The recent case of PGF II SA v (1) OMFS Company (2) Bank of Scotland plc  serves as a timely reminder of the court’s discretion regarding costs following acceptance of a Part 36 offer and the implications of refusing to mediate.
The proceedings related to a dilapidations claim arising out of alleged breaches of repairing covenants of underleases. The parties exchanged written submissions in preparation for trial in which the defendant made a new submission and indicated it would seek permission to amend its defence accordingly. In light of those submissions, on 10/01/12, the day before the trial was due to start, the claimant accepted a Part 36 offer which had been made by the defendant on 11/04/11. The usual position under Part 36 would have been that the defendant would pay the claimant’s costs up to 2 May 2011 (being 21 days after the Part 36 offer was made) and the claimant would pay the defendant’s costs from 3 May 2011 up to the date of acceptance.
Following the acceptance of the offer the claimant sought an order that the defendant should pay the claimant’s costs after 2 May 2011 contrary to the usual position set out above. This would require the court to exercise its discretion under CPR Part 36.10(4) and (5).
The court considered how it should apply its discretion and applied the test in Lumb v Hampsey , namely, whether the usual order should be departed from because it would be unjust for the claimant to pay the defendant’s costs after the expiry of the relevant period. Such a departure would be the exception rather than the rule. In considering whether the usual order would be unjust the court should take into account the factors set out in CPR 36.14(4) which include the information available to the parties at the time when the Part 36 offer is made.
One of the claimant’s arguments was that if the new submission had been made in the original defence then it would have accepted the offer within the relevant period. It therefore argued that the court was entitled to take this into account as “information available” to the parties at the time the offer was made.
The information available to the parties at the time the Part 36 offer was made
The court was unimpressed by the claimant’s argument and found that the new submission in question was in relation to the interpretation of a lease and was not “information” falling within CPR 36.14(c) and (d). The judge decided that information in this context meant factual information. Whilst the defendant might therefore be criticised for not arguing the point sooner, the claimant could have considered the alternative interpretation from its own reading of the relevant underleases.
The judge decided that the claimant had not satisfied him that the case fell within the exceptional category which would render it unjust for the claimant to pay the defendant’s costs after the expiry of the relevant period. If that was the end of the matter then the claimant would have been ordered to pay the defendant’s costs following the expiry of the relevant period. But that was not the end of the matter; the claimant also relied on the defendant’s refusal to mediate which it claimed was unreasonable.
The defendant’s refusal to mediate
The claimant originally suggested mediation in April 2011. The defendant did not respond. The question was raised again by the claimant in July 2011 but again the defendant did not respond.
Before the court the defendant argued, inter alia, that mediation would not have been successful if it had taken place when the claimant suggested it because there was insufficient evidence available from disclosure and expert evidence at the time. The defendant also argued that the absence of a response did not amount to a refusal and that in any event there was no reasonable prospect that mediation would have been successful.
The court found that the burden on the claimant to demonstrate that mediation would be successful was a low one. All it had to establish was that mediation had a reasonable prospect of success, not that it would be successful. In this particular case the judge found:
“there was a reasonable prospect that well advised commercial parties such as these, with the benefit of experienced lawyers would have been able to reach an accommodation.”
In relation to the lack of expert evidence relied on, the court found that a report had existed but that the defendant had not even asked for it. In any event the judge stated that:
“Experience suggests that many disputes…are resolved before all material necessary for trial is available…The rationale behind the Halsey decision is the saving of costs and this is achieved (or at least attempted) by the parties being prepared to compromise without necessarily having as complete a picture of the other parties’ case as would be available at trial. It might well be a legitimate reason for postponing a mediation if essential information was requested and refused and in such circumstances no adverse costs order might be made, but this was not the position here.”
The judge found that it was reasonable to infer that by failing to respond to the claimant’s letter, the defendant was refusing to mediate. Furthermore, the defendant had not raised any of the arguments it now relied on at the time the claimant suggested mediation and the judge highlighted that the court:
“…should be wary of arguments only raised in retrospect as to why a party refused to mediate or as to why it cannot be demonstrated that a mediation would have had a reasonable prospect of success…It would seem to me consistent with the policy which encourages mediation by depriving a successful party of its costs in appropriate circumstances that it should also deprive such a party of costs where there are real obstacles to mediation which might reasonably be overcome but are not addressed because that party does not raise them at the time.”
The judge found that there was a reasonable prospect that the dispute would have settled had the defendant not unreasonably refused to mediate. However, he was not prepared to go as far as ordering it to pay the claimant’s costs and instead made no order for costs from the expiry of the relevant period of the Part 36 offer.
- Consider very carefully whether mediation is appropriate. If you are not willing to mediate, consider the Halsey case which sets out circumstances in which a refusal to mediate might not be unreasonable. For more information see our previous article.
- If mediation is proposed by your opponent, don’t simply ignore the request as this will be taken to be a refusal to mediate.
- If you have got good grounds for refusing to mediate then make sure that you set out clearly your grounds at the time mediation is proposed. An after the event attempt at rationalising the decision is unlikely to go down well with the judge.
- If you have not good grounds for refusing to mediate then you run the risk of the court imposing substantial costs penalties, even if ultimately you are successful.
- Keep the question of mediation under review – for example, if you initially refuse to mediate because you are awaiting expert evidence – reconsider your position when that evidence is received.
For more information about the issues raised in this article or to find out more about how the Dispute Resolution team can help you please contact Rowan Turrall on 0118 952 7206 or email [email protected].
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.