A recent post looked at the Court of Appeal mediation scheme and examined the potential penalties for a party refusing to mediate. In PGF II SA –v- OMES Company I Limited  EWCA CIV 1288 the Court of Appeal looked at the potential costs penalties when a party refuses to mediate.
PGF was a case where the solicitors for the claimant made a “serious and carefully formulated” written invitation to the defendant to mediate. This offer was met with complete silence from the defendant. The offer was repeated three months later. A full response was promised, however the defendant did nothing. The case was later compromised by the claimant accepting a Part 36 offer from the defendant. Lord Justice Briggs gave a judgment which, Maurice Kay LJ and Beatson LJ agreed with.
THE FIRST INSTANCE DECISION
The judge at first instance accepted, in part, the claimant’s application for a costs sanction arising out of the defendant’s refusal to mediate. He imposed this by depriving the defendant of the costs to which it would normally have been entitled to under the provisions of Part 36. However he declined the claimant’s application to make the defendant responsible for its costs incurred during the same period.
The judge held that the defendant’s silence amounted to a refusal and this refusal had been unreasonable.
Both parties appealed.
- The defendant argued that the judge was wrong in principle. Silence did not amount to refusal and, in any event, that silence was not reasonable.
- The claimant argued that silence, in itself, was unreasonable, regardless of whether there were reasonable grounds to refuse to mediate. A litigant’s duty was to engage with a suggestion to mediate.
- The claimant’s submissions, although unsupported by authority, received support from the Jackson ADR Handbook, recently published and endorsed by the Judicial College, the Civil Justice Council and the Civil Mediation Council.
THE COURT OF APPEAL’S DISCUSSION OF PART 36
There was an interesting discussion of Part 36:
- CPR Part 36 lays down automatic costs consequences where a Part 36 offer is accepted (rule 10) and where at trial a claimant fails to improve upon it (rule 14). In the latter case, rule 36.14(2) preserves the court’s discretion to order otherwise where “it considers it unjust” to make an order as prescribed by the rule.
- By contrast, rule 10(5) provides only that the specified costs consequences will ensue “unless the court orders otherwise”, with no specific reference to an injustice test. Nonetheless the judge, following Lumb v Hampsey  EWHC 2808 (QB) concluded that the same test should be applied under rule 10 as under rule 14, including the non-exclusive guidelines set out in rule 14(4). Since then, that approach has been endorsed by this court in SG v Hewitt  EWCA Civ 1053. Where that threshold test is satisfied, the judge then has a wide discretion as to the form of costs order to be made in substitution for the prescribed consequences: see per Arden LJ in the Hewitt case at paragraph 76.
- Part 36 is itself designed to encourage parties to make, and promptly to accept, realistic offers of settlement. It may fairly be described as lying at the interface between litigation and ADR, see paragraph 10.25 of the ADR Handbook. It is however also designed to provide parties with a measure of protection against costs risk: see Matthews v Metal Improvements Co. Inc  EWCA Civ 215 and the Hewitt case (supra) at paragraph 75. It may for example be used by a defendant to encourage its opponent to accept a lower offer than its own valuation of the claim, on account of the claimant’s limited appetite for costs risk. It is a procedure frequently used by parties determined to pursue litigation to trial, precisely for the purpose of obtaining one or more layers of insulation against the costs risk arising from an uncertain outcome.”
PART 36 AND ADR
The Court then considered the relevant principles relating to ADR, conduct and costs, arising from the earlier decision in Halsey –v- Milton Keynes General NHS Trust  1 WLR 3002.
“i) 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.
ii) Nonetheless the court may need to encourage the parties to embark upon ADR in appropriate cases, and that encouragement may be robust.
iii) 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 power to deprive the successful party of some or all of its costs on the grounds of its unreasonable refusal to agree to ADR.
iv)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.”
“Supplementing those statements of principle, the Court of Appeal adopted and explained a non-exclusive list of factors likely to be relevant to the question whether a party had unreasonably refused ADR proffered by the Law Society (which had intervened):
- The nature of the dispute;
- The merits of the case;
- The extent to which other settlement methods have been attempted;
- Whether the costs of the ADR would be disproportionately high;
- Whether any delay in setting up and attending the ADR would have been prejudicial;
- Whether the ADR had any reasonable prospect of success.”
DISCUSSION OF THE ADVANTAGES OF ADR
The court then considered the effectiveness of ADR. Figures produced in 2012 reported that mediation led to 70% of cases settling on the day with 20% more settling thereafter. The Court of Appeal’s own pilot scheme on mediation had a 50% success rate.
There were some clear and sound policy reasons for promoting ADR.
- It could be effective.
- The Jackson report and the focus upon civil litigation costs and achieving proportionality led to a clear endorsement of the ADR process.
- The constraints on state resources and the need to focus court time on those disputes which really need it threw an increasing responsibility upon parties in civil litigation to engage in ADR.
CAN A PARTY JUST IGNORE A SUGGESTION FOR ADR?
The court pointed to a number of authorities that support the view that, at least in a case appropriate for ADR, a party cannot simply ignore a request to participate in mediation.
WHAT A PARTY REFUSING TO TAKE PART IN ADR MUST DO
It is clear that a party cannot simply say silent (or that it is profoundly unwise to do so).
“The ADR Handbook, first published in 2013, after the period relevant to these proceedings, sets out at length at paragraph 11.56 the steps which a party faced with a request to engage in ADR, but which believes that it has reasonable grounds for refusing to participate at that stage, should consider in order to avoid a costs sanction. The advice includes:
a.) Not ignoring an offer to engage in ADR;
b.) Responding promptly in writing, giving clear and full reasons why ADR is not appropriate at the stage, based if possible on the Halsey guidelines;
c.) Raising with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR, together with consideration of how that shortage might be overcome;
d.) Not closing off ADR of any kind, and for all time, in case some other method than that proposed, or ADR at some later date, might prove to be worth pursuing.
That advice may fairly be summarised as calling for constructive engagement in ADR rather than flat rejection, or silence.”
THE COURT OF APPEAL’S DECISION: SILENCE IN THE FACE OF AN OFFER OF ADR IS UNREASONABLE
“34. In my judgment, the time has now come for this court firmly to endorse the advice given in Chapter 11.56 of 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 the identification of reasonable grounds. I put this forward as a general rather than invariable rule because it is possible that there may be rare cases where ADR is so obviously inappropriate that to characterise silence as unreasonable would be pure formalism. There may also be cases where the failure to respond at all was a result of some mistake in the office, leading to a failure to appreciate that the invitation had been made, but in such cases the onus would lie squarely on the recipient of the invitation to make that explanation good.
35. There are in my view sound practical and policy reasons for this modest extension to the principles and guidelines set out in the Halsey case, which concerned reasoned refusals, provided in prompt response to the request to participate in ADR. The first is that an investigation of alleged reasons for refusal advanced for the first time, possibly months or even years later, at the costs hearing, where none were given at the time of the invitation, poses forensic difficulties for the court and the inviting party including, in particular, the question whether the belatedly advanced reasons are genuine at all. The manner in which this issue was debated both before the judge and on this appeal is illustrative of those difficulties.
36. The thrust of Mr. Guy Fetherstonhaugh QC’s submission for the defendant was that the Halsey tests for the unreasonableness of a refusal were to be assessed purely objectively, by reference to the material facts about the litigation at the time, so that it made no difference whether the refusing party provided or withheld its reasons at the time of the invitation. I disagree. When the question concerns the reasonableness or otherwise of a party’s conduct, the party’s own perceptions may play an important part in the analysis, as is apparent from the treatment of a party’s reasonable belief in the strength of its case, in the Halsey case at paragraph 26, rejecting as too narrow the purely objective approach applied by Lightman J in Hurst v Leeming  1 Lloyds Rep 379.
37. Secondly, a failure to provide reasons for a refusal is destructive of the real objective of the encouragement to parties to consider and discuss ADR, in short to engage with the ADR process. There are many types of reasonable objection to a particular ADR proposal which, once raised, may be capable of being addressed. Mediation may be resisted on the basis that some other type of ADR, such as early neutral evaluation, may be equally suitable and preferred by the objecting party. A proposed mediation may be expensive to the other party if, as is usual, the mediator’s fees are shared equally. In such a case it is not unknown for the proposing party to offer to bear the whole fee, or for some cheaper form of ADR, including judicial early neutral evaluation or financial dispute resolution, to be provided more cheaply by the court. ADR may be proposed before the other party has the requisite information, a difficulty capable of being addressed either by limited voluntary disclosure, or by ADR at a later date than that proposed.
38. Difficulties of this kind constantly arise in civil litigation, and the culture is now well-established under which the parties should discuss these difficulties, and seek to narrow their differences, before those which are irreconcilable are put to the court for determination. This occurs routinely in relation to expert issues, and is now prescribed practice ahead of case management conferences and pre-trial reviews. I can see no reason why the same should not apply to ADR, thereby saving valuable court time in the case management process which, as the practice guides now all make clear, extends to the encouragement of ADR rather than merely to the giving of directions for trial.
39.This second reason is partly a matter of practicality, but also serves the policy of proportionality. A positive engagement with an invitation to participate in ADR may lead in a number of alternative directions, each of which may save the parties and the court time and resources. The invitation may simply be accepted, and lead to an early settlement at a fraction of the cost of the preparation and conduct of a trial. ADR may succeed only in part, but lead to a substantial narrowing of the issues. Alternatively, after discussion, the parties may choose a different form of ADR or a different time for it, with similar consequences. In some cases the exchange of views may lead to an early appreciation that the interests of the parties would best be served by the earliest possible trial of an issue of law or construction, as indeed occurred in the second of the cases under review in Halsey where, in the event, the trial lasted a mere two hours.”
WAS THE REFUSAL TO MEDIATE UNREASONABLE?
The burden of proof
The Court of Appeal accepted the observations of the judge at first instance that the burden of proving that the refusal was unreasonable as lying on the claimant in that case (that is to say the party alleging that the refusal was unreasonable). However it also appeared to accept that the judges analysis when
“…he described the burden of demonstrating that ADR stood a reasonable prospect of success as not being an onerous one.”
The relevance of Part 36 offers
The Court of Appeal also rejected the argument that the fact that the parties had made Part 36 offers; that this was a “hard-nosed” commercial dispute and therefore not susceptible to mediation.
- It was wrong to regard a Part 36 offer, without any supporting explanation for its basis, as a living demonstration of a party’s belief in the strength of its case.
- Part 36 offers were regularly made at a level below what the defendant fears having to pay at trial in the hope that the claimant will settle for less.
- Part 36 offers do not necessarily, or even usually, represent the parties’ respective bottom lines.
- There was no “unbridgeable gap” between the parties which could not have been overcome in a mediation.
The exercise of the discretion
A refusal to accept an invitation to participate in mediation, or the more serious conduct of a refusal even to engage in discussion about mediation, does not produce any “automatic” results in terms of a costs penalty.
- It is simply an aspect of the parties’ conduct that needs to be addressed in a wider balancing exercise.
- The proper response in any particular case may range from disallowing of the whole, or only a modest part of, the otherwise successful party’s costs.
SHOULD THE COURT ORDER THE “SUCCESSFUL” PARTY TO PAY COSTS WHEN IT REFUSED TO MEDIATE?
The Court held that the courts had that power however it had to be reserved for exceptional cases.
“While in principle the court must have that power, it seems to me that a sanction that draconian should be reserved for only the most serious and flagrant failures to engage with ADR, for example where the court had taken it upon itself to encourage the parties to do so, and its encouragement had been ignored. In the present case the court did not address the issue at all. I therefore have no hesitation in rejecting Mr. Seitler’s submission that the judge did not go far enough in penalising the defendant’s refusal to engage with ADR.”
Disallowance of the whole of the successful defendant’s costs
Lord Justice Briggs held that he would have concluded that a part of the successful defendant’s costs should have been disallowed rather than the whole of them. However the discretion belonged to the first instance judge. Depriving the defendant of the whole of the costs was within the range of proper responses to the “seriously unreasonable conduct which the judge identified.”
TO “ENCOURAGE THE OTHERS”
The Court made it clear that it was considering the message to be sent out to other litigants.
“Finally, as is recognised by the weight placed on the judge’s decision in the passage in the ADR Handbook to which I have referred, this case sends 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, or the undertaking of some other form of ADR, or ADR at some other time in the litigation. To allow the present appeal would, as it seems to me, blunt that message. 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 which, even if a little more vigorous than I would have preferred, nonetheless operates pour encourager les autres.”
The Court of Appeal rejected the defendant’s appeal and upheld the judge’s decision that it should not recover costs from the Part 36 offer. The Court also rejected the claimant’s appeal where it was argued that the claimant should have recovered their costs.
The essential points are:-
- It is extremely foolish to stay silent in the face of an offer to mediate.
- A refusal to mediate may have to be justified.
- A refusal to mediate can have adverse costs consequences even if the refusing party is eventually successful.
- Litigators have to explain to their clients, with some care, a decision to decline mediation.
The earlier post on the Court of Appeal mediation scheme can be found at
LINKS TO CASES
The PGF decision in the Court of Appeal is at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWCA/Civ/2013/1288.html&query=pgf+and+mediation&method=boolean
The first instance decision is at http://www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/TCC/2012/83.html&query=pgf+and+mediation&method=boolean
THE JACKSON ADR HANDBOOK
Is available from the Oxford University Press and can be found at