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ADR and costs

To say that there can be costs consequences for failing to engage in ADR is hardly news but it is something that is always worth remembering and, if you don’t remember it, there is a good chance that the court will remind you!

We are constantly told that costs must be proportionate and with the advent of costs budgeting we know that the court can take a very strong line in disallowing costs which appear to be wholly disproportionate – see by way of example the important recent costs budgeting decision of Coulson J in CIP Properties (AIPT) Ltd v Galliford Try Infrastructure Ltd. It can be anticipated that courts will look favourably on the ADR section of the budget and that refusals to engage with ADR will continue to be met by adverse costs consequences or, at least, the threat of the same.

Whilst the Court of Appeal’s decision in Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 is now more than 10 years old, it is still the starting point when considering the possible costs consequences of refusing ADR.

The issue in Halsey was whether a party who had been refusing ADR should be penalised in costs. Dyson LJ held:

“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 then identified some of the factors which fall to be considered when addressing the issue as to whether or not a refusal to agree to ADR is to be regarded as having been unreasonable:

“The question whether a party has acted unreasonably in refusing ADR must be determined having regard to all the circumstances of the particular case. 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. We shall consider these in turn. We wish to emphasise that in many cases no single factor will be decisive, and that these factors should not be regarded as an exhaustive check-list.”

Halsey was revisited 10 years later in PGF II SA v OMFS Co 1 Ltd [2014] 1 W.L.R. 1386 where Briggs LJ gave some guidance about how to respond to a request for mediation when you don’t want a mediation!:

“The ADR Handbook, first published in 2013, after the period relevant to these proceedings, sets out at length in para 11.56 the steps which a party faced with a request to engage in ADR, but which believes that it has reasonable grounds for refusing to participate at that stage, should consider in order to avoid a costs sanction. The advice includes: (a) not ignoring an offer to engage in ADR; (b) responding promptly in writing, giving clear and full reasons why ADR is not appropriate at the stage, based if possible on the Halsey guidelines; (c) raising with the opposing party any shortage of information or evidence believed to be an obstacle to successful ADR, together with consideration of how that shortage might be overcome; (d) not closing off ADR of any kind, and for all time, in case some other method than that proposed, or ADR at some later date, might prove to be worth pursuing. That advice may fairly be summarised as calling for constructive engagement in ADR rather than flat rejection, or silence.”

Again by reference to the ADR Handbook Briggs LJ made clear that silence was rarely an option:

“In my judgment, the time has now come for this court firmly to endorse the advice given in para 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 of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds. I put this forward as a general rather than invariable rule because it is possible that there may be rare cases where ADR is so obviously inappropriate that to characterise silence as unreasonable would be pure formalism. There may also be cases where the failure to respond at all was a result of some mistake in the office, leading to a failure to appreciate that the invitation had been made, but in such cases the onus would lie squarely on the recipient of the invitation to make that explanation good.”

Yet the Court also made clear that it did not automatically follow that the successful party that had rejected mediation would be deprived of their costs:

“… a finding of unreasonable conduct constituted by a refusal to accept an invitation to participate in ADR or, which is more serious in my view, a refusal even to engage in discussion about ADR, produces no automatic results in terms of a costs penalty. It is simply an aspect of the parties' conduct which needs to be addressed in a wider balancing exercise. It is plain both from the Halsey case [2004] 1 WLR 3002 itself and from Arden LJ's reference to the wide discretion arising from such conduct in SG v Hewitt [2013] 1 All ER 1118 , that the proper response in any particular case may range between the disallowing of the whole, or only a modest part of, the otherwise successful party's costs.

52 There appears no recognition in the Halsey case that the court might go further, and order the otherwise successful party to pay all or part of the unsuccessful party's costs. While in principle the court must have that power, it seems to me that a sanction that draconian should be reserved for only the most serious and flagrant failures to engage with ADR, for example where the court had taken it on itself to encourage the parties to do so, and its encouragement had been ignored. In the present case the court did not address the issue at all. I therefore have no hesitation in rejecting Mr Seitler's submission that the judge did not go far enough in penalising the defendant's refusal to engage with ADR.”

Briggs LJ also in fairly robust terms made clear that failing to engage in ADR was wasting court resources and that parties should not need encouragement from the courts to engage in ADR they should just get on with it:

“… 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 on 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 on 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.”

In the recent decision in Laporte v The Commissioner of Police of the Metropolis [2015] EWHC 371 (QB) Turner J went through the various factors discussed in Halsey namely (i) the nature of the dispute, (ii) whether other settlement methods had been attempted, (iv) the cost of mediation, (v) delay, (vi) whether mediation had a reasonable prospect of success and concluded that there was a reasonable chance that ADR would have been successful in whole or in part and that the Commissioner was not justified in coming to a contrary conclusion. Turner J disallowed one third of the defendant’s costs as a result.

In Northrop Grumman Mission Systems Europe Ltd v BAE Systems (Al Diriyah C4I) Ltd [2014] EWHC 3148 (TCC) Ramsey J found that where a party rejects mediation in circumstances in which there are reasonable prospects of resolving the litigation by mediation, that conduct will generally be unreasonable. However CPR 44.2(4)(c) provides that a circumstance to take into account, when considering what order for costs to make, includes any admissible offer, being one to which the costs consequences of Part 36 apply. Here the winning party's conduct had been unreasonable in having refused to mediate, but the loser's conduct in not accepting an offer which it did not better was similarly a matter to take into account. It followed that the fair and just outcome was that neither party's conduct would be taken into account in deciding whether to modify the general rule on costs that the loser would pay the winner's costs without reduction.

In Garritt-Critchley v Ronnan [2014] EWHC 1774 (Ch) the defendants were ordered to pay the claimants' costs on an indemnity basis, as their failure to engage in mediation or any other serious alternative dispute resolution had been unreasonable. Judge Waksman QC made the observation about one of the objections that is sometimes made to mediation:

“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.”

So what are the lessons to be learned from these recent decisions?

  1. Bearing in mind all judges at all levels were given a copy of the ADR Handbook it is a good idea to be familiar with the same.
  2. A refusal to mediate may have adverse costs consequences but it does not follow automatically – it is one of several factors.
  3. If you are going to refuse mediation set out a reasoned response as to why it is not appropriate and leave open the possibility of mediating at a later stage giving reasons why that later stage is the appropriate one.
  4. If you lose and the other side refused ADR seek an order for costs that reflects that refusal.