Court of appeal rules on cost consequences of failure to mediate

Jacqui Joyce Law Leave a Comment

The appeal in PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288, raised for the first time the question of what should be the response of the Court to a party which, when invited by its opponent to take part in ADR, simply declined to respond.

Facts

PGF was the landlord in a dilapidations claim for £1.9m. The tenant, OMFS, denied liability entirely relying on s18(1) of the Landlord and Tenant Act 1927. On 11 April 2011 there was an exchange of Part 36 offers. The landlord offered to accept £1.25m and the Tenant offered to pay £700,000, effectively narrowing the gap to £550,000.
On the same day the landlord’s solicitors wrote seeking the tenant’s agreement to mediate and an explanation for any refusal. They sought conformation as to documents and information which the tenant might wish to see before mediation, an exchange of dates and the tenant’s list of proposed mediators. This invitation received no response. On 19 July the landlord’s solicitors sent a further invitation to mediate which again received no response. On 20 December the landlord decreased its Part 36 offer to £1.05m, narrowing the gap to £350,000.
Trial was fixed for 11 January 2012. In its skeleton argument on 10 January the tenant took, for the first time, the point that an air conditioning system (for which damages were claimed of about £250,000) was outside of the demise. The landlord then accepted the Part 36 offer of £700,000.

Part 36

The automatic cost consequences of the landlord accepting the Part 36 offer were that it should pay the tenant’s costs from 21 days after the offer was made until the date it was accepted. However, the court retains discretion to order otherwise where it considers it unjust to make an order as prescribed by the rules.

ADR

The Court reiterated the principles set out in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002, as to whether a court could encourage parties to mediate and its power to deprive a successful party of some or all of its costs on the grounds of its unreasonable refusal to agree to ADR. It also stated that, even though statistics need to be treated with caution, the research by CEDR of success rates in mediation (70% on the day with 20% more shortly thereafter) ‘are powerful testimony supportive of the value of the process in the cases where it has been undertaken’.

Reference was also made to the ‘clear endorsement’ of ADR by Jackson LJ as a means of achieving proportionality and of saving court time and costs and to the Court Guides, which require legal representatives to consider with their clients and the other side the possibilities of attempting to resolve the dispute, or particular issues, by ADR.
The Court looked at the advice set out in the ADR Handbook (2013) to a party faced with a request to engage in ADR, which it believes it has reasonable grounds for refusing to participate at that stage and what it should consider in order to avoid a costs sanction. This is summarised as ‘calling for constructive engagement in ADR rather than flat rejection or silence’.

Judgment

Briggs LJ stated that ‘in my judgment, the time has now come for this court to firmly endorse the advice given in the ADR Handbook, that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by identification of reasonable grounds.’

This was for reasons of both practicality (how do you investigate reasons that are only put forward months after the event and not at the time) and policy (a failure to provide reasons is a failure to engage with the ADR process.) The court’s view was that there may well be reasons why ADR is not appropriate at a specific point, but that the parties should discuss any difficulties. Also, even if ADR only works in part, it will still narrow issues and save the parties and the courts time and resources.

Whilst the above was sufficient to conclude that the tenant had acted unreasonably, the court then went on to examine the judge’s findings that there had been a refusal and it had been unreasonable.

The Tenant had argued that the fact that it had made its Part 36 offer, not withdrawn it, and that it had eventually been accepted showed that it cannot have been other than reasonable. Also that because of the monetary difference between the parties Part 36 offers, which were characterised as their bottom lines, the mediation stood no reasonable prospect of success.

Briggs LJ rejected both these points stating that it was wrong to regard a Part 36 offer as a living demonstration of a party’s belief in the strength of its case, and that Part 36 offers do not necessarily, or even usually, represent the parties’ respective bottom lines. There was no unbridgeable gulf between these parties respective Part 36 offers which could not have been overcome in mediation, particularly as the gap was broadly equivalent to the amount of further costs that would have been spent to go to trial.

Indeed he considered the dispute ‘eminently suited to mediation’. The dispute gave rise to complicated matters of detail likely to cost a disproportionate amount to litigate. The tenant argued that the matter settled when the claimant recognised the defect in its case regarding the air-conditioning. Briggs LJ commented that ‘that is precisely the sort of insight which a trained and skilled mediator, experienced in the relevant field, can bring to an apparently entrenched dispute.’
The Court upheld the judge’s order that the tenant should not get the costs it otherwise would have done under Part 36. It also left the door open for a court to impose the more draconian sanction of ordering the tenant to pay the landlord’s costs where the court had encouraged the parties to engage in ADR and that encouragement had been ignored. Briggs LJ regarded this case as sending out an important message to litigants that they need to engage with ADR and that the court’s task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasise that message by a sanction that operates ‘pour encourager les autres’.

Jacqui Joyce

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