The legal route can take its toll on a firm's bank balance and reputation, writes Fiona Reddan

MEDIATION HAS become an increasingly attractive option for Irish companies looking to resolve disputes in a way that strengthens business relationships, and saves valuable time and money - without having to go to court.

Unlike a court case, the process is voluntary, confidential and non-binding, although if a settlement is reached it will be binding. Mediation is particularly well suited to financial services companies that fear the negative publicity, as well as the costs, that would arise from litigation.

Sharon Daly, head of the commercial litigation and dispute resolution at Matheson Ormsby Prentice (MOP), says an advantage of mediation is that a resolution is only "limited by your imagination". In her experience, it is suited to most disagreements. And it has an 82 per cent success rate.

How does it work? At a mock event organised by MOP and mediated by former leader of the Progressive Democrats Michael McDowell SC, a group sought to find a resolution to a disagreement over bank funding.

The case centred on a disagreement between a bank and one of its customers, Trisha Average, who owns a large chain of hotels. Ms Average claimed that Big Bank had agreed to an extension of some € 2.5 million in her existing financing facilities of €10 million, in a deal signed off by the bank's representative, Mr Small.

Following this, Ms Average entered into agreements with a number of suppliers for completion of a new hotel, but her relationships with them soon broke down when the bank refused to honour her payments to them. Moreover, the economic downturn meant her hotel chain began to suffer and her company, ECL, began to default on its loans.

As a result, the bank moved to begin proceedings for full repayment of all facilities. Ms Average then made a counterclaim against the bank, looking for defamation damages resulting from her inability to pay her creditors.

The bank looked to transfer the issue to the commercial list of the High Court, but ahead of this, both parties agreed to try mediation.

The mediation process began by both parties setting out their respective cases, after which the mediator, Mr McDowell, met with both parties privately.

During these confidential discussions the mediator took the opportunity to assess what was needed for the parties to come to an agreement. As part of the process, it emerged that the bank's case was not as strong as it seemed, as it was in the process of firing Mr Small, who had acted without due authority when agreeing to Ms Average's additional financing requests.

Another issue that arose is that the charges the bank had in relation to ECL's borrowings were only registered on approximately half of the company's hotels, and it was seeking additional security on these loans.

The mediator made it clear to the bank that in the current environment, if it went down the receiver route it would likely get back less than the value of loans outstanding. Moreover, the bank admitted to Mr McDowell that it was loath to deal with the negative publicity that would possibly arise from a court case, and as such stated that it was "here to do business".

In her meetings with the mediator, Ms Average made it clear that if her relationship with the bank dissolved she would be unlikely to find an alternative source of financing, and that what she really wanted was an apology and some damages for the negative impact the removal of her line of credit had on her reputation.

Having detected a willingness to do business on both sides, when the the parties again met the mediator collectively, he moved quickly to reach a resolution by getting Ms Average to declare she was open to regularising the security on her existing loans with Big Bank, and getting the bank to acknowledge that it was open to maintaining its relationship with Ms Average, provided certain requirements were met.

What solution was reached?

The bank apologised to Ms Average and offered some damages in relation to her defamation case, as well as organising a refinancing of her loans. Ms Average agreed to the bank's request that she regularise the security on her loans. And it was all achieved in a day's mediation, without having to go to court.

While the example is perhaps a best-case scenario, it shows that in general, most parties have specific concerns but are willing to compromise on other matters.

As such, mediation can be a far better solution than going down the route of a full-blown court case.

Case study

*Dispute between Big Bank plc and its customers Trisha Average and Every County Ltd

*Bank gave facilities of €10 million to customers

*Customers are in default

*Proceedings issued in High Court

*Voluntary agreement between the parties to mediate in advance of the matter being admitted to the Commercial List