Two recent cases illustrate that belief in a strong case does not justify refusing to engage with ADR

The High Court has imposed indemnity costs in two recent cases (DSN v Blackpool Football Club Ltd [2020] EWHC 670 (QB) and BXB v Watch Tower and Bible Tract Society of Pennsylvannia & Ors [2020] EWHC 656 (Admin)) as a result of a party’s unreasonable failure to engage in ADR. In both cases, the party’s belief in the strength of its case did not warrant a refusal to participate in settlement negotiations. These decisions are further examples of a trend towards courts giving less weight to the ‘merits of the case’ as one of the factors taken into account when deciding whether a party was acting unreasonably in refusing to engage in ADR.

In the current environment – where judicial resources are stretched and courts have to prioritise between cases – parties can expect the courts to be even more robust in their exercise of the power to sanction parties who do not sufficiently explore settlement opportunities.

Consequences of an unreasonable refusal to engage in ADR

It is well-established that the unreasonable refusal to engage in ADR might result in cost sanctions. In Halsey v Milton Keynes General NHS Trust [2004] 1 WLR 3002, the Court of Appeal set out a list of non-exclusive factors that are relevant to determining whether a refusal was unreasonable. These factors, and how they have been interpreted and applied in subsequent decisions, are considered in more detail in a previous post here.

One of the factors listed in Halsey is the ‘merits of the case’. The fact that a party reasonably believes that it has a strong case was considered relevant by the Court of Appeal because otherwise a claimant could potentially extract a settlement from a defendant for a meritless claim by using the threat of cost sanctions to its advantage. However, the Court set a high bar for when the strength of the case justifies a refusal to mediate. It noted that a party’s reasonable believe that it has a ‘watertight’ case may be reason for a refusal to mediate and that some cases are ‘clear-cut’ in this respect (such as when a summary judgment application would have succeeded). However, even for ‘border-line cases, the Court observed, “little or no weight” should be given to a party believing it would win as “border-line cases are likely to be suitable for ADR unless there are significant countervailing factors which tip the scales the other way”.

This ‘merits of the case’ factor has been considered relevant in subsequent cases. In Northrop Grumman Mission Systems Europe Limited v Bae System [2014] EWHC 3148 (TCC), for example,  the High Court held that the respondent’s reasonable view that it had a strong case provided “some but limited justification for not mediating”.

The DSN and BXB decisions

The High Court recently addressed the consequences of parties refusing to engage in ADR on this basis in the DSN and BXB decisions.

The DSN and BXB cases were similar in many respects. Both cases concerned successful claims for vicarious liability for sexual assault. In both cases, the Master had issued an order (in the standard form) that the parties were to consider settling the litigation by any means of ADR. In both cases, the claimants sought an order for indemnity costs on the basis (amongst other reasons) that the defendants had not been willing to engage in ADR. In both cases, the defendants justified this refusal in part on account of their belief in the strength of their case. In both cases, the Court eventually ordered costs to be assessed (for set timeframes) on an indemnity basis.

In its reasoning in DSN, the Court read restrictively the already limited relevance of the merits of a case on a refusal to engage in ADR. It observed that the repeated refusal by the defendant to engage in settlement negotiations on the basis of a belief in a strong case was ‘inadequate’ and noted that:

“No defence, however strong, by itself justifies a failure to engage in any kind of alternative dispute resolution. Experience has shown that disputes may often be resolved in a way satisfactory to all parties, including parties who find themselves able to resolve claims against them which they consider to be well founded”.

In BXB, the court further commented on the possible advantages of ADR even when a defendant believes in the strength of its case. The court contended that the belief in a strong case does not:

“necessarily mean that there was nothing to discuss. One important purpose of a joint settlement meeting is to convey a defendant's view about the strength of its case. In any event, the possibility of agreeing quantum subject to liability provides a good reason to engage in discussions even in a case where the defendant is confident about its case on liability.”

These cases show that a party refusing to engage in ADR on the basis of a belief in the strength of its own case has to satisfy a high bar to succeed on this argument. Such refusal may carry with it considerable cost consequences. In light of the current strain on judicial resources, it is expected that the courts will be even more robust in their exercise of the power to sanction parties who do not sufficiently explore settlement opportunities going forward.