The courts have repeatedly held that a failure to engage in alternative dispute resolution (ADR), and in particular mediation, may constitute unreasonable conduct and therefore risks a costs sanction. A recent Court of Appeal judgment confirms that exceptions exist and potentially widens their scope. Nonetheless, from a practical point of view, parties should remain cautious about refusing to engage in ADR.
The existing position
The established position is that parties are always expected to consider ADR. The courts have consistently indicated that a failure to respond to an invitation to participate in ADR, or a refusal to participate, may be viewed as unreasonable conduct and could result in costs sanctions (see the Practice Direction on Pre-Action Conduct and the Court of Appeal judgment of Susan Dunnett v. Railtrack plc). A party that refuses to mediate and then goes on to be successful at trial may find the amount of costs it can recover significantly reduced. If that party loses the trial, it risks paying the other side's costs at the higher, indemnity, rate.
Absolute silence in response to an invitation to ADR is highly likely to be considered unreasonable, even if reasonable grounds to refuse existed (PGF II SA v. OMFS Company 1 Ltd).
Examples exist where a refusal to mediate was deemed reasonable and the costs consequences avoided. The Court of Appeal provided guidelines on what may constitute such reasonable grounds in Halsey v. Milton Keynes General NHS Trust. Nonetheless, the courts' starting position has been that ADR should be considered.
The costs consequences are not automatic. The unreasonable conduct is a factor for the court to consider when exercising its discretion on costs.
Gore v. Naheed and Ahmed
In Gore v. Naheed and Ahmed  EWCA Civ 369, the Court of Appeal considered an appeal relating to a right of way for vehicle access. The claimant, Mr Gore, was successful and awarded his costs. The defendants argued these costs should be reduced due to Mr Gore's failure to engage in mediation.
The Court of Appeal's view was that:
A party's desire to have the issue resolved by litigation, rather than mediation, is not necessarily unreasonable, especially when that party is ultimately successful at trial.
Even if a failure to engage in ADR was deemed unreasonable, the costs consequences remained at the discretion of the court.
Factors to consider when identifying reasonable grounds for refusing mediation included whether the mediation had any realistic prospect of success and whether there were complex questions of law unsuitable for mediation.
What this means
The court's approach in Gore is markedly different from its position in recent years, such as the PGF case. Whilst Gore is consistent with the approach in Halsey (that exceptions to the general rule exist), it is surprising to see the courts row back from promoting ADR.
Although engaging in ADR remains in the best interests of a party in most cases, this highlights the occasional instances where a party may reasonably wish to resist an offer to mediate. An example is where the other side has failed to set out its position in a coherent way, so the mediation appears doomed to fail. (As an aside, such a situation could be dealt with by suggesting the mediation is delayed until the other side explains its case properly.) The Gore judgment may well assist in such circumstances.
The issue for parties is that, given any sanction will still ultimately come down to the court's discretion, uncertainty on costs will exist until the end of the trial. In large complex cases, those costs consequences could easily dwarf the costs of a mediation. The prudent approach remains that parties should remain receptive to offers to mediate. When considering whether there is a good reason to refuse such an offer, the Halsey factors mentioned above may assist. These included:
The nature of the dispute: Most cases are suitable for ADR, although there may be an issue that is likely to arise again in future and a party needs a binding precedent to deal with such occurrences.
The merits of the case: For instance, if the defendant considers the claimant is using the threat of costs sanctions to extract a settlement, despite the claim being without merit.
Other settlement methods have been attempted: This may show that a party is making efforts to engage in ADR but, as the other side has unrealistic views of the merits of its case, mediation is not appropriate.
The costs of mediation would be disproportionately high: On very small disputes, a reluctance to mediate is less likely to result in a costs sanction.
Delay: For instance, if mediation would require the trial to be adjourned.
Whether the mediation had a reasonable prospect of success: The Gore judgment was consistent with this factor.
If a party considers there is a good reason to refuse to mediate, it should fully set out its reasons in writing to the other side. These grounds should be kept under review. If there is doubt, the prudent approach remains to engage in ADR and consider mediation.