Costs decision from the Court of Appeal in a "sad case about lost opportunities for mediation"

In Rolf v De Guerin [2011] EWCA Civ 78, the Court of Appeal considered an appeal about the costs of a small building dispute, in circumstances where the claimant succeeded on only a fraction of her claim and the defendant refused several offers to mediate until the eve of trial. The Court of Appeal exercised its discretion to make no order as to costs. It held that refusing to participate in settlement negotiations or mediation was, on the facts, unreasonable and ought to bear materially on the exercise of the court's discretion. Indeed, Lord Justice Rix characterised the matter as "a sad case about lost opportunities for mediation". Alexander Oddy, Mike McClure and Emily Lew comment.

Background

The award of costs according to the "loser pays" rule in England and Wales is subject to the court's discretion. In particular, the Civil Procedure Rules ("CPR") provide that the court must have regard to the conduct of the parties, which includes before the proceedings, and the efforts made, if any, during proceedings to resolve the dispute (CPR 44.3 and 44.5).

While the CPR does not expressly mandate the use of ADR, the courts have shown on a number of occasions a willingness to exercise discretion so as to impose adverse cost consequences on parties that refuse to engage in ADR unreasonably. The leading case is the Court of Appeal's decision in Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576, where the court issued guidance on the relevant factors to consider in determining whether a party had acted unreasonably in refusing ADR. The burden of proof will be on the unsuccessful party (and thus the payer of costs) to show that the successful party's refusal of ADR was unreasonable. Factors relevant to the court's assessment include (but are not limited to):

• the nature of the dispute and the merits of the case
• whether other settlement methods have been attempted
• whether the cost of mediation would have been disproportionately high
• whether there would have been delay to the trial if mediation had been undertaken
• whether the mediation had a reasonable prospect of success
• the encouragement of the court (this may of itself be demonstrative of an unreasonable refusal to mediate)

Facts

Mrs Rolf contracted Mr De Guerin to build a garage and loft at her home. Work began at the property, but eventually ceased following a break down in the relationship between the parties (in particular, several disagreements between Mrs Rolf's husband and Mr De Guerin). By this stage the garage had been substantially constructed and Mrs Rolf had paid Mr De Guerin £28,750. Mrs Rolf subsequently paid other builders £20,000 to finish the job.

Mrs Rolf brought a claim against Mr De Guerin alleging that the work had not been completed with skill or care, or at all. Her claim was asserted in various amounts between £44,500 and £92,500 and at the time of the trial was £70,000. Prior to commencing proceedings, Mrs Rolf made offers of settlement and continued to do so after proceedings were on foot. Mrs Rolf then sent a formal Part 36 offer to settle the claim for £14,000 plus costs. At the same time, Mrs Rolf also indicated that she was willing to attend mediation. No reply was received to this letter so Mrs Rolf sent two further letters to inform Mr De Guerin that the offer of settlement and mediation remained open - still no response was received.

One week before the trial was due to commence, Mr De Guerin offered to settle the claim for £14,000 plus reasonable costs, payable in monthly instalments over 36 months. The next day, Mrs Rolf amended her original Part 36 offer to accept £21,000 plus reasonable costs, again offering to attend mediation. Mr De Guerin responded that he was willing to attend mediation, but that £14,000 over three years was his best offer.

County Court decision

The parties never attended a mediation and proceeded to trial where Mrs Rolf was awarded just £2,500 in damages. At the costs hearing, at which Mrs Rolf submitted she should recover a substantial proportion of her costs, the judge held that since the claim was for "very, very much more" than the damages ultimately awarded, there should be no order of costs for the period until the expiry of Mrs Rolf 's first Part 36 offer. After that time, Mrs Rolf was to pay Mr De Guerin's costs since Mrs Rolf's Part 36 offer was too high and Mr De Guerin was right to reject it.

Mrs Rolf appealed the costs decision. She said that the court should exercise its discretion and recognise that she had succeeded at trial (even if the damages awarded were far less than her claim or her offers to settle). Mr De Guerin submitted that the appeal should be dismissed. Mr De Guerin said that Mrs Rolf's offers of £14,000 and £21,000 were considerably in excess of his adjudged liability and he was therefore fully entitled to ignore them. Furthermore, when asked by the Court of Appeal why he had been unwilling to mediate, he said that: (i) if he had mediated, he would have had to accept his "guilt"; (ii) he would have been unable to have persuaded a mediator what Mrs Rolf 's husband was like (a judge had to see that in court when Mr Rolf gave evidence); and (iii) he wanted his day in court.

 Court of Appeal decision

The Court of Appeal (Rix LJ, with whom Elias and Tomlinson LJJ agreed) allowed Mrs Rolf's appeal and made no order as to costs.

Rix LJ considered that the judge had erred fundamentally in relation to Mrs Rolf's Part 36 offer. In particular, there is nothing in the Part 36 procedure which states that an offeror is to be prejudiced as to costs because he has expressed his willingness to accept less than his open position. That would make the procedure "a most dangerous one to use".

In exercising the court's discretion, Rix LJ stressed the following factors:

• Mrs Rolf was only just the winner. She was awarded £2,500 in damages when her Part 36 offer was for £14,000 and her claim at trial was for £70,000.
• Mrs Rolf had only succeeded in one out of the three issues in the case.
• The ground on which Mr De Guerin succeeded was unpleaded and he would not have been so successful if he had relied solely on his pleaded arguments.

In addition, Rix LJ considered the parties' willingness to settle and made the following points:

• It was clear to Mr De Guerin from the start that Mrs Rolf wished to avoid litigation: she made offers to settle before commencing proceedings; she made Part 36 offers; and she even reconfirmed a Part 36 offer that was ignored.
• The facts of the case indicated that negotiation and/or mediation would have had reasonable prospects of success.
• Mrs Rolf's attempts at settlement had been ignored by Mr De Guerin until it was too late, and even then his offer was unrealistic given his financial situation.
• Mr De Guerin had given no reasons until the appeal for why he refused to attend mediation. In any event, the reasons he gave in the Court of Appeal for refusing mediation did not "bear real examination and [were] unreasonable".
• Indeed, Rix LJ noted that Mr De Guerin's wanting his day in court was not "an adequate response to a proper judicial concern that parties should respond reasonably to offers to mediate or settle and that their conduct in this respect can be taken into account in awarding costs".
• The spurned offers to enter into settlement negotiations or mediation should bear materially on the outcome of the court's discretion, particularly in this class of case (a small building dispute) where trial should be a solution of last resort.

Comment

This case provides a salutary warning to parties, even where they are partially successful, of the potential adverse costs consequences of refusing to mediate and is yet another example of the Court of Appeal endorsing the use of mediation. Indeed, in the opening line of the judgment, Rix LJ described it as "a sad case about lost opportunities for mediation". He also said it demonstrated how, in certain disputes, such as the small building dispute in this case, litigation can be "wasteful and destructive" and a trial should be regarded as a solution of last resort.