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In PGF, the Court of Appeal adopted a ‘modest extension’ of the principles set out in Halsey v Milton Keynes General NHS Trust relating to the costs consequences of an unreasonable refusal to engage in alternative dispute resolution (ADR).
PGF commenced proceedings against OMFS in October 2010, claiming £1.8 million in respect of alleged breaches of repairing covenants. On 11 April 2011 the claimant’s solicitors sent two letters to the defendant – one was a Part 36 offer of £1.25 million, the other invited the defendant to take part in early mediation.
The mediation offer anticipated that the defendant may wish to review the claimant’s disclosure, that the parties may benefit from experts meeting to exchange information, and set out specific dates for the mediation.
It concluded by requesting the defendant’s agreement to mediate, or for an explanation for any refusal. The same day, the defendant’s solicitors made a Part 36 offer of £700,000. It did not refer to the claimant’s letter and it appears that the parties’ letters crossed.
Neither Part 36 offer was accepted and nothing further was heard in respect of the claimant’s mediation request. On 19 July 2011 the claimant by its solicitors sent a further invitation to mediate, along with a chaser letter on 1 August 2011.
The defendant’s solicitors promised a full response by 3 August 2011, but no response was received in relation to the mediation request (it should be noted that the defendant, by its solicitors, was providing full and lengthy responses in relation to other matters pertaining to the ongoing litigation).
On 10 January 2012, the day before the trial, the claimant accepted the defendant’s Part 36 offer of £700,000. In accordance with Civil Procedure Rules 36.10, the ordinary consequence of this would be that the claimant was obliged to pay the defendant’s costs for the ‘relevant period’ (in this case from 2 May 2011 to 10 January 2012).
In Halsey, the Court of Appeal addressed the extent to which the court should use its powers to encourage parties to engage in ADR. Unlike in PGF, which concerned a failure to respond to an ADR request, Halsey considered communicated refusals(which, it was claimed, were unreasonable).
Whilst acknowledging that parties should not be compelled to mediate, the Court stated that parties should be encouraged to enter into ADR procedures.
The court’s general ability to consider a party’s conduct when deciding whether to depart from the general rule that an unsuccessful party should pay the successful party’s costs includes the power to deprive a successful party some or all of its costs on the grounds of a refusal to agree to ADR.
The Court of Appeal went on to set out guidelines relevant to the question as to whether a party had unreasonably refused to mediate.
The claimant argued that the defendant’s refusal to engage with the ADR proposals constituted an unreasonable refusal to mediate, and as such the defendant should not be entitled to recover its costs for the relevant period, and indeed that the defendant should pay its costs for that period.
The judge held that the defendant’s silence did amount to a refusal to participate in mediation and, applying the Halsey principles, that the refusal was unreasonable. As such, the defendant was refused the right to recover all of its costs incurred during the relevant period.
The defendant appealed, and the claimant cross-appealed (claiming that the judge had not gone far enough and that the defendant should pay its costs for the relevant period).
The Court of Appeal held that the first instance decision to deprive the defendant of its costs for the relevant period was within the range of proper responses to the defendant’s conduct. The court held that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable even where the refusal to mediate might have been capable of justification.
This extension of the Halsey principles was justified on the basis that: the investigation by the court of alleged reasons for refusal to mediate, where none were given at the time, poses difficulties in determining whether the belatedly advanced reasons are in fact genuine; a failure to provide reasons for a refusal to engage in ADR is destructive of the objective to engage in the ADR process.
In rejecting the claimant’s cross-appeal, the Court of Appeal noted that a costs order of the nature applied for by the claimant, whilst in principle within the court’s power, was a sanction that should be reserved for only the most serious and flagrant failures to engage with ADR.
PGF sends out a clear message as to the court’s views on ADR as a method of resolving disputes which the court fully endorses and will seek to encourage parties to utilise, including with recourse to costs orders.
Following PGF, it is likely that a failure to respond to, or engage with, a party’s ADR proposal will be held to be an unreasonable refusal to mediate which may be punished when it comes to costs. As such, if subject to a proposal made by the other side to enter into ADR, detailed consideration should be given to doing so and a positive decision made.
To the extent that there are reasonable grounds not to mediate sufficient for a party to refuse to enter into ADR, these grounds should be substantively set out in writing to the other side.
For more information please contact John Sykes, Partner
T: +44 (0)20 7203 5358