The recent Court of Appeal decision in PGF II v OMFS has received a fair bit of interest. However, this has been most directly focused on the basic point of the case, that you cannot be silent in the face of an offer of mediation. In fact the case contains a much broader range of useful pointers for litigation lawyers.

The Facts

The facts are relatively well known. This was a property dispute over terminal dilapidations. The two sides both made a series of offers to settle. The final one of these was a Defendant's offer of £700,000 which the Claimant accepted at the last minute. This would, in the normal course of events, have left the Claimant liable for the Defendant's costs from the date of the offer until its acceptance. However, the Claimant had also proposed mediation at a fairly early stage, shortly after the directions hearing. This proposal was detailed one including suggested mediators, possible dates, and documents that might be required for a mediation. The Defendant made no reply to this offer or to a subsequent one two months later. The Claimant asserted that this silence was an unreasonable refusal to mediate. The lower Court agreed and refused to award any costs to the Defendant for the period covered by the Part 36 offer. However, it also then refused to award any further costs to the Claimant. Both parties appealed to the Court of Appeal.

Silence

The, by now relatively well known, decision of the Court of Appeal was to agree with the lower court that silence in the face of a sensible mediation offer was unreasonable conduct which should be taken into account when dealign with costs. It is important to note that the Court of Appeal did not state that a refusal to mediate was unreasonable or that a costs penalty would automatically be applied.

Refusal and Reasonableness

Therefore the outcome of this appeal is that the position on a refusal to mediate is unchanged. Where a party refuses an offer of mediation then they are required to show that this offer is reasonable. If they cannot do so then they may face a costs penalty following the Halsey principles. What is different is that silence is now automatically classed as an unreasonable refusal. Therefore, while it may be acceptable to write a letter saying no to a mediation offer it will never be reasonable to simply save client money by ignoring the offer even if it is ridiculous!

How to Say No

PGF II has much more to say on this point however. It is also stated that “a failure to provide reasons for a refusal is destructive of the real objective of the encouragement to parties to consider and discuss ADR”. Therefore it is implicit in the decision that simply writing to say no is also likely to be considered unreasonable, it is necessary to engage with the process and produce a properly reasoned argument for refusing mediation.

Partial Mediation and Narrowing

PGF II also endorses the value of mediation for narrowing issues. It is still that case that mediation is treated as an all or nothing affair with parties either settling the matter or walking out with no agreement at all. PGF II states that this is common in the use of experts by requiring expert meetings at which they produce a list of points of agreement and dispute for submission to the Court and comments that this same concept should be applied to ADR as a whole.

How to Deal with Silence

While the Court of Appeal did not criticise the Claimant for its failure to actively chase up the mediation offer it did endorse the comments of the lower court where surprise was expressed that no specific letter commenting on the silence of the Defendant in the face of the offer was sent and that it was not raised before the court in a case management hearing. The obcious message is that if mediation is offered and ignored the offer should be actively chased and, if a case management or pre-trial hearing is scheduled then the failure to respond to a mediation offer should be raised with the Court.

Strength of the Case

It is a generally accepted principle, and it is restated in PGF II, that it is reasonable to refuse mediation on the basis of the merits of the case. In other words, you are not required to mediate if you are going to win! This is not a wholly objective test, although it does appear that some Courts have applied it in that way, but must have a substantial element of objectivity about it. However, if the party has a reasonably held belief in the strength of their case then the fact that they are ultimately shown to be wrong does not render them unreasonable. However, the fact that an offer is made which the other side accepts does not render the refusal reasonable.

Burden of Proof

PGF II again reiterates that the burden of proof to establish unreasonableness rests with the party who is alleging it. However, it goes on to say that the threshold is fairly low. In fact, it appears that a dual burden is emerging. The first burden is on the party alleging unreasonableness to get over the relatively low hurdle of showing that the other side refused mediation in circumstances which might fall within the areas deemed unreasonable. At that point the burden appears to shift and it is for the party alleging that they have been reasonable to get over the somewhat higher threshold of demonstrating that their refusal was reasonable.

Suitability for Mediation

It was argued in PGF II that the case was unsuitable for mediation as it was largely one of quantum. It is common for parties to assert that their case is inherently unsuitable for mediation. PGF II makes clear that this is a risky strategy. The Court was very clear that quantum cases were “eminently suited” for mediation.

Jackson ADR Guidance

There is an amusing circularity in this case. The Jackson ADR guidance states that silence in the face of a mediation offer may be classed as unreasonable. However, it does so specifically by citing the case of PGF II v OMFS in the lower courts. However, the Court of Appeal then lifted this paragraph from the Jackson ADR guide to support its reasoning that silence should be classed as unreasonable. Therefore the main support for the reasoning of the Court of Appeal is the very decision that was being appealed against in the first place!

More seriously, it is clear from PGF II that the Jackson ADR guidance is being given great weight and it would clearly be wise for all litigation lawyers to obtain a copy and make sure they understand the sections on refusal and engagement with mediation.

Measure of Penalty

It is important to note that PGF II repeats that unreasonable refusal is not an immediate costs victory for the other side, even where there has been silence. There is no “automatic result” in terms of costs penalty and it is one of the factors to be weighed. Therefore, while it is no doubt possible to perform a “mediation ambush” on a party by offering mediation and then attacking their refusal or silence this will not be a means of avoiding sanction for your own bad behaviour. Additionally, it should be noted that the lower court refused to award costs to the Claimant and the Court of Appeal dismissed the Claimant’s appeal on this point. In so doing the Court specifically limited this power to “the most serious and flagrant failures to engage with ADR.” Quite what such a flagrant failure might look like is open for speculation! It is also worth noting that while the Court of Appeal did not disturb the lower court's decision on costs it did comment that if they had made the decision they would not have deprived the Defendant of all of its costs and would only have deprived them of a proportion. While that proportion or how it might be calculated was not specified it seems clear that PGF II should be taken as a high water mark and that future cases will probably deprive those who refuse mediation unreasonably of some, rather than all, of their costs.

Conclusion

PGF II is an important decision. However, its imnportance is still not properly recognised due to the more narrow focus on silence. This in part reflects the fact that mediation has yet to fully penetrate the litigaiton scene and so approaches to it are still a little unsophisticated. No doubt this will change in time.