Covid 19 and Mediation:delivering for the Economy

The economic downturn caused by Covid-19 means, as there has so often been in past recessions, that there will be a contra-cyclical upturn in disputes and consequently work for their advisors (and the courts). Many commentators have considered how ADR and mediation has responded to the crisis in the short-term: “online” mediation has been the principle change and seems likely to be part of the new normal. There have also been well-informed comments on how mediation will and should change as the economy and society adapts to a post-pandemic world. In this article, I want to look in more detail at the latter: the long-term economic case for mediation and the role that it should play in helping the recovery.

The sad fact is that many fundamentally sound businesses will fail through no fault of their own – the strains placed on a balance sheet may prove impossible to bear where sales and cash flow have been so badly affected. Administrators will have an obligation to make recoveries. Surviving businesses will need to secure assets. There will be some defence tactics that will be driven by the need to protect cash.

Let us be straight – disputes are expensive, time consuming, stressful and, judged objectively, immensely inefficient. Yet disputes happen: unforeseen circumstances arise, parties behave badly, commitments made are not honoured. It is right, therefore, that mechanisms are in place to enable the wronged party to obtain redress, to recover damages and put that party back in the position that it should have been but for the breach.

Adam Smith, author of the Wealth of Nations,

practising social distancing in Edinburgh

But it does not work like that. Former clients of mine identify legal fees, court fees, experts’ fees, management time and the stress associated with litigation as “frictional costs”: they are expenses that increase for the parties but have no effect on the value of the dispute. In the perfect market described by Adam Smith, the efficient frictional costs that return parties to the status quo should be zero. Yet our dispute process is always less than a “zero sum” game: the cost to all parties of the time expended is never taken into account. As we inch towards whatever may be the new post-covid normal, those opportunity costs are greater than ever when judged against the needs of individuals and businesses to use their resources to adjust and deliver.

What does mediation bring to that sad equation and what should mediators be selling to their customers as we come out of lockdown?

Mediators must be clear and repeat the message that mediation takes costs and uncertainty out of the dispute process; that the adversarial nature of our litigation process obscures the win / win that mediation offers. Mediation-assisted settlements can and do bring options to a resolution that enable both parties to move forward following the exploration of the drivers behind a dispute and the outcomes the parties want to achieve. Terms of payment and a myriad of other options are available – particularly where there is an ongoing business relationship with the other party – which are a far better option than the dubious “win” of an apparently large but unsatisfied judgment which is then followed by a dispute about recoverable inter-party costs coupled with an ongoing liability of the “winner” for “own client” costs.

However, lawyers need not worry - there will be plenty of litigation. But while the law provides parameters for the dispute, commercial reality can and will drive solutions: mediation facilitates conversations at an earlier stage where parties can be more flexible and assists parties to reach a resolution. Direct and indirect costs, those “frictional costs”, are avoided. Uncertainty is removed from both balance sheets and the management of the businesses can be devoted to re-designing and re-building their businesses rather than fighting each other. In short, both parties can focus on the demands of the future rather than the disputes of the past making it more likely that both businesses survive what is going to be a difficult environment.

The message for mediators to be selling to their customers as lockdown eases is  that those benefits will also transfer at a macro-economic level. More efficient dispute resolution and the various benefits that flow from it will deliver more businesses providing additional goods and services to customers in a stronger economy. A good message at an uncertain time.