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Lessons to be learned from PGF II SA v OMFS Company 1 Limited

It is a well-established principle that an unreasonable refusal to participate in alternative dispute resolution (ADR) is a form of unreasonable conduct of litigation and, to which the court is likely to respond by imposing costs sanctions on the winning party. This principle was established in Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002 and effectively laid down the following guidelines:

• The court should not compel parties to engage in ADR;
• The court can, however, encourage parties to do so in appropriate cases and such encouragement can be robust;
• The court has the power to regard the parties’ conduct when deciding to depart from the general rule on costs. This includes the ability to deprive the successful party of some or all of its costs on the grounds of an unreasonable refusal to agree to ADR;
• There is a burden on the unsuccessful party to show that the successful party’s refusal was unreasonable – there is no presumption in favour of ADR.

When considering whether a party’s refusal to engage in ADR was unreasonable, the court will consider a list of non-exclusive factors including: the nature of the dispute; the merits of the claim; whether other methods of settlement had been tried; and whether the ADR had reasonable prospects of success.

The question before the Court of Appeal in PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288 was what the response from the court should be to a party which, when invited by its opponent to take part in the process of ADR, simply declines to respond to the invitation?

PGF were the freeholders of a commercial building and OMFS were their tenants, until their leases expired in 2009. PGF served schedules of dilapidations and thereafter carried out works to the value of £1.8 million. A claim was issued in the High Court for recovery of this amount and OMFS denied liability, relying on section 18 of the Landlord and Tenant Act 1927. As the claim progressed, both sides made Part 36 offers to settle. By the time the trial date had arrived, there was a difference of £350,000 between the respective parties’ offers. In the meantime, PGF’s solicitors had invited OMFS to take part in early mediation in a number of emails. Despite, promising to respond to the request, a detailed reply was not forthcoming. Prior to the commencement of trial, new evidence came to light and PGF accepted the Part 36 offer of £700,000 made by OMFS.

The Judge at first instance was required to make a decision on costs. PGF submitted that by its failure to respond to the request to mediate, OMFS had unreasonably refused to participate in ADR. The Judge accepted this submission and deprived OMFS of their costs from the date of expiry of the Part 36 offer, but did not agree that OMFS should also have to pay PGF’s costs for this period. The matter was appealed.

Lord Justice Briggs gave the lead judgment and ruled that silence in the face of an invitation to participate in ADR is, as a general rule, unreasonable, regardless of whether an outright refusal at the time might have been justifiable on reasonable grounds. The reasoning for this is twofold: an investigation by the court of alleged reasons for refusal at a later stage poses difficulties including considering whether those reasons were genuine at the time; and that a failure to give a reason for refusal is destructive of the objective of encouraging parties to engage in the ADR process.

Although Briggs LJ suggested that it may have been reasonable in the circumstances to disallow only a proportion of OMFS’s relevant costs, he acknowledged that the Judge was exercising his discretion and that the sanction imposed was within the range of proper responses to seriously unreasonable conduct.

The decision is a clear extension of the Halsey principles. Put simply, if a party choses to ignore an offer to engage in ADR, it does so at its peril. Whilst there are a few occasions where not responding may be appropriate, these are likely to be rare. The Court of Appeal has laid out a clear explicit endorsement of the value of ADR within the litigation process.

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