8 Mar 2012
Don't ignore a request to mediate
Halsey applied! A note on PGF II SA v OMFS Company  EWHC 83 (TCC)
by Tony Allen, Solicitor, Mediator and Senior Consultant to CEDR
Another strong decision has emerged from the Technology and Construction Court as a warning that judges will not look kindly on a failure to respond to a proposal for mediation. In PGF v OMFS  EWHC 83 (TCC), Recorder Stephen Furst QC sat as a Deputy High Court judge to hear a dilapidations claim for just over £1 million brought by PGF in respect of premises in Lombard Street, London. Trial was to start on 11 January 2012, but on the previous day PGF accepted a Part 36 offer of £700,000 made by the defendant OMFS nine months earlier on 11 April 2011. This terminated the substantive claim, and while PGF were entitled to costs up to the date of the Part 36 offer, they sought a court order under CPR 36.10(4)(b) for OMFS to pay their costs from April 2011 until settlement, seeking to challenge their normal liability to pay OMFS’s costs after late acceptance under CPR 36.10(5)(b). PGF argued that the ordinary expectation that they should be liable for OMFS’s costs following late acceptance should be varied for three reasons:
- it was only on 10 January 2012 (the day before trial) that OMFS made it clear that they were going to argue that they were not liable for defects in the ventilation system because that system was actually outside the demised premises (a point that they had not pleaded) and about which OMFS would need to amend at trial;
- that this was “information” within the meaning of CPR 36.14(4) available (or not) to the parties at the time the Part 36 was made, which if available would have materially affected their decision as to whether to accept it or not;
- PGF had proposed mediation in a Part 36 offer of their own in April 2011, and again in July 2011, both of which had been ignored by OMFS: these amounted to unreasonable refusals, giving rise to grounds for varying the normal costs order.
The judge broadly found against the claimant PGF on the first two points, which left only the refusal of mediation as a basis for disturbing the ordinary costs pattern. The judge applied the tests and burden of proof established by Halsey v Milton Keynes NHST carefully. He accepted that the burden lay on PGF that mediation had a reasonable prospect of success and overall to persuade the court to vary the normally expected costs order, but he readily found that the defendants OMFS had behaved unreasonably by ignoring PGF’s invitations to mediate, and that mediation had reasonable prospects of success (never easy to challenge when a case actually settled just before trial). He also found that the claimant’s offer to mediate was genuine and, although not repeatedly followed up, there was no evidence of the claimant simply going through the motions of offering mediation. Implicitly he also accepted the claimant’s assertions that the case was well suited to mediation; that OMFS did not reasonably consider their case so strong as to warrant refusing mediation, and that the Part 36 offers constituted evidence of willingness to treat with each other reasonably; and that mediation would not give rise to undue cost or delay.
The judge rejected the suggestion that any adverse order should only be made from the hypothetical date for the mediation, finding that the basis for the sanction is the unreasonable conduct, which in this case coincided with the Part 36 offers mad in April 2011. Although he declined to award costs to PGF for the period after the Part 36 offer had expired, he awarded PGF their costs up to the expiry of the 21 day period in May 2011, and made no order as to costs thereafter, each party bearing their own. This matches the outcome in the earlier touchstone case (not referred to in PGF) of Dunnett v Railtrack.
Features of the case
There are some interesting additional features of this decision which are worthy of comment, and which bear on the use of mediation in other sectors.
Firstly, the judge was prepared to infer from OMFS’s silence in response to the two invitations to mediate that they had declined to mediate, and he found those to have been unreasonable.
Furthermore, there had been a previous mediation between the parties in 2010 over another aspect of the service charge. The implication sought to be raised by OMFS was that PGF had adopted an unreasonable stance within the confidentiality of the mediation and that this was a legitimate factor in deciding whether a later mediation would have been successful. The judge declined to receive evidence of the previous mediation because PGF declined to waive privilege. He also refused to draw any adverse inference from PGF’s refusal to waive that privilege, for, as he commented:
To do so would be to undermine the very protection given to the parties in relation to their conduct in a mediation.
He also commented that by ignoring the 2011 mediation proposal, OMFS had surprisingly missed the chance to argue that point as an explanation for their refusal. He was unimpressed by the mobilisation of such an argument so late in the day when faced by a possible costs sanction.
This has the practical effect of making it very unwise for a party to ignore a good faith invitation to mediate. If the invitee feels that mediation is inappropriate, then they should say so in writing, setting out reasons fully in a way likely to appeal to a judge later, either in an open letter or marked “without prejudice save as to costs”. It also underlines that unreasonableness demonstrated in declining to mediate can give rise to a sanction, but unreasonableness alleged to have occurred within a mediation is not admissible later. This is an important distinction. Unless parties can feel entirely safe within the evidentially secure environment created by a mediation agreement, they will be unlikely to move. It is only in cases where for whatever reason (usually unwise) both parties agree to disclose attitudes taken within a mediation that the court can have the right to adjudicate on such matters. The outcome for the Earl of Malmesbury in his claim against Strutt and Parker ( EWHC QB 4240 is a salutary lesson about doing so, demonstrating that a judge is only likely to find one of the parties to have been reasonable in their attitude at a mediation and might well penalise the other one.
Secondly, OMFS sought to escape a sanction by arguing that the mediation would not have worked because of the absence of expert valuation reports when the mediation would have taken place. Again the judge said:
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. First, such assertions are easy to put forward and difficult to prove or disprove but in this case are unsupported by evidence. Secondly, and in any event, it is clear that the courts wish to encourage mediation and whilst there may be legitimate difficulties in mediating or successfully mediating, these can only be overcome if those difficulties are addressed at the time. It would seem to me consistent with the policy which encourages mediation by depriving a successful party of its costs in appropriate cases 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.
This is a gloss on Halsey which does much to remind us that Halsey actually decides that costs sanctions are permissible against a successful party who either ignores a judge’s recommendation or another party’s genuinely intended invitation to mediate, so long as the Halsey criteria are met. Halsey read through the eyes of this decision seems somewhat more daunting than before.
The judge also discussed what mediation can achieve even when all material has not been assembled to the level required for a trial, and was prepared to disregard such arguments in deciding whether mediation would have worked. He shows considerable understanding of the way negotiations proceed in mediations by doing so. He commented:
Experience suggests that many disputes, even more complex disputes than the present, are resolved before all material necessary for a trial is available. Either parties know or are prepared to assume that certain facts will be established or, during the course of a mediation, such information is made available, often on a without prejudice basis. 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.
He added that getting necessary information first might be a good reason for postponing a mediation and for avoiding an adverse costs order, but this was not the case here.
This is often the reason given for not mediating, or even trying to settle, clinical negligence claims until very late in their life before trial. Of course there is a trade-off between the savings in cost and time as against less information about the evidence if earlier settlement is attempted, but what this judge’s approach commends is that this should normally and legitimately be explored by actual engagement in such processes rather than by participating in a stand-off. No one is compelled to settle in a mediation, and the court door remains open to any party who thinks their case is better heard than settled.
The third and more general point to make about the judgment in HGF v OFMS is the pleasure it gives to discover a judge who has an excellent understanding of the dynamics of mediation. This permeates Recorder Furst QC’s judgment. In commenting on the reasonableness of each party’s braod approach, he comments:
In any event the skill of a mediator lies in drawing out seemingly intractable positions.
Later, in relation to the gap between the parties at the time of the Part 36 offers and the mediation proposal:
The essence of all successful mediations is a willingness to compromise and/or the realisation that certain points are not as strong as the party believed….in my view, there was a reasonable prospect that these parties, given the essentially commercial nature of the dispute and being well advised, would have been prepared to compromise and/or would have accepted that various points raised were not as strong or certain as the open position which they adopted.
We can now perhaps anticipate a generation of judges which was in private practice in the era during which mediation has been normalised and many of whom will have been fully involved in representing parties in mediations and acting as mediators is emerging. They will almost certainly make a considerable difference to judicial attitudes and understanding of the mediation process in ways which articles like this, seminars and theoretical training cannot hope to match for effectiveness, nor even the publicising of anonymised case studies, bound as mediation is by the confidentiality provisions which are what make it work so effectively.
[With thanks to Andrew Manning-Cox of Wragge LLP and David Miles of Blake Lapthorn for pointing out this case]