In PGF II SA v OMFS Company 1 Ltd , the Court of Appeal considered, for the first time, whether a failure by a party to respond to an invitation to mediate should be treated as an unreasonable refusal to mediate – previous cases having focused on situations where there had been an express refusal to do so.
The Court of Appeal held that silence in the face of an offer to mediate is of itself unreasonable – even if circumstances exist which would justify an express refusal to mediate.
HALSEY V MILTON KEYNES
The leading case on the costs consequences of a party unreasonably refusing to mediate, or engage in another form of alternative dispute resolution (ADR), is the Court of Appeal decision inHalsey v Milton Keynes General NHS Trust . In PGF II SA v OMFS Company 1 Ltd, Briggs LJ summarised the key principles from Halsey as follows:
- The court should not compel parties to mediate even were it within its power to do so. This would risk contravening Article 6 of the Human Rights Convention, and would conflict with a perception that the voluntary nature of most ADR procedures is a key to their effectiveness.
- Nonetheless, the court may need to encourage the parties to embark upon ADR in appropriate cases, and that encouragement may be robust.
- The court’s power to have regard to the parties’ conduct when deciding whether to depart from the general rule that the unsuccessful party should pay the successful party’s costs includes the power to deprive the successful party of some or all of its costs on the grounds of its unreasonable refusal to agree to ADR.
- For that purpose, the burden is on the unsuccessful party to show that the successful party’s refusal is unreasonable. There is no presumption in favour of ADR.
The following factors may be relevant to the question of whether or not a party has unreasonably refused to mediate:
- the nature of the dispute;
- the merits of the case;
- the extent to which other settlement methods have been attempted;
- whether or not the costs of the ADR would be disproportionately high;
- whether or not any delay in setting up and attending the ADR would have been prejudicial;
- whether or not the ADR had any reasonable prospect of success.
This list is not exhaustive and the importance of each individual factor will vary, depending on the circumstances of the case.
Briggs LJ commented that these:
‘… guidelines have stood the test of time, and the crucible of application in subsequent reported cases.’
PGF II SA V OMFS COMPANY 1 LTD
The key facts
The key facts can be summarised as follows. The claimant was a landlord and the defendant was a tenant. The landlord claimed that the tenant had breached certain repairing covenants in the lease and issued proceedings to recover damages for those breaches.
The tenant made a Part 36 offer on 11 April 2011. On the same date, the landlord made an offer to mediate. Briggs LJ described this as a ‘carefully thought through and apparently sensible mediation proposal’.
The tenant did not respond to the offer to mediate. The offer to mediate was repeated by the landlord in July 2011. Despite promising a full response to the letter in which this second offer was contained, the tenant’s solicitors failed to reply or to make any comment on the offer to mediate.
The day before trial in January 2012, the landlord became aware that the tenant intended to seek permission to amend its pleadings to include a new argument about the proper interpretation of the lease. The landlord’s response was to accept the tenant’s Part 36 offer later the same day.
The Court had to determine the cost consequences of the landlord’s acceptance of the tenant’s Part 36 offer.
Normal costs consequences of accepting a Part 36 offer
CPR Parts 36.10(4) and 36.10(5) set out the normal costs consequences of a party accepting a Part 36 offer after the expiry of the relevant period (which is a period of not less than 21 days after the offer is served). Under those provisions, the default position would be that:
- the landlord (as the claimant) would be entitled to its costs up to the expiry of the relevant period (ie 2 May 2011); and
- the landlord (as the offeree) would pay the tenant’s costs from the date of expiry of the relevant period to the date of acceptance (ie from 2 May 2011 to 10 January 2012).
However, the landlord argued that the default position under Part 36 should be reversed because the tenant had, it argued, unreasonably refused to mediate.
When should the court depart from the normal costs consequences?
The test for whether or not the usual costs order should be departed from was set out in the case of Lumb v Hampsey , where it was decided that the question to be considered by the court is whether or not it would be unjust for the offeree to pay the offeror’s costs after the expiry of the relevant period. Such a departure would be the exception rather than the rule. The factors set out at CPR Part 36.14(4) (which ostensibly sets out the circumstances in which it will be unjust to apply the normal costs consequences of a party failing to beat a rejected Part 36 offer at trial) are also relevant to the question of whether it would be just to depart from the normal rule set out in CPR Parts 36.10(4) and 36.10(5).
This approach was subsequently endorsed by the Court of Appeal in SG v Hewitt , where Arden LJ said that where the threshold test has been satisfied, the trial judge then has a wide discretion as to the form of costs order to be made in substitution for the consequences prescribed by Part 36.
The first instance decision
At first instance, the judge held that the tenant’s silence amounted to a refusal to mediate and, applying the Halsey guidelines, that this refusal had been unreasonable. By way of sanction, the judge ordered that the tenant should not be awarded its costs incurred since the expiry of the relevant period, to which it would otherwise have been entitled under Part 36. However, he rejected the landlord’s argument that the tenant should pay its costs incurred during the same period. Both parties appealed.
Support for mediation as a means of resolving disputes
Briggs LJ started from the position that mediation ought to be encouraged. He quoted from research conducted by the Centre for Effective Dispute Resolution (CEDR) which suggested that, in 2012, 70% of mediated cases settled on the day, with another 20% settling shortly afterwards. He noted that these figures should be treated with some caution because they were based on voluntary returns by 238 mediators and it was likely that successful mediators were more likely to have taken part in the survey. Nevertheless, results even approaching that level of success were ‘powerful testimony supportive of the value of the process’.
Briggs LJ noted that, in his report into civil litigation costs, Jackson LJ had endorsed mediation as a means of resolving disputes at a proportionate cost and had concluded that mediation is still underused and insufficiently understood. Finally, Briggs LJ expressed the view that mediation was an effective way of ensuring that the court’s time was only spent on cases that really needed it and that it was a waste of the court’s limited resources both (i) to try cases which could have been settled and (ii) to spend time encouraging parties to engage in mediation where they should have done this without the court’s intervention.
SILENCE IS UNREASONABLE
Against that background, it is perhaps unsurprising that Briggs LJ held that a failure to respond to an invitation to mediate is of itself unreasonable – even if circumstances existed which would justify an express refusal to mediate. He cited the following ‘sound practical and policy reasons’ for taking this approach:
- Parties should be required to advance their reasons for refusing to mediate at the time the offer is made rather than months or even years later at a costs hearing when it will be much more difficult to tell whether the ‘belatedly advanced reasons’ are genuine.
- Parties should be encouraged to consider and discuss the ADR process. Even if a party has a reasonable objection to mediation, a discussion of that objection might enable the parties to agree on a different form of ADR, such as early neutral evaluation, or to agree that mediation should take place at a different time from that proposed (eg after disclosure).
Briggs LJ accepted that there might be rare cases where mediation would so obviously be inappropriate that to characterise silence as unreasonable would be ‘pure formalism’. Therefore, the principle that the court should treat silence in the face of an offer to mediate as unreasonable conduct should be the general, rather than invariable, rule. He also said that there may be cases where the failure to respond was a result of some mistake in the office, leading to a failure to appreciate that an invitation had been made, but in such cases the onus would lie squarely on the recipient of the invitation to make that explanation good. In our view, it would be surprising if such an argument succeeded in anything but the most exceptional of circumstances – especially if the relevant party had instructed solicitors. One would not generally expect the court to be overly sympathetic towards administrative errors of this nature on the part of a litigant’s solicitors.
The next question was whether the first instance judge, having decided that the tenant’s conduct was unreasonable, had applied the correct sanction. Briggs LJ had no hesitation in dismissing, as too draconian, the landlord’s argument that the judge should have ordered the tenant to pay the landlord’s costs incurred after the expiry of the relevant period, as well as having to bear its own costs.
Briggs LJ had more sympathy for the tenant’s argument that the judge had gone too far in depriving the tenant of all its costs incurred since the expiry of the relevant period. If it had been a case of exercising his own discretion, Briggs LJ said that he would have concluded that the tenant should have been deprived of only a proportion of its costs, and not all of them. However, the discretion was that of the judge. His approach to the basis upon which the court could properly depart from the otherwise automatic consequences of Part 36 was entirely correct and his decision was within the range of proper responses to the ‘seriously unreasonable conduct’ which the judge had identified. Furthermore the decision would send an important message to other litigants. Therefore, the first instance decision ‘even if a little more vigorous than [Briggs LJ] would have preferred,’ should be upheld ‘pour encourager les autres’.
The case sends a clear message that the court will expect parties to enter into a serious and meaningful discussion about the possibility of participating in a mediation or using another form of ADR and will penalise any failure to do so in costs. On a practical level, a party who wishes to decline an invitation to mediate, should explain in detail why it does not consider mediation to be appropriate at that time, preferably by reference to the factors set out in Halsey (see above). The courts are unlikely to be sympathetic to refusals to mediate in the majority of cases. In many cases, the best approach will be to identify further steps that need to be taken (such as the provision of further information by the other side) before a mediation is likely to succeed or to suggest another method of ADR which is more appropriate in the circumstances.
By Doug Wass, partner, and Jonathan Pratt, professional support lawyer, Macfarlanes LLP.
E-mail: Doug.Wass@macfarlanes.com; Jonathan.Pratt@macfarlanes.com.