Costs Sanctions For Failing to Respond to an Offer to Mediate: A Warning to Litigants in the UK

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A recent UK Court of Appeal judgment demonstrates a clear and unequivocal endorsement of mediation and makes clear that a party who refuses to acknowledge or engage in an invitation to participate in mediation can face significant financial penalties.

In Depth

Many people understandably dread the prospect of litigation and the court system. Litigation is a formal process whereby control (and indeed, the result) of a dispute is essentially transferred from the parties to their legal representatives and the relevant court. The process is well known to be both time consuming and expensive. In addition, most court proceedings are open to the public, a situation that is particularly unattractive where disputes involve families or closely held companies.

These perils have been associated with litigation for centuries. Abraham Lincoln, who was a prominent lawyer in the 1850s, is quoted as saying “Discourage litigation. Persuade your neighbours to compromise whenever you can. Point out to them how the nominal winner is often a real loser – in fees, expenses and waste of time.”

A mechanism by which disputing parties can avoid litigation and achieve compromise is mediation. Mediation is a private, voluntary process in which all parties to a dispute work with an impartial mediator who assists them in finding ways to resolve their conflict. The location and the identity of the mediator, plus the form of settlement can be decided by the parties. The hope for both sides is that a solution can be found that will fit the needs of both parties and permanently resolve the dispute.

Mediation is consequently an important consideration for both clients and the courts. In recent years, parties to litigation who fail to consider mediation at any point are increasingly experiencing adverse judgments and, in some cases, financial penalties.

A recent decision by the Court of Appeal means costs sanctions can now be imposed on a party to litigation if that party fails to respond to an offer of mediation.

In PGF II SA v OMFS Company 1 Limited [2013], the Court found that the defendant had “unreasonably refused to mediate” and was consequently deprived of costs to which it would otherwise have been entitled. The defendant had received two “serious and carefully formulated” invitations to mediate and failed to respond to them both. This silence amounted to a refusal to mediate, and the Court found that the refusal was unreasonable.

This judgment endorses the advice given in the Alternative Dispute Resolution (ADR) Handbook

That 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.

While it has long been established that an unreasonable refusal to mediate can be penalised in costs, PGF II SA v OMFS is the first judgment to confirm that a party’s silence, when invited to mediate, can equally be considered as unreasonable and have consequent costs sanctions.

The judgment is significant and should be borne in mind by all parties and advisors embarking on civil litigation. It demonstrates a clear and unequivocal endorsement of mediation and ADR generally and makes clear that a party who refuses to acknowledge or engage in an invitation to participate in the ADR process can face significant financial penalties.