Civil litigation – Costs – Respondent landlord bring claim for breach of repairing covenants – Appellant tenants ignoring respondent’s invitations to mediate but making Part 36 offer to settle – Respondent accepting offer after expiry of time limit – Judge ordering parties to bear own costs for period after expiry of Part 36 offer – Whether appellants acting unreasonably in ignoring invitations to mediate – Whether such conduct justifying costs order made by judge – Appeal and cross-appeal dismissed
The appellants were the tenants of commercial premises on several floors of a building owned by the respondent landlord under leases that contained full tenant’s repairing covenants. Following the expiry of the leases in 2009, the respondent brought a claim against the appellants for dilapidations in the sum of £1.9m. The appellants denied liability, primarily on the ground that the disrepair had caused no damage to the respondent’s reversion.
In April 2011, the respondent made successive offers under CPR 36 to accept a reduced sum in settlement of the claim; it also invited the appellants to participate in mediation to resolve the dispute. The appellants did not respond to that invitation but sent their own Part 36 offer of £700,000, although no reasons were given for that figure. The appellant did not accept the offer but later made a further invitation to mediate, which again received no response.
The day before the trial in January 2012, the appellants sought to amend their case to argue that an air-conditioning system to which part of the dilapidations claim related did not fall within the demised premises and so was not covered by the repairing covenants. The respondent then accepted the appellants’ Part 36 offer, bringing the proceedings to an end save for the question of costs.
Pursuant to CPR 36.10(5)(a), the respondent was entitled to its costs to early May 2011, when the 21-day period for acceptance of the appellants’ Part 36 offer had expired. However, the judge held that each party should bear its own costs thereafter, rather than the respondent paying the costs of the appellants for that period according to the usual practice in respect of Part 36 offers. In that regard, he rejected an argument of the respondent based on the appellants’ late amendment to their case but accepted its contention that the appellants had unreasonably refused to mediate: see [2012] EWHC 83 (TCC); [2012] PLSCS 26.
Both parties appealed on the mediation point. The appellants contended that the judge had erred in characterising their conduct as an unreasonable refusal to mediate. The respondent contended that the judge had reached the correct conclusion on that point but should have responded by awarding costs against the appellants.
Held: The appeal and cross-appeal were dismissed.
CPR 36 was designed to encourage parties to make, and promptly to accept, realistic offers of settlement. It lay at the interface between litigation and alternative dispute resolution (ADR) procedures such as mediation, although it was also designed to provide parties with a measure of protection against costs risk. While the court should not use its powers to compel the parties to mediate, it could encourage them to do so in appropriate cases and an unreasonable refusal to agree to ADR was a matter to which it could have regard in deciding whether to depart from the general rule that the unsuccessful party should pay the successful party’s costs: Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576; [2004] 1 WLR 3002 applied.
The constraints that now affected the provision of state resources for the conduct of civil litigation called for an ever-increasing focus on means of ensuring that court time, both for trial and for case management, was proportionately directed towards those disputes that really needed it, with an ever-increasing responsibility thrown on the parties to civil litigation to engage in ADR, wherever that offered a reasonable prospect of producing a just settlement at proportionate cost. In the same way that it was a risk of the court’s resources to have to try a case that could have been justly settled earlier and at a fraction of the cost by ADR, it was likewise a waste of the court’s resources to have to manage the parties towards ADR by robust encouragement, where they could and should have engaged with each other in considering its suitability without the need for the court’s active intervention.
The court therefore firmly endorsed the advice in Chapter 11.56 of the ADR Handbook that, as a general rule, silence in the face of an invitation to participate in ADR was of itself unreasonable, regardless of 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. As Chapter 11.56 advised, a party should not ignore an offer to engage in ADR but should respond promptly in writing, giving clear and full reasons why it considered ADR to be inappropriate at that stage. In an appropriate case for ADR, a party could not just ignore a request to participate in mediation: Burchell v Bullard [2005] EWCA Civ 358 and Rolf v De Guerin [2011] EWCA Civ 78; [2011] 07 EG 97 (CS) considered. There were sound practical and policy reasons for that approach, including those relating to the forensic difficulty in establishing the genuineness of reasons for refusal to mediate, where these were given for the first time at the costs hearing. Moreover, a failure to provide reasons for a refusal was destructive of the objective of encouraging parties to consider and discuss ADR. Considerations of practicality and proportionality applied since a positive engagement with an invitation to participate in ADR could lead in a number of alternative directions, each of which might save the parties and the court time and resources.
On the face of the correspondence between the parties, the defendant’s silence in face of two requests to mediate was unreasonable conduct of litigation sufficient to warrant a costs sanction, regardless of whether that silence properly constituted a refusal. In any event, silence in the face of repeated requests could not be construed as anything other than a refusal, particularly where the first request was couched in such detailed and sensible terms that it could not reasonably have been regarded as mere tactics. The dispute was eminently suited to mediation where breach of the repairing covenants was not seriously denied and the only issue going to liability depended on competing valuation evidence. Mediation had a reasonable prospect of success when offered by the respondent in April 2011.
A finding of unreasonable conduct constituted by a refusal to accept an invitation to participate in ADR, or, more seriously, a refusal even to engage in discussion about ADR, produced no automatic results in terms of a costs penalty. The judge had been entitled to exercise his broad discretion to deprive the appellants of the whole of their costs during the relevant period. That fell within the range of proper responses to the seriously unreasonable conduct that the judge had identified.
Guy Fetherstonhaugh QC (instructed by Kingsley Napley LLP) appeared for the appellants; Jonathan Seitler (instructed by Browne Jacobson LLP) appeared for the respondent.
Sally Dobson, barrister