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Litigation costs – penalty for failure to mediate

    • Real estate dispute resolution
    • Real estate litigation


    PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288

    Parties to litigation will need to review their files to ensure they are not at risk of serious costs penalties as a result of this Court of Appeal decision. It is established that an unreasonable rejection of a suggestion to submit to alternative dispute resolution (“ADR”) may lead to a costs penalty; this principle is now extended to a failure to respond at all to the suggestion.

    In this dispute there were competing Part 36 offers (to settle), but additionally two offers by the claimant to refer the claim to mediation. The defendant failed to respond to both of them. On the day before trial, the claimant accepted the defendant’s Part 36 offer.

    The usual costs consequence of accepting a Part 36 offer at this late stage would be that the claimant would be liable to pay the defendant’s costs incurred after expiry of the period for acceptance of the offer. However, the High Court held that the defendant’s failure to respond to the claimant’s offers of mediation amounted to a refusal of them, which in this case was unreasonable. The usual costs order should therefore be departed from, and each party should bear its own costs incurred after the expiry of the defendant’s offer.

    The Court of Appeal, upholding the High Court’s decision, emphatically endorsed the need to consider ADR, and confirmed that any unreasonable refusal to embark on ADR will allow the court to depart from the usual costs rules. The court stated that “silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether a refusal… might have been justified”. The court was also insistent that if there are reasonable grounds for refusing ADR, these have to be expressed and addressed at the time that ADR is offered. The court cannot retrospectively assess the reasonableness of a refusal.

    The emphasis on ADR is a key element of the Jackson reforms, reflected in the recent publication of the Jackson ADR Handbook, prepared on the recommendation of Lord Justice Jackson. ADR is expected to play a vital role in reducing the use of the courts’ resources and costs. This case clearly confirms that the courts will not tolerate parties unreasonably failing to consider ADR. It is wise to revisit any previous offers of ADR to ensure that responses have been given and any refusals have been fully justified. Undoubtedly, there will be cost consequences for not fully responding to an offer to mediate even if it may be entirely reasonable to do so.

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