FG II SA v OMFS Company & Bank of Scotland Plc


The Message

Failure to engage in alternative dispute resolution can prove costly.

The Case

The High Court has penalised a successful party for not responding to an offer to mediate

The Claimant, PFG, claimed some £1.8 million in damages for terminal dilapidations in relation to 3 floors at 33 Lombard Street in the City of London that had been let to the Defendants under separate Leases. A substantial part of this claim related to the costs of removing air conditioning installed by the Defendants.

On 11 April 2011, the Defendants made an offer of £700,000 pursuant to Part 36 of the Civil Procedure Rules to settle the claim. PFG did not accept this offer but, instead, suggested mediation. The Defendants never responded to the offer to mediate despite being chased to do so and the claim progressed towards trial

On 10 January 2012, the day before the trial, the Defendants served their legal submissions and for the first time made clear that their case in relation to re-instatement of the air-conditioning was based upon this being outside its demise and, accordingly, outside its liability to re-instate under the Leases.

As a Part 36 Offer remains open for acceptance until withdrawn, PFG decided at the very last moment to accept the offer of £700,000 in the light of the defence now being run but it argued that the normal rule that it should pay all the costs incurred from 2 May 2011 (being 21 days after the Offer was made) should not apply because the Defendants had refused to mediate or make clear their case.

In a case decided in 2004 called Halsey v Milton Keynes General NHS Trust, the Court had made clear that a party who unreasonably refused to participate in alternative dispute resolution could be penalised as to costs as the Court was keen to promote early settlement discussions to save on the costs of litigation.

PFG said this sort of case was eminently suitable for Mediation despite the wide gulf between the parties and their poor relationship due to having been involved in a previous service charge dispute. The Defendants argued that an early Mediation would have been pointless as they needed to deal with Disclosure and expert evidence before they could properly evaluate the claim. They also argued that there was no prospect of success because the parties were so far apart on quantum and that they could rely on a previous failed mediation on the service charge issue to justify their stance.

The Court first made clear that a failure to respond to a mediation offer constituted a refusal to mediate but it accepted that the Defendants should not be punished for not making their legal case clearer when they made their offer as they did not know at that time about the argument re the air-conditioning being outside the ambit of the Leases.

Accordingly, as there was no evidence a mediation would have succeeded, the Court accepted the Defendants should not pay PFG’s costs since the 2 May 2011. However, it held that the Defendants should be penalised by having to pay their own costs since then as the Court held there was a reasonable prospect a Mediation in or about May 2011 would have succeeded.

Importantly, the Court emphasised that the very purpose of mediation is to allow parties to re-evaluate their cases and the gulf between the parties should not therefore be an automatic bar to mediating. It also made clear that, in property disputes where parties are professionally advised, any obstacles to a successful mediation should normally be capable of being resolved, whether by early disclosure of otherwise. Parties should not be allowed to retrospectively think of arguments to justify having not engaged in the process earlier.

This case is particularly relevant to dilapidations claims which should normally be capable of early and sensible resolution and it will be a bold or foolish party who now does not respond positively and quickly to an offer to mediate.