The cost of not talking

Court of Appeal upholds decision disallowing £250,000 costs

In a judgment given on 23 October 2013, the Court of Appeal for the first time answered the question of what is the Court to do when a party is invited by its opponent to take part in a process of alternative dispute resolution - in this case, mediation - and that party fails to provide any response. The answer? Heavily penalise them on costs.

In PGF II SA v OMFS Company 1 Limited (2013) the Claimant Landlord was the freehold owner of a mixed commercial and office building in London. The Defendant Tenant took assignments of office leases on the first, second and fourth floors for the remainder of terms expiring in 2009.

Schedules of Repair were served by the Landlord in 2009, alleging breaches of the Tenant's repair obligations which were valued at in the region of £1.81 million. The Landlord carried out substantial refurbishment and subsequently issued proceedings in October 2010, claiming slightly more £1.9 million.

Following the issuing of proceedings, the Landlord made a Part 36 offer to settle the claim on payment by the Tenant to the Landlord of £1.125 million. The Landlord later made a second Part 36 offer, superseding the first, to accept £1.25 million. At the same time, the Landlord invited the Tenant to partake in mediation.

The Defendant neither agreed not disagreed with that proposal, instead making a Part 36 offer to pay the sum of £700,000 to the Claimant in settlement of the claim. The Landlord's offer to mediate was later repeated. Again, the Tenant failed to provide any response to the invitation to mediate. The Landlord subsequently offered to accept £1.05 million. The offer was not accepted, nor was any counter offer made.

The trial was to commence on 11 January 2012. On 10 January 2012, the Tenant, for the first time, asserted that an air conditioning system in respect of which damages of £250,000 was claimed for disrepair did not form part of the property which had been let to the Tenant. That same day, the Landlord accepted the Tenant's offer of £700,000.

The ordinary consequences of that acceptance would mean that the Landlord would be obliged to pay the Tenant's costs from 21 days after the offer was first made until the date of acceptance (2 May 2011 - 10 January 2012) unless the Court ordered otherwise. The Tenant duly sought to recover the costs it had incurred during this period which amounted to in the region of £250,000.

The Judge, citing the Tenant's refusal to respond to the offer to mediate, held that the Tenant should not recover any of these costs.

The Tenant appealed, asserting that:-

• silence could not be construed as a rejection of the proposal to mediate;
• even if it could, the Tenant had not acted unreasonably, its position having been vindicated by the Landlord's acceptance of the offer; and
• mediation would have failed.

The Court of Appeal dismissed the appeal. The Court of Appeal acknowledged that the Tenant's offer was ultimately accepted by the Landlord. However, this did not excuse the failure to engage in mediation, nor the failure to provide any response to the invitation to engage in mediation. The Tenant's failure to provide any response to the proposal for mediation could be seen as nothing other than a refusal to engage in mediation. This itself was unreasonable behaviour that justified a costs sanction being imposed.

The Court of Appeal believed that the Tenant's position regarding the air conditioning would likely have come out at mediation. Given that it was this last minute revelation led to the Landlord's acceptance of the Tenant's offer, it is clear that the Court of Appeal believed the matter would have settled at mediation.

Whilst there may be occasions where a refusal to engage in ADR can be justified, these are few and far between. In any event, where a party does not wish to partake in ADR, the reasons for adopting that stance must be conveyed to an opponent. If a party simply ignores a reasonable proposal that the parties partake in an ADR process, they will have to face the consequences which, as shown in PGF II SA v OMFS Company 1 Limited (2013), can be extreme.

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.