Making a Part 36 offer provides a means of putting pressure on the other side to settle a case and of protecting, to some extent, a client’s position on costs. If a claimant does not accept a Part 36 offer and fails to obtain a more advantageous judgment, unless it considers it unjust to do so, the court will order the claimant to pay the defendant’s costs from the date when the relevant period expired (generally 21 days after the offer was made) and interest on those costs, and it will order the defendant to pay the claimant’s costs before that date.

In the recent case of PGF II SA V (1) OMFS (2) Bank of Scotland 2012 EWHC 83 (TCC), the Claimant landlord began proceedings in respect of claims for dilapidations arising out of alleged breaches of the repairing covenants of underleases, including issues surrounding air conditioning systems. The day before the trial, the 10 January 2012,  the Claimant accepted a Part 36 offer that had been made by the Defendant on 11 April 2011. Proceedings came to an end, save for the question of costs.

The Claimant applied for an order that the Defendant pay the Claimant’s cost on a standard basis for the period prior to 2 May 2011 (end of 21 day relevant period of a Part 36 Offer) (the “first period”) and for the period from 2 May 2011 to 10 January 2012, when the offer was accepted (the “second period”). It is the second period costs that were disputed. Under CPR 36.10 (4) and (5), unless the court orders otherwise, the Claimant is liable for the Defendant’s costs for the second period. This position is only departed from if it would be unjust for the Claimant to pay the Defendant’s costs.

The Defendant was offered the opportunity to mediate in May, June and July 2011 but refused to do so. The Claimant relied on the principle that a successful party (here the Defendant under CPR 36.10) may be deprived of its costs if it unreasonably refuses to mediate (Halsey v Milton Keynes General NHS Trust [2004]).

On the initial facts, the case did not fall in the exceptional category which would render it unjust for the Claimant to pay the Defendant’s costs for the second period and therefore it was not appropriate that the Defendant should pay the Claimant’s costs as requested. If the matter rested here, the Claimant would have been ordered to pay the Defendant’s costs.

However, it was held unreasonable of the Defendant not to respond to the suggested mediation and therefore not to agree to mediate the dispute. There was nothing to suggest that the Claimant was merely going through the motions and would not have engaged in mediation. The court believed that there was a reasonable prospect that the dispute could have been settled.

As such, it was ordered that the Claimant was entitled to its costs on a standard basis for the first period but there was no order for costs in respect of the second period. Therefore, the Defendant had lost its chance to recover its legal costs (under CPR 36.10) from the Claimant due to its refusal to mediate.

This case highlights the costs consequences of refusing to mediate. Mediation has become an integral part of litigation and the courts continue to punish those who refuse to mediate unreasonably.

For more information on any of the above please contact Phillip Baldwin at Phillip.Baldwin@parissmith.co.uk