ADR and costs penalties in financial remedies cases
Published: 29/03/2023 14:58
Historically inter partes costs orders in financial remedies proceedings have been as common as hens’ teeth, for the very simple reason that the current costs rules largely preclude them being made. Thus FPR 28.3 provides so far as is material:
‘(5) Subject to paragraph (6), the general rule in financial remedy proceedings is that the court will not make an order requiring one party to pay the costs of another party.
(6) The court may make an order requiring one party to pay the costs of another party at any stage of the proceedings where it considers it appropriate to do so because of the conduct of a party in relation to the proceedings (whether before or during them).
(7) In deciding what order (if any) to make under paragraph (6), the court must have regard to –
(a) any failure by a party to comply with these rules, any order of the court or any practice direction which the court considers relevant;(b) any open offer to settle made by a party;(c) whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue;(d) the manner in which a party has pursued or responded to the application or a particular allegation or issue;(e) any other aspect of a party's conduct in relation to proceedings which the court considers relevant; and(f) the financial effect on the parties of any costs order.
(8) No offer to settle which is not an open offer to settle is admissible at any stage of the proceedings, except as provided by rule 9.17.’
Thus the starting point for any application for an inter partes costs order, is that the general rule is that no such order should be made. But the court also retains a residual discretion to make a costs order on the application of a party. Whether that costs order will be made or not, really hinges upon whether the court will impose a costs sanction upon the target party, for reasons grounded in their conduct. The key issue can be further refined to state that the key issue is likely to be whether a party’s conduct is unreasonable, so that it is just that they pay the costs which the other party has incurred.
Practice Direction 28A further provides:
‘4.3 Under rule 28.3 the court only has the power to make a costs order in financial remedy proceedings when this is justified by the litigation conduct of one of the parties. When determining whether and how to exercise this power the court will be required to take into account the list of factors set out in that rule. The court will not be able to take into account any offers to settle expressed to be ‘without prejudice’ or ‘without prejudice save as to costs’ in deciding what, if any, costs orders to make.
4.4 In considering the conduct of the parties for the purposes of rule 28.3(6) and (7) (including any open offers to settle), the court will have regard to the obligation of the parties to help the court to further the overriding objective (see rules 1.1 and 1.3) and will take into account the nature, importance and complexity of the issues in the case. This may be of particular significance in applications for variation orders and interim variation orders or other cases where there is a risk of the costs becoming disproportionate to the amounts in dispute. The court will take a broad view of conduct for the purposes of this rule and will generally conclude that to refuse openly to negotiate reasonably and responsibly will amount to conduct in respect of which the court will consider making an order for costs. This includes in a ‘needs’ case where the applicant litigates unreasonably resulting in the costs incurred by each party becoming disproportionate to the award made by the court. Where an order for costs is made at an interim stage the court will not usually allow any resulting liability to be reckoned as a debt in the computation of the assets.’
Thus, the Practice Direction further points to the conduct of the parties as grounding any costs order that is made, but also brings in the obligation of the parties to help the court to further the overriding objective. The Family Procedure Rules contain a version of the overriding objective familiar to civil practitioners, from its implementation in the Civil Procedure Rules, when they came into force in 1999, which provides as follows when the court is considering how to further the overriding objective in rule 1.4:
‘(1) The court must further the overriding objective by actively managing cases.
(2) Active case management includes–
(f) encouraging the parties to use a non-court dispute resolution procedure if the court considers that appropriate and facilitating the use of such procedure;(g) helping the parties to settle the whole or part of the case; ’
The conclusion that these provisions collectively point to, is that as part of the furtherance of the overriding objective, the parties can be directed by the court to use alternative dispute resolution (ADR). A party does not have to engage with this direction, but if they do not, there is ample scope within the costs rules and Practice Direction, for the opposing party to apply for a costs order, on the basis that failure to engage in ADR is unreasonable conduct. Moreover this conclusion runs with the grain of the civil justice system more generally: there is a vogue for ADR at the current time. The reasons for this are not hard to discern.
In addition to the philosophical belief that court proceedings should be a last resort and parties should resolve their differences consensually, the courts are under immense strain, short of resources, and labouring under huge backlogs. Rather than spend public money, fixing the court system and increasing its capacity, it is easier and politically more acceptable to encourage the parties to resolve their disputes outside the court system. And to ensure that they do, there has been a steadily hardening resolve to impose costs penalties upon parties who refuse unreasonably to pursue ADR and who insist upon their day in court.
In civil cases, there is a discernible trend in the caselaw to inflict costs penalties at the end of a case, for those parties who decide that mediation would be a waste of time, or do not condescend to reply to their opponents’ requests for a mediation.
By mediation, I mean the process described by CEDR as:
‘a flexible process conducted confidentially in which a neutral person actively assists the parties in working towards a negotiated agreement of a dispute or difference, with the parties in ultimate control of the decision to settle and the terms of the resolution.’
Mediation is one type of ADR, the deployment of which is now part of the Civil Procedure Rules.
Rule 1.4 CPR as part of the overriding objective in civil cases notes the court will:
‘(e) encouraging the parties to use an alternative dispute resolution(GL) procedure if the court considers that appropriate and facilitating the use of such procedure’
And the Rules have also taken on board to supplement mediation and other more traditional forms of ADR the process of early neutral evaluation in rule 3.1(m):
‘(m) take any other step or make any other order for the purpose of managing the case and furthering the overriding objective, including hearing an Early Neutral Evaluation with the aim of helping the parties settle the case.’
In practical terms, the court will consider inflicting costs penalties, on parties who unreasonably refuse to engage in mediation (or some other form of ADR). The leading case on when a refusal to engage in mediation is reasonable or not, remains that of Halsey v Milton Keynes General NHS Trust  EWCA Civ 576 where the Court of Appeal explained that the reasons which might justify the refusal of an offer of mediation included:
(a) The nature of the dispute. Some types of case might be simply unsuitable for mediation.
(b) The merits of the case. A mediation might be a waste of time where the merits of a party’s case were very strong.
(c) Other settlement methods have been attempted. And failed.
(d) The costs of mediation would be disproportionately high. Particularly if the costs of a trial then had to be added on, as well.
(e) Delay. Whether the mediation would cause delays in the court process.
(f) Whether the mediation had a reasonable prospect of success. Although this might involve a difficult evaluation of what might have happened.
The guidelines were modestly extended in the case of PGF II SA v OMFS Company Limited  EWCA Civ 1288 where the Court of Appeal decided that silence in the face of a reasonable request for mediation could also be unreasonable.
The Court of Appeal however seemed to sound a retreat from this approach in the case of Gore v Naheed  EWCA Civ 369 where the judge at first instance refused to apply a costs penalty for failing to engage with mediation and instead Patten LJ opined:
‘Speaking for myself I have some difficulty in accepting that the desire of a party to have his rights determined by a court of law in preference to mediation can be said to be unreasonable conduct particularly when, as here, those rights are ultimately vindicated.’
In November 2018, the Civil Justice Council issued its Final Report on ADR: significantly the authors of that report noted:
‘It is with greatest deference that we offer any criticism of the carefully considered guidance given by the Court of Appeal on a case management issue. But that is where we find ourselves and it is significant that some of the feedback we received seeking clarification of the inconsistencies in recent Court of Appeal decisions came from the judiciary.’
The Working Group put forward a number of recommendations including a revised and considerably narrower list of what might be good reasons for refusing mediation:
‘(1) The parties have already attempted mediation (or possibly ENE or some other form of ADR) without success.
(2) The parties are already committed to an ADR process in the near- term.
(3) The parties (or a party) satisfy the Court of a need to wait (often until after disclosure) for any meaningful negotiations to take place, but they will commit to using ADR at that stage if the case has not otherwise settled.
(4) There has been unreasonable or obsessive conduct by one or other party (of the Hurst v Leeming Variety).
(5) There is a genuine test case in which the court’s judgment on an issue of principle is required.’
They also went on to say what they considered did not amount to “good reasons” for refusing mediation:
‘In our combined experience of the way ADR and in particular mediation has worked in complex and entrenched disputes, we do not think that any of the following are acceptable opt-outs:
(1) That the case appears complex (this seemed to be accepted as in part justifying a refusal to mediate in Gore v Naheed).
(2) That the case involves serious issues such as fraud.
(3) That the ADR process appears to be unlikely to succeed.
(4) (Given the increasing flexibility of the ADR offering) that the cost of ADR is too great.
(5) That one or other party believes he or she has a strong case.’
Recently there have been a string of first instance decisions whereby fairly stringent costs penalties have been applied to parties who refuse to engage in mediation: including DSN v Blackpool Football Club  EWHC 670 (QB) and BXB v Watch Tower and Bible Tract Society of Pennsylvania  EWHC 656 (QB). Although the former case was reversed on liability grounds in the Court of Appeal, it is suggested that the first instance judge’s reasoning on applying a costs sanction for a failure to mediate, remains sound.
Both of these cases concerned allegations of sexual abuse: hitherto, it may have been thought that this was a type of case where mediation had little prospect of success: whether the abuse occurred or not, would appear to be one of those issues forming a chasm between the parties. But in each case a failure to engage in mediation proved to be an expensive course.
Looking forward, it would appear that the move to ADR is part of a culture shift which is accelerating, not least because of the current demands on the court system, and also I suspect because of a generational shift amongst the judges.
The influence of the ADR working party is probably also discernible in the decisions at first instance. It may also be that a key factor is working ADR into the court timetable: in which case failure to engage in ADR, is failure to comply with a court order.
It follows that genuine requests for mediation, have real force in relation to potential costs outcomes at the end of the case. That in turn means that those requests must be considered genuinely, and any letters written by either side, should be written, as ever on the premise, they may be read out in court, two years after they were written.