How Do I Avoid Adverse Costs from an ADR Requirement?

Courts in England and Wales can order parties in commercial disputes to engage in alternative dispute resolution, and since 1 October 2024 the Civil Procedure Rules require them to consider unreasonable failure to engage in ADR when deciding costs. For businesses facing a commercial claim, understanding what satisfies this requirement — and what does not — is now a practical commercial necessity, not a legal technicality.

This page explains the ADR requirement, what adverse costs sanctions actually mean, what counts as genuine engagement, and which alternatives give you the best protection against a costs order while producing the most practical outcome for your dispute.

What Is the ADR Requirement and Where Does It Come From?

The courts in England and Wales can now order parties to engage in alternative dispute resolution where such an order is proportionate and does not undermine the parties' right to a judicial hearing.

This power comes from two sources. First, the Court of Appeal decision in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416 (November 2023), which departed from the widely followed view, taken from Halsey v Milton Keynes General NHS Trust (2004), that courts could not compel ADR, and confirmed that they can. Second, the Civil Procedure Rules amendments that came into force on 1 October 2024, which put that power into the rules governing civil litigation in England and Wales.

As of 1 October 2024:

• CPR 1.1 — the overriding objective now includes promoting or using ADR.
• CPR 1.4(2) and CPR 3.1(2) — the court's duty to actively manage cases now includes ordering the parties to engage in ADR.
• Part 44 — when exercising its discretion on costs, the court must consider whether a party failed to comply with an ADR order or unreasonably failed to engage in ADR.

In plain terms: a court can now order you into ADR, and if you refuse without good reason — or simply ignore an ADR proposal from the other side — you risk a costs sanction even if you win on the merits. Whether a refusal is unreasonable depends on the facts.

What Do Adverse Costs Sanctions Actually Mean?

An adverse costs order is not a fine. It is a judicial decision about who pays the legal costs of the proceedings — and it can go against a party that wins on the substance of the case if that party behaved unreasonably in relation to ADR.

The consequences can be serious. In Henderson & Jones Ltd v Salica Investments Ltd [2025] EWHC 838 (Comm), the defendants failed to beat the claimant's Part 36 settlement offer, and the judge awarded enhanced interest at the full 10% above base rate on the £2,154,285 judgment sum from 21 November 2023. The judge noted that the defendants had unreasonably refused to mediate or engage in ADR on numerous occasions, and that was one reason he would not reduce the enhanced interest.

In Northamber PLC v Genee World Ltd [2024] EWCA Civ 428, the Court of Appeal held that silence in response to an offer to mediate was in itself unreasonable, even without an explicit refusal. But it said a costs penalty does not follow automatically, and the penalty it imposed was modest: the claimant's costs recovery against one defendant rose from 70% to 75%. Simply not replying to an ADR proposal can be enough to attract a costs sanction.

What Counts as Genuine Engagement with ADR?

Genuine engagement means actively considering an appropriate ADR route and participating in it in good faith — not going through the motions to avoid a sanction while having no real intention of resolving the dispute.

Courts assess this on all the circumstances. Relevant factors include whether the ADR proposal was reasonable and proportionate, whether the refusing party gave proper reasons for refusal, whether those reasons were justified given the nature and value of the dispute, and whether the party that refused made any counter-proposal.

Disputes up to £150,000 often sit in what we call the sub-legal band: the range below the tipping point at which it becomes commercially viable to instruct solicitors and use traditional court processes. Litigation costs there are often disproportionate to the amount at stake, so it is harder to argue that a reasonable, proportionate ADR proposal was unsuitable. The smaller and more straightforward the dispute, the harder it becomes to argue that ADR was unsuitable.

Viable Alternatives That Satisfy the ADR Requirement

Not all ADR is equal in terms of the protection it provides against adverse costs, or in terms of the practical outcome it produces. Here are the main viable alternatives and what each delivers.

Mediation

Mediation is the most commonly ordered form of ADR and satisfies the court's expectation in most cases. A mediator facilitates negotiation between the parties — but has no decision-making power. If the parties cannot agree, the dispute is unresolved and litigation continues.

For commercial invoice and debt disputes where the primary question is whether money is owed, mediation carries a significant limitation: it requires both parties to reach agreement. A debtor who has already ignored a final demand and a letter before action may engage with mediation in a technical sense while having no genuine intention of settling. Participation satisfies the ADR requirement, but it does not guarantee resolution.

Early Neutral Evaluation

Early Neutral Evaluation involves an independent expert giving a non-binding opinion on the merits of the dispute. It can be useful for resetting unrealistic expectations and creating conditions for negotiated settlement — but the opinion is not binding and either party can reject it and proceed to litigation.

ENE satisfies the ADR requirement where it is the process the court has ordered or where it is a reasonable response to the nature of the dispute. For a full comparison of ENE and binding alternatives, see our page on whether you should agree to Early Neutral Evaluation.

Binding neutral decision

A binding neutral decision process goes further than either mediation or ENE in two important respects: it produces a definitive outcome, and it demonstrates a more substantive commitment to resolving the dispute outside the courts.

Both parties agree in advance to be bound by the neutral's decision. An independent neutral, an independent lawyer with at least 15 years' practical experience, acting as an expert, not an arbitrator, reviews the contract, the documents, and the written submissions from both sides, and issues a binding determination. There is no hearing. Neither party needs a solicitor. The dispute is resolved.

At Dispute Neutral, that decision is issued within 10 business days of the matter being ready. Fees are banded by the amount in dispute and known in advance. The process is private. It covers commercial disputes up to £150,000 in England and Wales and Northern Ireland, and both parties must agree to use it.

From a costs perspective, a genuine attempt to resolve a dispute other than by a full court process is likely to be looked on favourably, and a binding decision has the added advantage of producing an outcome. Whether any particular conduct is reasonable still depends on the facts, and if a court has ordered a specific form of ADR, you must comply with that order.

The Practical Sequence for Protecting Yourself Against Adverse Costs

Whether you are bringing a claim or on the receiving end of one, here is how to protect your position.

Propose ADR early and in writing. Do this before proceedings are issued if possible. A written proposal — by email or letter — creates a clear record. State the process you are proposing, why it is proportionate, and the timeframe you suggest.

Respond to any ADR proposals promptly. Silence in response to an ADR proposal is likely to be treated as unreasonable. If you receive an ADR proposal you have concerns about, respond in writing with specific reasons — do not simply ignore it.

Choose a process that produces a binding outcome. Mediation and ENE carry the risk of no resolution. A binding neutral decision process produces a definitive outcome and shows a real commitment to resolving the dispute proportionately.

Document everything. Keep records of every ADR proposal made or received, every response, and every reason given for acceptance or refusal. This documentation is your protection in any subsequent costs assessment.

Include an ADR clause in your contracts from the outset. Businesses that include a Dispute Neutral clause in their standard terms of business ensure that if a dispute arises, the ADR process is already agreed — before proceedings begin and before positions become entrenched. Draft clauses are available in the Include us section of the site.

Frequently Asked Questions

Can I avoid the ADR requirement entirely if I think my case is strong?

No. Courts assess unreasonable refusals under CPR Part 44, and costs penalties can be imposed even on a party that wins. The strength of your case is one factor a court may consider when deciding whether a refusal was reasonable, but confidence in your case is rarely a safe reason on its own to ignore or refuse ADR. Respond to any proposal and give specific reasons if you decline.

What if the other side is the one refusing ADR?

Document the refusal carefully. Send your ADR proposal in writing, set a reasonable response deadline, and keep every communication. In Northamber PLC v Genee World Ltd, the Court of Appeal held that silence in response to an offer to mediate was in itself unreasonable, although the penalty it imposed was modest and a penalty does not follow automatically. When deciding costs, the court must consider whether a party unreasonably failed to engage in ADR, so your documented record of proposing ADR, and their failure to engage, is something the court can take into account.

Does engaging in ADR mean I am admitting the other side's claim has merit?

No. Agreeing to participate in ADR, including a binding neutral decision process, is an agreement about how the dispute will be resolved, not about who is right. The neutral reviews both sides' case equally and issues a determination based on the evidence. Engaging with ADR is a sensible procedural decision that can help your costs position. It is entirely separate from the question of whether the claim against you is valid.

Is a binding neutral decision process considered genuine ADR for CPR purposes?

Yes. Expert determination and binding neutral decision processes are recognised forms of ADR. Genuinely taking part in one is an attempt to resolve the dispute other than by a full court process, which is likely to be looked on favourably on costs, and unlike mediation or ENE it produces a definitive outcome. If a court has ordered a specific form of ADR, you should comply with that order. For more on how Dispute Neutral fits the current ADR landscape, see our page on why Dispute Neutral is a strong fit.

Protect your costs position — and resolve the dispute

If you are facing an ADR requirement in commercial proceedings, or you want to propose a binding ADR process to the other side before proceedings escalate, Dispute Neutral offers a practical route for commercial disputes up to £150,000, if both parties agree to use it.

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Related guides

• Courts can now order ADR — with costs sanctions for refusal
• The new ADR landscape — and why Dispute Neutral is a strong fit
• Should I agree to Early Neutral Evaluation?
• How Dispute Neutral works
• Include Dispute Neutral in your terms