The rules of engagement cannot be ignored

Implementing a business rescue or business turnaround is a stressful endeavour. All parties have a different idea of what the company should be and what it should focus on during the recovery process.

This also puts the BRP in an awkward position because the rescue/turnaround cannot proceed without significant buy in from all parties. Mediation is often a process that is used as a last resort to settle these disputes.

There are very specific rules of engagements when it comes to this. Cliffe Dekker Hofmeyr recently published a thought leadership position paper which focuses on the role of mediation and the fine line between negotiating in good or bad faith.  

Lay your weapons down
The paper points out that mediation is an alternative method of dispute resolution that requires parties to interact directly with one another with the aim of settling any disputes amongst themselves before an independent third party.

Rule 41A of the Uniform rules of Court makes it a mandatory requirement as a pre-action for litigants to consider mediation when instituting any new action or application proceedings. To

give effect to this, rule 41A requires the aforesaid proceedings to be accompanied by a notice stating whether each party is amenable to resolving the matter by way of mediation or not, along with reasons.

The purpose of rule 41A is two fold:

• to alleviate the caseload on the courts; and
• to ensure that matters are capable of being resolved without recourse to the judicial system.

Perceptions of bad faith in mediation
But what happens when parties agree to mediate and an allegation is made that one party acted in bad faith during the mediation process?

The Cliffe Dekker Hofmeyr paper points out that this question was considered in the case of Kalagadi

Manganese (Pty) Ltd and Others v Industrial Development Corporation of South Africa Ltd and Others (Case No.12468/2020).

In this case, Kalagadi Manganese (Pty) Ltd (Kalagadi) instituted an application against the Industrial Development Corporation of South Africa Ltd (IDC) compelling the IDC (and other lenders) to accept a restructuring arrangement which stemmed from a previous urgent application by the IDC to place Kalagadi under business rescue. Following the application, the parties agreed to mediate the dispute.

The paper points out that, in the midst of the mediation process, the IDC terminated the mediation and Kalagadi contended that the IDC acted in bad faith by doing so. Thereafter, Kalagadi instituted proceedings to declare that the IDC had acted in bad faith.

Mediation must have a purpose
The Cliffe Dekker Hofmeyr paper points out that the court first had regard to the purpose of mediation, along with its general nature and functioning, and considered the four pillars of mediation identified by Rule 41A:

• [mediation is] a voluntary nonbinding non-prescriptive dispute resolution process;
• the terms of the process to be adopted are those agreed upon by the parties;
• the mediator facilitates the process to enable the parties to themselves find a solution and makes no decision on the merits nor imposes a settlement on them; and
• the process is confidential.”

Nota bene
The Cliffe Dekker Hofmeyr paper points out that the court found that a mediator does not decide on the outcome of the dispute; instead, he/her helps parties break down, understand and focus on the important issues that need to be resolved.

The mediator further attempts to unlock the impasses between parties where it is possible to do so. The fact that an impasse cannot be overcome between parties does not immediately mean that a party that then withdraws from mediation acts in bad faith.

Accordingly, the application to declare that the IDC acted in bad faith in regard to the mediation process was dismissed by the court. Although litigants can have noble intentions in engaging with Rule 41A, they must be careful to understand the true purpose and functioning of mediation proceedings which, among other things, dictate a voluntary and non-prescriptive attempt to resolve disputes between parties.

How long is a piece of string?
Returning a distressed company to a profitable core is at the heart of the business rescue process and should be at the heart of the mediation process.

But how long is a piece of string? One party may have a very specific idea of what the profitable core is while another party may have a different idea altogether. They may even have the same idea but differ on the aggressiveness of the strategy.

Mediation is an intricate game of chess where one wrong move may unravel your whole game plan. Careful planning and prudence is needed when playing this game. Tread carefully here.