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Costs penalty following a refusal to mediate is not necessarily an automatic sanction

It had been thought that if a party refused ADR in the form of mediation that there would be a costs penalty against that party even if they were successful in the case. In a recent case this principle has been slightly undermined. In Gore v Naheed & Anor [2017] EWCA Civ Lord Justice Patten, giving judgment held (at paragraph 49):

“… 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. But, as Briggs LJ makes clear in his judgment [in PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288], a failure to engage, even if unreasonable, does not automatically result in a costs penalty. It is simply a factor to be taken into account by the judge when exercising his costs discretion.

Patten LJ in referring to the facts of the case said at paragraph 50:

“In this case the judge did take it into account but concluded that it was not unreasonable for Mr Gore to have declined to mediate. His solicitor considered that mediation had no realistic prospect of succeeding and would only add to the costs. The judge said that he considered that the case raised quite complex questions of law which made it unsuitable for mediation. His refusal to make an allowance on these grounds cannot in my view be said to be wrong in principle.”

It seems that if this case is followed that the previous position that parties must take part in mediation or possibly be penalised in costs might be qualified. It remains to be seen but it may well be that such a sanction may not be automatic if parties to litigation do not wish to take part in mediation/ADR and they have good reason for not doing so – as in the Gore case.

 

Cost penalty for refusing mediation

Costs penalty following a refusal to mediate is not necessarily an
automatic sanction

It had been thought that if a party refused ADR in the form of mediation
that there would be a costs penalty against that party even if they were
successful in the case. In a recent case this principle has been slightly
undermined. In Gore v Naheed & Anor [2017] EWCA Civ
Lord Justice Patten, giving judgment held (at paragraph 49):


“… 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.
But, as Briggs LJ makes clear in his judgment

[in PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288

], a failure to engage, even if unreasonable, does not automatically
result in a costs penalty. It is simply a factor to be taken into
account by the judge when exercising his costs discretion.

Patten LJ in referring to the facts of the case said at paragraph 50:


“In this case the judge did take it into account but concluded that it
was not unreasonable for Mr Gore to have declined to mediate. His
solicitor considered that mediation had no realistic prospect of
succeeding and would only add to the costs. The judge said that he
considered that the case raised quite complex questions of law which
made it unsuitable for mediation. His refusal to make an allowance on
these grounds cannot in my view be said to be wrong in principle.”

It seems that if this case is followed that the previous position that
parties must take part in mediation or possibly be penalised in costs might
be qualified. It remains to be seen but it may well be that such a sanction
may not be automatic if parties to litigation do not wish to take part in
mediation/ADR and they have good reason for not doing so – as in the Gore
case.

The hidden costs of refusing ADR

What is the cost of refusing negotiation/mediation/adjudication?

Although Adjudication has to a large extent replaced the necessity for litigation or arbitration it is a modern fact of life that, if for any reason you have to litigate your construction dispute, before proceeding to litigation, you should at the very least considered and preferably engaged in Alternative Dispute Resolution (‘ADR’). The major form of ADR is mediation.

The compelling reason for this is the courts encourage ADR, in fact they expect the parties to have attempted it. The courts will consider whether a party has unreasonably refused to engage in ADR and penalise them in costs if they have done so. The fact is therefore that a refusal to engage in ADR can reduce a costs award even if successful at a trial.

There have been numerous cases on this point. In the case of Laporte and another v The Commissioner of Police of the Metropolis (2015) Turner J provided an explanation of the approach the courts will take when assessing whether a refusal to engage in mediation by one party should lead to a reduction in a costs award.

The Civil Procedure Rules sets out the usual rule that costs follow the event but with the court having discretion to amend the award because of the conduct of a party – and that discretion includes whether or not a party was willing or not to engage in ADR.

In Laporte the Police won the case on every substantive issue. The Claimants however requested that the standard approach of costs following the event should not be followed because the Defendant had been unwilling to engage in ADR. In this case mediation was suggested in September 2013 but it took the Defendant until June 2014 to confirm they would not agree to mediate.

Turner J considered the foremost authority in this area, Halsey v Milton Keynes General NHS Trust (2004), which had set out six issues to be considered when making an order for costs:

  • the nature of the dispute;
  • the merits of the case;
  • whether other settlement methods have been attempted;
  • the cost of mediation would be disproportionately high;
  • delay to the trial; and
  • whether the mediation had a reasonable prospect of success.

 

In considering these issues Turner J said that the most important question was whether there was a reasonable prospect of a mediation being successful. In argument the Defendant alluded to the Claimant’s view that they would require a sum of money to settle. However the Judge found that this had not been formally required nor had the Defendant excluded the possibility of making an offer in negotiations. He decided this was not adequate justification.  In fact it was the case that the Defendant had on the procedural backfoot for trial preparation and this was the reason it had failed to engage in ADR.

Given the refusal to mediate and following Halsey the Defendant was awarded only two thirds of its costs – the failure to engage in ADR in this instance was not deemed sufficient cause to prevent recovery of any costs.

Whose terms apply?

Whose terms Apply?

The age old question in construction disputes of whose terms apply is still a surprisingly common problem and raised its’ head again in Transformers & Rectifiers Ltd v Needs Ltd [2015] EWHC 269.

Here there was an argument between parties who had carried out business with each other for a number of years. The purchase order used had the purchaser’s terms on the back of the form but did not refer to them on the front. When placing orders by email the purchaser did not send a copy of the terms. To make the problem worse compound the supplier’s acknowledgement, although referring to its’ terms and conditions, did not supply a copy of the terms but advised a copy of those terms was available on request – but it did not supply them. Inevitably the question arose as to whose terms applied.

The judge said that a purchaser wishing to incorporate their terms and conditions in orders sent by e-mail must give the supplier reasonable notice of them and that they intended to rely on them. To ensure this and because the front page of the purchase order did not refer to the terms on the back it would be necessary to e-mail a pdf attachment including the face of the purchase order and the terms on the back. In this case the purchaser had not done so and accordingly failed to incorporate its terms into the contract.

However the Judge also said that a supplier who wanted to incorporate their own terms by referring to them in an acknowledgement must refer to them on the face of the acknowledgement, making it obvious those terms were to govern the contract. Unless referring to standard terms the supplier ought to give the purchaser reasonable notice of their terms – printing them on the back of the acknowledgement or by sending a copy to the purchaser. In this case the supplier had not done so.

The consequence in this case was that as both parties had failed to take these actions neither party’s terms applied.

 

Court fees

Court fees

The costs of litigation have gone up. From 9 March 2015 court fees payable on the issue of proceedings in money claims have undergone a substantial increase. Issue fees for all claims valued at £10,000 or more are now 5% of the value of the claim, with a maximum issue fee, for all claims valued at £200,000 or more, and claims for unspecified amounts, of £10,000.

This new fee structure applies to all money claims, as well as counterclaims with a value of £10,000 or more. Issue fees for claims worth less than £10,000 are unchanged.

With its’ speed it is no wonder Adjudication is so popular.

Pay Less Notice

Pay Less Notice

If you engage someone to carry out construction work for you, whether you be an employer or contractor or sub contractor, then you must be aware of the requirement for Pay Less Notices if you wish to withhold monies from a payment. The case of ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) exemplifies why.

ISG were employed by Seevic to carry out work under a JCT Design and Build Contract 2011. The contract requires the contractor to submit monthly interim applications for payment stating the amount the contractor considers to be due to him, and the basis on which that sum has been calculated. The contract also contains a standard procedure requiring the employer not later than five days after the due date to serve a payment notice, stating the amount it considers to be due. Importantly if the employer intends to pay less than the sum stated in the payment notice or interim application, it must serve a pay less notice no later than five days before the final date for payment.

ISG submitted an application for interim payment 13. Not only did Seevic fail to make any payment they also failed to issue a payment notice or a pay less notice. In the consequent Adjudication the adjudicator decided ISG was entitled to the sum of £1,097,696.29 as set out in Interim Application 13 because Seevic had failed to issue the notices required – a purely technical victory.

Seevic did not comply with the Adjudicator’s decision and they started their own Adjudication in which they requested the Adjudicator to value ISG’s works at the date of their Application No 13. In this second Adjudication it was decided that the value was in fact less than the amount that had been claimed by ISG.

ISG applied for summary judgment to enforce the first decision and further that the Adjudicator in the second Adjudication did not have jurisdiction to make the decision that he had arrived at. They stated that the value of its work at the time of interim payment 13 had already been decided because, in the absence of any notices served by Seevic, the value must be taken to be that stated in the application.

Mr Justice Edwards-Stuart concluded:

  • In the absence of fraud then where there was no payment or pay less notice the contractor becomes entitled to the amount stated in the interim application – irrespective of the true value of the work actually carried out. The employer can, defend itself by serving the notices provided for by the contractual provisions;
  • However, it is not open to either party to go back over such ground in order to revisit the amount of the valuation by issuing adjudication proceedings.

On that basis the court found that the value of interim payment 13 had already been decided in the first Adjudication because the effect of the payment notice regime meant that there could be no dispute about the value of the work that was the subject of the second Adjudication.

The Judge allowed the enforcement of the decision in Adjudication No 1 and held that the adjudicator in Adjudication No 2 had no jurisdiction to make the decision he did. He said:

“the statutory regime would be completely undermined if an employer, having failed to issue the necessary payment or pay less notice, could refer to adjudication the question of the value of the contractor’s work at the time of the interim application (or some later date) and then seek a decision requiring either a payment to the contractor or a payment by the contractor based on the difference between the value of the work as determined by the adjudicator and the sums already paid under the contract.”

The lesson is that as an ‘employer’ you must ensure that you serve the requisite notices if you disagree with an application or a valuation because otherwise you will be forced to make payment of the amount applied.

The importance to issue Pay Less Notices on your contractor or sub contractor promptly

Learn about the importance of timely Pay Less Notice

This case emphasises how important it is to issue Pay Less Notices on your contractor or sub contractor promptly and within the time scales laid down.

The courts have refused to enforce an adjudicator’s decision valuing an interim application. This unusual step was because the adjudicator had previously decided a sum was owed by the Employer in respect of the same interim application – not on a valuation basis but because of it’s failure to serve a pay less notice.

There were two adjudications. In the first Adjudication the Contractor had successfully claimed £1.1m from the Employer because the Employer had failed to serve a Pay Less Notice disputing the sum to be paid. In effect they did not make payment of the amount of the Contractor’s interim application. The win was therefore a technical knockout rather than a win on a pure valuation basis.

However (and presumably because they thought they would lose the first Adjudication) just before the decision in adjudication 1 the Employer launched another adjudication requesting the adjudicator to value the sum that was due to the Contractor in the same interim application.

This was on the grounds that the adjudicator was not making a decision in the first adjudication on the value of the interim payment because that was to be decided on the knockout basis.  The adjudicator accepted that the second Adjudication was in fact a different dispute, and decided that the Contractor should actually have been paid around £300,000, not the £1.1m awarded in the first Adjudication.

The Employer paid the Contractor the £300,000 but the Contractor issued enforcement proceedings to recover the other £800,000 from the first Adjudication.  The Employer also issued its own enforcement proceedings in respect of the second adjudication.

The court found that in deciding first that £1.1m was payable, and then that the value of the valuation was only £300,000, the adjudicator had made two decisions about on the same dispute – it is important to note a dispute can only be decided once by an adjudicator. The court found that the decision in the second adjudication was of no effect.

The important point is this: the courts will not permit a party who fails to follow the statutory scheme and issue a Pay Less Notice to recover its position in a second adjudication.  Although the interim valuation may have been wrong the Employer will now have to start court proceedings in order to recover the sums due to it.

This case emphasises how important it is to issue Pay Less Notices on your contractor or sub contractor promptly and within the time scales laid down.

The courts have refused to enforce an adjudicator’s decision valuing an interim application. This unusual step was because the adjudicator had previously decided a sum was owed by the Employer in respect of the same interim application – not on a valuation basis but because of it’s failure to serve a pay less notice.

There were two adjudications. In the first Adjudication the Contractor had successfully claimed £1.1m from the Employer because the Employer had failed to serve a Pay Less Notice disputing the sum to be paid. In effect they did not make payment of the amount of the Contractor’s interim application. The win was therefore a technical knockout rather than a win on a pure valuation basis.

However (and presumably because they thought they would lose the first Adjudication) just before the decision in adjudication 1 the Employer launched another adjudication requesting the adjudicator to value the sum that was due to the Contractor in the same interim application.

This was on the grounds that the adjudicator was not making a decision in the first adjudication on the value of the interim payment because that was to be decided on the knockout basis.  The adjudicator accepted that the second Adjudication was in fact a different dispute, and decided that the Contractor should actually have been paid around £300,000, not the £1.1m awarded in the first Adjudication.

The Employer paid the Contractor the £300,000 but the Contractor issued enforcement proceedings to recover the other £800,000 from the first Adjudication.  The Employer also issued its own enforcement proceedings in respect of the second adjudication.

The court found that in deciding first that £1.1m was payable, and then that the value of the valuation was only £300,000, the adjudicator had made two decisions about on the same dispute – it is important to note a dispute can only be decided once by an adjudicator. The court found that the decision in the second adjudication was of no effect.

The important point is this: the courts will not permit a party who fails to follow the statutory scheme and issue a Pay Less Notice to recover its position in a second adjudication.  Although the interim valuation may have been wrong the Employer will now have to start court proceedings in order to recover the sums due to it.

Interim applications, final accounts and unpaid applications

The amendments to the Housing Grants, Construction and Regeneration Act 1996 have now been in force since October 2011 and the changes are now reflected in standard contracts and sub contracts. They should also be incorporated into bespoke contracts. Despite this the new payment system introduced by the amendments still surprises employers, contractors and sub contractors. It can catch the unwary out as payment of an application may have to be made in full if an employer or main contractor fails to comply with the requirements now imposed. [continue reading…]

Suspension

Cashflow is the life-blood of any construction business. Without it contractors and sub contractors quickly go out of business. However obtaining payment is difficult and the industry is adept at giving reasons why payment hasn’t been made.

The answer is not to react by simply walking off site – the Construction Act provides that remedy but it must be done for proper demonstrable reasons and it must be done strictly in accordance with either the terms of the contract or the rules set out in the Act.

[continue reading…]