The Technology and Construction Court ("TCC") is known to endorse the use of Alternative Dispute Resolution ("ADR"), and there is a reasonable chance that during the course of a construction dispute some form of ADR mechanism will be encountered. The recent case of PGF II SA v OMFS Company 1 Ltd has extended the principle that an unreasonable refusal to enter into ADR proceedings will result in adverse cost consequences for the uncooperative party and has therefore heightened the need for organisations to be aware of the potential pitfalls of refusing, or indeed ignoring, an invitation to engage in ADR proceedings.
PGF issued proceedings against OMFS in October 2010 claiming roughly £1.9 million for alleged breaches of repairing covenants. Both a settlement offer of £1.25 million and an invitation to take part in early mediation were sent to OMFS and, on the same day, the solicitors for OMFS made an offer of £700,000 to PGF.
Neither of the offers was accepted, nor was the invitation to mediate acknowledged. A further invitation to mediate was sent to OMFS in July 2011, with a chaser letter following in August. Although a full response was promised, PGF heard nothing further in relation to the request to mediate.
In early 2012 PGF accepted OMFS's offer of £700,000. Ordinarily, this would mean that the claimant was obliged to pay the defendant's costs from 21 days after the date of the offer to the date of acceptance (the "relevant period"). PGF, however, argued that OMFS's silence in response to the repeated invitations to enter into mediation constituted an unreasonable refusal to participate in ADR and as such OMFS should instead be required to pay PGF's costs for the relevant period.
In the first instance the court agreed with PGF that OMFS's silence constituted an unreasonable refusal to enter into ADR. This would be the case regardless of whether a refusal to engage in ADR could be justified, and thus OMFS was not entitled to recover their costs for the relevant period.
OMFS appealed this decision and PGF cross-appealed, claiming that they should be permitted to recover their costs from the defendant.
The Court of Appeal upheld the first instance decision that silence can be taken as an unreasonable refusal to mediate even if a refusal to mediate may have been capable of justification. They did however reject PGF's cross-appeal, stating that while costs sanctions of this nature were, in principle, within the courts power, they should be reserved for the most serious failures to engage in ADR.
The above case plainly illustrates the increasing emphasis placed on the ADR process as a method of dispute resolution. The fact that the Court is willing to penalise a failure to respond even in situations where a refusal would be justifiable widens the scope for adverse cost consequences for those parties who fail to properly engage with ADR.
To this extent, parties to a construction dispute should seriously consider any invitation to enter mediation with a view to participating in ADR where at all possible and, if a decision is made to refuse the invitation they should set out clearly in writing the justification for doing so.