It’s good to talk - you could save a packet

Only the most battle-hardened litigation lawyers would not have been shocked by reports on the legal costs incurred by Royal Bank of Scotland in defending the recently-settled action brought by the RBS Shareholders Action Group.

Some reports suggested RBS had spent £100 million-plus before an 11th-hour settlement with the claimants. The 14-week trial would have cost RBS another £25m. Is this the best use of what is essentially taxpayers’ money? Could this long-running dispute have been resolved more cost-effectively via mediation?

Mediation is a flexible, voluntary, confidential form of alternative ­dispute resolution (ADR), in which a neutral third party assists parties to work towards a ­settlement. The parties retain ­control on whether or not to settle and on what terms. There are different styles of mediation but the most common is facilitative mediation in which (unlike a judge or arbitrator), the mediator will not decide the case on its merits, but work to facilitate agreement.

Almost all cases are suitable for mediation, with disputes involving customers, shareholders or investors against banks particularly susceptible to resolution. These cases are often complex and ‘fact-heavy’ and can be expensive. The costs on both sides in litigating can become disproportionate to the amounts in dispute.

The settlement offers accepted by the investors in the recent RBS litigation were substantial. However, the majority of customer claims against banks involve more modest amounts.

The mediation process allows for creative solutions. Generally speaking, a judge in a banking dispute can order the customer to repay money or order the bank to pay damages. I’ve been involved in settlements where the parties have resolved their differences by agreeing a restructuring of underlying debt. The customer can then seek refinancing with another lender. It can be a win-win solution.

Mediation allows parties to resolve differences in a non-public setting. Confidentiality is a cornerstone of mediation. This can ensure ­that ­negative or embarrassing precedents are avoided, as banks seek to avoid reputational damage.

So should courts be doing more to encourage parties involved in banking (and other) disputes to explore the possibility of resolving differences at an earlier stage?

The Commercial Court in Scotland has recently sought to do that. In March, it issued updated guidance about ADR, seeking to persuade ­parties to consider it at an early stage.

There are several key provisions, – firstly, before legal proceedings are issued, parties should consider whether ADR may be suitable.

Prior to the early procedural hearing, the parties should also “consider and discuss whether resorting to [ADR] may be appropriate in respect of some or all of the issues”.

The Commercial Judge will ask what steps parties have taken to resolve matters via ADR and they have an express power to order parties to hold a joint meeting to seek to resolve the dispute. Any refusal to attend may result in costs sanctions.

This initiative is significant. It brings forward the point at which the parties are encouraged to consider ADR.RBS settled during the first week set down for trial. Preparatory costs had already been incurred. If a settlement can be reached earlier, substantial sums are saved on lawyers’ fees. This money could be better spent funding any settlement. Asignificant part of the £100 million spent by RBS could have increased the settlement pot.

But does this new guidance go far enough? Some litigation lawyers would like to see Scottish courts go further. They point to practice in England, where an unreasonable refusal to mediate can result in significant costs consequences. If the suggestion to mediate is rejected out of hand, cost sanctions are likely. If the suggestion to mediate is considered, but rejected, the rejecting party should provide a thorough explanation. The risk of cost sanctions remains if the refusal is considered unreasonable.

I hope, in its next update rules, the Commercial Court might build upon this guidance. A further tightening of the rules to deal with any unreasonable refusal to mediate should encourage parties to focus their efforts on reaching an early resolution.

Gordon Deane is a partner with Balfour+Manson LLP