Refusal to Engage in Alternative Dispute Resolution: Costs Sanction or no Costs Sanction
Alternative Dispute Resolution (‘ADR’) is an effective tool to achieve an earlier settlement of a legal dispute but it also has a significant role in the control of costs. We discuss the circumstances in which a party’s failure to engage in ADR could result in a costs sanction, as well as situations in which a costs sanction may not apply.
Whilst the parties should always consider whether their disputes are suitable for ADR, it is voluntary in nature and there is no presumption that a party to a dispute should agree to mediation or other alternative dispute resolution processes. However, parties must recognise that if the unsuccessful party can demonstrate that the refusal of the successful party to engage in ADR was unreasonable the presumption that costs follow the event could be rebutted.
The Halsey Test
The Halsey test arises from the case of Halsey v Milton Keynes General NHS Trust; Steel v Joy  EWCA Civ 576, in which the Court of Appeal considered previous decisions to set out clear guidance on whether refusal to engage in ADR would be considered unreasonable.
The Court of Appeal found that refusal to agree to ADR does not justify departure from the general rule that costs of litigation should follow the event, unless the successful party acted unreasonably in refusing to do so. The Court of Appeal found that the following factors should be considered when determining whether refusal to engage in ADR was unreasonable:
The nature of the dispute – “most cases are not by their very nature unsuitable for ADR”;
The merits of the case – “the fact that a party reasonably believes that he has a watertight case may well be a sufficient justification for a refusal to mediate”;
Whether other settlement methods have already been attempted;
Whether the costs of ADR would be disproportionately high;
The stage of the proceedings in which ADR is suggested and whether it would have the effect of delaying trial; and
Whether it has reasonable prospects of success.
The burden was found to be on the unsuccessful party to show that the successful party’s refusal was unreasonable.
The Court of Appeal in Lomax v Lomax  EWCA Civ 1467 have since acknowledged that the court’s engagement with mediation has progressed significantly since Halsey was decided. Below we consider the specific circumstances in which a party’s failure to engage in ADR resulted in a costs sanction and those in which it did not.
Circumstances in which Failure to Engage may Lead to a Costs Sanction
A defendant that refuses to attempt ADR in an appeal on the grounds that it was not prepared to make any further payment to the claimant and was confident that it would succeed on the appeal could face a costs sanction. In Dunnett v Railtrack plc  EWCA Civ 303, Railtrack plc was indeed successful in having Dunnett’s appeal dismissed, but the Court of Appeal deprived Railtrack plc of its costs as a result of its failure to consider ADR. The court warned that refusing to consider ADR places a party at risk of adverse costs consequences regardless of the outcome of the litigation.
A party that refuses to mediate because the dispute turned on a point of law and the matter was not one where emotions played a significant part in the case could also be deprived of its costs despite winning the case. In Royal Bank of Canada Trust Corpn Ltd v Secretary of State for Defence  EWHC 1479 (Ch), the Ministry of Defence refused mediation despite the Government’s pledge that ADR would be considered and used in all suitable cases where the opponent was prepared to adopt it. The Ministry of Defence’s reasons for failing to engage in mediation did not make the matter unsuitable for mediation and the Ministry of Defence was awarded no costs despite winning.
A party that agrees to mediate but then subsequently causes it to fail due to adopting an unreasonable position may also face a costs sanction. In Seventh Earl of Malmesbury v Strutt & Parker  EWHC 2199, the court determined that the claimant’s offer did not reflect its true position and awarded the claimant only 80% of its costs to reflect their unreasonable attitude in the mediation.
Further guidance was provided by the Court of Appeal in PGF II SA v OMFS CO 1 Ltd  EWCA Civ 1288. In this case, the claimant sent a letter to the defendant proposing mediation. On the same date, the defendant made a Part 36 offer but did not respond to the invitation to mediate. Some months later and one day before trial, the defendant gave notice of its intention to amend its Defence. The claimant replied by accepting the defendant’s Part 36 offer. Instead of the normal costs consequences applying, the Court found that the defendant’s silence amounted to a refusal to mediate and concluded that it would be unjust for the claimant to pay any of the defendant’s costs for the period following the 21 days after the defendant’s Part 36 offer.
The most recent case of DSN v Blackpool Football Club Ltd (Rev 1)  EWHC 670 (QB) is an indication of how the courts are getting harder on parties who refuse to engage in ADR. In this example, the defendant flatly refused to engage in ADR because it believed it had a strong defence and because “no purpose would be served by any form of ADR”. The claimant beat its own Part 36 offer made in December 2019 and would have, therefore, been entitled to costs on the indemnity basis from the date of expiry of that offer. However, instead the claimant was only awarded costs on the indemnity basis from 25 February 2019, being the date on which the defendant refused to attend a joint settlement meeting.
Circumstances in which there may be No Costs Sanction
There may be no costs sanction in circumstances where a party refuses to mediate because they hold the view that it has no realistic prospects of success and is, therefore, not appropriate. In Hurst v Leeming  EWHC 1051 (Ch), Mr Leeming’s view that Mr Hurst was incapable of a balanced evaluation of the facts was held to have been justified and the court refused to penalise Mr Leeming’s failure to mediate.
There may also be no costs sanction where a defendant refuses to mediate on the basis that it has a strong claim and the claimant then rejects an offer to settle that they subsequently fail to beat. In Northrop Grumman Mission Systems Europe Ltd v BAE Systems  EWHC 3148 (TCC), the claimant accepted that the defendant was entitled to its costs having been successful, but argued that they should be reduced by 50% due to its refusal to mediate. The court held that the defendant’s refusal to mediate was unreasonable, but that it should be balanced against the fact the claimant failed to beat the defendant’s offer, and that it should not impact on the costs order.
Finally, the court will not impose a costs sanction on a party that refuses to mediate where their opponent has proposed the mediation with the motive of putting pressure on them to make a large contribution towards what their opponent is willing to accept. In Societe Internationale de Telecommunications Aeronautiques SC v Wyatt Co (UK) Ltd (Maxwell Batley (a firm), Part 20 defendant)  EWHC 2401 (Ch), the claimant tried to bully the defendant into mediation and the purpose of the invitation to mediate was not with a view to resolving the liability of the defendant without litigation.
A party must be able to demonstrate adequate reasons in support of its decision to refuse to consider ADR. If a successful party’s refusal to engage in ADR is deemed to be unreasonable, there is a strong possibility that the Court will depart from the general rule that costs of litigation should follow the event and disallow that party at the very least a proportion of its costs.
The benefits of ADR processes can be significant, including having the ability to significantly control legal costs expenditure. It is imperative that costs budgets prepared during the proceedings make sufficient allowance for the parties to engage in ADR. Costs should be claimed for mediation or another form of ADR within the ADR/Settlement phase of the costs budget in accordance with the most recent Precedent H Guidance Notes.