Dilapidations Disputes: The Fear of Crippling Legal Costs

The greatest fear in dilapidations disputes is mounting legal costs if proceedings are issued. Hence the longstanding practice of serving Part 36 (or Calderbank) offers. But as less than 1% of dilapidations cases make trial these days, along with ever-increasing pressure to mediate first with a costs penalty for refusing, is that practice now outmoded?

The Background

We all know as professionals that litigation costs can be huge. ‘The fear’ is that they can come to exceed any benefit in continuing negotiations, and so drive unfavourable settlements, therefore effectively serving as a barrier to justice.

Dilapidations trials commonly last 4-8 days, because of the number of experts involved. Costs can run into hundreds of thousands of pounds.

Hence the long-established practice of ‘costs protection’ i.e. the party serving a so-called Part 36, or Calderbank, offer. In short, the making of an offer is privileged until after the court has determined the claim sum. If the offer was better than the judgment sum from the other side’s perspective, then costs will be awarded more or less in your favour.

And so Part 36 offers are banded about, often from quite an early stage in negotiations. But are they the most effective tool for costs protection these days?

I ask because I recall reading just before Covid that the Property Litigation Association had advised that fewer than 1% of dilapidations cases actually make trial these days. That fraction of 1% is probably even smaller now, due to the prevailing backlog in the civil justice system. There has also been increasing pressure on parties to engage in ADR before trial. In dilapidations, the customary form of ADR is mediation, which has more than a 90% success rate according to both the CEDR, and my empirical observation.

The law has evolved in recent years to make it all but compulsory to engage in ADR before trial. A party that ignores or refuses an invitation from the other side is likely to be penalised on costs, even if they otherwise succeed in the litigation.

So perhaps there is now a more effective approach to costs protection than the rush to issue Part 36 offers; especially prematurely. Remember that your Part 36 offer is meant to be your best offer to your opponent, but how can it be, if you are yet to mediate? Surely you have more to give.

Must the Parties Mediate?

In Halsey -v- Milton Keynes General NHS Trust [2004] EWCA Civ 576 the court concluded that it had no jurisdiction to force the parties to mediate. To oblige truly unwilling parties to refer their dispute to mediation would be to impose an unacceptable obstruction to their right to access the court (thus contravening Article 6 of the Human Rights Act).

However, more recently in Churchill -v- Merthyr Tydfil Borough Council [2023] EWCA Civ 1416, the Court of Appeal considered the lower court’s rejection of the defendant’s application for the proceedings to be stayed for 3 months for the parties to first engage in ADR. The claimant had been refusing to do so. The Deputy District Judge had of course simply followed the leading authority of Halsey as above.

In the Court of Appeal judgment, Sir Geoffrey Vos stated:

‘The court can lawfully stay proceedings for, or order, the parties to engage in a non-court based dispute resolution process, provided that the order made does not impair the very essence of the claimant’s right to proceed to a judicial hearing and is proportionate to achieving the legitimate aim of settling the dispute fairly, quickly and at a reasonable cost’.

Whilst this case does not of itself make ADR compulsory, it is the first made in the light of the 2021 Civil Justice Council Report on Compulsory ADR which found that:

‘Any form of ADR which is not disproportionately onerous and does not foreclose the parties’ effective access to the court will be compatible with the parties’ Article 6 rights’.

The path thus appears to move inexorably towards compulsory ADR.

What if a Party Refuses?

In Halsey, the court also considered whether a refusal to mediate should give rise to costs sanctions. The key is whether the party has unreasonably refused. This specifically applies to the merits of the particular case i.e. it is reasonable for a defendant to refuse if the offer comes from a claimant using the threat of costs sanctions to extract a settlement when the claim has little to no merit. This scenario is unlikely in any dilapidations case of course, as the tenant invariably has breached covenants to repair, redecorate and reinstate alterations; the dispute is thus one of quantum, not liability.

Another reasonable ground to refuse to mediate which could potentially apply to some smaller dilapidations case, is where the costs to mediate (commonly £15,000-£20,000 per party these days) would be disproportionately high. However, even this is unlikely to be considered reasonable refusal even in dilapidations cases for a small sum. In Burchell -v- Bullard & Others [2005] EWCA Civ 358, the court considered that the nature of the case (a small building dispute) lent itself to mediation as the cost of mediation was small (‘a drop in the ocean’) relative to the cost of litigating a case of this kind.

Dilapidations cases are especially expensive to litigate, commonly lasting 5-8 days, because each side is likely to have a minimum of two experts (both building and valuation surveyors).

• In JB -v- DB [2020] EWHC 2301 [Fam], Mr Justice Mostyn penalised a party in costs for failing to comply with the prior order to use their best endeavours to resolve the dispute ‘if necessary through mediation or another form of non-court dispute resolution’.
• In Garritt-Critchley & Others -v- Ronnan & Another [2014] EWHC 1774 [Ch], the defendants were ordered to pay the claimant’s costs on an indemnity basis because their position of consistently refusing to mediate due to confidence in their position and a belief that the parties were too far apart, was wrong.
• In DSN -v- Blackpool Football Club Limited [2020] EWHC 670 [QB], the judge considered that indemnity costs should apply because the defendant’s refusal to engage in mediation was conducted ‘out of the norm’, as the court did not accept the defendant’s justification that it believed it had a strong defence. No defence by itself justified a failure to engage in any kind of ADR.

Protection on Costs

So, in light of the above, it appears that the slavish and often premature making of Part 36 offers is probably often of limited real effect; in particular because:

• They do nothing to compel progress; and
• They contradict the ethos of the mediation to almost certainly occur pre-trial in that if this was truly your best offer, how can you improve on it in the inevitable compromise at mediation?

Our experience is therefore that, at the right time, an open offer to mediate, reminding the other side of the costs sanctions for refusing or ignoring the invitation, is more effective. You include the names of say three well-regarded mediators and suggested dates to mediate. There can be no legitimate objections, as mediators cannot exercise bias, as they do not make any judgment. They are simply helping the parties find their own agreement. Mediations can be arranged quickly – usually within a month or two.

So, this alternative approach not only provides a more palpable threat of a costs penalty, it has the dual benefit of breaking inertia and forcing progress to likely settlement. Remember, more than 90% of mediations produce settlement on the day, or shortly following. They are still worthwhile for the few that do not settle, as issues will commonly be narrowed, so making for a shorter trial.

In the event that the matter does not settle at mediation, then would be the time to serve a Part 36 offer. Or certainly, the one that really is your best and final.

Please email Paul Raeburn paul@dilapsolutions.com if you have any questions in relation to the above or require any advice with regards to dilapidations disputes.