Source: https://www.macfarlanes.com/what-we-think/in-depth/2020/engage-with-alternative-dispute-resolution-or-face-the-costs-consequences/
Timestamp: 2020-07-09 11:26:21
Document Index: 43586864

Matched Legal Cases: ['art 36', 'EWCA ', 'EWCA ', 'art 36', 'art 36', 'art 36', 'EWCA ', 'EWCA ']

Engage with alternative dispute resolution or face the costs consequences! - Macfarlanes
“No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution”
The English court has continued to demonstrate that it will not simply pay lip service to the Civil Procedure Rules that require a party to consider and engage with Alternative Dispute Resolution (ADR). A party that fails to engage with ADR (for example, mediation, without prejudice meetings, an early neutral expert evaluation) runs the risk of an adverse costs order being made against it, irrespective of the perceived strength of its case.
Whilst certain cases are not capable of settlement and require a judicial determination, a party to litigation should at all stages consider whether it should engage in ADR with its counterparty in order to seek to resolve the dispute. If it elects not to do so, it will be required to justify this to the court.
Although parties may consider a settlement to be unlikely, there is often considerable benefit to be gained by entering into ADR at the right time in order to understand the other side’s position and strategy. It may also create an opportunity for a party to identify weaknesses in its own or its counterparty’s case.
The Practice Direction on Pre-Action Conduct and Protocols highlights the need to actively consider ADR, and treat litigation as a “last resort”. It provides the court with the discretion to take into account any non-compliance when giving directions for case management and awarding costs orders.
Whilst parties cannot be forced to mediate1, the court can give directions to encourage resolution of a claim, and any unreasonable refusal to engage in settlement discussions will likely be punished through costs awards.
In 2017, OMV Petrom SA v Glencore International AG2 confirmed that "the parties are obliged to make reasonable efforts to settle, and to respond properly to Part 36 offers made by the other side. The regime of sanctions and rewards has been introduced to incentivise parties to behave reasonably, and if they do not, the court's powers can be expected to be used to their disadvantage. The parties are obliged to conduct litigation collaboratively and to engage constructively in a settlement process".
Recently, the court has imposed indemnity cost orders against parties who unreasonably refused to engage in ADR. An indemnity costs order is an order that the paying party pay approximately 70-80% of the counterparty’s legal costs and disbursements. In the context of a large commercial dispute, this can be a considerable figure.
BXB v Watch Tower and Bible Tract Society of Pennsylvannia and anor3
The claimant claimed that the defendants should pay all of her costs on the indemnity basis in view of their unreasonable conduct and, in particular, their refusal to engage in ADR.
Mr Justice Chamberlain laid down four applicable principles before setting out his decision.
Whether to order that costs be assessed on the standard or the indemnity basis is for the discretion of the judge, having regard to the conduct of the parties and the circumstances of the case. But an award of indemnity costs requires something that “takes the case outside the norm”: Excalibur Ventures LLC v Texas Keystone Inc. (No. 2) [2017] 1 WLR 2221.
An unreasonable refusal to engage in ADR may justify an award of indemnity costs to a claimant, even where the claimant recovers very substantially less than originally claimed: Garritt-Critchley v Ronnan [2014] EWHC 1774 (HHJ Waksman QC). One reason for this is that “[p]arties don't know whether in truth they are too far apart unless they sit down and explore settlement”.
Silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds: PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288, [2014] 1 WLR 1386 (Briggs LJ). This is in part because “a failure to provide reasons for a refusal is destructive of the real objective of the encouragement to parties to consider and discuss ADR, in short to engage with the ADR process”.
However, a finding that a party has unreasonably refused even to engage in discussion about ADR produces no automatic results in terms of a cost penalty. It is simply an aspect of the parties' conduct which must be addressed in a wider balancing exercise: Gore v Naheed [2017] EWCA Civ 369, [2017] 3 Costs LR 509 (Patten LJ).
Mr Justice Chamberlain awarded the claimant costs on the indemnity basis from the date of the defendants’ unreasonable refusal to engage with the claimant’s invitation to attend a joint settlement meeting.
DSN v Blackpool Football Club Ltd4
In this case, the defendant failed to beat the claimant’s Part 36 offer, and the court made the usual order for indemnity costs in favour of the claimant from the date of the expiry of the claimant’s Part 36 offer.
However, Mr Justice Griffiths also ordered that the defendant pay the claimant’s costs on the indemnity basis from the point in time when the defendant unreasonably refused to engage with ADR.
The defendant in this case refused to engage in any discussion whatsoever about the possibility of settlement. It did not respond to any of the three Part 36 offers (except to reject the final one). The defendant had instead submitted that “no purpose would be served by any form of ADR”, after considering all of the available evidence, since it “continues to believe that it has a strong defence to this claim and stands by the contents of its Defence”.
Mr Justice Griffiths stated that “the reasons given for refusing to engage in mediation were inadequate. They were, simply, and repeatedly, that the defendant ‘continues to believe that it has a strong defence’. No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution.”
He also commented positively on the process of ADR: “Experience has shown that disputes may often be resolved in a way satisfactory to all parties, including parties who find themselves able to resolve claims against them which they consider not to be well founded. Settlement allows solutions which are potentially limitless in their ingenuity and flexibility, and they do not necessarily require any admission of liability, or even a payment of money. Even if they do involve payment of money, the amount may compare favourably (if the settlement is timely) with the irrecoverable costs, in money terms alone, of an action that has been successfully fought. The costs of an action will not always be limited to financial costs, however. A trial is likely to require a significant expenditure of time, including management time, and may take a heavy toll on witnesses even for successful parties which a settlement could spare them. As to admission of liability, a settlement can include admissions or statements which fall short of accepting legal liability, which may still be of value to the party bringing a claim.”
Wales (t/a Selective Investment Services) v CBRE Managed Services Ltd and anor5
Despite the claimant’s claim being dismissed, in this case the court disallowed a substantial proportion of the successful first defendant’s costs, on the basis of their refusal to engage in ADR. The first defendant “repeatedly declined and, indeed, refused to participate in mediation”. This conduct was deemed to be unreasonable by His Honour Judge Halliwell. He determined that the first defendant was in breach of the requirements of the Practice Direction on Pre-Action Conduct, in that it “denied the [claimant the] opportunity to fully canvass and engage with the underlying issues”, and it did not provide a satisfactory explanation for its failure to participate in mediation. HHJ Halliwell disallowed 50% of the first defendant’s costs for a period of over two years during which they unreasonably failed to engage in ADR.
In contrast, the second defendant in this case repeatedly indicated a willingness to engage in mediation. HHJ Halliwell did not, therefore, disallow any of the second defendant’s costs for a failure to engage with ADR.
Parties to litigation should approach any dispute with a commercial mindset. Any party that fails to treat forms of ADR as a priority may be penalised by the court in costs (and in certain circumstances a party may be ordered to pay the other party’s costs on the indemnity basis). This is even in cases where a party considers that its counter-party’s claim has no merit.
Whilst it can be legitimate for a party to push back on an offer to engage with ADR (for example on the basis that the claim is not sufficiently advanced), it should set out the basis for any rejection in correspondence and ensure that it revisits the possibility of engaging in ADR as the proceedings develop in order to demonstrate to the court that it has acted reasonably.
These considerations apply to all disputes and whilst the Covid-19 pandemic has impacted on certain aspects of the way that litigation is conducted, our view is that this does not mitigate the need for parties to consider engaging in ADR. In fact, in certain cases, there can be a number of significant benefits in engaging with an ADR process compared to a protracted and drawn out contentious dispute. For example, mediations can provide parties with a confidential and relatively low-cost means to seek to achieve a commercial settlement and/or narrow the issues in dispute. It may also allow a party to understand its counterparty’s strategy and identify weaknesses in their case.
In the current climate, we consider that the court will expect sophisticated commercial parties to make use of the resources available to conduct ADR remotely (for example, virtual mediations) and to be able to explain to the court what steps they have taken to seek to resolve the dispute. The UK Government has also made it clear (by way of a guidance note published on 7 May 2020) that it expects commercial contractual parties to act “responsibly” and “fairly” in their dealings with one another during the “Covid-19 emergency”. Whilst this is only guidance, this public policy consideration will likely be borne in mind by the courts of England and Wales for the foreseeable future.
Even after the impact of the Covid-19 has reduced, the court will continue to expect parties to engage with ADR. If a party does not so, it will need to justify this to the court and it may face potentially significant costs penalties.
Co-authored by trainee solicitor, Carrie Gothard.
1 Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576
2 [2017] EWCA Civ 195
3 [2020] EWHC 656 (Admin)
4 [2020] EWHC 670 (QB)
5 [2020] EWHC 1050 (Comm)