Eddie Senatore
Facilitation and Mediation

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Mediation and insolvency

According to former US Judge Peck one primary objective of mediation is to restore communication between parties to mitigate against further deterioration in relationships, allowing parties to explore solutions and options without their legal position has being compromised which facilitates the discovery of mutual interests, as another objective.  Building trust is hard work, especially in insolvency.  Mediation creates the possibility of settlements so long as there is a willingness.

There have been a couple of large-scale insolvency cases in which mediation has been used successfully.  This includes the Lehman Brothers bankruptcy and MF Global Holdings Limited where the courts encouraged mediation between US, Wales and English counter parts resulting in a global settlement being achieved.

Nortel Networks Incorporated is a case were mediation failed.  Of the $7.5 billion in assets banked, over $1.3 billion in professional fees have been paid, while creditors ranging from hedge fund managers to retirees wait.

Judge Peck suggests mediation requires some key success factors. Firstly, there is a window of opportunity within which to mediate; with US Judges and attorney’s getting better at identifying this window.  An important skill I would imagine. Secondly, decision makers need to be in the room.  Decision makers not only need to understand the solutions and settlement proposals, but more importantly be part of the consensus building process. Lastly, and importantly, there must be a willingness or sincere desire to settle the dispute.  When the process is undertaken voluntarily and initiated by the parties, success is more likely; compulsion led mediation less so.

Judge Peck also recommends any resulting agreement should include a clause enabling parties to refer an agreement to the relevant court, so that the agreement has teeth.  Unusual.

I’m not suggesting for a minute litigation is irrelevant, far from it.  Litigation has its place, whether it is to set legal precedent or facilitate a quick outcome in cases where there is a developed set of procedures such as summary judgement or when courts are well placed to handle the dispute on hand.  However, there are some distinct advantages to mediation including:

·     Lower costs – costs are agreed and fixed

·     Quicker than litigation

·     Less adversarial – solution focused, claims not being forced to fit common law

·     Easy to follow and understand - less jargon

·     Less process – pre-trial, directions, request for particulars, discovery, security for costs etc

·     Private and confidential - material cannot be used subsequent to mediation 

·     Can be terminated at any time

Lehman Brothers requested the Bankruptcy Court to approve a set of alternative dispute resolution procedures using the Bankruptcy Code to approve the process.  There were objections raised, with arguments against being alternative dispute resolutions should only apply to adversarial proceedings; that contracts did not provide for mediation; that mediation is inconsistent with the centralised decision-making process that bankruptcy entails and other jurisdictional arguments. Objections were also raised around impact of substantive rights, scope of procedures, mediation logistics and other special needs.

Not to be.  

Alternative dispute resolution was approved by the Bankruptcy Court enabling Lehman Brothers to commence mediation prior to filing for litigation.  As the process is entirely confidential parties do not have to settle nor waive rights.  It proved successful with 77 of 202 alternative dispute resolution matters involving 224 counterparties being mediated with all but 4 settling.  

In Hong Kong a scheme was used to manage the Lehman Brothers bankruptcy mediation process.  There was the pre-mediation phase which involved information gathering, pre-mediation briefings and preparatory meetings.

The Hong Kong Monetary Authority established an office, with trained staff who would educate potential users on the mediation process.  This would include simplified information, forms and guidance notes.  When information gathering is complete pre-mediation briefing sessions are conducted. Mediators discuss the suitability of mediating specific cases to both sides – in the case of Lehman Brothers both investors and bankers were briefed.  

These sessions enable informed decisions to be made as to whether or not mediation could be used to resolve claims.  If so, preparatory meetings commence.  A mediator other than the mediator who undertakes the mediation itself helps prepare the parties for mediation.  This would include assisting with exploring solutions and settlement options. Parties are then required to complete a consent to mediation, claim and claim response forms.  

Solutions or offers can be put at any time, even before mediation has commenced.

Then mediation takes place, either the parties resolve their dispute or narrow down the issues.  Mediation must be concluded with 21 days and mediation meetings should not last more than 4 hours.  

The downside?  As mediated outcomes are confidential there is no sharing of lessons learnt or issues ventilated, nor the resolutions achieved.  


Eddie Senatore