In recent years there has been an increasing emphasis on the use of alternative dispute resolution ("ADR") methods, particularly mediation, in regard to the settlement of disputes.
This has become even more prominent in what is commonly referred to as the "post-Jackson era", i.e. after the civil litigation reforms arising from Lord Justice Jackson's review of the civil costs system.
The use of mediation was further considered in the case of PGF II SA v OMFS Company 1 Limited  EWCA Civ 1288 where the Court of Appeal confirmed the High Court’s decision relating to costs consequences following silence to an invitation to participate in ADR.
This case relates to a property dilapidations dispute between PGF II SA ("PGF"), the landlord, and OMFS Company 1 Limited ("OMFS"), the tenant. It was the parties' actions in settling this matter prior to trial that were relevant to the issues in appeal.
Following the discovery of a flaw in its case on the eve of the trial PGF accepted a "Part 36 offer" made by OMFS some 9 months earlier.
A Part 36 offer provides the offeror with a form of costs protection. If the other party fails to achieve a result at trial that exceeds the terms of the Part 36 offer, or accepts the offer after a period of 21 days from the date of the offer ("the relevant period"), then the offeror would usually expect to be awarded the costs it had incurred from the expiry of the relevant period until the date of acceptance/trial on an "indemnity basis". This is a significantly higher rate of recovery of costs than a successful party would usually expect to recover on a standard assessment of costs.
Thus, OMFS would have expected to recover a substantial amount of its costs for the 9 month period prior to PGF accepting its Part 36 offer.
However, PGF requested that the Court exercise its discretion in the award of costs, taking into account OMFS’s failure to respond to PGF’s invitation to submit the dispute to mediation on a number of occasions. PGF argued that OMFS’s failure to respond was an unreasonable refusal to engage in ADR and should be accounted for in the assessment of costs.
High Court’s decision The High Court referred to a previous decision on this issue in the case of Halsey v Milton Keynes NHS Trust  1 WLR 3002 which established that, although the Court cannot compel parties to submit a dispute to ADR, it may encourage parties to do so. Further, the Court is entitled to exercise its powers to enforce costs consequences to deprive a successful party of some or all of its costs on the grounds of an unreasonable refusal to agree to ADR.
The significance of the High Court's decision is that it extended the previous guidance from Halsey regarding the conduct that might be treated as unreasonable in the context of ADR to include a situation where a party fails to respond to an offer to engage in ADR.
In reaching its decision the High Court endorsed the advice given in the ADR handbook, produced as guidance followed the Jackson reforms, that:
"silence in the face of invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless of whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds."
As a result, OMFS was deprived of the costs it would usually have expected to recover for the period following the expiry of the relevant period for the Part 36 offer to the date of acceptance.
Issues in the Court of Appeal
The Court of Appeal was asked to consider the High Court's findings in relation to costs. The Court of Appeal noted that the High Court’s decision had "sent an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR". Against this backdrop the Court of Appeal declined to interfere with the earlier decision in relation to costs, noting that it was a reasonable conclusion for the Court to make. The Court of Appeal did elaborate and say that an unreasonable refusal to engage in ADR will not automatically result in a costs penalty but is an aspect of the parties' conduct which will be addressed in the context of reviewing the conduct of the parties during a dispute as a whole.
The Court of Appeal’s decision demonstrates that whether or not a refusal to engage in ADR is unreasonable will be considered on the facts of each particular case. However, in regard to whether a refusal to engage in ADR is unreasonable, the Court has acknowledged that the threshold for establishing this is "not an onerous one".
Clearly, there will be circumstances where an invitation to engage in ADR is not appropriate for a particular case or at a particular time. However, in light of the this decision, if a party declines such an invitation it should set out the reasons for the refusal and, it is suggested, not close the door completely on using ADR in the future.
For more information, please contact Tim Richards on 01223 461155 or click here to email Tim.