The costly risk of refusing ADR

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In New Zealand, most construction disputes are resolved through adjudication under the Construction Contract Act 2002. Looking more broadly, legal disputes in New Zealand can be resolved through:

  • litigation in court, which is becoming increasing expensive and protracted; or
  • alternative dispute resolution (‘ADR’) including negotiation; expert determination; mediation; adjudication; and arbitration.

Overseas, parties to disputes can also choose between litigation or ADR. Morover, there is a growing trend of judges penalising parties in litigation who refuse to attend ADR. This trend has not yet reached our shores. However, the development is worth understanding and keeping an eye on:

  • In England and Wales, the benefits of ADR are recognised in the Pre-Action Protocol for Construction and Engineering Disputes, which aims to put disputing parties ‘in a position where they may be able to settle cases early and fairly without recourse to litigation’.
  • In England and Wales, there is well-established authority that even if a party completely succeeds in litigation, if they have refused ADR without sufficient reasons, they may face cost penalties.
  • In the October 2015 England and Wales decision Reid v Buckinghamshire Healthcare NHS Trust  an unsuccessful party was ordered to pay costs on an indemnity basis because it refused to mediate. Master O’Hare explained:

If the party unwilling to mediate is the losing party, the normal sanction is an order to pay the winner’s costs on the indemnity basis, and that means that they will have to pay their opponent’s costs even if those costs are not proportionate to what was at stake. This penalty is imposed because a court wants to show its disapproval of their conduct.

In New Zealand, some parties completely reject the notion of ADR in favour of litigation, notwithstanding ADR can be cheaper, faster and less acrimonious. If New Zealand does follow the lead of England and Wales, Hong Kong and other jurisdictions, we may see a real shift in this attitude.

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