ADR update: Is a refusal of a serious offer to mediate ever reasonable?

Our April 2014 newsletter featured the Court of Appeal decision in PGF II SA -v- OMFS Company 1 Ltd.¹ That case was regarded by many as developing further the Halsey² principles on when a refusal to mediate will be considered unreasonable. A recent High Court decision builds on the approach taken in PGF II, illustrating just how difficult it can be to establish the reasonableness of a refusal to mediate.³

The facts

The case concerned the interpretation of a licence agreement and whether the defendant was entitled to terminate for convenience. The notice of termination had been given in November 2011. After almost two years of correspondence, the claimant commenced Part 8 proceedings and claimed £3 million in damages.

During those two years the claimant requested mediation on several occasions. The defendant always declined. However, it did offer to pay the claimant's reasonable termination costs (although the judge noted that the offer was made in the knowledge that the claimant would have difficulty in making that claim). More importantly, it did make a "drop hands" settlement offer in January 2014, once proceedings were underway.

In September 2014 Mr Justice Ramsey held that the defendant had been entitled to terminate. The claimant then sought a reduction of the defendant's recoverable costs by 50 per cent because of its unreasonable refusal to mediate.

Was the refusal to mediate unreasonable?

Mr Justice Ramsey thought that, on the facts and by reference to Halsey and PGF II principles, the defendant's refusal was unreasonable.

Although he accepted that the defendant had acted reasonably in considering that it had a strong case, he thought that only provided it with limited justification for not mediating. In reaching that conclusion, he considered the Jackson ADR Handbook, which highlights the positive effect that mediation can have in resolving disputes even if the claims have no merit. Another marginally positive factor in the defendant's favour was the fact that it had made other attempts to settle, in particular the "drop hands" offer.

However, he dismissed the arguments that the case was unsuitable for mediation. It was, in his opinion, a "classic case" for mediation. The fact that the case centred on an issue of contractual interpretation did not make it unsuitable. The dispute did not affect the continuing relationship between the parties or any issues outside the damages claimed.

He was equally dismissive of the arguments that the mediation would have been disproportionately costly with little prospect of success. He considered that the likely mediation costs of £40,000 compared favourably to the overall costs incurred of £500,000 where the claim was for £3 million. On prospects of success, he thought that the court cannot merely look at the polarised positions taken by the parties as that ignores the ability of the mediator to find middle ground. He also referred (by reference to the ADR Handbook) to the fact that the statistics show that generally mediation is likely to be successful.

Weighing up these factors, he concluded that it was unreasonable for the defendant not to mediate the dispute.

Saved by the offer?

As pointed out in PGF II, a finding of unreasonable conduct by a refusal to mediate will not automatically result in a costs penalty. It is simply one aspect of a party's conduct that has to be taken into account as part of a wider balancing exercise.

Fortunately for the defendant, the other factor Ramsey J considered was its January "drop hands" offer. While it did not justify a refusal to mediate, the fact that it made an offer which the claimant did not beat was a matter to be taken into account. Both factors meant the loss of the opportunity to resolve the case without the need for a hearing. As such, Ramsey J concluded that neither party's conduct should be taken into account. The usual "loser pays" rule therefore applied.

Will it ever be reasonable to refuse a serious offer to engage in ADR?

This case highlights how difficult it can be to establish the reasonableness of a refusal of a serious offer to mediate. Save for circumstances where the dispute is clearly unsuitable, for example, where the issues affect other parties or interests broader than the dispute, it will be difficult to satisfy the court that there was a strong reason to refuse a serious request to engage in ADR.

This tougher stance towards refusals to mediate reflects the recommendations of Lord Justice Jackson, who considered that greater encouragement for parties to mediate and a change of culture was required. Hence the publication of the ADR Handbook, to which frequent reference was noticeably made in both this case and PGF II.

That said, the courts will take other factors into account when deciding on costs and the defendant was able to rely on the offer it had made and avoid any penalty. This highlights the importance of carefully considering your strategy towards ADR and other attempts at settlement at all stages of the litigation process.

The decision is available on Bailii: http://www.bailii.org/ew/cases/EWHC/TCC/2014/3148.html

_Notes

_{¹Northrop Grumman Mission Systems Europe Limited -v- BAE Systems (Al Diriyah C4I) Limited [2013] EWCA Civ 1288.
²Halsey -v- Milton Keynes General NHS Trust [2004] EWCA Civ 576.
³[2014] EWHC 3148.}