RESOLVING FINANCIAL DISPUTES THROUGH MEDIATION: A Case Study from the Perspective of In-House Counsel

Posted on Mar 16, 2020 |Publications

By: Michael W. Emerson, Esq.

New York Law Journal Alternative Dispute Resolution (ADR) Special Report
March 2020

Imagine you work as “in-house” counsel at an investment bank.  Your principal role is to advise your clients (typically sales personnel, product structurers and traders) about the various legal, regulatory and compliance risks associated with esoteric financial products.  These products are not well understood by people outside the financial services industry.  They could be any number of financial instruments, such as indexed structured notes, mortgage-backed or other asset-backed securities, foreign exchange products or other financially engineered products. 


In the following example let us assume that we are referring to a sophisticated over-the-counter (OTC) derivative products transaction. 

A trade dispute occurs

One day an internal client comes to you and explains that a trade dispute has just arisen with one of the company's best clients. The trade consists of an OTC derivative product that is expected to generate several million dollars in future profits for your company. Since the client was hedging one of its existing risk exposures, the gain to your company would not necessarily be offset by a corresponding overall loss to the client.  That said, the client is complaining that the transaction already is not performing as expected.  That is, the client is already losing more money than they believed possible, and it is also claiming that the disclosures made about the transaction appear to be materially false, and, in any event, misleading.  You are told the client is threatening to sue if the trade is not immediately unwound.

Assessing the situation

Having listened to your internal client,  you have alerted your general counsel to the risk of a new lawsuit, and began to think about the way this matter should be handled   You are confident that senior management will oppose simply unwinding the transaction, which would eliminate the opportunity to earn the expected millions.  In addition, you are confident that the disclosures made about the transaction are accurate and that they properly address the risks inherent in the transaction. 

The one fact that makes you somewhat uncomfortable is that the client is not an experienced or sophisticated market participant in OTC derivatives.  For this reason, the client could be viewed as a sympathetic plaintiff and could allege that they were too inexperienced in this market to have properly understood the transaction.  In other words, the client could claim that the transaction was unsuitable for them. 

Litigation or mediation?

Based upon past experience with similar trade problems, you are acutely aware of the risks that litigation presents.  The enormous legal expense of formal litigation could easily erode the profit from the transaction and potentially cost your company even more.  Also, the significant time and effort required by everyone involved with the transaction, including senior management, to oversee a lengthy lawsuit could substantially interfere with their collective ability to generate additional business.  There is also a significant risk that litigation will permanently damage the relationship between your company and the client.

It is also uncertain which party would be likely to prevail in the litigation.  Given the nature of the transaction at issue – a complex and esoteric financial derivative – it is unclear how effectively a court would be able to decide the matter. 

Finally, should the matter be litigated rather than mediated, there is the potential for reputational harm to your company, as the client is claiming that the transaction was unsuitable for it.  In contrast, mediation is confidential, and nothing would be disclosed.  

A face-to-face meeting with the client to discuss the transaction proves unsuccessful, and it quickly becomes clear that both sides will simply agree to disagree about how to resolve the matter.  As a result, you decide the best approach to resolve this matter is to use mediation.  In particular:

  • You are acutely aware of the important relationship with this client, which is more likely to be salvaged through mediation than litigation.   
  • Mediation will be much less expensive than litigation and much quicker to resolve the matter at hand.  In fact, most mediations get resolved in a matter of days rather than in months or years.  
  • With mediation, your company and the client will retain control of the matter and will agree on when, how and on what terms the matter is resolved.  

Mediation allows both your company and the client to avoid the cost, delay and potential reputational damage associated with protracted and public litigation. You believe mediation will provide for a negotiated outcome that will happen more quickly, cost less, keep the dispute private and hopefully allow the parties to resume their historically beneficial relationship.

Choosing the “right” mediator

The next significant step, and one that is of paramount importance, is the selection of the right mediator.  This could have a profound effect on the outcome of your dispute.  Choose an experienced mediator and your matter could be resolved quickly, easily and inexpensively. Conversely, choose a mediator who is ill-suited for your dispute and your mediation could drag on without success, and the parties may end up more entrenched in their positions and convinced that formal litigation is the only practical outcome.  

So how can you be sure that you and your adversary are selecting the appropriate mediator for your matter wisely?  There are a number of factors to take into account when making this decision.

First.  It is important that you are comfortable that the mediator will in fact be neutral and not have mediator-bias.  Consider the following:

  • your communication with the proposed mediator;
  • past mediations he or she has handled; and
  • articles the mediator may have published.

Second.  To the extent possible, choose a mediator with whom you feel comfortable in both conversations and dealings.  

  • Be satisfied that you can trust this person to help resolve your dispute. 
  • Make certain you feel confident that the mediator can be effective in bringing the two parties together to resolve your dispute.   
  • Most importantly, be sure that you believe the mediator really understands your dispute and has the technical or other experience necessary to resolve it. 

Third. How effective do you believe the mediator will be in resolving the conflict?  

  • Satisfy yourself that the mediator has sufficient experience dealing with the same or similar matters to both be effective at discussing the issues with the parties and leading the parties to a resolution.  

Fourth. Try to determine which approach to mediation – facilitative or evaluative – your mediator will utilize. Do you believe that this is the appropriate approach for your matter?  

  • Given the significantly different levels of knowledge the parties have about the product involved in this dispute, each party may have its own preference for which approach to mediation would be more appropriate, and the two may not be easily reconciled.  
  • With the facilitative approach, the mediator attempts to resolve the matter utilizing only what is said by the parties without interjecting his or her own opinions into the dialogue.  
  • With the evaluative approach the mediator typically will make recommendations or proposals for settlement based on his or her background, knowledge or experience. 

One might expect the investment bank in our example, to favor the facilitative approach, since it likely has more expertise with OTC derivatives than does the mediator.  The investment bank may be reluctant to cede any control of the mediation process to the mediator.  Conversely, given the relative inexperience of the client with OTC derivatives, the client may strongly prefer a mediator who will utilize an evaluative approach in the mediation, and may feel more confident relying on the mediator's judgment to facilitate a settlement, rather than the recommendations of the investment bank, 

With all of these factors to consider, there is not necessarily a “right” or “wrong” approach to choosing a mediator for your dispute.  Being able to choose the “right” mediator for your matter will likely be based on a careful evaluation of the factors identified above. 

Final Thoughts

In addition to efficiency, cost savings and finality, mediation, unlike litigation, allows the parties flexibility and creativity to find business-like and client-driven solutions.  Moreover, mediation can include all issues between the parties that may not fit within the confines of formal litigation. Maintaining or preserving the business relationship is, to me, one of the biggest potential advantages of mediation over litigation.  It is the nature of mediation which can achieve this result.

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Reprinted with permission from the March 16, 2020 issue of The New York Law Journal © 2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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Mr. Emerson has served as the General Counsel and Deputy General Counsel for several of the world's largest financial institutions including Signature Bank, HSBC N.A., Credit Suisse, and Australia New Zealand Banking Corporation, New York branch. He also served as the General Counsel of the Banking Division of the New York State Department of Financial Services. Michael W. Emerson, Esq. is a financial services specialist with NAM (National Arbitration and Mediation) and is available to arbitrate and mediate cases throughout the New York Metro area.