What Is An Unreasonable Refusal To Mediate?

There has been a number of cases dealing with the question of refusal to mediate. Philip Hesketh summarises on cases dealing with costs consequences of refusing to mediate.

It has been long established law that the courts can penalise a party in costs for unreasonably refusing to mediate. A string of recent cases all demonstrate that the courts are becoming less tolerant of parties who refuse to mediate so now is a good time to review the position.

Halsey v Milton Keynes General NHS Trust

CPR 44.4 deals with factors the court should take into account in deciding the amount of costs. It includes at (3) (a) (ii)

“the efforts made, if any, before and during the proceedings in order to try to resolve the dispute;”

In the oft quoted case of Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 5761 the Court of Appeal confirmed that a party which unreasonably refused to mediate could be penalised in costs. Dyson LJ said at paragraph 13:

“In deciding whether to deprive a successful party of some or all of his costs on the grounds that he has refused to agree to ADR, it must be borne in mind that such an order is an exception to the general rule that costs should follow the event. In our view, the burden is on the unsuccessful party to show why there should be a departure from the general rule. The fundamental principle is that such departure is not justified unless it is shown (the burden being on the unsuccessful party) that the successful party acted unreasonably in refusing to agree to ADR.”

The Court rejected an argument put forward by the Civil Mediation Council that there should be a presumption in favour of mediation, saying, at paragraph 16:

“We accept the submission of the Law Society that factors which may be relevant to the question whether a party has unreasonably refused ADR will include (but are not limited to) the following:
a. the nature of the dispute;
b. the merits of the case;
c. the extent to which other settlement methods have been attempted;
d. whether the costs of the ADR would be disproportionately high;
e. whether any delay in setting up and attending the ADR would have been prejudicial; and
f. whether the ADR had a reasonable prospect of success.”

The effect of the case was to put the burden on the unsuccessful party to show unreasonableness. In addition the court provided a non-exhaustive list of reasons that could be used to justify a refusal to mediate. The advice to any party wishing to decline an invitation to mediate was to explain it on the basis of one, if not more, of the Halsey reasons.
Many commentators criticised the judgment suggesting the combination of the Halsey reasons and the burden being on the unsuccessful party meant that it was difficult to establish an unreasonable refusal. However three recent cases seem to show those objections look more and more unfounded.

PGF II SA v OMFS Company 1 Ltd

In PGF II SAy OMFS Company 1 Ltd [20131 EWCA Civ 12882 the Technology and Construction Court at first instance departed from the usual costs rule under Part 36. The claimant accepted a Part 36 offer nearly 12 months after it was made and just one day before the trial was due to start. In the interim both parties had incurred a further £250,000 in costs. The court made no order for costs from 21 days after the Part 36 offer thus depriving the defendant of a significant sum.

The reason for the penalty was that the defendant had completely ignored the claimant’s offer to mediate. The court held that their silence amounted to a refusal and the refusal was unreasonable.

The decision was upheld on appeal. Briggs U said at paragraph 34:

“In my judgment, the time has now come for this court firmly to endorse the advice given in Chapter 11.56 of the ADR Handbook, 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 0fADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds.”

The court went on to examine the two Halsey reasons the defendant put forward in support of their argument that the refusal to mediate was reasonable. Firstly it argued the merits of the case. It made a Part 36 offer and left it until trial without further adjustment. This demonstrated defendant’s belief in the strength of its case, a belief which, since the claimant eventually accepted it, could not have been otherwise than reasonable. This was dismissed by Briggs U as follows:

“First, it is in my view simply wrong to regard a Part 36 offer, without any supporting explanation for its basis, as a living demonstration of a party’s belief in the strength of its case. As! have said, defendants’ Part 36 offers are frequently made at a level below that which the defendant fears having to pay at trial, in the hope that the claimant’s appetite for, or ability to undertake, costs risk will encourage it to settle for less than its claim is worth.”
The second ground the defendant sought to rely upon was that the mediation had no reasonable prospect of success. This was based on the gap between the parties’ respective Part 36 offers, described by the defendant as their respective bottom lines. This was rejected. The court did not regard Part 36 offers as representing bottom lines so there was no unbridgeable gap and the history of the offers, considered objectively, showed the parties were “converging at a rate which made a mediation or some other form 0fADR highly appropriate”.

Garritt-Critchley and Others v Ronnan and Solarpower PV Limited

In Garritt-Critchley and Others v Ronnan and Solarpower PV Limited [2014] EWHC 1774 (ChJ3 Judge Waksman QC in the High Court awarded indemnity costs against a defendant that accepted the claimant’s Part 36 offer after a trial but before judgment had been delivered. The judge described the case as requiring a fact and evidence intensive exercise where the court would have to the credibility of witnesses and importance of documents. It required the parties to risk assess carefully whether or not their case would prevail. There was an obvious sliding scale of possible awards, it wasn’t an all or nothing case.

The defendant sought to rely on a number of the Halsey grounds, all of which were dismissed by the judge. They were as follows:

a) The nature of the dispute.
The defendant argued there was no natural middle ground because the outcome depended on whether a concluded agreement was reached. The judge described it as misconceived to consider mediation to be unsuitable because of difference of opinion on a binary issue.
b) The merits of the case.
The court on the facts did not think it reasonable for the defendant to be so confident in its case. It noted that no application for summary judgment had been made. The judge also quoted Lightman J in Hurst v Leeming [20021 EWHC 1051 (Ch)4 ““The fact that a party believes that he has a watertight case again is no justification for refusing mediation. That is the frame of mind of so many litigants.”
c) Whether the mediation had a reasonable prospect of success. The defendant considered the six figure gap in the parties’ respective valuations which existed for a large part of the litigation was evidence a settlement at mediation was unlikely. The judge said at paragraph 22 “Parties don ‘t know whether in truth they are too far apart unless they sit down and explore settlement. If they are irreconcilably too far apart, then the mediator will say as much within the first hour of mediation. That happens very rarely in my experience.”
d) Whether the costs of the ADR would be disproportionately high. After the claimant had offered £10,000 to settle the claim the defendant refused to mediate on the basis that a day in mediation may cost as much as the offer. The judge rejected that saying the comparison should have been made to the costs of trial, not the offer. The parties’ figures showed a mediation would have cost significantly less than the trial did.

Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C41) Ltd (No 2)

The most recent in this line of cases is Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C41) Ltd (No 2) [20141 EWHC 3148 (TCCJ5. In this case the court held the defendant was entitled to terminate a Licence Agreement under the true construction of the provisions of Clause 10.4 of the Enabling Agreement which governed the Licence Agreement. Accordingly the defendant was entitled to its costs but the claimant argued those costs should be reduced by 50% by reason of the defendant’s unreasonable refusal to mediate the dispute.

Ramsey J accepted BAE reasonably considered that it had a strong case and on the merits decided that this was “a factor which provides some but limited justification for not mediatinp”. On this issue the judge commented:

“As stated in Halsey, the fact that a party reasonably believes that it has a watertight case may well be sufficient justification for a refusal to mediate.

The authors of the Jackson ADR Handbook properly, in my view, draw attention at paragraph 11.13 to the fact that this seems to ignore the positive effect that mediation can have in resolving disputes even if the claims have no merit. As they state, a mediator can bring a new independent perspective to the parties if using evaluative techniques and not every mediation ends in payment to a claimant.”

The court concluded that notwithstanding this reasonable belief the defendant’s refusal to mediate was unreasonable. It said at paragraph 71:

“This is therefore a case where the nature of the case was susceptible to mediation and where mediation had reasonable prospects of success. However, BAE reasonably considered that it had a strong case. On that basis was it unreasonable for BAE to reject NGM’s offer to mediate?! have come to the conclusion that it was. Whilst BAE’s view of their claim provided some justification for not mediating,! consider that the other factors show that it was unreasonable for BAE not to mediate the dispute. Whilst BAE point out that the matter was resolved by a comparatively short Part 8 hearing, even that would have been likely to have been avoided by the use of mediation.
Where a party to a dispute, which there are reasonable prospects of successfully resolving by mediation, rejects mediation on grounds which are not strong enough to justify not mediating, then that conduct will generally be unreasonable. I consider that to be the position here.”

The defendant escaped a costs penalty, notwithstanding the unreasonable refusal to mediate, as their conduct was mitigated by the claimant’s conduct in failing to accept a “without prejudice save as to costs” offer made by the defendant.

Conclusion

The courts are now more likely to use costs sanctions against parties who refuse to mediate. The perceived burden of showing a refusal to mediate is unreasonable appears to have been eased by these recent decisions.

What is the driver behind this move? Most likely it is the current lack of funding in the court service. Briggs U acknowledged the point in PGF:

“Thirdly, the constraints which now affect the provision of state resources for the conduct of civil litigation (and which appear likely to do so for the foreseeable future) call for an ever-increasing focus upon means of ensuring that court time, both for trial and for case management, is proportionately directed towards those disputes which really need it, with an ever-increasing responsibility thrown upon the parties to civil litigation to engage in ADR, wherever that offers a reasonable prospect of producing a just settlement at proportionate cost. Just as it risks a waste of the court’s resources to have to try a case which could have been justly settled, earlier and at a fraction of the cost by ADR, so it is a waste of its resources to have to manage the parties towards ADR by robust encouragement, where they could and should have engaged with each other in considering its suitability, without the need for the court’s active intervention.”

October 22, 2014

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