Court of Appeal gives guidance on when it is reasonable to refuse ADR

In a judgment handed down this week, the Court of Appeal has given some welcome guidance for litigants on when it may be reasonable to refuse Alternative Dispute Resolution (ADR). The Court of Appeal also held that it is inappropriate for the courts to compel unwilling parties (including public authorities) to submit a dispute to ADR. However, the judgment gives broad support for the use of ADR, and mediation in particular, which it stated is suitable in many disputes. It also confirms the court’s role to encourage ADR actively.

The appeals

The judgment was given in two appeals (Halsey v Milton Keynes General NHS Trust and Steel v Joy [2004] EWCA Civ 576) brought by the unsuccessful parties in two cases after the successful parties, who had declined to mediate, were not penalised in costs. The Court of Appeal dismissed both appeals. However, given the number of decisions in recent years, some conflicting, about when a successful party should be penalised in costs for refusing to mediate, the Court of Appeal took the opportunity to review this area and give guidance on the relevant factors to be considered. The importance of the judgment was emphasised by submissions being accepted from four interveners to the appeals, namely, the Law Society, the Civil Mediation Council, the ADR Group and the Centre for Effective Dispute Resolution.

Earlier cases

As we have reported in previous e-bulletins, the Court of Appeal’s decision in Dunnett v Railtrack Plc [2002] All ER 850 and the subsequent High Court decision of Lightman J in Hurst v Leeming [2003] 1 Lloyd’s Rep 379 highlighted the necessity for lawyers and litigants to consider ADR, failing which a successful party might be penalised in costs. In Shirayama Shokusan Co Ltd v Danova Ltd [2003] EWHC 3006 (Ch) Blackburn J in the High Court went even further by ordering that ADR take place, despite the resistance of one of the parties. In Royal Bank of Canada v The Secretary of State for Defence[2003] EWHC 1841(Ch) Lewison J in the High Court penalised a government department in costs although the department had been successful in the litigation, due to its failure to accept an earlier mediation proposal. In that case the judge attached great weight to the government’s “ADR pledge” in March 2001, to use ADR to settle disputes in all suitable cases and use the court process as a last resort.

However, in another High Court decision, Corenso (UK) Limited v The Burnden Group Plc [2003] EWHC 1805 (QB) the successful party which had refused to mediate was not penalised in costs as it had entered into another form of ADR (namely, Part 36 offers had been made). The judge held that so long as parties constructively engage in settlement negotiations, a party should not be automatically penalised because it had failed to engage in a particular form of ADR proposed by the other side.

While the overall trend in the cases has been strongly to encourage parties to mediate whenever possible, cases such as Corenso indicated the law was still developing and created uncertainty for parties. The time was ripe for further clarification.

Judicial encouragement of ADR

Lord Justice Dyson, giving the judgment of the court, summarised the various ways in which the Civil Procedure Rules (CPR) encourage the use of ADR. The overriding objective in Part 1 of the CPR includes an obligation on the court to manage cases actively and this includes “encouraging the parties to use an ADR procedure if the court considers that appropriate”. The court guides which are published by the different divisions of the High Court also encourage the parties to consider ADR and judges in the Commercial Court routinely make “ADR orders” which provide the strongest form of encouragement, while stopping short of actually compelling ADR.

While the judgment supports judicial encouragement (which may be “robust”) for the parties to enter into ADR, Dyson LJ held that to make mediation compulsory for unwilling parties would be an “unacceptable obstruction to the right of access to the court” under Article 6 of the European Convention on Human Rights. Even if a court does have jurisdiction to make such an order, it would, he said, be inappropriate for the court to exercise it. The judgment further noted that one of the key features of ADR processes is that they are procedures entered into voluntarily by the parties. The role of the court, Dyson LJ reiterated, was to encourage, not to compel.

Costs sanctions

Dyson LJ stated that to deprive a successful litigant of some or all of his costs on the grounds that he had refused to agree to ADR is an exception to the general rule that costs should “follow the event”, namely the unsuccessful party should pay to the successful party his costs of the action. The judgment emphasises that the burden is on the unsuccessful party to show why there should be a departure from the general rule. The fundamental principle is that such a departure is not justified unless the unsuccessful party shows that the successful party acted unreasonably in refusing to agree to ADR.

Factors to be considered

The Court of Appeal held that whether a party has acted unreasonably in refusing ADR must be determined having regard to all the circumstances of the particular case. (Dyson LJ specifically rejected the submission made by one of the interveners, the Civil Mediation Council, that there should be a presumption in favour of mediation.) Factors which may be relevant to that question will include (but are not limited to) the following:

• The nature of the dispute. Dyson LJ accepted that ADR is not appropriate in all cases. He acknowledged that there are cases in which the parties require the court to determine issues of law or construction, set a binding precedent or give injunctive or other relief, but most cases, he said, are not by their very nature unsuitable for ADR. 
• The merits of the case. If a party reasonably believes he has a strong case this is relevant to the question of whether he has acted reasonably in refusing ADR. The court should be astute to the danger of claimants seeking to use the threat of costs sanctions to extract a settlement where the claim is without merit. However, this factor will only provide justification where the party refusing ADR reasonably believes his case is “watertight”, for example, where the party would have succeeded in an application for summary judgment. 
• Other settlement methods have been attempted. This is a relevant factor but the Court of Appeal also pointed out that mediation often succeeds where previous attempts to settle have failed. 
• The costs of the mediation would be disproportionately high. This factor may be taken into account, for example, where the sums at stake in the litigation are comparatively small. The Court of Appeal acknowledged that a mediation can sometimes be at least as expensive as a day in court. 
• Delays. If a mediation is suggested close to trial and acceptance would delay the trial then this factor may be taken into account. 
• Whether the mediation had a reasonable prospect of success. While not the “critical factor” it had been in the Hurst case, the Court of Appeal said this will often be relevant to the reasonableness of the decision to refuse mediation. It acknowledged that it may sometimes be difficult for a court to decide this question. However, it has again placed the burden on the unsuccessful party - to show that there was a reasonable prospect that the mediation would be successful. This is not an onerous burden to discharge and it would, Dyson LJ said, be fairer and easier than for the successful party to prove the mediation would not have succeeded.

Refusal to mediate in the face of judicial encouragement

The Court of Appeal considered that another relevant factor was whether the court had encouraged the parties to agree to ADR. Dyson LJ stated that the stronger the judicial encouragement, the easier it would be for the unsuccessful party to discharge its burden of showing that the successful party’s refusal was unreasonable. Therefore, although the court must not compel parties to undertake ADR, if it has robustly encouraged ADR, then a party who refuses runs a higher risk of being penalised in costs for that reason alone.

Public bodies

The Court of Appeal then considered the particular issue of public bodies refusing ADR despite the government’s “ADR pledge”. Dyson LJ said that the pledge was no more than an undertaking that ADR would be considered and used in all suitable cases. Therefore if a case is not suitable for ADR, a refusal to agree to ADR would not breach the pledge (and the judge in the Royal Bank of Canada case was wrong to attach such weight to the pledge).

Comment

The Court of Appeal’s judgment provides some useful guidance as to when it may be reasonable to refuse to mediate or undertake some other form of ADR. The judgment places the burden of proof on the unsuccessful party and, while it continues the trend of cases strongly encouraging mediation, it marks a clear rejection of any role for the court in compelling litigants to attempt ADR. It does appear, however, to shift the balance in favour of a successful party who has refused to mediate. That party will receive his costs unless it can be shown by the unsuccessful party there is justification to depart from the general rule. Nevertheless, the judgment is another strong reminder that litigants and their lawyers must now routinely consider whether their dispute is suitable for ADR.