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Fail to mediate at your peril

Those of us who act as mediators in property matters have been conscious for some time of the particular suitability of mediation as a forum in which to resolve disputes over property rights. The flexibility and breadth of the mediation process enable the parties to look beyond the strict legal principles with which a Court would be concerned and to identify and address as well the more esoteric and human issues which often lie just beneath the surface in cases involving land.

The importance of attempting to mediate if there is any reasonable prospect that a settlement might be achieved has been re-emphasised recently by Recorder Furst QC sitting as a Deputy High Court Judge in PGF II SA v OMFS Co [2012] EWHC 83 (TCC). It contains a salutary lesson for all of us about the importance placed upon mediation by the Courts and the significant risk clients are now running if they are not prepared to engage in a genuine effort to resolve their disputes through mediation or some other form of ADR. An apparently reasonable and ultimately acceptable Part 36 offer is not necessarily enough to protect them on costs thereafter.

PGF v OMFS was a case about dilapidations arising out of alleged breaches of repairing covenants in a series of underleases. It was ultimately settled on the day before trial when the Claimant accepted a Part 36 offer made by the Defendant some nine months earlier. However, the issue of costs remained live, the Claimant submitting that the Court should depart from the usual provision under CPR 36.10 on two grounds.

The first ground, concerning a failure by the Defendant to plead a point which was then taken in its outline submissions for trial, was held by the Judge to be insufficient to render the case exceptional so as to displace the usual costs consequences in CPR 36.10(5). There remained the second assertion that the Defendant should lose its costs protection because of its “unreasonable refusal to mediate”.

On that issue, the Defendant argued first that it had not actually refused to mediate at all; it had simply not responded to two requests that it should agree to mediation. The Judge gave this short shrift, apparently equating a failure to engage with the suggestion with an outright refusal for these purposes.

As for the reasonableness or otherwise of that “refusal”, the Defendant maintained that the failure of a previous attempt at mediation between these parties in a separate dispute about service charges, the Claimant’s conduct in allegedly using the present proceedings to seek to pressurise the Defendant into paying more than was due in order to bring matters to a conclusion, and the absence of expert evidence as to diminution in value when mediation was proposed all meant that there could not have been an effective negotiation at that point in time. Thus, said the Defendant, it would have acted reasonably in refusing to mediate then in any event.

The Judge adopted the principles set out in Lumb v Hampsey [2011] EWHC 2808 (QB), Kunaka v Barclays Bank plc [2010] EWCA Civ 1035, and Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576. The fundamental question for the Court was therefore whether the usual costs order under CPR 36.10(5) would be unjust in the circumstances, taking into account by analogy the matters set out in the guidance to CPR 36.14(4), and noting that in a case of late acceptance of a Part 36 offer those circumstances would need to be exceptional in order to justify a departure from the general rule. A refusal to mediate would potentially be justifiable in a case where, for instance, a mediation would truly have no real prospect of success, but to adopt a negative or, it seems, even a noncommittal attitude towards attempting mediation puts a party at risk of a finding that they have acted unreasonably in so doing. If the Court has seen fit to encourage the parties to try ADR, that risk is significantly increased. However, a small ray of hope is provided for those reluctant to mediate: the burden lies on the party seeking to avoid the usual order for costs to establish that a refusal to mediate was unreasonable in the circumstances; it is not incumbent upon the refusing party to justify their choice, albeit sensible that they should provide evidence to that effect so as to challenge the other’s contention. The six factors which the Court should consider within its broader analysis of circumstances in determining whether a party has acted unreasonably in refusing to mediate are:- (1) the nature of the dispute; (2) the merits of the case; (3) the extent to which other settlement methods have been attempted; (4) whether the costs of ADR would be disproportionately high; (5) whether any delay in setting up and attending ADR would have been prejudicial; and (6) whether the ADR had a reasonable prospect of success.

Applying those principles to the facts of PGF v OMFS, the Judge concluded that the Defendant’s refusal by silence was unreasonable. He noted in particular that whilst the Claimant was obliged to show that a mediation would have had real prospects of success that did not require the Court to be satisfied that it would in fact have produced a settlement. In his opinion, even though not all information was necessarily to hand at that time, there was a reasonable prospect that those parties well advised by experienced lawyers as they were would have been able to thrash out a deal. He also placed some weight upon the failure of the Defendant to raise in correspondence as arguments against mediation at the time it was proposed matters (such as the previous conduct of the Claimant in mediating another dispute and the absence of expert evidence) upon which they subsequently sought to rely to demonstrate that a mediation would not have succeeded at that point.

What, then, is the lesson to be taken from this decision? In reality, its value is as a clear restatement of the importance of being seen to do the right thing, and of the present willingness of the judiciary to punish those who fail without articulated good reason to avail themselves of the opportunity to resolve disputes otherwise than through the Courts. An effective mediator can often make a significant difference in a property case, seeking to focus the parties on the realities open to them rather than the “principles” at stake. That option should not be discarded lightly. Whilst there may be proper reasons not to take an individual case to mediation either generally or at a particular stage, it is crucial that the option of ADR is explored regularly, and that the reasons for any refusal to attempt it are clearly set out in correspondence. Equally, if the other side is unwilling to consider mediation, one should think seriously about exposing that position in correspondence even where a Part 36 offer has been made, so as to enhance protective submissions on costs in due course.