Tom White and William Glynn of Clyde & Co LLP provide comment on the implications of recent Court decisions on parties contemplating the merits of engaging in alternative dispute resolution (ADR).
It is a long-standing principle endorsed by the Courts that parties to litigation should seek to resolve their differences without recourse to contested hearings. Claims which could (and should) be settled but are instead taken all the way through to judgment represent an enormous use (and sometimes waste) of public resources, creating pressure and delays in respect of perhaps more complex matters which can only be determined by a Judge. Limiting the costs of litigation is also at the forefront of the Court's procedural objectives, and requirements or encouragement to consider ADR are, for example, contained in the Pre-Action Protocols, and in a number of the Court Guides.
There is therefore significant impetus for parties to seek to resolve their claims before they come before the Court. The recent Interim Report of the Civil Justice Council on "ADR and Civil Justice" suggests that there may be merit in the Court being "more interventionist at an earlier stage" in encouraging parties to mediate, although it stopped short of proposing compulsory mediation.
Parties who fail to act reasonably, including failing to accept a reasonable offer of settlement or unreasonably refusing to mediate, can find themselves with a pyrrhic victory even if their claim or defence is successful, because there may be a sting in the tail as a result of a potentially significant adverse costs order. Applying this form of costs sanction is relatively rare, hence the Civil Justice Council endorsing increased intervention regarding ADR.
Factors to take into account – is a refusal to mediate reasonable?
The leading authority on whether it is reasonable for a party to refuse to mediate is Halsey v Milton Keynes General NHS Trust  EWCA Civ 576. The defendant NHS Trust had been wholly successful, and the claim had been dismissed. However, the Trust had repeatedly refused a number of invitations to mediate. The unsuccessful claimant therefore sought a decision that there should be no order as to costs, to reflect this conduct.
The Court of Appeal did not consider that a costs sanction would be appropriate on the facts in Halsey. However, it did provide useful guidance as to what factors would be taken into account in determining whether it was reasonable to refuse an offer of mediation. These factors are the nature of the dispute, the merits of the case, other settlement attempts, the costs and potential delays of ADR and the prospects of ADR being successful.
The sound of silence
The Court of Appeal decision in PGF II SA v OMFS Company 1 Limited  EWCA Civ 1288 dealt with the consequences of a failure even to respond to a suggestion of mediation.
During the course of the litigation, the claimant had proposed mediation. The defendant did not respond. Shortly before trial, the claimant accepted a Part 36 offer which the defendant had made, with costs to be determined. The claimant argued that the defendant's silence in the face of an invitation to mediate was unreasonable conduct by reason of which the defendant should be precluded from recovering part of its costs. The Court of Appeal agreed, highlighting the danger of failing to engage with proposals for ADR.
These cases have given rise to a paradox. Whilst the Courts take great trouble to seek to reduce litigation costs, litigants now often feel obliged to incur the (often considerable) expense of mediation for fear of being penalised on costs even if they consider it unlikely that the claim will settle at mediation.
Two recent cases appear to show the Court taking a lenient approach in favour of a successful party which has declined to mediate.
In Gore v Naheed & Anor  EWCA Civ 369, the unsuccessful party was ordered to pay the costs of the successful party, despite the successful party having refused an offer of mediation. On appeal, the paying party sought to argue that some "allowance" in respect of costs should be made to reflect the refusal to mediate. The Court of Appeal disagreed.
Patten LJ said that he had "some difficulty in accepting that the desire of a party to have his rights determined by a court of law in preference to mediation can be said to be unreasonable conduct particularly when, as here, those rights are ultimately vindicated." He further noted that "a failure to engage, even if unreasonable, does not automatically result in a costs penalty. It is simply a factor to be taken into account by the judge when exercising his costs discretion".
Patten LJ's decision was that "[the successful party's] solicitor considered that mediation had no realistic prospect of succeeding and would only add to the costs. The judge said that he considered that the case raised quite complex questions of law which made it unsuitable for mediation. His refusal to make an allowance on these grounds cannot in my view be said to be wrong in principle."
This case was considered in the Interim Report of the Civil Justice Counsel to be "an excellent prompt for discussion between stakeholders" in ADR.
Another recent case where this issue was considered was Parker Lloyd Capital Ltd v Edwardian Group Limited (27 October 2017, unreported). A successful defendant had refused an offer to mediate, on the basis that there was no merit in doing so because it would not have accepted any offer, was confident that the claim would fail, and considered that the offer of mediation was designed simply to extract a nuisance settlement offer, which the defendant would not be willing to make. It argued that it was therefore justified in refusing to mediate, because it would have been a waste of costs. The decision not to mediate was taken even though at a CMC the Master had noted that there would be risks in refusing to do so.
The Court held that the claimant had failed to show that the refusal to mediate had been unreasonable, and accordingly refused to order any reduction of the defendant's costs on this basis.
A party may feel that it would be justified in refusing an invitation to mediate, perhaps because there is good reason to believe that a mediation would be unsuccessful such as the other side's complete intransigence or unrealistic expectation of damages. However, there is a risk that in making a refusal the court will later determine that the decision was unreasonable (an outcome that would only be known at the conclusion of the case).
These recent cases offer a degree of reassurance for parties who are in doubt as to the merits of engaging in ADR. Patten LJ's comments in Gore v Naheed suggest that the burden of proving that a refusal to mediate was unreasonable is a heavy one.
However, the risk of costs sanctions cannot be ignored. Before refusing to mediate, parties should carefully consider the factors set out in Halsey, and would be well advised to articulate their reasons for refusing in correspondence at the time. They might also consider alternative, cheaper, forms of ADR such as a (time-limited) without prejudice meeting, the party's representatives having a without prejudice telephone discussion to explore whether there is any room for compromise or engaging in without prejudice correspondence.
The consultation on the Civil Justice Council's Interim Report closed on 15 December 2017, and the results are awaited with interest. Compulsory ADR still seems a long way off, but increased intervention from the Courts may bring it a step closer.
This article is reproduced with kind permission from the authors and appeared in Lexology in December 2017.