How to deal with settlement approaches in the early stages of a dispute

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A quick recap on the PGF case: silence can be costly
We recently highlighted the Court of Appeal decision in PGF II SA v OMFS Company 1 Ltd [1] (PGF) in which a costs sanction was imposed on a defendant because of its failure to respond to the claimant’s request to mediate. Ignoring the other party’s request amounted to an unreasonable refusal to mediate for which the defendant was penalised. For our quick refresher on the decision in the PGF case.

The courts’ strong support of ADR procedures like mediation is in keeping with Lord Justice Jackson’s costs reforms which are forcing many parties and their lawyers to rethink how they approach the early stages of litigation.

ADR (of which mediation is just one method) has been around for a couple of decades. Yet, in the PGF case, Lord Justice Briggs felt compelled to refer in his judgment to Lord Justice Jackson’s, “clear endorsement of ADR as a process which is still insufficiently understood and still under-used”. [2]

It is true that those involved in disputes may not fully appreciate the workings of ADR procedures. However, there can be few commercial dispute resolution lawyers left without a thorough understanding of ADR – and the consequences for their clients – if they do not give a full explanation of the various processes available to litigants to assist in the early resolution of a dispute.

Why are the courts so supportive of Alternative Dispute Resolution?
So why are the courts so supportive of ADR?

There were sound public policy reasons for the Court of Appeal’s decision in the PGF case. In particular, the court considered that:

  • ignoring an offer to try ADR or not providing reasons for refusing such an offer can ‘stymie’ negotiations
  • where parties do not explain their reasons for ignoring or refusing an offer to engage in ADR at the time of the refusal, it will often be harder, more expensive and more time consuming to establish the true reasons and their reasonableness later.

In addition, the court recognises the benefits of ADR. A mediation, for example, costs less than proceeding to trial and can:

  • help to save, preserve or resurrect a business relationship
    uncover practical solutions the parties might not have considered previously
  • help the parties gain insights into their own and their opponent’s position which can help facilitate settlement, even if the mediation is unsuccessful on the day.


If you have a dispute – be proactive and review ADR options from the outset

If you are involved in a dispute whether as a claimant or defendant, you should endeavour from the outset to resolve it. In particular:

  • review all ADR options to ascertain which is the most appropriate for the resolution of the dispute. Consider what might be the most cost-effective process for resolving the dispute
  • seek full explanation from your lawyers on the different ADR options and their potential costs
  • engage with the other party. Such engagement could lead to full or partial settlement and thereby reduce both the costs and the need for court and judicial time
  • discuss the issues. Discuss your proposals for ADR. If the other party doesn’t agree, remember that there are lots of options: mediation; expert determination; early neutral evaluation – or just plain negotiation
  • continue to review ADR options if the dispute continues – don’t curtail further discussions.

Action to take if you receive a request to try mediation or other ADR methods
So what should you do if your opponent asks you to try ADR?

If you receive such a request, take action – do not ignore it. In particular:

  • consider all ADR options as well as the particular option proposed
  • engage with the other party and respond substantively to the ADR request (and preferably within a reasonable time scale)
  • if you do not believe it is the right time to engage in ADR – or that the particular procedure suggested is not appropriate, fully explain your reasons and make an alternative suggestion. (Have a look at the section below on what constitutes an unreasonable refusal).

Even if you believe it is too early to try ADR, you must still engage with the other party. If you:

  • don’t have enough information about the claim – ask for it
  • need sight of some documents – ask for them
  • need an expert view before you can settle, discuss expert evidence with the other party and discuss when might be the right time to try ADR in the future
  • think the cost of ADR is not justified – explain why.

If you do not give reasons at the time, you might later find yourself having to explain to the court why you refused to try ADR. That could well involve you in a forensic investigation to prove your thinking and actions at the time of the refusal which is likely to be difficult. And remember that, as a result of the PGF decision, if you gave no response at all, your position will be deemed to have been unreasonable.

What constitutes an unreasonable refusal to mediate?
When is it reasonable to refuse to engage in ADR?

In deciding whether a refusal is unreasonable, the court will take into consideration a number of factors including: the type of dispute; the merits of the arguments in the case; whether the parties have tried to settle the dispute: whether the costs of ADR would be so great as to be disproportionate to the amount in dispute, and whether or not there was a good chance of the ADR process resulting in settlement. These principles were set out in the case of Halsey v Milton Keynes General NHS Trust [3].

In the PGF case, the Court of Appeal extended the Halsey principles slightly by confirming that ignoring an offer to use ADR would effectively amount to an unreasonable refusal to engage in ADR.

Handling ADR: tips for in-house lawyers
Finally, some tips for in-house lawyers. ADR is no longer one of a litigator’s tools: it is a litigation essential. The court hinted in the PGF case that lawyers, who do not fully advise their clients on ADR, risked negligence should their client be penalised in costs for unreasonable refusal to engage in ADR processes.

All litigators should read and use the Jackson ADR Handbook [4] not least because:

  • Jackson LJ was its catalyst – and fully supported the Handbook’s authors
  • the foreword to the handbook has a recommendation by Lord Dyson MR who refers to it as “properly authoritative” on ADR
  • in the PGF case, the Court of Appeal agreed with the claimant’s reliance on the handbook [5] in the absence of any other authority to support their argument that the defendant’s failure to respond to the mediation request amounted to unreasonable behaviour.

The use of ADR is one of the key ways in which the courts are trying to reduce the costs of litigation. Those litigating or intending to litigate should explore all options for settlement in the early stages of their dispute and respond promptly and constructively to any settlement approaches made by the other party.

[1] PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288
[2] Paragraph 26 of PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288
[3] Halsey v Milton Keynes General NHS Trust
[4] See:
[5] Paragraph 11.56 of the ADR Handbook