Refusal to Mediate. When Silence is Not Golden.

Below is an interesting guest post from Vaisakh Shaji.

A recent UK Court of Appeal judgment in PGF II SA vs OMFS Company Ltd reiterated the Halsey principles, which essentially established the scope and permissible limits of court’s discretion in referring a matter to ADR mechanism. It enumerates situations under which a costs-sanction can be imposed in civil litigation by Courts, wherein a dispute which could have been settled through inexpensive and less-time consuming means was thwarted by the decree-holder.

What is The Hasley Principle?

The Court of Appeal in Halsey vs Milton Keynes General NHS Trust, for the first time addressed a situation in which it would be appropriate for the court to use its powers to encourage parties to settle their disputes outside court. The Court held that, it shall not compel the parties, rather encourage the parties to do so, in the most suitable cases. As summarized in this recent post in Herbert Smith ADR bulletin, Halsey established that:

• the court should not compel parties to engage in ADR but may encourage them to do so in suitable cases ("robustly" where appropriate);
• the court's power to have regard to the parties' conduct when exercising its discretion as to costs includes the power to deprive the successful party of some or all of its costs on the grounds of its unreasonable refusal to participate in ADR; and
• for that purpose, the burden is on the unsuccessful party to show that its opponent's refusal was unreasonable (that is, there is no presumption in favour of ADR).

For further reading of the same, you can access the post here.

I decided to do a preliminary research regarding costs-sanctions or the reference to Halseys principles in India. The power of the court in this regard, is either largely unexplored or is lying in a grey area. Needless to state, judicial reforms over the last two decades gave us the Lok Adalat system, an improved Arbitration and Conciliation Act (‘AC act’), among such other amendments in the procedural laws with respect to court annexed mediation.

Reference to Supreme Court judgments and the AC act would show the permissible limits of judicial intervention in arbitration. The court’s discretion to refer parties to mediation even on its own motion under the Legal Services Act cannot be done without hearing out both the parties.

However, the emphasis here is not on the efficacy of referring parties to an ADR mechanism, rather on the costs of civil litigation. Section 35 and 35A of the Civil Procedure Code (‘CPC’) gives power to the courts to impose ‘costs’ on the parties to a civil litigation. Subject to statutory limits, and the rules framed by the respective High Courts, the SC through various judgments have reiterated that costs cannot be ‘fanciful’ or ‘whimsical’, rather it should be ‘actual’ and ‘realistic’ as was held by the Apex Court in Sanjeev Kumar Jain vs Raghubir Saran Charitable Trust.

For the present discussion, a review of SC judgments with respect to principles regarding awarding of costs is not necessary (those interested can read the Law Commission of India 240th report); rather, a situation where the Court can order a party to pay costs of litigation due to his unwillingness to enter into an ADR mechanism.

The Court of Appeal by applying the Halsey principles, held that what is paramount is the nature of the dispute, and whether an ADR mechanism would be better suited to bring finality to the dispute, among other factors. Lord Justice Briggs in PGF emphasized that, silence in the face of an invitation to participate in ADR is, as a general rule, of itself unreasonable, regardless of whether an outright refusal, or a refusal to engage in the type of ADR requested, or to do so at the time requested, might have been justified by the identification of reasonable grounds."

The refusal of a party to enter into mediation was prima facie, considered an unreasonable act by the Court. The emphasis was to show the growing support for ADR mechanism in civil disputes. In such a situation, the onus would be on the successful-party to justify his silence. Given that the nature and scope of arbitration is increasing in India, it would be hugely beneficial if the Courts in India take a more progressive stance. Most commercial agreements entered into today invariably have an arbitration clause and mediation as a tool is used only in a limited context.

The Court, within its permissible limits under CPC or under the AC Act could act in such a way that it encourages a constructive participation in the ADR process by civil litigants. Even if a dispute is not commercial and is a claim under tort, judicial precedence has shown that Courts in India are inclined to consider a matter to be resolved through arbitration; an English law proposition accepted by the SC in Renu Sagar vs General Electric. The PGF judgment is progressive in such regard, and re-emphasizes the importance of settling disputes by alternate mechanisms and a blatant refusal by a party could be at its own risk.