Using Mediation To Resolve Disputes With Banks

Small business is heavily dependent on the banking industry for financial services and it is inevitable that disputes will arise. In recent years the rapid advances in electronic technologies and deregulation have altered the relationship between banking and business, although problems still arise when the customer believes the lending of money constitutes advice from the bank that the project or investment is viable.

The three key areas for disputes are complaints about banking practice, errors in transactions and calculations, and poor service resulting in financial damages.

The Australian Banking Industry Ombudsman Scheme operates across the country and helps resolves complaints between banks and their customers & is available for individuals and small business.

Background

Mario and Helen owned and operated a family Nursery business. Following a profitable year they decided to purchase a fast food shop in the area. The nursery had arrangements with a Bank and they were able to obtain an investment loan secured against the business. Over a period of 10 years Mario & Helen required several additional injections of funds for capital equipment and renovations and ended up with two overdrafts and three loans.

The Dispute

The family had not provided the Bank with financial details for the past 12 months and loan repayments were irregular. The Bank applied penalty interest rates which further exacerbated the debt problem resulting in a demand for recovery under the mortgage security. Neither party had tried to hold a meeting to resolve the matter, preferring to communicate in writing. There was considerable emotion involved in the dispute and a risk that Mario & Helen would lose everything.

The Facts

The debt had doubled over the 10 years without a full review of the indebtedness. The documentation for the additional loans was not completed correctly. The communication and processes used to notify changes in interest rates were poor.

The Process

As Mario & Helen had been customers for over 15 years the bank requested the matter be settled by mediation. The mediation was not prescribed by legislation and was based on the Bank’s judgement that mediation made business sense. The Australian Banking Industry Ombudsman (A.B.I.O.) was not considered as Mario & Helen were an incorporated company and not eligible under the terms of reference at that time. The Ombudsman’s role has now been extended to cover all small businesses. Although agreeing to the mediation, Mario & Helen were not prepared to attend and sent an agent with full authority to settle the matter. Although not a preferred arrangement, the mediation proceeded.

After two attempts to mediate the dispute the parties were deadlocked and all attempts to break the deadlock had failed. The mediator approached Mario and was able to convince him to attend a mediation in person.

The first joint session enabled the Bank manager to hear first hand how poor business practices on both sides had led to a doubling of the debt over 10 years. The mediator was able to identify the common goals and establish effective communication. This was the first time either party had spoken directly to each other for 18 months. It surprised the mediator how quickly the parties were able to eliminate the side issues and focus on the solutions.

The mediator assisted the parties to recognise their contribution to the current crisis, and was able to manage their expectations about the likely outcome. Effective communication had been achieved and this enabled fresh options to be identified and the gap narrowed. The bank manager made the first major concession by offering to waive the penalty interest, and from there both parties were prepared to contribute to a final resolution. The process had generated considerable goodwill and trust between the parties, which was certainly not present before the mediation.

The Mediated Outcome

The penalty interest rates were waived. All loans were consolidated into one with a capped credit limit . Agreement was reached to sell the fast food business with the net recovery to be offset against the loan.

Lessons to be learnt

Professional business practices on both sides would have identified the financial ‘early warning signals’ in time to remedy the situation. Effective communication is essential to good business relationships.