Ruling over the middle ground

Diplomacy has always been considered an art. Now however, the equally nuanced craft of mediation is being heralded as the way forward in dispute resolution in Scotland. It is increasingly celebrated as a flexible, confidential, swift, and efficient method of resolving disputes. These benefits are undoubtedly the reason the process has been growing so significantly both in popularity and profile. Core Mediation, one of Scotland's best known mediation-providers, boasts that it carried out more mediations from January to May 2005 than it had done throughout the whole of 2004.

Although discussions in a mediation can be as lengthy and complex as submissions in court, the rules are simple. It is, above all, informal and voluntary. The process involves the neutral mediator assisting parties towards finding a solution to their dispute; this is confidential and, until a final agreement is reached, non-binding. It is separate from any litigation that may be ongoing. As such, if the mediation process fails, parties are not prejudiced by discussions that arose during the mediation. It is only when parties are satisfied with the result achieved that a binding agreement is entered into. It is these elements that both define mediation and make it a success. The parties who are likely to be successful at mediation are those who approach the process with a genuine willingness to negotiate, but with the reassurance that, if the process fails, all is not lost.

The benefits of mediation are recognised not only by mediators and practitioners: the judiciary has also been quick to acknowledge that there is a place for the assisted settlement of court actions. However, to what extent has this acknowledgement turned into encouragement? And to what extent should encouragement extend to requirement?

In the English Court of Appeal case Burchell v Bullard and others [2005] EWCA Civ 358, judicial encouragement of alternative dispute resolution was more than apparent. In this case the court decided that where one party's refusal to mediate was unreasonable that party could be penalised in costs.

In Scotland, there are similar indications that the judicial system is beginning to put pressure on parties to consider alternative dispute resolution. The 2005/06 Business Plan for the Sheriff Court Rules Council ("SCRC") indicates that the function of the court in relation to the use of alternative dispute resolution procedures should be considered. The Mediation Committee of the SCRC has discussed the Sheriff's power to compel parties to mediate and agreed to draft a new Sheriff Court rule to encourage mediation in certain cases. A report on the proposals is being drafted. It has been agreed that the Mediation Committee will liase with the Court of Session, in a bid to ensure that both courts adopt a similar approach in relation to alternative dispute resolution.

The Scottish Legal Aid Board also has adopted a new approach to consideration of alternative dispute mechanisms. Recent guidance has indicated that the refusal by a legally aided party to enter into mediation procedures will be considered by the Board in deciding whether to grant legal aid.

With these developments in mind, we can see that compulsory mediation is not unforeseeable. Such a requirement would necessitate a departure from the established constitution of mediation as a voluntary process. If the constituent elements of mediation were fundamentally altered, would it be as successful?

Referral of a case to mediation, or any other form of alternative dispute resolution, does not guarantee settlement. Ultimately, the success of a referral is dependent upon the willingness of the parties to negotiate. The defendant in Burchell refused to mediate, presumably because he was unwilling to compromise on his defence (and counter-claim). Lord Justice Ward stated that the case was "par excellence, the kind of dispute which….lends itself to ADR," and that "[t]he defendants cannot rely on their own obstinacy to assert that mediation had no reasonable prospect of success." However, might the defendants' own obstinacy be the very reason that the mediation had no chance of success?

There may be more fateful obstacles to enforced mediation. Mediation providers are not currently regulated, and there are no formal rules governing the process. Whilst this undoubtedly adds to the benefit and appeal of mediation in its current form, if it was mandatory would it be wholly compatible with the principles of natural justice? And yet, if steps were taken to formalise the process, costs would increase, and yet another tenet of mediation would be lost. Until these issues can be reconciled with mediation as we know it, perhaps the best way forward is simply to maintain the hype.

Kenny Cumming

20 February 2006

Avoiding Litigation

This briefing focuses on "how and why" disputes reach the courts. We have selected a variety of recent cases as examples of how things can go wrong and what to avoid.

You think you have a guarantee

Ballast plc v Laurieston Properties Limited (in Liquidation) & Others 25 January 2005 – highlights the substantial losses that can arise when businesses rely on informal assurances.

Ballast entered into a building management contract in relation to two housing developments with Laurieston Properties Limited ("LPL"). LPL was the developer of the projects and entered into joint venture agreements with Morrison Residential Investments Limited ("MRIL"), a wholly owned subsidiary of Morrison Homes. MRIL offered facilities to developers, like LPL, who had insufficient funds to see projects through to completion. Although matters proceeded relatively smoothly at first, LPL ran into difficulties in making payments to Ballast, eventually leading to the action for payment.

LPL was a company with few assets. Ballast were unlikely to recover from LPL, and sought to sue, amongst others, MRIL on the basis that it had guaranteed the outstanding payments due to Ballast from LPL. Ballast claimed that the guarantees had been made in a series of informal communications, and in a letter from MRIL's representatives stating that payments would be made from the joint venture account.

A guarantee is a unilateral obligation and very clear words must be used if the guarantee is to be established in law. The letter founded on merely stated that payments would be made from the joint venture account, and the informal discussions relied on were not sufficient by themselves to establish that MRIL had agreed to guarantee outstanding payments. Ballast's action failed.

The sums involved were substantial; over £1million was outstanding, and on Ballast's account was incurred on the basis of the belief that MRIL would guarantee these payments. With hindsight, if Ballast had refused to proceed without a properly constituted agreement or guarantee then such huge, and ultimately irrecoverable, losses might have been avoided.

You think you have a contact

Charles Crimin v Cairnbay Limited 29 June 2004 - an example of a DIY contract not doing what one of the parties thought it did.

Mr Crimin, the pursuer, had over a period of three years made loans to a variety of companies, of which Mr Paterson was a director. In June 2002 it was agreed that all sums outstanding (just over £150,000) should be repaid to Mr Crimin out of the proceeds of a property sale. A contract was entered into between Mr Crimin and Mr Paterson without legal advice; it was claimed that Mr Paterson signed the contract as a director of the defenders; Cairnbay Limited. The property was duly sold and Mr Crimin sought to enforce the terms of the contract and recover the loans from Cairnbay.

Unfortunately for Mr Crimin although the contract was signed by Mr Paterson, he did not sign as a director of Cairnbay. Mr Crimin nevertheless sought to argue that the intention of the agreement was that Cairnbay was to repay the loans. Although this may have been Mr Crimin's understanding of the arrangement, the contract was incapable of being interpreted in this way. The action was dismissed and Mr Crimin failed to recover the loans from Cairnbay.

You think you are an agent

M Brydon, R Peterson, T/A Petersons Crane Hire v F E Beaufont Limited 16 December 2002 – when failing to address a businesses' contractual relationships leads to loss:-

Petersons operate a plant hire business. They sourced a crane for the defenders from Lerwick Port Authority which was damaged while being operated for the defenders' business. The Port Authority sued Petersons for the damage caused and Petersons settled that case for around £95,000. Petersons then sought to recover that amount from the defenders.

Petersons argued that when they entered into the contract of hire with the Port Authority they did so as agents for the defenders, and this entitled them to be indemnified for their losses. There was no formal agreement between Petersons and the defenders, aside from a series of faxes detailing the specification of the crane and hourly rates.

The exchange of informal correspondence and telephone calls did not support a relationship of agency. All the background established was that Petersons sourced a crane for the defenders. Petersons' fallback position was that even if there wasn't a contract of agency, there was a custom of trade implying an indemnity provision into the agreement between Petersons and the defenders. Establishing a custom of trade in this case meant proving that an indemnity is implied into every contract for the hire of plant. Petersons couldn't meet the test and the case was dismissed. The informal "sourcing" arrangement left Petersons liable for any damage caused to the plant. Clearly not a result that was intended.

You agree prevention is better than cure

We want to find out more about how our clients' businesses operate so that we can give you robust advice on how to stay out of court. This helps us do our jobs better and helps you. To find out more please contact:

KENNY CUMMING
DL: 0131 473 5252
Kenny.cumming@shepwedd.co.uk

IAIN DRUMMOND
DL: 0131 473 5767
Iain.Drummond@shepwedd.co.uk

20 February 2006