CASE STUDY: How mediation resolved a $20 million lawsuit amicably

If you heard about a mediation that amicably resolved a $20 million legal dispute for one million — less than five per cent of the original cost — you’d be forgiven for raising an eyebrow.

A mediator must be fully equipped, not only with qualifications, but with practical mediation skills and techniques, and a knowledge of mediation law [1], practice and procedure, including the ability to stretch the imagination and solve problems creatively [2].

The role of mediator [3] is prescribed in the Malaysian Mediation Act (2012) as follows:

Section 9:

1. A mediator shall facilitate a mediation and determine the manner in which the mediation is to be conducted.
2. A mediator may assist the parties to reach a satisfactory resolution of the dispute and suggest options for the settlement of the dispute.
3. For the purpose of subsection (1), the mediator shall act independently and impartially.

This narrative will illustrate the procedural approaches utilised in mediation, the result of which achieved mutual satisfaction and win-win benefits for the parties involved. 

Outline of the claims

Multiple claims were triggered between 2016 and 2017 when a row of twenty units of terraced, single-story private dwellings owned by individual claimants sustained varying degrees of damage due to their situation adjacent to an ongoing construction project.

For obvious confidentiality and privacy, the particulars of the parties, locations, district, township, construction project and other vital information can’t be divulged.

This case study is solely and principally concerned with the mediation process undertaken.

Aftermath of the damage

The claimants in this case jointly and severally appointed a legal firm to represent them in a class action against the main contractor (R1) and the developer (R2), jointly referred to as “the respondents”. 

The respondents chose to remain unrepresented by counsel. Instead, R1 took a leading role in the mediation by appointing an executive director (in charge of the project), a project engineer and a site supervisor as representatives.

Shortly after being appointed, counsel for the claimants issued a seven-page Letter of Demand to the respondents asserting that they were responsible for the alleged property damage amounting to $20 million in aggregate for specific performance, general damages, special damages and of course, costs.

The letter also strongly demanded an assurance that the unstable ground under the properties had been stabilised. It effectively stated that if the ground had not been stabilised, there would be no point continuing discussions to resolve the dispute given the high chance of further damage being sustained. 

Appointment of the mediator

On receipt of the counsel’s letter, R1 replied by proposing mediation [4], and agreement was secured from the counsel on behalf of the claimants. R1 then nominated a sole mediator who was also accepted. 

As statutorily required, the mediator issued a written request for consent [5] to act as the appointed mediator and declared his impartiality and the absence of financial or personal conflict of interest in relation to the outcome of the mediation [6].

In line with the parties’ consent, [7]  the mediator formulated an agreement [8] which once signed by the parties, formalised the process. As part of this agreement, R1 consented to bear the full cost of the mediation [9].

A preliminary meeting with the parties at a neutral venue enabled the submission of relevant documents [10], aptly dubbed “the background information”.

Here, it was emphasised that this documentation, so submitted, would not be used in a court of law.

This initial step was also essential to ensure that all involved had a locus standi, or a legitimate proprietary interest, in the matter.

Preliminaries for submission included: 

• The Contract of Agreement vis-à-vis the project,
• A list of the project’s stakeholders,
• R1’s Contractor’s All Risks (CAR) insurance policy (Third Party Liability: Section II)
• Dilapidation survey report [11]
• The houses (drawings)
• Claimants/registered owners’ identity cards c/w land title deeds (grants)
• Statements of claims by the claimants supported by estimates of repairs

No useful purposes will be served to extrapolate on the importance of the aforesaid documents, save to say, that they were exceedingly useful reference materials to understand the identities of the parties, the registered property ownership details, and the extent of damages to individual houses as experienced by the parties.

Finally, the mediator dealt with the claimants’ overriding concerns about whether “the instability of the ground on which the houses rested had been contained”. 

Here, R1 provided an independent expert’s report on the stability of the site where the houses were located which was accepted, without issue from the claimants. This resolved the matter of specific performance, a pre-condition for accepting mediation. [12].

Throughout the preliminary meeting, the parties displayed a respectful demeanour, decorum and professionalism, without any untoward incidents.

Proximate cause

In the absence of other probable, cogent or plausible explanations, the proximate cause of the damages to the claimants’ houses, which had suffered compromised, weakened and lost foundations, [13] was attributed to the 120-storey, super-structure project, housing four levels of underground car parks, premised directly adjacent to the claimants' properties.

The contract price of the project was $800,000,000.00. Given the distance between the project’s perimeter and the claimants’ houses was approximately six meters [14], probable cause of the damage was unrefuted.

On a side matter, the insurer [15] of the project and their loss adjuster were invited to attend the proceedings but declined having promptly settled R1’s Contractors’ All Risks (CAR) third party liability policy claim in the sum of $3.8 million, paid direct, one month before the mediator was officially appointed.

A critical point of observation is that the insurer, having decided to opt out of the matter, suggests without much doubt that they believed R1 was responsible for the damage.

Proximate cause was therefore not within the scope of mediation. 

Mediation context

At the onset, one of the claimants failed to produce the relevant document relating to ownership of the damaged properties, which negated his locus standi.

His claim of $1,000,000.00 was set aside, leaving a balance of $19,000,000.00. The attending counsel accepted, without protest, the deletion of this claimant from the list.

Next, R1 confirmed the absence of a dilapidation survey report, making it difficult to establish any pre-existing damage to the properties prior to the commencement of the project.

The parties appreciated the mediator’s explanation regarding the importance of a dilapidation survey report, more so, for the project of this magnitude, given its close proximity to the surrounding properties.

According to the land office’s records, the claimant’s houses had been erected some 50 years ago on underdeveloped and virgin jungle land. Fast forward, the site had become a busy, modern, commercial township complete with infrastructure.

The burden of proof therefore rested with the claimants to demonstrate, on balance of probability, that there was no pre-existing damage at the material time that the project commenced.

This was an onerous and uphill task, given the age of the houses and potential rate of settlement, defined as “the downward movement of a structure, such as a railway bridge, dam or building due to compression or movement of the soil below it” [16].

It was crystal clear that the claimants encountered difficulties establishing the pre-existing and post-project damage. As such, the documents outlining their claim statements and repair estimates were deemed unreliable and unconclusive.

Proceedings get underway

A caucus [17] aiming to break the deadlock was held with counsel for the claimants during which a list of the damaged properties was produced categorising them as Group A and Group B to reflect the so-called “minor” and “major” damage, respectively.

However, in the eyes of the mediator, the lack of precise information provided rendered the list vague and ambiguous. In fairness, the details were shared with R1 for their records. 

Following a protracted discussion with R1, a monetary compensation of $10,000.00 per home owner was proposed, embracing general and special damages in full and final settlement of the claim, without prejudice to liability.

At the resumption of the mediation, R1 were not able to demonstrate a justification or rationale for this proposal, hence, it was a non-starter.

Further, the counsel’s contention that the cost of remedial works for the houses marked “major damages” undoubtedly exceeded $10,000.00 per house, remained unchallenged by R1.

All facts considered, the damage, whether pre-existing or otherwise, sustained by these houses was subjective, which could potentially result in a dead end; a nightmare of fruitless argument to be avoided at all costs.

Mindful that the cessation of mediation is not an option in a dispute resolution, the mediator next arranged a caucus with R1, to review their proposal.

Salient arguments

During the following discussion, it became apparent that R1 had failed to consider many vital factors. Pursuant to Section 9 (2) [18] of the MA2012, the mediator drew R1’s attention to the following salient facts, [19] all of which were not in their favour:

1. Proximate cause [20] was 100 per cent attributable to the project, with no question of contributory negligence on the part of the claimants, who had enjoyed their properties for over 50 years, without incident.

Without doubt, in the absence of evidence to the contrary, R1 was fully liable for the causation of damage to these houses.

2. It is not uncommon for a claimant or claimants to seek an equitable remedy by way of a pre-trial injunction [21] subject to the discretion of the court. The application for an injunction can be made independently at any point in time, without needing to be part of a claim [22].

An injunction, once granted, would have the effect of stopping construction at the site, either temporarily or permanently, resulting in a delay  to the delivery of the project and giving rise to liquidated damages, accruing on a daily basis, payable to R2.

Ultimately, R2 would be liable for liquidated damages to compensate the buyers for late delivery of units sold to them.

The liquidated damages for such a mammoth project would likely to be prohibitive and mind-boggling, a situation best avoided by R1.

3. In a worst-case scenario, a court’s anticipated decision would likely favour the claimants based on the available facts relating to proximate cause and the circumstances of the damage.

Undoubtedly, the court would be cognisant of the fact that the claimants, mostly retirees, who owned the houses classified as having suffered “major damages” had been forced to vacate their private dwellings due to the risk of weakened and fractured structure that might collapse.

As a result, the court may well exercise its discretion to award each claimant a substantial compensation for general, aggravated and exemplary damages, with an allocated mandatory sum for the special damage, all of which might amount to a figure much greater than that originally claimed.

Additionally, the court would likely award costs [23] to the claimants, meaning R1 would be forced to bear their own legal costs, whereas, in mediation, they would not incur legal fees unless they chose to be represented.

4. R1’s insurer had acted pre-emptively by unilaterally paying funds directly into R1’s account under their CAR policy. An insurer is not an arbiter of damages.

Technically speaking, third party liability provides indemnity to the named insureds, in this case, the developer as principal (R2) and the main contractor (R1), in respect of their legal liability in the course of the contract works during the period of insurance.

However, the claimants had not filed a formal legal action in court at the time the insurance proceeds were made to R1 and as such, legal liability, or the negligence, of the two Rs had not yet been judicially determined.

While it is possible that the insurer decided to accept R1’s legal liability for the damage to the claimants’ properties based on the loss adjuster’s report, the norm for settlement in a third-party liability claim is the issue of a third-party discharge voucher from the insurer to be jointly signed by the claimants, after which the insurance proceeds are directly credited to the solicitor’s account for distribution to the respective claimants.

In this instance, R1 was credited with the insurance proceeds “in full satisfaction and discharge of all claims made or to be made…in connection with [the] policy in respect of damaged third parties’ residences on [date stated]”.

In summary, R1, who lost nothing, were paid for the claimants’  losses. Needless to say, the insurer’s action was a Pandora’s box [24].

5. In the event that the mediation failed, the next course of action for the claimants would have been to file a legal suit naming R1 and R2 as well as the insurer as defendants.

In such circumstances, the claim discharge voucher signed by R1 would be a meaningless document insofar as the court and claimants were concerned.

It follows that the insurer would then have to recant the claim settlement with R1 and seek a refund of the payment arising from their ill-conceived action.

Mediator’s suggested option

At the end of the caucus, R1 agreed the mediator’s litany of potential adverse consequences could play out as described, and the outcome would be dire for the construction project’s stakeholders.

R1 therefore requested the mediator’s advice and the following was proposed:

• Each claimant receive monetary compensation of $45,000.00 
• R1 repair the damaged houses within three months, regardless of pre-existing damage.
• R1 pay the claimants’ counsel in the amount of $60,000.00 for legal services rendered.  

R1 agreed to the mediator’s proposal, which was then presented to the claimants who, after discussion with their counsel also accepted, thus resolving the dispute by Mediation Settlement Agreement (MSA).

Conclusion

The essence of mediation is to amicably resolve a dispute as expeditiously as practicable, without debating or determining fault. Parties  mutually agree to mediation with a common intention to resolve their dispute in privacy.

Occasionally, where one or more parties is not able to reach an amicable settlement, “a mediator may end the mediation if, in his or her opinion, further efforts at mediation would be unlikely contribute to a satisfactory resolution...” [2528/26]

Having initiated the mediation, the respondents succeeded in avoiding adverse publicity for their landmark project and gained substantial savings.

The claimants meanwhile, succeeded in obtaining reasonable compensation, including repairs from the respondents, thus, avoiding long, stressful due process and substantial legal costs of a court trial. 

About the author

LF Ong is a pioneer in the Malaysian loss adjusting circles. He was the former chairman of the Association of Malaysian Loss Adjusters (AMLA) and the Chartered Institute of Arbitrators (CI Arb), Malaysia branch, and a former director of the Malaysian Insurance Institute (MII), now known as the Asian Institute of Insurance (AII).

He was an examiner and a Question & Answer Setter of the CII/MII Business Interruption insurance examinations at the Associateship level. He also held the position of deputy managing director of an international loss adjusting practice and later, joined a substantial local loss adjusting practice. Currently, he is a practicing arbitrator and mediator and is a member of the Advocates & Solicitors Disciplinary Committee of the Malaysian Bar.

References

[1] For the purpose of this mediation, reference was made to the Malaysian Mediation Act 2012 (Act749) (MA2012).

[2] Section 9 (2) of MA2012 provides “…mediator may assist …and suggest option for the settlement of the dispute”.

[3] Section 9 of MA2012; The Australian MA 1997 is silent on the role of mediator; Part 2, Section 8, of the UK Mediation Act 2017 has a provision on the role of mediator.

[4] Section 5 of MA2012

[5] Section 7 (6) of MA2012

[6] Section 7 (7) of MA2012

[7] Section 5 (4) of MA2012

[8] Section 6 of MA2012

[9] Section 17 (2) of MA2012

[10] Section 10 of MA2012

[11] A Dilapidation report is a record of pre-existing condition of the buildings, with photographs, compiled prior to the commencement of the project.

[12] Specific performance was a pre-condition of the claimants to accept mediation. 

[13] The CAR policy, Third Party Liability:  Section II, was extended to cover “Vibration, Removal or Weakening of Support”, subject to a deductible.

[14] I foot = 0.3048m

[15]  Subsequently, it transpired that the insurer had decided to opt out of the matter by way of settlement of the claims in the sum of $3.8 million direct with R1 under the Third Party Liability Section II of the CAR policy. 

[16] The Penguin Dictionary of Civil Engineering (Third edition) at page 239 by John S Scott defines “Settlement” as the “downward movement of a structure, such as a railway bridge, dam or building due to compression or movement of the soil below it” (emphasis in bold added)

[17] A caucus is a confidential and private meeting between the mediator and claimants or the mediator and  respondents in a separate session, with the view to resolve the dilemma.

[18] Ibid [2]

[19] This caucus was conducted on an off the record basis

[20] Ibid. [4] & [5]

[21] Special Relief Act 1950 (SRA 1950)

[22] Order 29 Rule 1 Rules of Court 2012

[23] General rule: Costs follow the event

[24] Oxford English dictionary at page 605 defines Pandora’s box as “a process that once begun creates many problems”

[25]Section 11 (3) of MA2012