How Creditors Can Use Mediation to Resolve a Disputed Commercial Debt

How Creditors Can Use Mediation to Resolve a Disputed Commercial Debt

Summary

• Mediation provides a cost-effective, confidential way for creditors and debtors to resolve disputed commercial debts without going to court.
• The process involves a neutral mediator helping both sides find a practical settlement.
• Creditors benefit from faster resolution, preserved business relationships, and reduced legal costs.
• Settlements reached through mediation can be made legally binding through a written agreement.
• Courts in England and Wales increasingly expect parties to attempt mediation before litigation.

When a business debt is disputed, many creditors reach for the court process as the next logical step. Yet litigation can be expensive and time-consuming, with outcomes that are never guaranteed. Mediation offers an alternative route: one that prioritises communication, settlement, and preservation of commercial relationships.

What is Mediation in Commercial Debt Disputes?

Mediation is a voluntary process where a neutral third party, known as a mediator, assists the creditor and debtor in negotiating a settlement. The mediator does not decide who is right or wrong; instead, they help the parties clarify issues, explore possible solutions, and agree on a way forward.

When is Mediation Appropriate?

Mediation is suitable when there is a genuine dispute about liability, quality of goods or services, or the amount owed. It can also help when communication between the parties has broken down.

Examples include:

• A supplier is claiming payment for goods that the buyer says were defective.
• A client is disputing an invoice due to alleged contract variations.
• A disagreement about payment terms or interest.

Mediation is less suitable where fraud is alleged or where urgent interim relief is required, such as freezing orders.

The Mediation Process

A typical mediation follows several steps:

1. Agreement to mediate: Both sides sign a mediation agreement confirming confidentiality and the voluntary nature of the process.
2. Appointment of a mediator: The parties choose a mediator, often accredited by the Civil Mediation Council (CMC).
3. Preparation: Each side provides a short statement summarising the dispute and their position.
4. Opening session: The mediator explains the process, and each side has the opportunity to outline their perspective.
5. Private meetings: The mediator holds confidential discussions with each party to explore settlement options.
6. Negotiation and agreement: The mediator facilitates negotiation until a settlement is reached or the parties agree that no resolution is possible.

Mediations can take place in person or online and typically last one or two days.

Advantages for Creditors

For creditors, mediation provides several clear advantages over traditional litigation:

• Cost control: Mediation is far cheaper than court proceedings. Mediator fees are shared, and parties often reach a settlement in a single day.
• Speed: Disputes that might take months or years in court (when you count the time and difficulty which often come with enforcing decisions) can often be resolved in days.
• Confidentiality: The process and outcomes remain private, protecting commercial reputations.
• Flexibility: Settlements can include creative solutions beyond simple payment, such as revised payment plans or future business commitments.
• Preserved relationships: Mediation allows creditors to recover sums owed while maintaining valuable trading relationships.

Legal Status of Mediation Settlements

A settlement reached at mediation is not automatically binding. To ensure enforceability, the terms should be set out in a written settlement agreement, often called a mediated agreement or memorandum of understanding.

Once signed, this agreement becomes a binding contract. If the mediation takes place during ongoing court proceedings, the terms can be converted into a consent order, making them enforceable by the court.

Cost Implications and Court Expectations

Courts in England and Wales actively promote mediation. Under the Civil Procedure Rules, the court can penalise a party in costs if they unreasonably refuse to mediate.

For example, in PGF II SA v OMFS Company 1 Ltd [2013] EWCA Civ 1288, the Court of Appeal confirmed that ignoring an invitation to mediate can justify cost sanctions, even if that party later wins the case.

The Court stated that the decision:

“sends out an important message to civil litigants, requiring them to engage with a serious invitation to participate in ADR, even if they have reasons which might justify a refusal, or the undertaking of some other form of ADR, or ADR at some other time in the litigation.”

How to Prepare for Mediation

Preparation improves the chances of success. Creditors should:

• Gather all relevant documents, including contracts, invoices, and correspondence.
• Prepare a concise statement of issues and desired outcomes.
• Consider acceptable compromises, such as staged payments or partial write-offs.
• Be open to discussion and solutions that preserve the commercial relationship.

What Happens if Mediation Fails?

If mediation does not result in a settlement, the parties can still proceed to court. However, much of the groundwork done during mediation, clarifying the facts, understanding the other side’s position, and narrowing the issues, can make any later litigation more efficient.

Even if no agreement is reached on the day, parties often settle soon afterwards once emotions have cooled and the cost implications become clearer.

Conclusion

For creditors facing a disputed commercial debt, mediation offers a practical, cost-effective, and legally recognised route to settlement. It encourages cooperation over confrontation, confidentiality over publicity, and pragmatism over legal formalities. In an era where courts increasingly expect ADR before litigation, mediation is not only a smart business decision but often a procedural necessity.

FAQs

Is mediation compulsory in debt disputes?

No, but courts expect parties to consider it seriously. Refusing to mediate without good reason can lead to cost penalties.

Who pays for the mediator?

The cost is usually shared equally between the creditor and the debtor, unless they agree otherwise.

Can a mediator force a settlement?

No. The mediator facilitates discussion but cannot impose a decision. Any agreement must be reached voluntarily.

Are discussions at mediation confidential?

Yes. Everything said during mediation is confidential and cannot be used in court unless both parties agree.

What if the debtor fails to honour the settlement?

If the agreement is written and signed, it is legally binding. The creditor can enforce it in court if necessary.