UK: Party Deprived Of Costs Pour Encourager Les Autres

Last Updated: 3 January 2014
Article by Robert Wood

Summary and implications

Costs sanctions imposed on a party which refused to engage in an invitation to mediate have been approved by the Court of Appeal, to encourage others to consider alternative dispute resolution (ADR) as a viable alternative to formal proceedings.

  • If a serious invitation to mediate is received, a party must address it swiftly and, should it wish to refuse, ensure that it may do so on reasonable grounds. The courts are keen, given the current economic climate, to encourage litigants to undertake forms of ADR to avoid incurring high litigation costs.
  • Parties should be aware of other parties using ADR proposals as a costs tactic.

The approach of the courts to ADR

ADR is a hot topic for litigators. The courts' approach and legal policy is to encourage the use of mediation and other forms of ADR as a viable alternative to formal proceedings. The rationale is that ADR is cheaper and more flexible than court proceedings.

A judge cannot order the parties to use ADR without their consent, but the judge does have the ability to put pressure on the parties by issuing adverse cost orders against them for failing to engage.

The court may take an unreasonable refusal to engage in mediation into account when awarding costs as it is construed as an element of the parties' conduct in pursuing the litigation. This principle is from Halsey v Milton Keynes General NHS Trust*. Halsey identifies six factors which may be taken into account to assess whether a party was unreasonable in its conduct when refusing to mediate (see the box over the page).

In a recent case, a party was penalised in costs for ignoring an offer to mediate

The principle in Halsey was fully endorsed recently by the Court of Appeal in PGF II.**

In that case, OMFS brought proceedings against PGF for breach of repairing covenant relating to three leases.

The claim was for £1.9m. OMFS made two Part 36 offers which were not accepted. This was followed up with a detailed invitation to mediate, which PGF ignored, even when OMFS re-sent the invitation. PGF made its own Part 36 offer of £700,000, which OMFS accepted the day before trial.

The usual position would be for OMFS to pay PGF's costs incurred between 11 May 2011 (the date the Part 36 offer was made) and 11 January 2012 (the date of acceptance of the offer). The parties went to court to decide who was liable for costs.

The initial hearing

Initially, Mr Furst QC decided that PGF's silence amounted to a refusal and that such refusal was unreasonable. He decided that PGF shouldtherefore be deprived of the costs it would otherwise have been entitled to under Part 36. Both parties appealed.

The Court of Appeal upheld the decision in Halsey

The Court of Appeal fully endorsed the decision in Halsey and the statement in the ADR Handbook that "silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable".

He added that a positive engagement in ADR should at least lead to a narrowing of the issues, focusing the minds of the parties to the most pertinent issues or at a minimum prompting the parties to agree to another form of ADR with similar consequences.

PGF argued that its refusal to mediate was justified

PGF argued that acceptance of its Part 36 offer proved that its refusal to enter into mediation was justified.

This argument was rejected by the court, stating that it is well-established that parties must seek to narrow their differences before those which are found to be irreconcilable are put to the court for determination.

There was no reason not to apply this principle to ADR as a method of saving valuable court time and, in accordance with court practice guides, encourage the use of ADR.

Points to note

The case will clearly impact the way litigators approach mediation and ADR as an alternative to court proceedings. The courts are actively encouraging parties to consider ADR and this decision shows a willingness to penalise parties as a way of encouraging others to take ADR seriously.

Parties to a dispute must be aware of the cost implications of failing to engage in any offer of ADR. If a party fails to consider ADR, or believes it is inappropriate, it must as a bare minimum respond giving reasonable grounds to refuse the offer.

In PGF, it was noted that the first instance judge may have taken the costs sanction too far and that a costs sanction will not automatically flow from unreasonable conduct. However, the Court of Appeal endorsed the level of sanction on the basis that it operates pour encourager les autres.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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