Penalising costs for refusing to enter into ADR

Must parties to a dispute entertain ADR before litigating and what are the consequences if one party refuses? The case of Murray and another v Bernard develops this area of law.
The Admiralty and Commercial Court Guide (paras G1.1 and G1.4), the Chancery Division Guide (paras 17.1 and 17.4), the Queen’s Bench Guide (para 6.6.1) and the Technology and Construction Court Guide (paras 2.4.3 and 7.1.3) state that legal representatives should:
(1) in all cases consider with their clients and the other parties the possibility of attempting to resolve the dispute or issue(s) by ADR; and that
(2) they should ensure that their clients are fully informed as to the most cost-effective means of resolving their dispute.
However, parties are not obliged to submit their dispute to ADR but the court will consider the reasons for any refusal to do so when exercising its discretion on costs under CPR 44.2. For example, in Vector Investments v J D Williams [2009] EWHC 3601, the failure of the claimant to negotiate after having received a substantial offer led the judge to limit costs to 50% starting 21 days after the offer had been made.
However, in PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288 the Court of Appeal said that “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 upon itself to encourage the parties to do so, and its encouragement had been ignored.”
The court in PGF II SA applied Halsey v Milton Keynes General NHS Trust [2004] 1 W.L.R. 3002 said:
1. The court should not compel parties to mediate even were it within its power to do so. This would risk contravening article 6 of the Human Convention on Human Rights, and would conflict with a perception that the voluntary nature of most ADR procedures is a key to their effectiveness.
2. Nonetheless the court may need to encourage the parties to embark upon ADR in appropriate cases, and that encouragement may be robust.
3. The court’s power to have regard to the parties’ conduct when deciding whether to depart from the general rule that the unsuccessful party should pay the successful party’s costs includes power to deprive the successful party of some or all of its costs on the grounds of its unreasonable refusal to agree to ADR.
4. For that purpose the burden is on the unsuccessful party to show that the successful party’s refusal is unreasonable. There is no presumption in favour of ADR.
The Jackson ADR Handbook (2013, OUP, para 11.56) sets out 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:
1. Not ignoring an offer to engage in ADR.
2. Responding promptly in writing, giving clear and full reasons why ADR is not appropriate at the stage, based if possible on the Halsey guidelines.
3. 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.
4. 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.
In the recent case of Murray and another v Bernard [2015] EWHC 2395 (Ch), the court considered the effect on costs of the claimants’ initial refusal to mediate, in circumstances where the claimants later agreed to mediate.
The defendant had argued that there should be no order for costs in favour of the claimants because the claimants had failed to take an opportunity or accept an offer to mediate. However, it was determined that although the Claimants had refused an initial offer to mediate, they had subsequently (and relatively speedily) changed their minds and agreed to mediate. However, the mediation did not take place because the Defendant then decided it was not ready to mediate.
The judge held that this was not a case in which it could be said that the claimants failed to mediate. They did not have one opportunity only to mediate for the purpose of the costs rule. A party may be penalised for a wrongful refusal to mediate because parties are not to be encouraged to refuse opportunities to settle cases. However, in this case, the claimants changed their minds and therefore they could not be criticised for refusing to mediate.
Although this case confirms that a delay in agreeing to mediate will not automatically lead to adverse costs consequences, it would be risky to assume that if a party initially refuses to mediate, but later changes its mind, this will have no effect on costs.

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