ADR: RSVP or face costs sanctions

Where a dispute has arisen, it is simply not an option for parties to stick their heads in the sand regarding alternative dispute resolution (ADR).

Given the current economic circumstances, the courts are increasingly insistent that parties should conduct litigation in a cost-effective manner, and, rather than risk diluting this message, they have made something of an example of the parties to the recent case of PGF II SA vs OMFS Company 1 Ltd [2013].

If ADR is not to be entered into, reasons should be provided: if a party does not want to participate in ADR it should explain the reasons why and the reasons should be explored by the parties

The Court of Appeal stance in Halsey vs Milton Keynes General [2004] was that an unreasonable refusal to participate in ADR may lead to costs sanctions. In PGF, the otherwise successful defendant ignored two requests from the claimant to mediate and was denied its costs as a result. As such, it now appears that silence in the face of an invitation to participate in ADR can also constitute an unreasonable refusal, and should attract a costs penalty.

This is a general rule and there are exceptions: the general rule need not apply where ADR is clearly inappropriate or where a mistake means that the other party is not aware of the offer. However, from a practical point of view, parties would be best advised to respond to invitations even where ADR is clearly inappropriate, setting out the reasons why it is not suitable. Silence even in this instance is an unhelpful course of action as it leaves behaviour open to misinterpretation, which could in turn risk financial penalties for the silent party.

If ADR is not to be entered into, reasons should be provided: if a party does not want to participate in ADR it should explain the reasons why and the reasons should be explored by the parties. Lord Justice Briggs states that civil litigants should “engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal, or the undertaking of some other form of ADR, or ADR at some other time in the litigation”.

Reasons justifying a refusal might refer to some of the following factors:

• The nature of the dispute: the subject-matter may render a dispute intrinsically unsuitable, for example, where the parties wish the court to determine an issue of law or construction
• The merits of the case, although note that the fact that a party reasonably believes that he has a strong case is adamantly not the same as a party who unreasonably believes that his case is watertight (which latter is no justification for refusing mediation)
• The extent to which other settlement methods have been attempted, although this appears to be no more than an aspect of factor
• Whether the costs of the ADR would be disproportionately high - this is of particular importance where the sums at stake are comparatively small
• Whether any delay in setting up and attending the ADR would have been prejudicial, perhaps delaying the trial of the action
• Whether the ADR had a reasonable prospect of success: this is difficult to determine so refusal on this ground may be a high-risk strategy.

It is unclear just how much practical effect PGF will have on the majority of construction professionals given the statutory right to adjudicate construction contracts. However, where litigation occurs, parties ignore ADR at their peril.

Stephanie Canham is national head of projects and construction at law firm Trowers & Hamlins