Case study

Negligence claim dropped after mediation brings perspective to dispute

A moderately sized engineering company obtained borrowing facilities from a high street bank secured by a debenture over the company assets and by guarantees from the company directors. The guarantees given by the directors were additionally secured by mortgages over their homes.

The company ran into difficulty and the bank appointed administrative receivers ('receivers') - two partners in a national firm of chartered accountants. In the early stages of the receivership the receivers assured the directors that they would be able to make sufficient recovery from the sale of the company assets and that it was highly unlikely that the bank would need to call upon the directors’ personal guarantees. This turned out not to be the case. The sum raised from the sale of company assets left a shortfall. The bank called in the directors' guarantees and the directors were forced to sell their homes to meet the obligation.

The directors were extremely angry especially in view of the early reassurance they had been given by the receivers. The directors jointly took out a court action against the receivers, claiming in negligence against them selling the assets at an under value and many other acts of maladministration by the receivers. If, they claimed, the receivers had achieved realistic values for the sale of the company assets, the directors’ personal guarantees would not have been called upon.

The directors did not relish the costs of a full trial and mediation was agreed. The mediation took place a few weeks before the scheduled trial date. Throughout the mediation, the receivers insisted that they had acted correctly and refused to make any financial offer towards the amounts being claimed by the company directors.

The without prejudice and confidential nature of the mediation process allowed the receivers to describe to the company some of the actions they had taken to maximise recoveries and some of the unexpected events which had occurred to frustrate this aim. It also enabled the directors to fully appreciate how determined the receivers were to have allegations of negligence dismissed at trial in circumstances where they believed their conduct could not be criticised. The mediation closed with no settlement having been reached.

The directors agreed to withdraw their litigation. They said the explanations given in the confidentiality of mediation had allowed them to recognise that the receivers had indeed acted correctly and that they had a very weak case in litigation. In return, the receivers’ firm met the costs (around £1,500) incurred by the directors in going to mediation.

This is just one of many cases that disprove the myth that mediation is about compromise and 'splitting the difference'. It allowed the claimants to recognise the weakness of their argument thus avoiding the high risk of losing at litigation and having to contribute to the costs of the defendant. Mediation saved the defendants the cost, management time and inconvenience of having to defend the case in litigation.