PGF II SA v OMFS Company and Bank of Scotland PLC [2012] EWHC 83 (TCC) (Mr Recorder Furst QC)

INTRODUCTION

As well as attracting increasing academic attention, mediation remains a topic of considerable importance for civil practitioners. The recent decision in PGF II SA v OMFS Company and Bank of Scotland is important to both groups. To academics it confirms the judiciary's essentially consistent policy of strongly encouraging mediation in suitable cases; to practitioners it is a firm reminder of the risks involved in not seriously contemplating mediation even when Part 36 offers and other forms of settlement are in use. Since the Woolf Reforms there has been increasing emphasis on active, some would say pro-active, case management by the judiciary. A major tool in their armoury has been the cost sanction regime under section 44 including the wide discretion given to judges in assessing the conduct of the parties under 44.3(5). It is through the use of these provisions, that allow for costs to be apportioned against either party according to how they have conducted themselves as a whole during litigation, that has been central to the judicial encouragement of mediation. There has been a well-documented series of cases that has clearly emphasised the danger of parties failing to consider mediation as an appropriate method of dispute resolution. (1) This case continues and develops this theme and indeed clarifies that even a reasonable Part 36 offer is not sufficient to protect the client from cost implications.

THE FACTS

The facts of the case are relatively straightforward. The defendants were tenants of the claimant, with leases expiring in 2009. At some point a licence had been granted to the tenants allowing them to make alterations to the ventilation and air conditioning system. The licence was subject to a reinstatement clause. In August 2008 notice was served on the tenants requiring them to reinstate the system in accordance with the terms of the licence, and in January 2009 on the expiry of the lease the landlord served a schedule of dilapidations. The Scott Schedule clearly differentiated between the alleged breach of the requirement to reinstate under the licence and the wants of repair under the repairing covenant in the lease. However, at some later date the original schedule had been altered, placing the requirement to reinstate the air conditioning system into that part of the schedule that dealt with wants of repair. Proceedings were eventually commenced in October 2010. The claimant's Particulars of Claim cited various breaches of the repairing covenants, but no specific mention was made of the terms of the licence and no breach of the duty to reinstate was explicitly alleged. The claim in total was for a little over one million pounds. In January 2011 the defendants filed their defence, the main thrust of which being that certain work carried out by the landlord had not been necessitated by the alleged breach.

In April 2011, the defendant's made a Part 36 offer in the sum of 700,000 [pounds sterling] in full and final settlement of the landlord's claim. On the same day the landlord as claimant also made a Part 36 offer but also wrote to the defendant under a separate letter suggesting mediation. The defendant ignored the letter and a subsequent offer to mediate made in July 2011 was also ignored. On 10 January 2012, the day before the hearing was scheduled to commence in court, the claimant accepted the defendant's Part 36 offer of 700,000[pounds sterling]. The letter of acceptance demanded that the defendants pay all the costs incurred by the claimant on the standard basis up to the 2 May 2011 (being within the 21 day relevant period after the Part 36 offer had been made) and in addition all their costs incurred after the expiry of the relevant period. The claimant put forward two arguments for claiming costs after the expiry of the relevant period:

(1) that the defendant had introduced new 'information' and raised a new argument in January 2012 that had the claimant known about beforehand would have been material to their case, and

(2) that the defendant had unreasonably declined or refused to mediate. …