5 tips for resolving disputes with business partners before they escalate

Disputes between business partners can be like marital disputes especially when the relationship that held a business together is tearing it apart. When you are talking about shareholders, partners or fellow directors the arguments can differ but fundamental questions like “What needs to change for us to stay together?” or “Who should leave and on what basis?” can also be similar. Personal decisions can be inextricably linked to what’s best for the family except that here ‘the family’ is the business – unless it is a family business, in which case there are probably two families to consider.

Getting even may feel tempting but how do you go about getting what you want?

1 Step back. Look at the big picture. Before you do anything, think. What do you want? What’s best for the business? Investigate your options and, in each case, the best way of achieving your objective.

2 Check your agreements and get advice. Find out where you stand. Review the Shareholder Agreement, the Articles of Association and any other agreements that you agreed back at the ‘pre-nup’ stage. What do the termination and deadlock provisions say? Do they offer you the best way of separating successfully? Or have things moved on since then?

3 Reality test your options. In each case, be sure to understand where you are likely to end up and what the risks, costs and tax consequences are. For you and your business. Who controls the board and the shareholder meetings? How are employees, clients, financiers, creditors, debtors and competitors likely to react when word gets out? What contingency plans should you make? Tell your top team what is happening. You want them to feel included. They probably know anyway.

In a family business there can be added complications to consider, particularly where continuing shareholders and family members not involved in running the business have differing needs and interests.

Then – and this can be a difficult one – think carefully about who can best take the business forward.

4 Decide on your game plan. Are you going to be better off litigating, negotiating or mediating? Analyse what each is likely to achieve or jeopardise.

a) If you want to negotiate, consider hiring a mediator. The chances of successfully settling a dispute are that much higher. 70 per cent of UK commercial mediations settle on the day. Introducing an independent mediator invariably changes the dynamics and gets people focused on settling. The process is confidential.

It should become clear during the mediation whether the relationship is salvageable or not. If it isn’t, use the mediation to work out the best way of divorcing safely and inexpensively without destroying the business.

At some stage you are likely to end up mediating. ‘When’ is mainly a question of timing. If people seem ready to talk, the earlier you do so the greater the likely savings in legal costs and management time. If not, wait for a window of opportunity but don’t leave it too late. Also, carefully consider any invitation to mediate and reply promptly if you don’t want a court to impose a hefty ‘costs sanction’ on you later.

b) If you want to litigate, first find out:

- What the effect on you and the business is likely to be, win or lose. People often have multiple hats, e.g. as shareholder, director and employee. Be sure you know where you stand in each scenario.

- If you win, can a court give you what you want? For instance, would winding up the business, removing a director or forcing a share purchase work for you? Judges rule on points of law. They don’t offer businesses relationship solutions. A judge can sanction the appointment of an independent valuer to give a binding valuation (assuming that’s a risk you want to take) but don’t expect a judge to get involved in the actual valuation. Also, getting and agreeing an independent valuation can be harder in the aftermath of a bitterly contested litigation.

- What are your chances of winning? A ‘strong’ case usually means just means 60-65 per cent. Get cost estimates through to end of trial. Calculate how much you should net, win or lose.

- How long could getting a binding court decision take? Think about how you and the business will be affected in the meantime. It can get messy and protracted.

- Now, repeat the exercise for everyone else.

5 Don’t let it fester. Tackle it head on. Face to face. Arrange to meet away from the office. Give yourselves plenty of time and block out diaries to avoid distractions. Agree who should attend. Keep numbers to a minimum. Include anyone who needs to be part of a settlement. Consider whether advisors should attend and whether a mediator could make it more productive.

Next week, how to come away from a meeting getting what you want.  

What about those problems where litigation isn’t the answer?

Maybe because it is unlikely to be cost-effective or quick enough. Or where a client is anxious to keep a dispute private or not to jeopardise business.
1 Shareholder disputes: Take a shareholder dispute, for instance. Unless the termination provisions in the shareholder agreement are crystal clear, the business will probably suffer whoever wins a legal battle. However, if you mediate, you can usually clarify whether the relationship is salvageable (and what needs to be done to get it back on track) and if it isn’t, use the mediation to work out the best way of divorcing safely and inexpensively without destroying the business.
2 Family businesses: These are probably an even more obvious example, with the additional complicating factor of the dynamics of the family relationships and how these tie in with ownership or business needs.
3 Nipping problems early: Why wait until problems become litigious? Mediation can be a very effective way of helping people who are experiencing difficulties, either with third parties like clients or suppliers or with work colleagues inside the business. Either way, problems can be addressed before they escalate and sometimes the relationship can even be strengthened. Think of it as commercial marriage guidance.
4 Boosting year-end figures: With year-ends approaching and an eye on the bottom line, clients may respond favourably when you take stock of an outstanding dispute, particularly if it means that a litigation could be taken off the books or an accounting provision might be substantially reduced.
5 Disputes involving overseas partners: Mediating is considerably easier than litigating or enforcing abroad, while allowing you to retain greater control over conduct of the case.
6 Lower value disputes: Where the amounts involved are relatively small and litigating is unlikely to be cost-effective, mediation offers businesses an efficient way of handling disputes that, especially for smaller or start-up companies, may have a significant financial impact. Please contact me if you would like to know more about how I do this for disputes with a claim value of up to £75,000.

Making mediation work: disputes involving public bodies

According to the latest audit on mediations published by CEDR, the public sector is a key growth area. So how do public authorities fit into the world of mediation? Does mediation really work for public bodies? Or for people who have a dispute with a public body? In short, the answer is yes. In fact, it very often does.
Whilst the nature of some disputes does not always lend itself to commercial discussions or inter-party negotiations – for example some judicial review or human rights claims, or those that involve points of principle – there are a huge number of disputes that can successfully be settled through mediation.
Where there is a dispute capable of settlement or compromise in some way with, for example, a procurement dispute, termination and breach of contract claim, or a dispute relating to the payment of monies or debt, it can pay dividends for a public body to attempt to avoid the costly and time consuming process of litigation through mediation. The potential savings can be huge.
There are however additional key issues that need to be considered by public bodies in advance of any mediation:
1.     Risk
Public bodies calculate the risk associated with litigation on a different basis to commercial parties. There are many more considerations to take into account than just the payment or receipt of cold hard cash. They will also need to consider their duties to the public and other fiduciary duties, the statutory and political framework within which they operate, the continuation of service provision to the public, particularly when key services might be at risk, and whether the public body is acting within its powers.
2.     Authority
Does the public body have the authority to enter into a settlement agreement on the terms proposed and do those attending the mediation have power to bind the public body through the signing of the settlement agreement? Often public bodies may only be able to reach an agreement in principle at a mediation and an agreement may need to be formally ratified or approved before it can become legally binding. The parties will need to consider whether it would be possible or appropriate for those at the mediation to be given delegated authority to settle on certain terms beforehand, or whether authority can be delegated over the telephone if an agreement in principle is reached on the day. Parties should also bear in mind that public bodies may also be required to justify their decision to settle a dispute on a particular basis, and that may limit the terms on which it can realistically propose settlement.
3.     Transparency
Public bodies also have an obligation to act transparently. The parties should carefully consider the terms of any settlement, particularly issues of confidentiality, and whether any agreement, agreement summary or press release will need to be agreed and publicised once the mediation has concluded. Parties should be live to this from the outset when any proposal to mediate is being considered.  One of the benefits to mediation is that the parties can settle matters in private and any agreement can remain entirely confidential. However, if a public body considers that some form of publicity will be required this should be flagged early on to ensure that the parties are proceeding to mediation on the same basis and with similar expectations.
Central Government is already formally committed to resolving disputes effectively and expediently through mediation and other ADR processes, and the Ministry of Justice has set out plans to create a similar Dispute Resolution Commitment for Local Authorities and businesses. Whilst that work is underway, the facts speak for themselves – public bodies are increasingly using mediation to successfully resolve their disputes; saving money, time, and business relationships as they go.
Guest blog: Charlotte Clayson, Trowers & Hamlins LLP

“You never really understand a person until you consider things from his point of view…until you climb into his skin and walk around in it.”

That’s what Atticus Finch tells Scout in “To Kill a Mockingbird” and I have yet to meet a mediator who isn’t attracted to the notion of putting oneself in another party’s shoes.
Surprisingly though, if Nicholas Epley is to be believed, we tend to be very bad at doing so even though we think we are very good at it. In his book “Mindwise: How we understand what others think, believe, feel and want”, Epley cites an experiment that shows that ”More time together did not make…couples any more accurate… it just gave them the illusion that they were”. Worse still, he argues that if one has a mistaken belief about someone else’s perspective, then “carefully considering that…perspective will only magnify the mistake’s consequence” which is logical if instinctively difficult to accept. Whatever the answer though instead of presuming what the other side may think or want, it can often be helpful to stop wondering and simply ask them, particularly in a mediation when there is little downside to asking such a potentially awkward question.
In his Financial Times article ‘How (not) to argue’ http://goo.gl/xH2lxh John McDermott explains why even though an argument may be well evidenced, we may still reject it. One reason is that our response is likely to depend on whether or not the new factual information supports what we believe. If it does, we typically ask “Can I believe this?” but if it challenges it, we instead tend to ask “Must I believe this?” This echoes Daniel Kahneman’s belief that “Intuitions come first, strategic reasoning second” and suggests that if you want to erode someone’s intransigence, trying to understand who you are arguing with is likely to be more productive than concentrating on the subject of the argument.
In a couple of weeks Charlotte Clayson of Trowers & Hamlins is writing a specialist blog about mediation and public bodies. Please let me know if you would like me to send you or a colleague this.

Why litigants can misunderstand the likelihood of winning

I recently wrote about why litigants often make irrational decisions and referred to Daniel Kahneman’s book ‘Thinking, fast and slow’. This week, I am going to concentrate on why people sometimes misunderstand the likelihood of winning. 

1 ‘Loss Aversion’ can have a disproportionate effect. We feel the pain of a loss much more than we feel the pleasure of a gain. According to Kahneman’s studies if you lose £10 today, even if you find some money tomorrow, you would need to find more than £20 to make up for that £10 loss. That may help explain why litigants will often prefer to risk incurring greater costs rather than accept the crystallisation of an existing loss. 

2. Flaws in comparing costs and losses: People react differently depending on whether a disadvantage is framed as a cost or a loss. Kahneman cites a study where people were offered the choice of a sure £50 loss and a 25% chance to lose £200. 80% of them went for the gamble. However, when the choice was re-framed as paying £50 for insurance against a 25% risk of losing £200, only 35% refused to pay for the cost of protection. 

3. ‘Not understanding the odds’. We typically overestimate these in cases involving a chain of events, i.e. where to win, each of a series of events must occur, like in a restraint of trade case for example. We forget that even if each event is very likely, if the number of so-called ‘compound’ events is quite large, the overall probability of success can still be low. Conversely, we underestimate so-called ‘disjunctive’ events, i.e. where a complex system will fail if any of its essential elements fail. The likelihood of an individual component failing may be slight but if many components are involved, the probability of failure can be surprisingly high. 

4 Our understanding can be distorted by bias. Like the ‘Present’ bias, which causes us to pay attention to what is happening now and not worry about the future. This may explain why we overeat or have unprotected sex, but also why litigants may escalate disputes in spite of warnings that things might not turn out the way they want.

Another bias that frequently comes into play when dealing with conflict is the ‘Negativity’ bias, the problem being that negative events are remembered much more than positive ones. So much so that it is reckoned that for every argument one has in a relationship, you need to have five positive memories to maintain an even keel – something that might also be worth bearing in mind when framing an apology.

In next week’s blog, I will explain why trying to understand who you are arguing with can be as productive as concentrating on the subject of the argument. 

Why litigants make irrational decisions…

Reading Daniel Kahneman’s book ‘Thinking, fast and slow’ I was struck by how often the Nobel Prize winner’s findings also resonate in a litigation context. Aside from any emotional or financial distortions, here are six things that can affect a litigant’s judgement.

1. ‘I’ve got a strong case’. Once they have been told this, litigants frequently cling to this notion instead of properly analysing what the real odds or financial ramifications are likely to be. Apparently, we become over reliant on how things are described to us, even when we are paying that person to be on our side. Predicting an outcome in terms of the favourability of a description is going to be insensitive to both the reliability of the evidence and the expected accuracy of any prediction.

2. The illusion of validity: We are often overconfident in our own predictions. That might explain why when mediators ask advisors what their client’s chances of winning are, the combined tally invariably exceeds 125%. Or why buyers and sellers may have the same information about a stock tip yet both believe that the current price is wrong and will be corrected in their favour.

3. Hindsight bias: Our overconfidence is fed by our illusory certainty of hindsight. Take the ‘I knew it all along’ effect. Our recollection of what we said or predicted at the time often gets subsequently distorted. If the event then occurs, we tend to exaggerate the probability that we had previously assigned to it. If it doesn’t, we erroneously recall that we always considered it to be unlikely.

4. Outcome bias. We tend to evaluate decisions by whether the outcome is good or bad, not by whether the process was sound.

5. Being blind to the obvious, and blind to our blindness. When we focus intensely on something, it can make us effectively blind. Here’s an example http://goo.gl/s6Nz but it can also apply to a litigant’s case.

6. Impure decision-making. We often make decisions based on our own beliefs and preferences, rather than logic. That is why, for example, an objective improvement can be even experienced as a loss, say where an employee receives a smaller rise than other people in the office. Similarly, our ability to make objective comparisons tends to be skewed by how easily we can recall similar instances, how recently they happened and the impact that they had.

Next time, I will explore why clients may misunderstand litigation risks and why we are much worse than we think at being able to understand someone else’s point of view.