Silence, in the face of repeated requests, amounts to a refusal to mediate
The Court of Appeal in PGF II SA –v- OMES Company I Limited  EWCA CIV 1288 recently looked at the costs penalties that can be applied when a party refuses to mediate.
The Court of Appeal made it clear that a party can be severely penalised for failing to engage in Alternative Dispute Resolution ("ADR").
Facts of the case
In this dilapidations case between the landlord Claimant and the tenant Defendant, the Claimant issued proceedings for damages in excess of £1.9 million in relation to three floors of offices let by the Claimant to the Defendant.
Part 36 offers and the Claimant's requests to mediate
At or shortly before the commencement of proceedings, the Claimant made an offer pursuant to Part 36 of the Civil Procedure Rules ("CPR") to accept £1.25 million plus interest from June 2009 in settlement. By a separate letter the Claimant invited the Defendant to take part in an early mediation.
The same day the Defendant sent the Claimant a Part 36 offer of £700,000 inclusive of interest, promising an explanation for its reasoning under separate cover. Such an explanation was neither forthcoming nor was it asked after.
Further invitations to mediate were sent by the Claimant on 19 July and 1 August 2009.
On 20 December 2009 the Claimant made a further Part 36 offer, to accept £1.05 plus interest, narrowing the gap between the parties' offers to £35,000 plus interest. In response to this, the Defendant simply stood firm behind its offer of £700,000.
On 10 January 2012, the day before the trial was due to commence, exchange of skeleton arguments took place. The Defendant took for the first time the point that an air-conditioning system in respect of which about £250,000 was claimed by way of dilapidation did not form part of the demise.
As a result of this information coming to light the Claimant accepted the Defendant's offer the same day.
In accordance with CPR Part 36, the normal rules applied to the late settlement namely the Claimant would have to pay all of the Defendant's costs incurred from 21 days after making the offer ("the Relevant Period") unless the Court ordered otherwise.
Nonetheless, the Claimant gave notice that it would seek an order for costs in its favour in respect of the Relevant Period on the sole ground of the Defendant's late raising of the point about air conditioning.
The first instance decision
At the hearing on 11 January 2012, the Claimant further submitted that the Defendant's had unreasonably refused to participate in ADR. Whilst the late amendment point failed, the ADR point succeeded to the extent that the Judge held that the Claimant was entitled to its costs, on a standard basis, incurred up to the expiry of the relevant period following CPR Part 36 offer but there will be no order for costs in respect of the period thereafter.
The Defendant was therefore prevented from receiving its costs from the Claimant for the relevant period so each party bore its own costs for the relevant period.
As regards the costs of the hearing on 11 January 2012, the Judge held that each party should bear its own costs given that neither party succeeded in full.
The Defendant appealed on the basis that its stance with regards to refusing to mediate (by way of its silence) had been justified by the eventual settlement. The Defendant asserted that mediation would have failed in any event and that its silence did not amount to a refusal to mediate.
However, the Court of Appeal did not agree with the Defendant on these points and was as unforgiving as the Judge of the First Instance.
The Court highlighted the following factors in favour mediation in the current litigation climate:
- the statistical evidence on mediation to date appears to indicate that mediation appears a high level of success;
- the intense focus in Jackson LJ's report on civil litigation costs and in particular on the need for proportionality between the cost of litigation and the value of that which is at stake led to his clear endorsement of ADR; and
- the constraints which now affect the provision of state resources of the conduct of civil litigation call for an ever-increasing focus upon means of ensuring that court time is proportionately directed towards those disputes which really need access to the court.
The Court therefore held that silence in the face of an invitation to participate in ADR amounted to a refusal to mediate and that, as a general rule, such a refusal is in itself unreasonable. The Court further held that a refusal to mediate can only be justified in exceptional circumstances.
The Court confirmed that whilst a party's failure refusal to accept an invitation to participate in ADR constitutes unreasonable conduct, such a refusal does not produce automatic costs penalties. Such unreasonable conduct is simply an aspect of the parties' conduct which needs to be addressed in a wider balancing exercise.
The Court therefore recognised that it would have concluded that this case is one in which only some proportion of its costs as the successful party, rather than the whole of them, should have been disallowed. However, the Court stated that the discretion to make such a decision fell on the Judge and that to deprive the Defendant of the whole of its costs during the Relevant Period was within a range of appropriate responses to the Defendant's seriously unreasonable conduct.
The Court therefore declined to interfere with the Judge's decision to deprive the Defendant of all its costs during the Relevant Period.
Implication of the Court of Appeal's decision going forward
The Court of Appeal made it obvious in its concluding remarks that its decision, whilst harsh, was intended to send out a clear message that all parties in litigation need to be open to some form of ADR, even if they have reasons which might justify a refusal.
Failure to mediate, even by way of silence to a request for mediation, can be perceived by the Court as unreasonable conduct allowing a Judge to exercise a broad discretion in curtailing the refusing party's costs.