PGF II SA v OMFS Company 1 Limited [2013] EWCA 1288


The Court of Appeal recently looked at how the Court should deal with a party who fails to respond to an invitation to participate in alternative dispute resolution ("ADR").

On the day before the trial of a dilapidations dispute, the Claimant accepted a Part 36 Offer previously made by the Defendant. Under the normal application of Part 36, the Claimant should have paid the Defendant's costs incurred from the date on which the Part 36 offer period expired until the date on which it accepted the offer.

However, in this case, the Court of Appeal agreed with the Trial Judge that the Defendant was not entitled to recover these costs because it had ignored previous requests from the Claimant to mediate. By applying such a harsh sanction, the Court has sent a very clear message about the importance of requests for ADR.

The facts

The Claimant ("the Landlord") was the owner of a property at 33 Lombard Street, London. After the lease had expired, the Landlord issued proceedings against the Defendant ("the Tenant") for damages of approximately £1.9 million for breach of repairing obligations. The Tenant defended the claim on the basis that there was no diminution in value under Section 18 of the Landlord and Tenant Act 1927, and so the Landlord had suffered no loss.

After bringing the claim, the Landlord put forward a Part 36 Offer to settle the dispute for £1.25 million plus interest.  It also put forward a carefully worded invitation to the Tenant to take part in an early mediation.  The letter suggested that a meeting between experts and exchange of information should take place before mediating. In the letter, the Landlord offered to provide the Tenant with its Section 18 valuation.  It also proposed various dates for mediation and contained a list of suggested mediators.  Finally the letter sought the Tenant's agreement to mediate, or an explanation for any refusal.

On the same day the Tenant put forward its own Part 36 Offer of £700,000 including interest to settle the claim. However it did not respond in any way to the Landlord's invitation to mediate.

Neither of the Part 36 Offers was accepted.

Three months later the Landlord's solicitors sent a further invitation to mediate asking the Tenant, if it was willing to attend, to provide dates of availability, and if it was not prepared to attend, to provide its reasoning. Again the Tenant failed to respond to the invitation to mediate and the claim progressed toward trial.

Skeleton arguments were exchanged the day before trial. At this point, the Tenant raised for the first time the argument that the air conditioning system, which accounted for £250,000 of the claim, did not form part of the demised premises, and that it was not therefore liable to repair it.

Later that day the Landlord accepted the Tenant's Part 36 Offer of £700,000 to settle the dispute. This should have had the effect of making the Landlord liable for the Defendant's costs incurred from 2 May 2011 to 10 January 2012. It can be seen that these costs would have been substantial, as this included all the preparation for trial. The Landlord gave the Tenant notice that it would be continuing with the trial to deal with the point on costs.

At trial the following day the Landlord argued that the Tenant should not be entitled to costs because it had raised the issue of the air conditioning so late in the day, and because it had been unreasonable in refusing to participate in ADR.  It also sought its own costs for the "relevant period".

The First Court decision

The Trial Judge found partly in the Landlord's favour. He did not accept that the late amendment to the Tenant's claim was sufficient to deprive it of costs. However, he agreed with the Landlord that, because the Tenant had failed to respond to the requests to mediate, that it should not be able to recover the costs that it would otherwise have been entitled to for the period 2 May 2011 to 10 January 2012.  These costs were in the region of £250,000.

This was on the basis that the Tenant's silence, in not responding to the invitation to mediate, amounted to a refusal, and that the refusal was unreasonable.

However, the Judge did not award the Landlord its own costs for the same period.

Both parties appealed.

The issues

The Court of Appeal had to decide:

  • Did the Tenant's silence amount to a refusal to mediate?
  • If so, was that refusal reasonable?
  • If it was unreasonable, was the Trial Judge correct in depriving the Tenant of the whole of its costs during the relevant period?

The decision

The Court of Appeal upheld the Judge's decision.

First, the Court gave some further guidance on Part 36 and ADR. The whole point of Part 36 is to encourage parties to make realistic offers and to accept them promptly. It is also designed to provide a layer of costs protection. The Court has substantial powers in respect of costs, and it may be appropriate for it to use those powers to encourage parties to use ADR. This includes the power to deprive a successful party of costs if it acts unreasonably in refusing to use ADR. Factors that will go to whether a party is acting reasonably in refusing ADR include:

  • The nature of the dispute;
  • The merits of the case;
  • The extent to which other settlement methods had been attempted;
  • Whether the ADR costs would have been disproportionate;
  • Whether the ADR would have caused a prejudicial delay;
  • Whether the ADR had any reasonable prospects of success.

Secondly, the Court considered that the Defendant's silence did amount to a refusal. Although it was surprising that the Claimant had not pushed a little harder, nonetheless Briggs LJ said that it would be "perverse not to regard silence in the face of repeated requests as anything other than a refusal."  The Court was critical of the failure to reply to the invitations, describing it as "destructive".

Next, the Court considered whether this refusal was unreasonable, in the face of repeated invitations to participate in ADR. It agreed with the Trial Judge that it was. In reaching this decision, the Court considered the high success rate of mediations reported over the previous ten years, and the fact that a skilled mediator, experienced in the relevant field, might have brought the issue of the air conditioning system to the parties' attention at a much earlier date than the day before trial. The Court therefore considered that the Trial Judge had been right to conclude that mediation had a reasonable prospect of success.

Finally, the Court had to consider whether the Trial Judge's operation of his discretion on costs had been applied appropriately. It found that a refusal to accept an invitation to participate in ADR does not automatically produce a costs penalty. Whilst in principle the Court did have the power to go further and order the otherwise successful party to pay all or part of the unsuccessful party's costs, this should be saved for the most serious breaches, for example where the Court had recommended mediation and a party had ignored it.

Consequently, the Court upheld the Trial Judge's decision and dismissed both appeals.

Our advice for litigants

The Court's message has been made crystal clear: ADR is important and a request to participate will be ignored at your very great peril.

If you are engaged or think that you may soon be engaged in legal proceedings, consider whether ADR may be appropriate to help narrow the issues in dispute and whether it has a reasonable chance of success. If it does, have your solicitors prepare a carefully worded invitation to the other side to participate. This will help protect you on costs in the event that they do not respond or unreasonably refuse.  It may also lead to settlement of the claim.

If you receive an invitation to participate in ADR you must not ignore it. Take advice from your solicitors on whether ADR is appropriate. If it is then this may lead to an early resolution of the matter and you should accept. If you believe that you have reasonable grounds for refusing to participate, in order to avoid a costs sanction you should: respond promptly, giving clear and full reasons why ADR is not appropriate; raise with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR; and do not close off the idea of ADR completely as it may prove worthwhile at a later date.