Costs sanctions when mediation requests are ignored

This case raised the question regarding the costs implications for a party which, when invited to participate in ADR (e.g. mediation), declines to respond to the invitation in any way.

The facts underlying the dispute are not relevant, but briefly concern a claim for breach of repair covenants in a lease of a commercial building. The claimant made two Part 36 settlement offers which were not accepted. It then sent the defendant a detailed invitation to mediate the dispute, to which the defendant did not respond. Instead the defendant sent its own Part 36 offer to the claimant. The claimant sent a further invitation to mediate, but again did not receive any response from the defendant. Shortly before trial, the claimant accepted the defendant’s Part 36 offer.

Under the Civil Procedure Rules, where a Part 36 offer is accepted belatedly (e.g. after the usual 21 day period for which a Part 36 offer is open for acceptance), ordinarily a claimant would be liable for the defendant’s costs for the period from the date of expiry of the offer (the relevant period) to the date on which the claimant accepted the offer.

In this particular case, the judge at first instance deprived the defendant of its costs for this relevant period. It held that the defendant’s silence in relation to the claimant’s invitation to participate in ADR amounted to a refusal to engage in ADR. The court considered that this refusal was unreasonable in accordance with the Halsey guidelines (stemming fromHalsey -v- Milton Keynes General NHS Trust (2004)). Those guidelines indicated various factors that were likely to be relevant to the issue of whether a party’s refusal to engage was unreasonable, including the nature of the dispute, the merits of the case, the extent to which other settlement methods had been attempted, whether the costs of the ADR would be disproportionately high, whether any delay in setting up and attending the ADR would have been prejudicial and whether the ADR had any reasonable prospect of success.

The defendant appealed. The Court of Appeal reached a similar conclusion, rejecting the appeal. It went a step further than the judge at first instance by also deciding that the defendant’s silence in the face of two requests to mediate was itself sufficiently unreasonable to warrant a costs sanction without the need for a detailed point by point analysis of the Halsey guidelines to determine whether the deemed refusal was unreasonable. The Court of Appeal stated:

‘… that silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless 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.’

The Court of Appeal recognised that there may be rare cases where the general rule above would not apply, where for example, ADR was so obviously inappropriate that to characterise silence as unreasonable would be ‘pure formalism’, or where the failure to respond was a mistake. However, the onus of successfully explaining this would lie on the recipient of the invitation.

The Court of Appeal further held that there were sound practical and policy reasons for extending the principles contained in the Halsey case. Firstly, an investigation of alleged reasons for refusing to mediate posed forensic difficulties if the reasons were advanced for the first time at a costs hearing months or even years after the invitation to mediate, particularly in relation to the question as to whether those reasons were genuine. Secondly, a failure to provide reasons for a refusal was destructive of the real objective of encouraging parties to consider and discuss ADR. Any difficulties or reasonable objection to a particular ADR proposal should be discussed, so that the parties could narrow their differences before asking the court to determine those issues which were irreconcilable. That occurred routinely in relation to expert issues and there was no reason why the same should not apply to ADR in order to save valuable court time in the case management process, which extends to the encouragement of ADR and not just the giving of directions for trial. This second reason was not only practically useful but it also served the policy of proportionality since it might lead to alternative directions and a saving of time and resources for the parties and the court.

Although the finding above was sufficient for the Court of Appeal to impose a costs sanction, it also upheld the first instance judge’s decision regarding whether there was a refusal by the defendant to engage in ADR and whether that refusal was unreasonable.

The court held that it would be perverse not to regard silence in the face of repeated requests as anything other than a refusal, especially because the first invitation to mediate was couched in such detailed and reasonable terms that it could not reasonably have been regarded as mere tactics. As to whether the refusal was unreasonable, the court also commented that Part 36 offers did not usually represent the parties’ respective bottom lines and that there was therefore no unbridgeable gap between two parties’ Part 36 offers which could not be overcome through mediation.

Finally, the Court of Appeal held that a finding of unreasonable conduct through a refusal to mediate did not automatically result in a costs penalty. However, judges had a wide discretion regarding how far to depart from the cost consequences of Part 36 and this included depriving the defendant of the whole of its costs during the relevant period for seriously unreasonable conduct. In principle, judges could go even further and order the otherwise successful party to pay all or part of the unsuccessful party’s costs, but this should only be reserved for the most serious failures to engage with ADR, for example, where the court encouraged the parties to do so and had been ignored.

This case demonstrates the importance of engaging with a serious invitation to participate in ADR, even if there are reasons which might justify a refusal.