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In a landmark decision in the recent case of PGF II SA v OMFS Company 1 Limited , the Court of Appeal decided that a party which failed to respond to a reasonable request to mediate should be subjected to a costs penalty.
This was the outcome even though the party that declined to mediate was wholly successful in the litigation. The decision was deliberately intended by the Court of Appeal "pour encourager les autres".
Encouraging the use of Alternative Dispute Resolution (ADR) is built into the Civil Procedure Rules (CPR), which govern the conduct of litigation in England and Wales. Mediation is a form of neutrally assisted negotiation.
Research indicates that mediation is proving a very effective ADR process for timely resolution of many different kinds of dispute: 70-80% of cases settle at mediation or shortly afterwards. The overriding objective enshrined in the CPR obliges the courts to deal with cases justly and at proportionate cost.
To further this objective, the courts encourage the parties to use ADR if appropriate.
One of the main ways in which the court enforces its rules is by means of costs orders. Under the CPR the court has a general discretion in relation to costs. The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party, but the court may make a different order (CPR 44.2).
PGF was a terminal dilapidations case in which the landlord claimed damages totalling £1.9 million from its former tenant. About nine months before trial was due to start, the landlord invited the tenant to take part in a mediation. The tenant completely ignored that invitation but, instead, sent the landlord a formal (Part 36) offer to settle the claim for £700,000.
The landlord issued further invitations to mediate and made various settlement offers, but the tenant stuck to its guns making no response to the proposal to mediate and refusing to offer more than £700,000. The day before the trial was due to start, the landlord decided to accept the tenant's offer.
By this time, each side had spent a further £250,000 on preparing for trial.
The tenant asked the court to order the landlord to pay all of the tenant's costs incurred since the settlement offer of £700,000 was made. The Court of Appeal declined to do so on the grounds that, had the tenant agreed to a mediation, it was probable these extra costs could have been avoided.
The Court of Appeal recognised this was a harsh decision, but that it was necessary to send out "an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal…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…" in costs.
The lessons we can draw from the PGF case are as follows:
  EWCA Civ 1288
This article was written by Jeremy Hudson.
For more information please contact Jeremy on +44 (0)20 7427 6452 or firstname.lastname@example.org