Since 2010 the Squire Patton Boggs’ Manchester and Leeds UK offices have been involved in a large scale mediation Project on behalf of Institutional Lender clients.
After the economic crash in 2008 many residential properties were repossessed by lenders who made large losses on the sums they advanced. In part this was because a large amount of property transactions from that time involved mortgage fraud. Lenders were unable to claim against individual borrowers for the remainder of any debt as they were often insolvent or untraceable. The money was written off as unrecoverable until a limb of new legal claims was established against insurers providing professional indemnity insurance to solicitor and surveyor firms. Claims were brought against the solicitors/surveyors involved in the property purchase on the grounds that whilst jointly instructed by the lender and borrower they either acted negligently or in breach of contract and this directly lead to mortgage fraud taking place and the subsequent losses lenders suffered.
Why Mediation and not Litigation?
These would to be strong claims in court – the professionals were instructed by lenders, they failed to act to a reasonable standard by not reporting pertinent facts and/or not making more thorough investigation into the borrower, either in direct breach of their contract with the bank or in breach of the implied duty of care they owed the bank as their client, and this caused the lender loss as they would not have lent the money had they known the true circumstances of the sale. So why was mediation chosen instead?
Advantages for Lender Claimants
Mediation is relatively cheap compared to the cost of progressing a matter through the courts, and represents a significant cost saving. In addition, in this project claims are mediated in groups (usually between 10-30 claims at any one time), further reducing the cost. Another key benefit is the confidentiality of the process and settlements. Lenders do not want details of their lending criteria revealed in the public forum of court.
Furthermore, the timescale – it may take up to a year for a case to proceed to court and multiple years if a case goes to appeal. Mediation provides a speedier option, especially given the large numbers of claims involved – during the property boom of the noughties hundreds of property sales were taking place a month. Also the recovery of costs is greater and more predictable than through the courts system. Insurers will pay 70% of legal costs incurred in the Project meaning that the cost to lenders is relatively low. For example, last year, in a large mediation made up of 65 individual claims, the resulting net cost per claim to the lender client was £2,000.
Advantages for Insurers
Again there is a cost saving; commonly Insurers will already be aware of the actions of their insured and will be investigating coverage and in most cases will have already set settlement funds aside. It is preferable to deal with any claims collectively as Insurers can then ensure the Settlement Agreement provides that no further claims can be brought against that particular firm if they are discovered at a later date. Unlike litigation, this clause can be added as the flexibility of mediation allows parties to have a greater say in negotiations and control over the outcome. This offers a better commercial solution for the Insurer as the cost of dealing with the claims is lower and they gain certainty that the matter has been definitively concluded.
Finally the informal nature of mediation facilitates a straightforward process; there are no Pre-Action Protocols, Civil Procedure Rules or timetables to comply with like in litigation and none of the ‘red tape’ found increasingly in arbitration. In this particular instance ‘case information sheets’ are typically the only document provided to insurers prior to the mediation. These information sheets set out the basis of the claim, any supporting evidence, deal with any obvious weaknesses or counterarguments the insurer would likely raise and provide a comprehensive assessment of the claim value taking into account case law and other factors such as contributory negligence.
Why does the Project work?
The advantages, as detailed above, are clear for both sides. However it goes beyond that. The collaborative environment of mediation has allowed an open and honest relationship to develop between the parties. Also, because settlement is mutually agreed upon, the parties are typically more satisfied with the outcome than is the case in a court process leaving the commercial relationship between the parties intact.
Originally an independent mediator, Stewart Chapman, a CEDR accredited mediator, conducted the ‘mediation meetings’. However, as a mutual trust has developed, these meetings no longer involve an outside mediator and the parties now openly discuss claims and their proposals for settlement. Over the four year lifespan of the Project thus far all ‘mediation meetings’ have successfully led to settlement being reached with approximately £30 million recovered by Squire Patton Boggs for Lender clients with gross total legal costs equating to around £1.2 million per year.
Mediation is not as entrenched in the French legal system as it is in the UK. Predominately this is because there is a large amount of statutory, judicial and regulatory support for mediation – it is a requirement under the Civil Procedure Rules that parties must consider ADR and there can be cost penalties for bringing frivolous claims to court which should have been mediated, something judges have been interpreting strictly. In addition the Solicitors Regulation Authority’s current Code of Conduct also provides that solicitors make clients aware of different methods of resolving a dispute, again ensuring mediation is highlighted to clients.
This Project would not be possible in France; firstly these claims are unlikely to exist due to the mandatory insurance of borrowers and the potentially higher level of regulation of notaries conducting property transactions. In addition Insurers are less amenable to mediation in France; partly due to lack of cost awards in the French court system. However the outlook is positive; well established bodies, such as the CMAP and the ICC, through the introduction of its mediation rules of January 1, 2014, continue to raise the profile of mediation as a whole as an effective method of dispute resolution. Maybe a project of this nature is not too far off the horizon; it is simply a hop across the Channel.