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12 November 2013
In PGF II SA v OMFS Co(1) the Court of Appeal extended the guidelines set out in Halsey v Milton Keynes General NHS Trust(2) concerning whether an unreasonable refusal to engage in alternative dispute resolution (ADR) justifies the imposition of a costs penalty. The court held that failure to respond to repeated invitations to participate in ADR was inherently unreasonable and should attract a costs penalty, regardless of whether a reasoned outright refusal would have been justifiable.
The claimant, PGF II SA, brought proceedings in October 2010 against OMFS Company 1 Limited, claiming approximately £1.9 million for alleged breaches of repairing covenants.
On April 11 2011 the claimant made the defendant a Part 36 offer of £1.25 million and separately invited the defendant to engage in mediation. On the same day, the defendant made its own Part 36 offer of £700,000, but did not respond to the claimant's mediation request.
In July 2011 the claimant repeated its request for the defendant to engage in mediation, but the defendant again failed to respond.
On January 10 2012, the day before the trial, the claimant accepted the defendant's April Part 36 offer. Ordinarily, on acceptance of the Part 36 offer, the claimant would be obliged to pay the defendant's costs for the "relevant period" (as defined in Civil Procedure Rule 36.10), which in this case began 21 days after the defendant had made its offer.
In Halsey the Court of Appeal set out guidelines on the circumstances in which a court can impose a costs penalty against a successful party on the grounds that it had refused to take part in ADR. The court concluded that the imposition of such a penalty may be justified if the other party can show that the successful party acted unreasonably in refusing to agree to ADR.
At first instance, the judge considered Halsey and concluded that:
He therefore deprived the defendant of the right to recover all of its costs incurred during the relevant period.
The defendant appealed the decision, arguing that it should not have been deprived of its costs. The claimant cross-appealed, claiming that the judge had not gone far enough and the defendant should in fact pay the claimant's costs for the relevant period.
The Court of Appeal extended the guidelines in Halsey, holding that, as a general rule, silence in the face of an invitation to participate in ADR is of itself unreasonable. In PGF the defendant's silence in the face of two requests to mediate was clearly unreasonable and sufficient to warrant a costs penalty without the need for a point-by-point analysis of the Halsey guidelines.
The court's reasoning was twofold. First, it found that it would be impractical to determine retrospectively whether the successful party's reasons for refusing to participate in ADR were sensible and genuine. Second, it held that failure to provide reasons for a refusal to engage in ADR is contrary to the court's objective of encouraging parties to engage in ADR.
In respect of the amount of the costs penalty, the court noted that it is clear from Halsey and subsequent case law that it has a wide discretion to disallow anything from the whole to a modest part of the otherwise successful party's costs. It noted that there was no recognition in Halsey that the court might go further and make an order that the otherwise successful party pay all or part of the unsuccessful party's costs. Despite this, the court concluded that in principle, a court must have such power, although it is a sufficiently draconian measure that it should be reserved for only the most serious and flagrant failures to engage in ADR – for example, where the court takes it upon itself to encourage the parties to engage in ADR and its encouragement is ignored.
In PGF the court found that the first-instance judge's decision to deprive the defendant of the whole of its costs during the relevant period was within the range of proper responses to the seriously unreasonable conduct that the judge identified.
This case clearly illustrates the potential costs risks of ignoring requests by an opponent to engage in ADR. The Court of Appeal was highly critical of the claimant for not accepting the defendant's Part 36 offer when it was made, rather than nine months later, by which time the parties had between them incurred £500,000 in additional costs. To put that figure into context, at the time that the defendant made its Part 36 offer, the parties had been only £550,000 apart. However, notwithstanding its criticism, the Court of Appeal was still prepared to uphold the decision of the first-instance judge to deprive the defendant of its costs.
This case underlines the point that if an opponent suggests engaging in ADR, the safest course of action is to do so. Even if a party is resolute that it does not wish to participate in the suggested ADR, it should provide a substantive reasoned response explaining why it holds that view, rather than simply ignoring the request.
For further information on this topic please contact Simon Hart or Chris Whitehouse at RPC by telephone (+44 20 3060 6000), fax (+44 20 3060 7000) or email (email@example.com or firstname.lastname@example.org). The RPC website can be accessed at www.rpc.co.uk.
(1)  EWCA Civ 1288.
(2)  EWCA Civ 576,  1 WLR 3002.
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