Virtually unknown in this country 20 years ago, mediation is now one of the most common ways of resolving commercial disputes outside the court system. But what is mediation and should lenders embrace it or avoid it like the plague?

What is mediation?

Mediation is a structured form of negotiation in which the parties to a dispute attempt to settle their differences with the assistance of a mediator. Unlike litigation or arbitration, there is no judge in a mediation. The mediator does not decide any of the issues in the dispute or even (in most cases) express an opinion about the merits. The mediator’s role is simply to help the parties to find a mutuallyacceptable compromise.

Pros of mediation

We regularly represent lenders at mediations. Some of them are amongst the most pro-mediation of our clients. It is not hard to understand why given the advantages that mediation offers. Here are a few:

  • Success rate: According to the most authoritative recent survey of commercial mediations in England and Wales, around 75 per cent of disputes settle on the day of mediation, with another 13 per cent settling shortly thereafter. The aggregate settlement rate is therefore 88 per cent. Our own experience in banking cases backs up these statistics. We acted for lenders in 12 mediations during 2006 and 2007. Ten of them settled, a success rate of 83 per cent. 
  • Confidentiality: Mediations are conducted on a “without prejudice” basis. What transpires at a mediation cannot therefore be publicised or referred to at any later court or arbitral hearing save in very rare circumstances. Confidentiality can be a crucial factor for lenders in choosing an appropriate method for resolving disputes. 
  • Flexibility: The parties can fashion their own settlements at mediations, unconstrained by the views of any judge or the limitations of the law. So, for example, lenders keen to do future business with the other party to a dispute can agree not only an amicable settlement, but also the terms of any further lending. 
  • Cost: A large-scale commercial mediation is not cheap, particularly if more than two parties are involved, and each of them insists on bringing along solicitors and counsel. But the costs of even the most lavish mediation will be dwarfed by the expense of fighting the same case all the way to trial. 
  • Speed: Most commercial mediations last no longer than a day (albeit often a long one). Even when a dispute involves multiple parties, it is usually therefore possible to set up and hold a mediation in a few weeks. By contrast, court and arbitral proceedings can go on for years, with single hearings lasting months in the most complex cases.

And the cons?

There aren’t many. But here are two:

  • Risk that the mediation fails: The most significant downside is that the costs and effort involved in mediating are largely wasted if the parties fail to settle. Lenders should therefore choose carefully the cases that they agree to mediate and ensure that they mediate at the right stage of each dispute. For example, if a lender needs to see documents held by the other party in order to make a realistic assessment of the merits, it should not agree to mediate until after the other side has made disclosure. 
  • Revealing weaknesses: Mediations usually result in each party obtaining a better understanding of the other side’s position than it had before. If a lender has a weak case, a mediation may flush it out, emboldening the other party. But a weak case isn’t going to get better by keeping it under wraps until trial (even if that were possible). A lender with a weak case may therefore be best advised to mediate as early as possible, before too much damaging evidence comes to light.