Landmark Ruling Set To Generate Significant Rise In Alternative Dispute Resolution Settlements

Following a landmark decision handed down by the Court of Appeal at the end of last month, the proportion of commercial disputes, including those in relation to construction and engineering which are settled via mediation, is set to rise considerably.

It was decided in the recent PGF II SA v OMFS Company 1 Ltd case that silence in the face of a serious invitation to consider alternative dispute resolution (usually mediation) amounted to unreasonable conduct and a Judge in his discretion could impose costs sanctions.

The case focuses on a claimant issuing proceedings for damages of £1.9m. It later made without prejudice offers of £1.25m and £1.05m, but the former tenant and defendant in the case offered to pay £700,000. Crucially, the former tenant of the property refused to mediate.

The original trial took place in January 2012, but on the day before the hearing, the landlord accepted the tenant’s offer of £700,000 on the basis that they were not liable for the air conditioning system. Both sides at this point had spent £250,000 on legal costs.

The case was heard by the Court of Appeal after the judge in the initial hearing had said, despite the usual rule, that the tenant was not entitled to recover its cost from the landlord because it had refused to respond to requests to mediate.

Although the defendant appealed this decision claiming that mediation would have failed, the Court of Appeal upheld the original decision.

There is previous case law (Halsey v Milton Keynes General NHS Trust) on the ability of a party to refuse to mediate or engage in ADR and the general position is that a party can refuse to mediate if its grounds for doing so are reasonable. If refusal to engage in ADR or mediation amounted to unreasonable conduct this may attract a costs penalty, so a successful party may be deprived of recovering its legal costs from the opposition if this is the case. 

The case of PGF extends the principle set out in the Halsey case.  The unreasonable refusal to mediate was a simple failure to even respond at all to offers to engage in ADR/mediation.  Therefore this case is authority that it is advisable that when in receipt of an invitation to engage in ADR or mediate, it should be dealt with by either accepting the invitation or explaining in detail why it is not appropriate and why one refuses to mediate. 

Expert Opinion

The importance of ADR/mediation in the litigation process has been clearly highlighted here in the PGF case. An organisation which fails to respond to an offer to mediate or engage in ADR, does so at its peril. The ultimate sanction might be that even if a party in Court, it may recover no costs from the opposition, which could be substantial.” <br/> <br/>“Whilst, for the time being, Courts do not have the power to compel mediation this case makes clear the potential and costly consequence for a party that fails to engage in the process. However, it could also be viewed as judicial approval that it is appropriate to refuse to mediate provided that the refusal is communicated and the grounds for doing so are reasonable in all of the circumstances.” <br/> <br/>“We recommend that a solicitor is consulted when an offer to mediate or engage in ADR is made by the opposition so that your interests are protected. We are predicting an increase in mediation as the new costs rules bite and parties realise that they have to seek to resolve disputes at proportionate cost. Mediation could be a valuable and useful tool for helping to do that.“ <br/> <br/>