was unwilling or where court proceedings had been initiated. This was on the basis that the ADR process is a voluntary one, conceptually, and the role of the court was to encourage, not to compel the parties. So George, has the Court of Appeals decision now changed that position?

George: Well interestingly the court of appeal decided the following key points. Firstly, the judge was not bound by Halsey as the relevant passages in that case were obiter and did not address the power to order mediation but only the cost consequences of refusing it. Secondly, the court did have the power to stay proceedings for or order the parties to engage in non-court-based dispute resolution processes as long as it did not infringe the party's right to a fair trial under Article 6 of the European Convention on Human Rights, and was in pursuit of a legitimate aim, and in such a way that it is proportionate to achieving that legitimate aim. Thirdly, the court found that it should only stay proceedings for or order the parties to engage in non-court-based dispute resolution processes, 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. Here, the court should exercise that power with discretion, taking into account various factors. Although the court did not lay down fixed principles here as to what will be relevant, it acknowledged that the characteristics of the non-court-based dispute resolution process under consideration would be relevant. And finally, the judge in the Court of Appeal did not order a stay on the basis that the circumstances had changed since the application was made, and a stay would would not serve any useful purpose at that stage. However, the Court of Appeal encouraged the parties to consider a temporary stay for mediation or some other form of non-court-based adjudication. The Court of Appeal's decision in Churchill marks a significant milestone in the ADR landscape and pulls down this perceived barrier to court-mandated mediation that was put up by Halsey in circumstances where court proceedings have commenced. As a consequence, the court can lawfully stay existing proceedings for or order the parties to engage in a non-court-based dispute resolution process if it is proportionate and preserves the essence of the party's right to a judicial hearing. The fact that the Court of Appeal chose not to refer to ADR in its judgment. Opting for non-court-based dispute resolution, is also of note. Here, the Court has defined ADR are widely enough so as to catch internal complaints procedures, albeit provided such procedures are rigorous enough to satisfy the legitimate aim of settling a dispute fairly quickly and at reasonable cost. However, it must be remembered that whether the court should order or facilitate any particular method of non-court-based dispute resolution in a particular case will be a matter for its discretion where multiple factors could be relevant.

Ollie: Thank you, George. Clearly, this is a very significant decision when it comes to case management, when it comes to how far the court will intervene in the context of ADR. This isn't the only development in the approach and attitude to ADR in England in the last couple of years. Catherine, what procedural changes have there been or can we expect to see, including in light of Churchill, in respect of ADR?

Catherine: There are a couple of interesting developments that I will mention now. The first is that there is a new mediation pilot scheme for small money claims, which are claims for less than £10,000 to promote the use of mediation to resolve these claims. And there is a new practice direction governing this new scheme and the civil procedure rules. Given that it only applies to small claims, I don't propose to go into great detail right now. But obviously, if any listeners are interested in this, then please do not hesitate to reach out to any of us on this podcast. The second development is a new CPR consultation. So in April 2024, the Civil Procedural Committee, which is the UK body responsible for making and amending the civil procedure rules, announced a consultation on draft amendments to the CPR regarding the court's powers to order litigants to engage in ADR. And the consultation is said to flow directly from the Court of Appeal judgment in Churchill. And these proposed rule changes include to the overriding objective in CPR 1.1, And that's the overarching objective of dealing with cases justly and at proportionate cost and should include, so far as practicable, using and promoting ADR. There's also a change to the case management duties and powers in CPR 1.4 and 3.1 to clarify that the court's duties and powers include ordering parties to participate in an ADR procedure and not just encouraging them to do so. And similarly, amendments to the directions in Parts 28 for fast and intermediate tracks and Part 29, which is the multi-track, to confirm that the court should consider whether to order or encourage the parties to participate in ADR when making case management directions. And to my mind, these pick up on the points that George mentioned earlier about stepping towards heavily encouraging parties or even being able to compel parties by way of an order to engage in ADR as part of the general litigation process. And the final rule change goes to the cost discretion that the court has in part 44 of the CPR. So when considering exercising its discretion on costs, the court can consider whether a party has failed to comply with an order for ADR or has otherwise unreasonably failed to participate in ADR proposed by another party to the claim. That consultation closed on the 28th of May 2024, and the committee will now consider these amendments further. And it's fair to say that these proposed changes reflect the court's power to order ADR following the Churchill judgment. And as George mentioned, the judge in Churchill didn't lay down any specific principles for judges when deciding whether to order ADR. And the proposed changes reflect this. It still remains a matter of the court's discretion.

Ollie: Yes, and as to when and how the court will exercise its discretion, inevitably we'll see these principles develop through case or in due course. So I could turn back to George now. I appreciate the Churchill decision was a relatively recent one. It was a 2023 Court of Appeal decision. But could you talk us through any recent relevant decisions on the use of ADR or the approach to ADR that illustrate the position of the court?

George: Thanks, Ollie. So, yes, while not addressing the same specific issues as Churchill, Recent case law continues to highlight the judiciary's encouragement of ADR, reflecting what is a proactive stance towards integrating ADR into the civil justice system, as well as the willingness to sanction parties who fail to engage. There are two notable cases in that regard handed down since Churchill, which Catherine and I will discuss very briefly, if only to illustrate the seriousness with which the courts continue to treat this issue. So firstly, in the case of North Amber, PLC and Genee World Limited and others. The Court of Appeal considered a number of issues following a judgment relating to breach of an exclusive distribution agreement. One of the issues the court had to consider was an appeal in relation to costs. So following a CMC, it had been previously ordered by the court that at all stages the parties should consider engaging in ADR. This order provided that any party not engaging in any such means proposed by another must serve a witness statement giving its reasons. Despite the court's direction, the defendants failed to respond to the claimant's proposal for mediation or provide a witness statement explaining their refusal. On appeal, it was therefore argued that the trial trial judge failed to take sufficient account of the fact that the claimant had made an offer to mediate and there had been no substantive response from the defendant. The Court of Appeal agreed with this and increased North Amber's cost recovery by an additional 5% to 75%. It is important to note, of course, that this case did not actually cite Churchill in the judgment, but it's still indicative of the court's approach to ADR post-Churchill.

Catherine: Thanks, George. So the second case that we wanted to discuss briefly is Conway and Conway and another. And in this case, the claimant had a proprietary estoppel claim in relation to a barn arm that the defendants had been converting. Ultimately, the court rejected the claimant's claim. And even though the defendant was successful, they were criticized by the court for refusing to mediate. The claimant had offered to mediate on a number of occasions and had made without prejudice offers to settle. The defendants had ignored the claimant's attempts as they believed that they were almost certain to win a trial and that the breakdown in the relationship with the claimant meant that any mediation would have been unsuccessful. And so despite the of successfully defending the claim, the defendant's recoverable costs were reduced by 25% because of their refusal to mediate. And the judge here clearly had Churchill in mind when penalising the defendant's cost recovery. And so it's a fairly serious consequence and one that parties to litigation should bear in mind.

Ollie: Thank you, Catherine. So George, just I suppose stepping back, what are the main takeaways from these two cases when thinking about the general approach the courts to ADR and parties' conduct?

George: There are a handful of takeaways from these cases. Ultimately, these recent cases affirm the judiciary's robust support for ADR and demonstrate that the courts are increasingly willing to penalise parties who unreasonably refuse to engage in mediation or other forms of ADR. None of that is particularly new, of course. Cost sanctions, for example, have long been a possibility for failure to engage in ADR. However, the consistent message from the courts is very clear. ADR is not just an optional extra, but an integral part of the dispute resolution landscape that parties are expected to consider and utilise where appropriate. In Conway, the judge did specifically refer to Churchill in support of a statement about the importance of mediation, before deciding to significantly reduce the costs award of the successful party. If anything, post-Churchill, we may see the courts more prepared than ever before to sanction parties for a failure to engage. It is also important to note that we are not aware of case law in which a court has compelled the parties to mediate post-Churchill. But that is not to say it isn't happening or hasn't happened. It may be the case that such an order was contained in some form of directions, order that hasn't been reported.

Ollie: Thanks George. Now we're going to briefly look to the future and what trends or themes may be on the horizon in the context of ADR. So the combination of the judgment in Churchill, small claims mediation pilot and the CPR consultation mark a significant shift in how litigation should be pursued and case managed. The aim of integrating ADR as a process to facilitate and encourage resolution at the earliest opportunity has never been clearer. This use of ADR is likely to increase either through compulsion or through increased judicial scrutiny surrounding attempts at settlement and parties' refusals to participate in ADR. It's clear from the recent cases that parties who behave unreasonably risk cost sanctions and often very serious ones and even if they're successful at trial. Plainly it is critical for parties to meaningfully engage with the ADR process. So thinking about the future ADR is likely to play an even more prominent role and dispute resolution. Catherine, what trend do you think we'll see in the coming years in relation to this?

Catherine: Thanks, Ollie. Yeah, so I think it's fair to say that we'll see an expansion of mandatory ADR programmes. In its response to the consultation which gave rise to the small claims mediation pilot that I mentioned earlier, the UK government has said that the pilot is just the first stage of a plan to progressively integrate a mandatory mediation step into higher value claims in the county court. So that's within the fast track, which is 10 to 25,000 pound claims and the multi-track, which is claims over 25,000 pounds. As you can imagine, the integration of mediation within these higher value claims will involve referring parties to external mediators rather than mediators employed by HMCTS. And in its response, the government has recognised that many mediators are registered with professional bodies such as the Civil Mediation Council and the Chartered Institute of Arbitrators. And so, given the strength of the existing self-regulation among such bodies, the government has decided against, at this stage at least, introducing a centralised statutory regime to regulate this private mediation industry. That said, the government has said that it would continue to review how these existing regulatory requirements could be considered for the purposes of overseeing integrated mediation. So there's not been any details yet about when mandatory mediation provisions will be rolled out to the fast and multi-track cases. But it'll be really interesting space to watch to see that rollout and to see if any changes do come to this regulation of the private mediation industry.

Ollie: Thanks, Catherine. Another of the most significant trends in ADR is the move towards global harmonization, which involves creating consistent and cohesive ADR practices and standards across different jurisdictions. So, for example, last year the UK signed the Singapore Mediation Convention. This convention is an international treaty created by ANZATRAL, which provides an international framework for the enforcement of settlement agreements, resulting from mediation. The aim of the convention is to promote the use of mediation to resolve international commercial disputes by providing a harmonized and expedited enforcement ratio. To date, 57 countries have signed the Singapore Convention, and of these, 12 have also ratified it. The UK has not ratified it yet, but once it does, the convention will come into force six months later. It was expected to be ratified during the course of this year however for it to come into force implementing rules and legislation would need to be put in place and given the recent general election we'll have to see what happens next on this front and when. So that thought brings an end to our discussion today. Thanks very much for listening to this episode of Disputes in Perspective. If you do have any questions, please reach out to Catherine, George, or me, and we hope you will join us for the next episode.

Ourtro: Disputes in Perspective is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's litigation and dispute resolution practice, please email [email protected]. You can find our podcasts on podcast streaming platforms, reedsmith.com, and our social media accounts at ReedSmithLLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers. 

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