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failure to mediate can seriously damage your wealth

23 February 2012

The recent case of PGF II SA v OMFS Company [2012] EWHC 83 (TCC) illustrates the importance of considering the use of alternative dispute resolution, and in particular the sanctions which may be imposed by the Court dealing with the issue of costs following acceptance of a Part 36 offer when mediation has been refused without good reason.

Part 36 and the "presumption" of liability for costs

The provisions of CPR 36.10(4) and (5) are as follows:

"(4) Where -

(a) a part 36 offer that was made less than 21 days before the start of trial is accepted; or

(b) a part 36 offer is accepted after expiry of the relevant period;

if the parties do not agree the liability for costs, the court will make an order as to costs.

(5) where paragraph (4)(b) applies, unless the court orders otherwise -

(a) the claimant will be entitled to the costs of the proceedings up to the date on which the relevant period expired; and

(b) the offeree will be liable for the offerors costs for the period from the date of expiry of the relevant period to the date of acceptance."

Therefore, unless the Court orders otherwise, the presumption is that a Claimant accepting a Part 36 offer is entitled to its costs up to 21 days after the Part 36 offer has been made ("the Relevant Period") but will then be liable for the Defendants costs from the expiry of the Relevant Period up to the date of acceptance.

So, in what circumstances may the Court depart from this presumption regarding liability for costs?

There are a number of factors which a Court could take into account to be persuaded to depart from the presumption. One such factor, which has been considered in numerous cases, including the recent PGF case, is where a party unreasonably refuses to mediate or merely ignores reasonable requests to mediate. In PGF, the Court imposed a costs sanction by refusing to follow the presumption of liability for costs following the acceptance of a Defendants Part 36 offer, finding that a Defendant who had refused to mediate was not entitled to its costs from the expiry of the Relevant Period.

The Courts Approach to ADR

The importance of ADR is evident from the overriding objective in the CPR. CPR Part 1.4 states the Court, when exercising its case management powers, should encourage the parties to use an alternative dispute resolution procedure if the court considers that appropriate and to facilitate the use of such procedure. CPR Part 1.3 provides the parties are to assist the Court in furthering the overriding objective.

In the case of Rolf v De Guerin [2011] EWCA Civ 78, the Court of Appeal considered various issues, including the Defendants refusal to mediate. Before and after issuing proceedings the Claimant made various invitations to the Defendant to enter settlement discussions and later, mediation, which the Defendant rejected. Although the Defendant subsequently won at trial, the Claimant argued the Defendants refusal to take part in mediation amounted to unreasonable behaviour for the purposes of CPR Part 44 and therefore, the Defendant should not be awarded its costs. The Defendant put forward reasons why it refused to mediate, which included the Defendant arguing that he wanted "his day in Court" and that he did not think he would be able to demonstrate to a mediator the Claimants poor conduct prior to the proceedings being issued. Rix LJ dismissed these reasons, finding the Defendants refusal to mediate amounted to unreasonable behaviour for the purposes of CPR Part 44(5). As a consequence, the court was entitled to exercise its discretion and make no order as to costs.

In the case of Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002 (which the judge referred to in the PGF case), the court identified six possible factors which could be taken into account when assessing whether a party had unreasonably refused to mediate:

1. The nature of the dispute, as to which the Court warned that "most cases are not, by their very nature, unsuitable for mediation";

2. The merits of the case, by which a party which reasonably believes it has a strong case might make the refusal of mediation reasonable;

3. Whether other settlement methods have been attempted, though again the Court noted that "mediation often succeeds where other settlement attempts have failed";

4. Whether the costs of mediation would be disproportionately high;

5. Whether any delay in setting up and attending ADR would be prejudicial; and/or

6. Whether mediation had a reasonable prospect of success.

The PGF Case

The Claimant was the landlord and the Defendant was the tenant of 3 floors of office premises in the City of London. The Claimants claim was in respect of dilapidations arising out of the Defendants alleged breaches of repairing covenants. During the course of the proceedings, the Defendant had made an offer pursuant to Part 36 of the Civil Procedure Rules to the Claimant on 11 April 2011.

On the same day as the Defendant had made its Part 36 offer, the Claimant had made its own Part 36 offer, and had also written a "without prejudice save as to costs letter" to the Defendant suggesting a mediation at any time after 6 May 2011. The letter provided suggested dates when the Claimant would be available, and put forward the names of two possible mediators. The letter concluded by asking the Defendant whether it was agreeable to attend mediation and if not, why not. The Defendant failed to respond. The Claimants solicitors again raised the question of mediation in an open letter dated 19 July 2011 to which no response was received.

On 10 January 2012, the day before the trial was due to commence, skeleton arguments were exchanged. The Defendant was seeking to make a last minute amendment to its pleading. As a consequence of the last minute amendment the Claimant argued that it had no alternative but to accept the Defendants Part 36 offer made in April 2011, but made an application that the Defendant should pay the Claimants costs after the Relevant Date had expired, being 3 May 2011. It was accepted by the parties that the Claimant was entitled to its costs for the period up to 2 May 2011. The Court was therefore being asked to determine liability for costs for the period from 3 May 2011 only.

In respect of the Claimants costs from 3 May 2011 onwards, the Claimant argued that it should be entitled to these on the basis that (a) it was only on 10 January 2012 that it became aware the Defendant wanted to amend its pleading to be able to argue it was not liable for defects to the air conditioning system at the premises, which would, the Claimant said, alter the value of the Claimants claim and (b) the Defendant had unreasonably refused /ignored the Claimants suggestions to mediate.

Unless the Court ordered otherwise, the presumption was that the Claimant would be liable for the Defendants costs from 3 May 2011 to 10 January 2012, being the date the Part 36 offer was accepted.

In considering the question of liability for costs, the Court in the PGF case had regard to the case of Lumb v Hampsey [2011] EWHC 2808 (QB), which concerned how the Court should exercise its discretion under CPR 36.10(5)(b). In Lumb, the Court concluded the test to be applied was whether the usual order should be departed from because it would be unjust for the Claimant to pay the Defendants costs after the expiry of the Relevant Period, saying such a departure would be the exception, rather than the rule. In that case, the court also concluded that CPR Rule 36.14(4) gave guidance regarding the matters that the court should take into account when considering whether the usual order as to costs would be unjust.

In PGF, Furst QC, sitting as a Deputy Judge in the Technology and Construction Court, identified the matters which the Court should take into account, in accordance with the Lumb decision as being (a) the information available to the parties at the time when the Part 36 offer was made; and (b) the conduct of the parties with regard to the giving or refusing to give information for the purposes of enabling the offer to be made or evaluated.

Refusal to Mediate

In applying the factors set out in Halsey, the Claimant in PGF argued the dispute was well suited to mediation, there being nothing to suggest the Defendant considered its case so strong that it was reasonable for it to refuse to mediate. The costs of the mediation would not have been disproportionately high, nor would it have caused delay. The Claimant argued that a mediation would have had a reasonable prospect of success.

You may recall from the facts above that the Defendant failed to respond to the Claimants letters suggesting mediation. At trial, the Defendant sought to argue that an absence of a response to the Claimants suggestions to mediate could not be taken as a refusal or alternatively, if it were held that the failure to respond was a refusal to mediate, it did not do so unreasonably, relying on the factors considered in Halsey and in particular that there was no reasonable prospect that mediation would have been successful.

The Defendant argued, in the alternative, that it was not unreasonable for it to have refused to mediate and cited events which had taken place at a previous mediation between the same parties in 2010. The Defendant referred to a previous service charge dispute, arguing the burden of proving unreasonableness of a refusal to mediate rested on the Claimant, and that due to the Claimants objection to a waiver of privilege in relation to that mediation, the Claimant could not discharge the burden. In addition, the Defendant argued that had any mediation taken place around the dates suggested by the Claimant, it would not have been successful due to the absence of expert evidence.

The PGF decision

Furst QC confirmed the burden rested on the Claimant to demonstrate why there should be a departure from the general rule that the Claimant should be liable for the Defendants costs from 3 May 2011 onwards. Furst QC found the Claimant had discharged the burden, and held it was unreasonable for the Defendant not to (a) respond to the Claimants suggested mediation attempts and (b) not to agree to mediate. The Court agreed with the Claimants argument that the Halsey factors leading that Court to conclude there was an unreasonable refusal to mediate were present in the PGF case. This included the consideration that there was a reasonable prospect the mediation would be successful. In that regard, Furst QC found the burden on the Claimant to discharge the presumption was not an unduly onerous one, as a Claimant need not show the mediation would have been successful, merely that it had a reasonable prospect of success.

As a result of the Defendants unreasonable refusal to mediate, the Court ordered there be no order for costs for the period from 3 May 2011 onwards.

Conclusion

The PGF case shows the importance of the parties conduct throughout the proceedings when considering ADR and the suggestion of mediation, and the sanctions which may be imposed on a party which refuses to mediate without good reason. It is a useful reminder to all litigators that a party cannot simply rely on the usual costs consequences contained in Part 36.

This article first appeared in Butterworths Civil Costs Newsletter

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