UK: Go Ahead, Make My Day: Adverse Costs Orders For Refusal To Engage With ADR

Introduction

Most disputes are capable of solution through a suitable alternative dispute resolution ("ADR") process. It remains the most efficient and cost effective way to resolve outstanding issues between parties to litigation. Despite the attractions of ADR, many parties refuse to contemplate its use and often dismiss it out of hand or attempt to argue that it is not appropriate in the circumstances.

This article examines the English courts' approach to the refusal of a party to litigation to engage with an ADR process suggested by another party or the court. It sets out the law in the leading case of Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002 and analyses how the Halsey decision has been applied in several recent cases. The article concludes with advice on how to avoid the imposition of an adverse costs order by the court for refusal to engage with ADR.

Halsey v Milton Keynes General NHS Trust

The principle that parties to litigation should generally be encouraged to engage with ADR is imbedded within the legal system of England & Wales. The courts' case management duties include "encouraging the parties to use an alternative dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure" (Civil Procedure Rules, r.1.4(2)(e)). In practice, references to ADR in this context almost invariably mean some form of mediation by a third party.

Before the Halsey decision,the courts did engage in patchwork encouragement of ADR by imposing adverse cost orders on parties that unreasonably refused to engage in mediation. The reasoning behind what constituted unreasonable conduct for these purposes differed significantly between judges. This was, no doubt, as a result of the disparate views among members of the judiciary on the merits of mediation as an effective means of resolving parties' disputes.

Halsey was the first case in which the Court of Appeal addressed, as a matter of principle, the extent to which it was appropriate for the court to use its powers to encourage parties to settle their disputes otherwise than by trial. It restated that the court should 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. One particularly relevant element of a party's conduct was whether it had unreasonably refused to agree to ADR.

If a successful party was shown to have unreasonably refused to engage in ADR, the court would, all things being equal, reduce the amount of recoverable costs which would otherwise be due from the unsuccessful party. The court would not compel the parties to mediate, but would instead engage in a robust form of indirect encouragement.

Giving the judgment of the court, Lord Justice Dyson, as he then was, laid down non-exhaustive factors for deciding whether, in particular cases, a refusal to participate in ADR was unreasonable. He stressed that no single factor would be decisive, and the unreasonableness of the party's conduct must be determined having regard to all the circumstances of the case.

The burden of proof is on the party who alleges the other unreasonably refused to mediate. However the court in Halsey made clear that the burden is not an onerous one. The relevant question is whether there was a reasonable prospect that the mediation would be successful, not whether it would have been successful on the balance of probabilities. Most disputes are likely to meet this criterion in the eyes of the court, if not in the eyes of the parties.

Halsey Factors

The factors to be taken into account ("the Halsey factors") are the following:

  1. the nature of the dispute;
  2. the merits of the case;
  3. the extent to which other settlement methods have been attempted;
  4. whether the costs of the ADR would be disproportionately high;
  5. whether any delay in setting up and attending the ADR would have been prejudicial;
  6. whether the ADR had a reasonable prospect of success; and
  7. whether the court had encouraged the parties to pursue ADR.

The nature of the dispute

The court in Halsey recognised that some disputes are intrinsically unsuitable for ADR:

"The most obvious kind is where the parties wish the court to determine issues of law or construction which may be essential to the future trading relations of the parties, as under an on-going long term contract, or where the issues are generally important for those participating in a particular trade or market. There may also be issues which involve allegations of fraud or other commercially disreputable conduct against an individual or group which most probably could not be successfully mediated."

A party will not generally be acting unreasonably in refusing ADR if it can identify a point of law or construction which, if determined by the courts, would avoid future disputes by the parties on the same issue in their continuing legal relationship.

Similarly, if a particular trade or market has an interest in obtaining a definitive legal answer by the court, it is less likely that a member of that trade or market's refusal to engage in ADR will be found to be unreasonable. In Halsey, for example, a factor reinforcing the finding that the defendant had acted reasonably in refusing mediation was that, as an insurance company, it had a legitimate interest in obtaining a definitive legal determination of the meaning of one of its standard clauses.

Allegations of fraud or other commercially disreputable conduct are a serious matter and may make it less likely that the parties will see eye to eye in mediation. A party may want the allegations publicly refuted in court. However, the relevance of this factor remains highly fact specific. It may depend, for example, on how central the fraud allegations are to the other party's case, or whether those allegations have been made public. Any allegation of fraud or other disreputable conduct should not be thought of as a reason that automatically makes refusal to engage in ADR reasonable.

The merits of the case

A party's belief in the merits of the case is a relevant factor:

"The fact that a party reasonably believes that he has a strong case is relevant to the question whether he has acted reasonably in refusing ADR. If the position were otherwise, there would be considerable scope for a claimant to use the threat of costs sanctions to extract a settlement from the defendant even where the claim is without merit. Courts should be particularly astute to this danger.

... Borderline cases are likely to be suitable for ADR unless there are significant countervailing factors which tip the scales the other way... The fact that a party unreasonably believes that his case is watertight is no justification for refusing mediation. But the fact that a party reasonably believes that he has a watertight case may well be sufficient justification for a refusal to mediate."

The presumption is that borderline cases are suitable for ADR. Only in genuinely one-sided disputes will a party's belief in the strength of its case have significant weight. The court gave the example of a case where a party would have succeeded in an application for summary judgment, but did not, for whatever reason, make that application. Parties often take the position that the strength of their case is the most valid reason to refuse to mediate; the courts will rarely agree.

It should be noted that a party's subjective belief in the merits of its case is not relevant to this factor. Only if the belief is reasonable, viewed objectively, will that constitute a valid reason to refuse ADR. This underlines the importance for a party to obtain independent and objective legal advice, and for legal advisors to provide a frank appraisal of the merits.

The extent to which other settlement methods have been attempted

The court held that previous failed attempts to settle may be relevant:

"The fact that settlement offers have already been made, but rejected, is a relevant factor. It may show that one party is making efforts to settle, and that the other party has unrealistic views of the merits of the case. But it is also right to point out that mediation often succeeds where previous attempts to settle have failed."

This guidance demonstrates the difficulty a party might have in trying to assess whether its conduct in refusing to engage in mediation is reasonable. On the one hand the court says that failed attempts to settle may show that at least one party has an unrealistic view of the case, the implication being that any attempt to mediate would likely fail and can reasonably be refused. On the other hand, the court points out that mediation may succeed where previous attempts to settle have failed, the implication being that any refusal to mediate in such circumstances would be unreasonable.

In circumstances where attempts to settle have been made, whether a party's conduct is reasonable will likely be determined by a wide range of considerations including how realistic the positions of the parties in the settlement negotiations were, how long ago the settlement negotiations took place, whether there has been a material change in the parties' positions, and the likelihood that the impasse in the settlement negotiations could be overcome by the introduction of a third party mediator.

Again, the fact that multiple attempts at settlement have failed should not be regarded as an automatic justification to refuse mediation. The court will examine the reasons for the failure and attempt as best it can to determine whether those past failures would have impacted on the mediation's prospects of success.

Whether the costs of the ADR would be disproportionately high

The court held the potential cost of pursuing mediation can be a relevant factor:

"This is a factor of particular importance where, on a realistic assessment, the sums at stake in the litigation are comparatively small. A mediation can sometimes be at least as expensive as a day in court ... the possibility of the ultimately successful party being required to incur the costs of an abortive mediation is a relevant factor that may be taken into account in deciding whether the successful party acted unreasonably in refusing to agree to ADR."

In large commercial disputes this factor will almost never be significant. The costs of taking a matter to trial will heavily outweigh the costs of mediation. One situation where it will be relevant is if mediation is suggested after the trial has taken place but before an appeal is heard. In those circumstances the costs of preparing for a day in mediation may be disproportionately high relative to the costs of preparing for a more narrowly defined appeal.

Whether any delay in setting up and attending the ADR would have been prejudicial

The court held that the time the mediation is suggested is a relevant factor:

"If mediation is suggested late in the day, acceptance of it may have the effect of delaying the trial of the action. This is a factor which it may be relevant to take into account in deciding whether a refusal to agree to ADR was unreasonable."

This factor is straightforward. The closer to trial mediation is suggested, and the more disruptive mediation would be to a party's preparation for trial, the more likely it is that a party's refusal to participate in the mediation will be reasonable. The courts will be keenly aware of any offers to mediate made in an attempt to appear reasonable, but which come too late to be realistically accepted.

Whether the ADR had a reasonable prospect of success

The next factor the court discussed was whether the proposed mediation had a reasonable prospect of success. The court spent most time considering this issue:

"In our view, the question whether the mediation had a reasonable prospect of success will often be relevant to the reasonableness of A's refusal to accept B's invitation to agree to it. But it is not necessarily determinative of the fundamental question, which is whether the successful party acted unreasonably in refusing to agree to mediation. This can be illustrated by a consideration of two cases. In a situation where B has adopted a position of intransigence, A may reasonably take the view that a mediation has no reasonable prospect of success because B is most unlikely to accept a reasonable compromise. That would be a proper basis for concluding that a mediation would have no reasonable prospect of success, and that for this reason A's refusal to mediate was reasonable.

On the other hand, if A has been unreasonably obdurate, the court might well decide, on that account, that a mediation would have had no reasonable prospect of success. But obviously this would not be a proper reason for concluding that A's refusal to mediate was reasonable. A successful party cannot rely on his own unreasonableness in such circumstances."

It follows that although the court will look objectively at whether the proposed mediation had reasonable prospects of success, it will also take into account subjective factors, such as a party's willingness to compromise and the reasonableness of their attitudes in deciding whether a refusal to mediate was reasonable. A party cannot rely on its own stubbornness to argue that the mediation would never have reached a resolution.

Whether the court has encouraged the parties to pursue ADR

Although not traditionally referred to as one of the Halsey factors, the court placed special emphasis on the question of whether a party had ignored the court's encouragement of ADR when deciding whether that party's conduct was unreasonable:

"Where a successful party refuses to agree to ADR despite the court's encouragement, that is a factor which the court will take into account when deciding whether his refusal was unreasonable. The court's encouragement may take different forms. The stronger the encouragement, the easier it will be for the unsuccessful party to discharge the burden of showing that the successful party's refusal was unreasonable."

Even before Halsey, this factor was often decisive in the determination of whether a party's conduct was unreasonable. The courts do not like being ignored. In Dunnett v Railtrack plc [2002] 1 W.L.R. 2434, three of the claimant's horses walked onto the defendant's railway tracks and were struck by an express train and killed. The claimant failed in her negligence claim at first instance and again in the Court of Appeal. However, when giving permission to appeal, Lord Justice Schiemann suggested that both parties engage in ADR.

The defendant was confident of victory and refused the claimant's offer of mediation, seemingly without giving the offer any serious consideration. The Court of Appeal was highly critical of the defendant's behaviour, and held that the defendant, the successful party, should bear its own costs of the appeal. In circumstances where the court has expressly encouraged a party to consider pursuing ADR it will be rare for a party to escape sanction if it does not do so. The fact that the court gives its express encouragement suggests that it has determined that the dispute is suitable for resolution by an appropriate ADR process.

Recent developments

The general trend of decisions since Halsey has been to strengthen the encouragement of ADR through the more robust use of adverse cost orders against parties who unreasonably refuse to engage in mediation. The courts have not yet taken the step of compelling the parties to mediate but have instead broadened the circumstances under which a failure to engage with ADR will be deemed to be unreasonable and strengthened the sanctions against such behaviour. This section analyses two recent decisions that are illustrative of the courts' approach.

The Court of Appeal revisited the Halsey decision in PGF II SA v OMFS Co 1 Ltd [2014] 1 WLR 1386. In PGF II the claimant freeholder brought proceedings against the defendant tenant for breach of repairing covenants. Both parties made offers to settle pursuant to Part 36 of the Civil Procedure Rules ("CPR"). Under Part 36, if A makes an offer to B complying with certain formalities, and B accepts that offer, B is liable to pay A's costs from the date of expiry of the 'relevant period' (defined as 21 days after the offer was made) to the date of acceptance of the offer, unless the court orders otherwise.

After the Part 36 offers were made the claimant sent the defendant two written invitations to pursue mediation, three months apart, but the defendant failed to respond to either. On the eve of the trial the claimant accepted the defendant's Part 36 offer and the case was settled save as to costs.

The judge at first instance found that the defendant's silence in the face of serious invitations to mediate amounted to an unreasonable refusal to engage in ADR. Consequently, in the exercise of his discretion, he deprived the defendant of its costs pursuant to CPR Part 36 to which it would otherwise have been entitled.

The Court of Appeal agreed. It held that that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless of whether a contemporaneous refusal might have been justified by the identification of reasonable grounds. A party must not only have good reasons for failing to engage in mediation, but it must communicate those reasons to the other party.

The court was at pains to extol the benefits of mediation both to parties to litigation and their lawyers. Mediation was described as a process that was "still insufficiently understood and still under-used". The judgment leaves no doubt that in future the courts will continue to be robust in their encouragement of ADR. The court went so far as to suggest that the successful party could pay the unsuccessful party's costs if there was a "serious and flagrant" failure to engage in ADR, for example when the court's encouragement of ADR had been ignored.

The expansion of the courts encouragement of ADR continued in the first instance decision of Phillip Garritt-Critchley v Andrew Ronnan [2014] EWHC 1774 (Ch). Unusually, the unsuccessful party, the defendant, had refused an offer to mediate by the successful party, the claimant. HHJ Waksman QC held that the refusal was unreasonable and ordered that the claimant was entitled to be paid its costs of the whole action on the indemnity basis.

The judge placed particular importance on the suitability of the particular dispute to mediation. The case contained "an obvious sliding scale of compensatory award if the claimant's succeeded". There was expert evidence on quantum that contemplated a wide range of possible awards. In these circumstances, the judge considered this was a classic matter where mediation should be considered, and was robust in his criticism of the defendant for not doing so.

HHJ Waksman QC dismissed one by one the defendant's arguments that its conduct in refusing mediation was reasonable. The defendant's belief that its case was watertight was misconceived, and it was telling that it was not so confident in its belief to apply for summary judgment. Neither was the fact that there was considerable dislike and mistrust between the parties relevant. The judge thought this entirely commonplace, and if anything strengthened the case for ADR.

Finally, the argument that the parties were too far apart in their evaluation of the case was given short shrift:

"Parties don't know whether in truth they are too far apart unless they sit down and explore settlement. If they are irreconcilably too far apart, then the mediator will say as much within the first hour of mediation. That happens very rarely in my experience."

The reasons given by the defendant will be familiar to anyone habitually involved in litigation. Their dismissal by the court should serve as a warning to parties or their lawyers seeking to rely on them. It is the Halsey factors that should be at the forefront of parties' minds when considering whether to refuse an offer of ADR, not the more common, now discredited, arguments.

Conclusion

The English courts are increasingly taking a stricter approach towards parties that unreasonably refuse to mediate. They have broadened both the circumstances under which a failure to engage with ADR will be deemed unreasonable and the sanctions against such behaviour. What actions can a party who wishes to refuse ADR take, therefore, to avoid the imposition of an adverse costs order by the court?

Advice on this point was given by the Court of Appeal in the PGF II case. It expressly endorsed paragraph 11.56 of the Jackson ADR Handbook (2013), which sets out at length what steps a party should take in these circumstances. The court summarised the advice as follows:

"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."

A party's approach must be one of constructive engagement, having taken into account all the relevant factors and communicated its decision to the other side. If these steps are taken, the court is much less likely to sanction the refusing party.

Having said this, mechanistically following these steps should not be taken as a guarantee that an adverse costs order will not be made. The reasons given by the parties must be objectively reasonable. In Phillip Garritt-Critchley, the defendants had duly communicated their refusal to the other party with reasons. However, HHJ Waksman QC viewed the reasoning itself as deficient:

"Mr Maynard-Connor has referred me to the PGF case and in that case he has drawn my attention to paragraph 30 which talks about the ADR Handbook: not ignoring an offer, responding promptly, not closing it off and raising any shortage of information. None of that assists the defendants here. They did respond, they gave reasons but they were misconceived. So the fact that they responded promptly each time a letter was written is neither here nor there. It wasn't a question of shortage of information being an obstacle."

Both the form and the substance of the refusal are important. This is a difficult path to walk for parties not familiar with litigation. The above passages highlight the importance for parties considering whether to refuse an offer to mediate to obtain independent and objective legal advice on their dispute, and for legal advisors to provide a full and frank appraisal of the merits of these disputes to their clients.

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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