The Perils of Mediation in Commercial and Civil Litigation

The Perils of Mediation in Commercial and Civil Litigation

Mediation is becoming an increasingly popular form of commercial dispute resolution. It is often preferred to litigation upon the basis that it is faster and cheaper.   Mediation will also allow underlying commercial relationships to be preserved.

However, there are potential problems for lawyers arising out of a mediation. There is the potential for negligence actions against solicitors and barristers involved in mediations and claims for wasted legal costs where lawyers breach duties owed to parties.

An example is the recent 2013 English Court of Appeal decision in Frost v. Wake Smith & Tofields Solicitors is a good example where claims can be made against lawyers involved in mediations.   In the Frost case, Mr. Frost made a claim against his solicitors arising out of a mediation which took place in 2003.   The mediation related to a long-running, wide-ranging and acrimonious dispute between two brothers, David and Ronald Frost, who had been in business together for twenty years.

After a difficult mediation, an agreement was reached. The two brothers went out to dinner to celebrate. They left David Frost’s solicitor to draw up the settlement agreement.   This is always a foolish action. Experienced lawyers will never allow the parties to leave the mediation room until the mediation agreement has been finally drawn up, agreed and signed by all parties involved in the mediation.   However, this did not occur in this English decision. The two Frost brothers returned to the mediation room after dinner.   They signed the agreement. Brother Ron subsequently raised various objections to the agreement.   The two brothers ended up requiring a second mediation. Ultimately, the dispute was resolved except for the tax consequences of the agreement.

David Frost alleged that his lawyers had been under an obligation to achieve finality at the first mediation.   He claimed damages representing the difference in value to him between the first and second mediation agreements. At first instance, the English Court rejected Mr. Frost’s claim upon the basis that the first mediation agreement was impossible to perform.   At the first mediation, matters had not developed to a point at which the parties had reached, or could ever reach, a final agreement. It was not within a solicitor’s power to fill in the gaps.   The English Court of Appeal agreed and dismissed David Frost’s appeal.

David Frost did not, however, allege that his solicitor had not advised him properly about enforceability. The Court of Appeal, however, commented in the Frost case that a solicitor in such a situation would be under a duty to warn their client that the outcome of a mediation is not a final and binding agreement from which the other party could not reconcile. However, the Court of Appeal commented that the damages which would flow from the breach of this duty would at best lead only to the recovery of any expenditure wasted in attempting to explore the enforceability of the agreement.

It is also important to remember that under the Civil Procedure Act in Victoria, a party which refuses to mediate without good reason for doing so is likely to be penalized in costs either before formal litigation is commenced or during such litigation.   If that party’s solicitor fails to advise them of this risk, a claim against the solicitor could follow.   An interesting issue might arise where the defendant argues that it is entitled to refuse to mediate because of the strength of its defence. A court might still argue that the defendant should mediate because this strength should be made apparent during the mediation process.

Another duty on lawyers engaged in mediation is the duty to advise a party properly on the merits of the claim or defence. A solicitor could be sued for his or her failure to advise a client properly about the merits of the claim or defence both in the lead up to a mediation and at the mediation itself. Under-settlement may be a particular risk for a claimant where they are ill-advised about the strength and quantum of their claim or of their defence. Both solicitors and counsel could theoretically be liable for a breach of this duty.   Preparation before a mediation involves foreseeing any legal points which may arise and, where appropriate, arranging for colleagues or counsel to be available by phone or email should a need for specialist advice arise during the mediation. An example might be to seek advice about complex taxation issues.

Confusion about the status of offers of settlement can arise during a mediation.   One way of avoiding such an issue is to have the mediation agreement entered into between all mediating parties and the mediator to provide that any agreement reached between the parties and the mediation cannot be complete until it is reduced to writing and signed by or on behalf of each of the parties. In this way, arguments about whether or not offers have been made and, if so, whether or not they have been accepted, will be avoided. This places a duty onto solicitors for all parties to check carefully about the status of offers that have been made, offers that have been rejected, or offers that have been accepted so that a client’s expectations can be managed appropriately.

Frost v. Wake Smith & Tofields Solicitors raised the duty to advise about the nature of any agreement reached at a mediation.   Many details require attention before a final agreement can be reached at a mediation.   These will include checking that the representatives of the parties are in fact authorised to settle the dispute and to sign a settlement agreement. If the authority of those attending the mediation is limited either to sign or to settle the dispute, the solicitors for other parties will need to insist that additional authority is obtained before the mediation can commence.

It is always useful for solicitors attending a mediation to come equipped with a draft settlement agreement either on paper or, preferably, in electronic format on a laptop.   This makes for easy amendment. Many points will need to be checked before the mediation is completed such as the primary claims, secondary claims by and against third parties, payment terms, breach provisions, payment of legal costs and others.   If the mediation occurs within the context of a court case, what is going to happen to that case? Is to be withdrawn, dismissed, discontinued, stayed or is a default judgment being given now or in the future if the mediation agreement is breached or if payments are not made under it? Should the mediation agreement provide that it can be enforced as a court judgment without the breaching party having the right to prevent that enforcement?

David Frost’s solicitor was fortunate having regard to the Court of Appeal’s decision.

Drafting a complex settlement agreement is the last thing barristers and solicitors want to face after a hard day of negotiation. However, it is an unavoidable duty. However, care must be taken to have already provided clear advice to parties as to what is an acceptable agreement.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

For any further information concerning this article, please contact JHK Legal.

Author: Michael Tourkakes L.L.M, LL.B., Grad.Dip.(Leg Prac), Adv.Dip.Bus.(Leg Prac)

Published: June 2015

Insolvency

Insolvency

Worried you might lose your business, your livelihood or your home?

If you are the owner or director of a company that cannot meet its financial obligations you might be trading insolvent and you are right to be very concerned.

Read More
What Is Insolvency?

What Is Insolvency?

Insolvency is a term that applies to both companies and to individuals who can no longer meet their financial obligations, however personal insolvency (also known as bankruptcy) only applies to individuals.

Read More
The 7 mistakes people make when they hire an insolvency lawyer

The 7 mistakes people make when they hire an insolvency lawyer

If you’re not sure whether you need to hire an insolvency lawyer or not…it probably means you do.

Read More