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By David GRIFFITHS
Solicitor of the Supreme Court and Partner, Edwards Geldrad

Mediation has a vital role to play in achieving the twin objectives of GRIP 21, namely keeping afloat or re-structuring the failing business and as importantly, preserving value. I shall attempt to demonstrate this by reference both to practice and theory. I have suggested a bibliography for the reader who is keen to advance his studies in this area. First, however, some definitions.

What is mediation?

Mediation is the consensual procedure whereby parties to a dispute agree to negotiate that dispute within a formal framework and assisted by an impartial neutral third party, the mediator. The parties can agree themselves to refer their dispute to mediation. Alternatively, they can be directed to mediation by the court, where legal proceedings have been commenced.

Mediation differs materially from a court driven or arbitration procedure. Its focus is primarily on interests as opposed to rights. This is not to say that the parties negotiate in ignorance of or without regard to their legal rights; the emphasis is simply quite different. It will be clear at once that, in a mediation, the possibilities of creative solutions to a dispute are much greater than any solution which could be imposed by an arbitrator, judge or other tribunal.

A short story will suffice to bring out the point. Two sisters are in the kitchen quarrelling over the last orange in the bowl which both of them want to use. Arguments rage to and fro as to which sister should be entitled to take the orange. The elder sister asserts that because of her age she should be entitled to the orange. The younger sister points out that she has been working in the kitchen first. Both sisters recognise however that as they both have to live under the same roof some sort of compromise is going to be necessary and reluctantly they agree to divide the orange in two.

Their wise grandmother, who is sitting quietly doing her knitting by the oven in the corner, overhears the argument and asks her granddaughters why they want the orange. The elder declares: “I wish to finish off making some marmalade”. The younger points out that she desires a glass of fresh orange juice. Once each sister becomes aware of why the other wants the orange they are quickly able to come to an amicable solution. The younger sister takes the juice and the elder sister happily uses the pulp and the skin for her marmalade.

We see at once the human dimension to the problem. Such problems are typically present with the failing business. For example, the ageing proprietor who refuses to give up the reins, adopt new methods of working, improve technology and equipment or develop new product lines. Mediation is particularly important in the context of the family owned business where there are tensions between the generations which are having an adverse effect on the business. By definition any solution which the parties themselves can come up with – and this is the important thing, the parties own their decision, not the lawyers – can only be better than a decision foisted on them by a court. There should be no winners or losers in a mediation.

The same comments apply to the important objective of preserving value. Court procedures are ruinous. It is not just the money the clients have to pay their lawyers which is the problem. It is the time and energy which the parties themselves have to invest in an entirely negative process which is ultimately destructive.

Moreover to preserve value means moving quickly. Customers and key employees can leave the insolvent business very quickly. Mediation can be arranged very quickly within days if necessary. The response time of a court is limited and in any event its intervention is likely to serve little purpose. In the United Kingdom the leading dispute resolution body is CEDR (Centre for Effective Dispute Resolution) and I strongly recommend a visit to its website www.cedr.com .


The Role of the Mediator

Typically the parties will wish to select as mediator a person experienced in the factual area to which the dispute relates.


This is certainly by no means necessarily a judge or a lawyer. In fact, without proper training most judges and lawyers make poor mediators because their whole training is to present and deal with reasoned argument on rights as opposed to interests. The most effective advocate of a client’s cause is probably also a bad listener. A mediator must be a good listener.

The mediator has no decision capability whatsoever. This is an important point. It emphasises that the working out of the dispute and the solution belongs to the parties themselves who have a vital role to play and not to their legal representatives nor indeed ultimately to the mediator. The mediator assists the parties with understanding their own case and as importantly helps them to understand the case of their opponents. The mediator also helps them to work out what their own needs are in a mediation as opposed to their wants. The mediator also acts as a mirror of reality and reality checker.

Mediation in Practice

My own practice is as a licensed insolvency practitioner and solicitor advising UK and German insolvency administrators. I qualified as a mediator from the University of Münster under the tutelage of Professor Dr. Horst Eidenmüller, who is now Professor of Private International Law at the University of Munich and a leading European authority on mediation.

It soon became apparent to me that I could put my training into practice in insolvency work with the emphasis on not just maintaining but increasing the size of the cake for the creditors of the failed enterprise. Here I should say that all the mediations which I have participated in have successfully resulted in an agreement, even if it was concluded at 3 o’clock in the morning. This is with the exception of one case in the last few weeks, but it pays not to be over confident! It may help if I give a fairly typical example.

Disguising the facts and identities somewhat my clients were a large company quoted on the Stock Exchange in the construction industry. Their main sub-contractor had gone into an administration procedure under Part II of the Insolvency Act and subsequently into a company voluntary arrangement. Two other companies also quoted on the Stock Exchange were asserting claims to the same fund of monies claimed by my clients. The other parties included the supervisors of the corporate company voluntary arrangement (one of the big 4 accounting firms) and the unsecured creditors represented by the creditors’ committee.

There were serious doubts about the construction and effect of the terms of the company voluntary arrangement. The supervisors had already applied to court to determine the construction of the wording of the arrangement with all five parties facing an estimated five day hearing in court. Even a positive outcome of a court hearing would however still leave 80% of the remaining issues between the parties unresolved. Years of conflict lay ahead. The size of the “cake” available to the parties to share out was diminishing by the hour.

Surprisingly, the biggest obstacle to mediation was persuading not just the other parties but the legal department of my own client that they should mediate. No doubt they thought: ”Was this just another ploy on the part of Maître Griffiths to prolong the battle and extract more fees?” Speaking as the client’s adviser I could hardly confess to them that their legal case involved a plethora of the dreariest possible issues to sort out and that I was keener to close the file than they were.

It was also necessary to explain the economics of mediation and carry out risk reward analysis. The costs of the mediation would be a small fraction of the overall costs of continuing the dispute through the courts. Statistically a mediation offered a 70% prospect of an overall settlement.

I am pleased to say that through the involvement of a mediator with skill and expertise in the construction industry meant an overall settlement was reached within a matter of weeks. The clients were delighted and my firm’s fees were paid by return.

I should immediately point out that mediation is not a “soft” option to court or arbitration proceedings. It is extremely hard work, both exhausting and enervating. The pay off however is enormous. Not only have you avoided years of expense and conflict and negative emotions, you have come up with a solution which satisfies both the business and human needs of the parties. Again, this is something no court can ever achieve.

The Future of Mediation

Here, I can only really speak of the experience and pro-active steps taken by the English courts. In a recent case Halsey v Milton Keynes General NHS Trust [2004] EWCA Civ 576 the Court of Appeal has not hesitated to penalise in costs a party who unreasonably refuses to submit to mediation. Indeed, the Court can even make an order for costs against the party who has lost the legal proceedings but where his opponents have refused mediation, see Dunnett v Railtrack plc [2002] EWCA Civ 303.

Mediation in the Federal Republic of Germany appears to have been less successful. A recent report prepared by PricewaterhouseCoopers in co-operation with Europa Universität Viadrina in Frankfurt (Oder) has shown a reluctance by the parties to adopt mediation. It is not clear where this reluctance stems from. It may have something to do with the worries of lawyers in perceiving an erosion of their traditional areas of work. I can personally assure those lawyers that they need have no concerns. If you can provide your clients with an economic and expeditious route to resolving their disputes through mediation the world will very quickly beat a path to your door.

Within Europe and the increasingly cross-border nature of insolvency procedures mediation is still in its infancy. To be an effective and successful mediator even in your own jurisdiction requires a wide range of human, technical and inter-personal skills. The cultural differences of negotiation between the different member states of the European Union are immense and it would be a rare individual indeed who can cross these negotiation cultures. The specification for the insolvency mediator of the future is immense if not impossible. But it must be achieved.

Further reading:

Getting to Yes – The Secret to Successful Negotiations; by Roger Fisher, William Ury and Bruce Patton. Random House Business Books 2003

Getting Past No – Negotiating with Difficult People; by William Ury. Random House Business Books 2003

The Art and Science of Negotiation – How to Resolve Conflicts and Get The Best Out of Bargaining by Howard Raiffa. Harvard University Press

Getting Together: Building a Relationship That Gets to Yes by Roger Fisher and Scott Brain. Penguin Books

ADR Principles and Practice, Second Edition Brown Marriott, Sweet and Maxwell.