UK Court of Appeal: Mediation, a pre-requisite to litigation?

In PGF II SA v OMES Company 1 Ltd [2013] EWCA Civ 1288, the England and Wales Court of Appeal (Civil Division) confirmed on 23 October 2013, the finding in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002 that an unreasonable refusal to participate in ADR is a form of unreasonable conduct to which the court may properly respond by imposing cost sanctions and further detailed the determination of and rationale behind these cost sanctions.

In the present case, the defendant took assignments of office leases for several floors of a building. The leases imposed full repairing liability on the tenant. On expiry of the leases, the claimant took issue as to dilapidations and the dispute was referred to the Chancery Division. At or shortly before the commencement of the proceedings, the claimant made an offer to settle. The parties exchanged emails and the Claimant made a second offer. It also invited the Defendant to agree to mediation by separate letter. Although the parties exchanged numbers, no CPR Part 36 offer was accepted by either of the parties and the Claimant’s invitation to mediate, which was subsequently reiterated, received no response whatsoever from the Defendant.

The trial judge acceded to the claimant’s application for a costs sanction on the ground that the defendant had no reasonable argument to refuse to mediate. The defendant was granted permission to appeal “on the ground that the application of the Hasley case to the facts might be of potentially wide importance”.

The Court examined the development of mediation since the Hasley case in light of the Jackson ADR handbook, which was prepared and published in response to an invitation in LJ Jackson’s review of Civil Litigation Costs, which arose from the conclusion that “a culture change was needed among the civil litigation community, so that the widespread benefits of participating in ADR were better recognised”.

The Court noted that CPR Part 36 is “itself designed to encourage the parties to make, and promptly to accept, realistic offers of settlement” and to “provide parties with a measure of protection against costs risk”. It pointed out that the Halsey case addressed the extent to which a court could use its powers to encourage parties to settle their disputes. Since Halsey, (i) mediation has achieved a “remarkable level of success, (ii) although ADR must be endorsed, it is still “insufficiently understood” and “under-used” and (iii) constant effort has to be made on means to ensure that court time is “proportionately directed towards those disputes which really need it” due to the “constraints which now affect the provision of state resources for the conduct of civil litigation”.

Turning to the case, the Court explained that the defendant resisted the ‘unreasonable refusal to engage in ADR’ basis for a special costs order on three grounds: (i) silence does not amount to denial, (ii) deemed refusal cannot be unreasonable and (iii) since the expenditures of each side “during the relevant period was attributable to the claimant’s failure to accept a reasonable Part 36 offer until the day before trial, no departure from the Part 36 costs consequences should be ordered”.

The Court first firmly stated that, as a general rule, “silence in the face of an invitation to participate in ADR is (…) 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”, because, inter alia, (i) the real objective of the encouragement to consider ADR is destroyed by the failure to provide reasons for a refusal and (ii) parties and the courts may save time by engaging in a number of alternative directions, which may be discovered during the ADR process.

Therefore, the Court found that the defendant’s silence faced with two requests to mediate was “in itself unreasonable conduct of litigation sufficient to warrant a costs sanction”, although this penalty is not automatic: it is “an aspect of the parties’ conduct which needs to be addressed in a wider balancing exercise”.

In this instance, the Court stated it would not have ordered the defendant to pay the whole of the costs because, on the merits, he won. Nonetheless, discretion being “clearly that of the judge”, the Court decided to maintain de Judge’s decision as regards the amount of the sanction, explaining that “this case sends out an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR (…). The court’s task in encouraging the more proportionate conduct of civil litigation is so important in current economic circumstances that it is appropriate to emphasize that message by a sanction which (…) operates pour encourager les autres (sic)”.

This decision is the latest in a movement which originated with Directive 2008/52/EC on mediation in civil and commercial matters: several States, including the United Kingdom and Italy, took the occasion of the transposition of this directive to render, step by step, ADR processes compulsory prior to initiating court procedures.

This trend clearly differs from that adopted by French law, which is particularly attached to the consensual nature of ADR. Therefore, under French law, there is no obligation to participate in ADR when invited to. However, when the parties have undertaken to submit a dispute to ADR prior to arbitration or litigation, failure to do so renders a claim inadmissible under Articles 122 et seq. of the French Code of Civil Procedure (French Supreme Court, Mixed Chamber, 14 February 2003, n° N 00-19.423 and P 00-19.424).

In the current economic times, one may wonder whether the French judges should be influenced by this decision.

The decision is available here.

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