PGF II SA v OMFS Company 1 Limited

 

The Message

A party can be severely penalised for failing to engage in alternative dispute resolution.

The Case

The Court of Appeal has for the first time had to decide whether and how to punish a party for failing to respond to a request by the other party to mediate Although Alternative Dispute Resolution (“ADR”) is voluntary and can’t be imposed by the Court, parties have, in truth, little choice but to engage in ADR if they do not want to be punished by way of costs by the Court.

In this dilapidations case between the landlord claimant and defendant tenant, the claimant issued proceedings for damages in excess of £1.9 million in relation to the disrepair of 3 office floors let to the defendant at 33 Lombard Street in the City of London.

The claimant then made an offer to settle at £1.25 million which was not accepted and its solicitors suggested the parties should mediate at an early stage and put forward sensible proposals for doing so. The only response of the defendant was to make an offer of £700,000 in settlement.

Although the parties were only £550,000 apart in relation to a claim for some £2 million, the defendant never responded to the invitation to mediate even though it was repeated and the claimant offered to settle for £1.05 million, thus narrowing the gap to £350,000. The defendant simply stood firm behind its offer of £700,000.

On 10 January 2012, the day before the trial was due to commence, the claimant accepted the defendant’s offer. It did so in the light of the argument only raised that day by the defendant that it had no liability at all for the sum of £250,000 for repairing the air conditioning system as it was outside their demised premises. By this time, each party had spent a further £250,000 on legal costs since the defendant had made its offer.

The normal rule when a settlement offer is accepted late is that the accepting party has to pay all the defendant’s costs incurred from 21 days after making the offer although it can recover its costs before then. Naturally, the defendant sought to recover from the claimant the further £250,000 of costs it had incurred but the Judge held that it should not be entitled to recover any of these costs due to its refusal to respond to the offer to mediate.

The defendant appealed on the basis its stance had been perfectly justified by the eventual acceptance of its offer. It claimed mediation would have failed anyway and it had not actually refused to mediate as such.

However, the Court of Appeal was as unforgiving as the Judge. It relied on the reported 90% success rates of mediations and the need for parties to avoid expensive litigation by engaging fully in appropriate dispute resolution. It held a failure to respond was tantamount to a refusal to mediate and that a refusal can only be justified in exceptional circumstances.

The Court noted the case did eventually settle but only after a further £500,000 of costs had been incurred. It considered that these costs could have been avoided as mediation would have had a reasonable chance of success as the parties were not that far apart and a trained and skilled mediator may well have flushed out the point re the air conditioning which led to the eventual acceptance of the defendant’s offer.

However, the Court did appreciate that the claimant was even more culpable for having not accepted the offer when made and that it was probably excessive for the Judge to have deprived the defendant of all its further costs. However, the Court can rarely interfere with the discretion of a Judge and it declined to do so in this case in light of its agreement that there had been serious and unreasonable conduct by the defendant due to its complete failure to engage in any form of ADR.

As the Court made clear, its harsh decision in this case is intended to send an important message to all parties to litigation that they must seriously engage in seeking to settle or otherwise face severe sanctions.