PGF II SA v OMFS Company 1 Ltd

A party which receives a serious invitation to participate in alternative dispute resolution (ADR) must normally engage with it. Silence is, as a general rule, unreasonable conduct of litigation, even if a reasoned refusal, a different ADR process, or ADR at a later stage could have been justified. Rare exceptions may arise where ADR is plainly inappropriate or where the recipient proves that the invitation was overlooked through an office error.

An unreasonable refusal or failure to engage does not dictate a particular costs order. It is a relevant element in the court’s broad discretion. The sanction must follow an overall balancing exercise and may range from a modest disallowance of costs to, in a sufficiently serious and flagrant case, an order that the otherwise successful party pay some of the other party’s costs.

The claimant landlord brought a dilapidations claim against its former tenant. The tenant relied principally on Landlord and Tenant Act 1927 section 18 and made a Part 36 offer. The claimant made two written invitations to mediate, each of which the tenant ignored.

The claimant eventually accepted the tenant’s offer immediately before trial. Recorder Furst QC deprived the tenant of its costs for the relevant period because its silence amounted to an unreasonable refusal to mediate, but declined to order it to pay the claimant’s costs. The tenant appealed and the claimant cross-appealed. The central issue was the costs response to a party which simply fails to answer a serious invitation to participate in ADR.

1. Appeal and cross-appeal dismissed. Briggs LJ, with McFarlane LJ and Maurice Kay LJ agreeing, upheld the order depriving the defendant of its costs for the relevant period.

2. The court endorsed a modest extension of the principles in Halsey v Milton Keynes General NHS Trust [2004] 1WLR 3002. Silence in response to a serious ADR invitation is generally unreasonable in itself. The rule is not invariable: ADR may be so plainly unsuitable that a response would be a formality, and a genuine office mistake may explain silence. The recipient bears the onus of proving such an explanation.

3. Silence creates forensic difficulty by permitting reasons for refusal to be advanced only retrospectively. More importantly, it prevents the parties from addressing obstacles to ADR. A reasoned response may identify missing information, an unsuitable form or timing of ADR, disproportionate expense, or a preferable process. Constructive engagement may lead to settlement, narrower issues, a different ADR process, or an early determination of a discrete legal issue.

4. In any event, the repeated silence was properly treated as a refusal. Applying the non-exhaustive Halsey factors, the refusal was unreasonable. The dispute was suitable for mediation, the Part 36 offers did not establish either party’s bottom line or a reasonable belief in the strength of its case, and the parties’ offers had been converging. The valuation issues and likely future costs gave ADR a reasonable prospect of success.

5. An unreasonable refusal to engage in ADR produces no automatic costs consequence. It is one matter in a broad discretionary balancing exercise. Although the judge might have explained that balance more expressly, deprivation of all the defendant’s costs for the relevant period was within the proper range of responses. An order requiring an otherwise successful party to pay the other party’s costs is available in principle, but should be reserved for serious and flagrant failures, such as ignoring the court’s own encouragement to use ADR.

• Court of Appeal (Civil Division) Dismissed the defendant’s appeal and the claimant’s cross-appeal, affirming the costs sanction: [2013] EWCA Civ 1288.

• High Court, Technology and Construction Court Recorder Furst QC held that the defendant’s silence amounted to an unreasonable refusal to mediate. He deprived it of its costs for the relevant period but did not order it to pay the claimant’s costs.