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There is a growing debate with regards to mediation and its possible effects in the field of out-of-court dispute resolution and on the economy in general. The concept has attracted increasing attention recently, not only amongst lawyers, but also amongst members of the Cyprus Chamber of Commerce and Industry (KEVE). Nevertheless, despite its inherent potential to minimise cost and time in the dispute resolution process and maximise the possibilities of settlement, Parliament has chosen to burden the mediation process between debtors and financial institutions with countereffective elements that defy its purpose and contradict mediation’s very nature.
In brief, mediation is an out-of-court process during which a neutral third party-mediator acts as an intermediary in an effort to facilitate the exchange of information between the parties and use his or her skills in order to assist them to find a mutually agreed solution, without proposing any solution or taking sides.
Mediation is, by nature, a confidential, voluntary and nonbinding process, since the parties choose to embark in this process themselves and they are free to walk out at any stage, without any prejudice to their rights. Furthermore, the information exchanged between the parties throughout the process remains privileged and cannot be used in court. This process is quicker, less costly and involves less friction than resorting to a time-consuming and cost-heavy court action. More importantly, mediation provides the parties with the opportunity to find a win-win solution that even the courts may not be ready to award. Without a doubt, mediation could also be a catalyst in reducing the courts’ already heavy workload and speed up the dispute resolution process.
Instead of utilising all the benefits that mediation has to offer, Parliament has chosen to enact the Formation and Operation of a Uniform Service for the Resolution of Financial Disputes out of Court Law, L.84(I)/2010 as recently amended, part of which seems unworkable, defies the purpose of mediation and inheres more dangers for the banking sector than the benefits it attempts to grant to debtors. Part VIA provides for the establishment of a procedure according to which a debtor who is not satisfied with the restructuring proposal offered by a bank with regards to a loan not yet been repaid, can resort to mediation in pursuance of a more preferable solution, before the case goes before the court.
The mechanism outlined in the law clearly tips the balance in favour of the debtor. Firstly, no reference is made with regards to guarantors. In the event that the outcome of mediation between the debtor and the bank is successful and the parties agree to amend the loan agreement through a supplementary agreement without the involvement or consent of the guarantors, then it is possible that the bank will be left exposed and unsecured. According to the Contract Law, Cap.149, any amendment to the loan agreement between the debtor and the bank without the consent of the guarantor, absolves the guarantor of any responsibility with regards to any transaction taking place after the said amendment.
Furthermore, as long as the debtor demands the dispute to be sent to mediation, the bank has a statutory obligation to participate in the mediation process, and if it failes to do so it loses the right to claim the costs and legal fees of a subsequent successful action against the debtor. This is argued to be over-the-top and comes in conflict with the very nature of mediation as a voluntary process, whereby the parties are free to walk in and out at any time without prejudice to their rights, incurring no sanctions for their choice to do so. Along the same lines, in case the debtor wishes to walk out of the process, he or she is statutorily obliged to pay all the costs of the process, which may range up to EUR 500, essentially “punishing” the debtor for the deadlock reached.
Additionally, the parties are allowed to bring the dispute to mediation only if the case has not yet been brought before the courts or if the foreclosure procedure has not yet been instituted. As soon as the mediation process kicks in, the bank is barred from bringing an action to court or institute foreclosure measures against the debtor, until the mediation process is over.
This provision clearly ignores the dynamics of the litigation process, whereby the parties are more prone to find a solution closer to the hearing date and at the same time it grants the debtor the opportunity to forestall the debt collection process, to the detriment of the bank.
Furthermore, the bank is unjustifiably prevented from claiming their rights and resort to the courts, placing an insurmountable obstacle to the banks’ right of free access to justice.
In light of the above, it is inevitable that the current legal framework for mediation in loan disputes between debtors and banks is in urgent need of reconsideration before the statutory mediation mechanism takes off.