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Litigation and a trial will be the inevitable outcome for many disputes where the parties become entrenched in their positions. Part 36 offers to settle and mediation help to focus the parties鈥� minds on early resolution and it pays for parties to deploy a resolution strategy with these things in mind. Any resolution strategy warrants careful consideration because of the implications if you get it wrong. A recent Technology and Construction Court decision, PGF II SA vs OMFS Company and Bank of Scotland, illustrates the consequences where a party鈥檚 approach to resolving a dispute and specifically, refusing to mediate, was found to be unreasonable.

In October 2010, the landlord, PGF, brought a claim against the defendant tenant seeking losses suffered from allege breaches of reinstatement and repairing obligations. In April 2011, the defendant made an offer under Part 36 of the Civil Procedure Rules to settle the proceedings. Contemporaneously, the claimant invited the defendant to mediate, to which no response was received. In July 2011, the claimant repeated its invitation for mediation and again, the defendant failed to respond. In January 2012, the day before the trial was due to commence, the claimant accepted the defendant鈥檚 Part 36 offer. The matter came before the court on the issue of costs.

A party can be deprived of the benefit of making a Part 36 offer if it has acted unreasonably, in this case, by refusing to mediate

Part 36 offers focus parties towards resolution because they provide cost protection in litigation. For example, where a claimant accepts a defendant鈥檚 Part 36 offer after the expiry of offer, it is for the claimant to pay the defendant鈥檚 costs for the period from the date of expiry of the offer until acceptance, 鈥渦nless the court orders otherwise鈥�. The relevant period here was 2 May 2011 to 9 January 2012.

The courts have a general discretion as regards to costs. In PGF, the claimant argued that the now well-known principle established in Halsey vs Milton Keynes and NHS Trust that a successful party may be deprived of its costs if it unreasonably refuses to mediate should apply here and the defendant should not therefore recover its May -January costs. The defendant鈥檚 refusal to mediate here was said to be unreasonable because (i) the dispute was well suited to mediation; (ii) there was nothing to indicate the defendant thought its case so strong that it was reasonable to refuse to mediate; (iii) there was no suggestion that either party had an unrealistic view of the merits of the case; (iv) the costs of mediation would not have been disproportionate or high and nor would it have caused a delay; and (v) mediation would have had a reasonable prospect of success.

The defendant argued that the absence of material disclosure and expert evidence meant that it was not in the position to engage in a reasonable discussion as to settlement.

The court accepted PGF鈥檚 reasoning and held that it was unreasonable of the defendant not to respond to the suggested mediation and therefore not to agree to mediate. Accordingly, the defendant did not recover its costs for the period beyond when its offer expired. The judgment contains important commentary about the role of mediation in the eyes of the court for costs purposes. Relevantly, the 鈥渆ssence of all successful mediations is a willingness to compromise and/or the realisation that certain points are not as strong as the party believed鈥�. The court inferred that this should be common knowledge to commercial parties and their lawyers. The judgment also reiterates the policy encouraging mediation by depriving a successful party of its costs in appropriate circumstances and extends that by indicating that it should also deprive such a party of costs where there are real obstacles to mediation which might reasonably be overcome but are not addressed because the party that has not raised them at the time.

In summary a party鈥檚 litigation strategy will normally include consideration of a Part 36 offer and/or mediation. What this case shows is that a party can be deprived of the benefit of making a Part 36 offer if it has acted unreasonably, in this case, by refusing to mediate in circumstances where it should have. The case is useful for guidance on the consequences of refusing to mediate generally. It is submitted that exceptional reasons will need to be given, at the time, as to why it is not appropriate to mediate.

Digby Hebbard is partner at Trowers & Hamlins