Businesses Can Be Penalised In Legal Costs For Unreasonable Failure To Mediate Before Going To Court

Businesses risk being unable to recover legal costs from the other side, even if they win a court action, if they have unreasonably refused to accept mediation before going to court, the Court of Appeal has decided.

A landlord asked a tenant to pay for dilapidations – the cost of making good certain disrepairs and defects required under the lease. The tenant did not pay, even after the landlord had carried out the repairing works. The landlord claimed £1.9m in court but the tenant argued that the property was worth the same before and after the repairs, therefore as the landlord had suffered no reduction in the property’s value, it was not liable to pay anything.

The landlord made several formal offers to settle the dispute, ranging from £1.125m to £1.25m. The tenant made a counter-offer of £700,000.

Crucially, the landlord also invited the tenant to take part in mediation in what the court described as ‘a thorough, carefully thought through and apparently sensible mediation proposal’. The tenant did not reply to the invitation, despite several reminders.

On the day of the hearing the landlord accepted the tenant’s offer of £700,000. Usually, the court would then order the landlord to pay the tenant’s legal costs from a date 21 days after the tenant’s offer was originally made, on grounds the landlord should have accepted it within that time frame and saved the tenant from having to take further advice.

However, the court ruled that the landlord did not have to pay those costs: the tenant’s conduct amounted to an unreasonable refusal to mediate which should be penalised. It therefore exercised its discretion to excuse the landlord from paying any of the tenant’s costs.

On appeal, the tenant argued:

• the landlord’s acceptance of its offer of £700,000 showed that its refusal to mediate was reasonable;
• the difference between their offers (of around £550k) showed there was no reasonable prospect of mediation being successful;
• there was no ongoing relationship between the parties that would have made mediation more likely to come up with a novel solution than the court.

The Court of Appeal found that the £700,000 did not necessarily represent the value of the claim – such offers were commonly lower than the real value of the claim – and £550k was not necessarily an unbridgeable gap. It also found there were factors other than the closeness or otherwise of the relationship between the two parties that made mediation eminently suitable in this case. These included the nature of the dispute, the respective merits of the parties’ arguments, whether other methods of resolution had been tried, the costs of mediation and timescales.

However, the court rejected an application by the landlord that the tenant should also pay its legal costs because of its failure to mediate. The court said such a draconian sanction would only be appropriate for the “most serious and flagrant failures” to consider mediation or other methods of alternative dispute resolution – for example, where the court itself had suggested mediation. There had been no such serious and flagrant failure in this case.

Recommendation

Businesses involved in legal disputes should ensure they have considered mediation and/or other forms of alternative dispute resolution before going to court. If they don’t, they risk being penalised in costs if the court decides they have unreasonably refused mediation or other forms of ADR.

Case ref: PGF II SA v OMFS Company 1 Limited [2013] EWCA Civ 1288