Posted on 7 Feb 2014
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Offers to Mediate and the Consequences of Failing to Respond

The Court of Appeal has recently decided for the first time how a party who fails to respond to a request to mediate is to be dealt with and the case will be of significant impact in relation to all forms of disputes (not only those which are property related) where an offer to mediate is made.

Facts

In the case of PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288 the Court of Appeal was asked to deal with the issue of costs where the subject matter of the claim had been settled through negotiations.

The case related to a dilapidations claim in respect of office premises in London issued by the landlord against the defendant tenant where the claim was in excess of £1.9 million.

Throughout the course of settlement negotiations the claimant made an offer to settle at £1.25 million which was not accepted by the tenant. In response, the landlord's solicitors suggested in written correspondence that the parties attended mediation.  The court commented that the offer to mediate was 'a serious and carefully formulated written invitation'.

The tenant then made an offer to settle for £700,000 by way of a part 36 offer but did not respond to the landlord's suggestion that the parties should attend mediation.  The landlord then repeated its offer to participate in mediation but again the tenant failed to respond to the offer.

The claim was eventually settled by the landlord accepting the tenant's part 36 offer the day before the trial was due to commence.

The usual rules relating to late acceptance of a part 36 offer require the accepting party to pay the other party's costs which have been incurred as from 21 days after making the offer up to the date of acceptance of the offer unless ordered otherwise by the court.  Accordingly, the tenant requested payment of its costs for the relevant period which were in the region of £250,000. In response the landlord notified the tenant that it would be seeking an order for payment of its costs on the basis of the tenant having advanced a new argument at a late stage. The landlord also submitted that the tenant had unreasonably refused to engage in alternative dispute resolution.

The Court of Appeal noted that the landlord was at fault for not having accepted the tenant's offer on a timely basis but despite this, found in favour of the landlord and decided that the tenant's failure to provide any response to the landlord's offer to mediate amounted to a refusal to mediate which, following previous case law, can only be justified in very limited circumstances.  Accordingly, the Court of Appeal held that the tenant was not entitled to payment of the £250,000 worth of costs it had claimed despite the usual rules relating to part 36 offers.

What does this mean for the retail sector?

This decision was a harsh decision in the circumstances but it demonstrates the emphasis courts put on alternative dispute resolution and shows that parties must now demonstrate that they have engaged in proposals to resolve the dispute by other means apart from court proceedings.  Parties who continue to ignore offers to mediate or who fail to provide good reasons not to mediate will do so risking costs orders being made against them regardless of the outcome of the case. 

For more information on this case and other related issues, please contact Katherine Breckin at katherine.breckin@michelmores.com.