Mediation Of Closely Held Business Disputes

Sunday, August 1, 2004 - 00:00

Mediation is increasingly being used to settle a variety of disputes. A large percentage of these mediations involve commercial disputes after a lawsuit has already been filed, in which the court orders the mediation or the parties elect to participate in mediation to try to resolve the dispute before a scheduled hearing.

However, mediation is also particularly well suited for disputes facing closely held businesses before litigation is commenced, especially where the dispute involves the owners/partners of the business, an important supplier or customer, a joint venture partner or a key executive. Such disputes can be one of the most potentially destructive, costly and difficult situations facing the closely held business. If the dispute involves the owners/partners of the business or a key executive, it is also often an emotionally charged situation. Additionally, delays in addressing such disputes can be extremely destructive to the continued operation of the business, including potentially adverse effects on the company's client relationships and/or morale issues with other employees.

In view of the foregoing, parties to such a dispute should look to a process that can expedite consideration, discussion and hopefully resolution of the dispute and offer the prospect of significant cost savings in resolving the dispute. Mediation before a skilled and experienced third party neutral offers an excellent avenue to accomplish these objectives.

It is important to remember that mediation is not arbitration. While both processes involve a third party neutral, mediation is very different from arbitration in several respects. One of the most important distinctions is that the third party neutral in mediation (i.e., the mediator) does not act as a final arbiter of the dispute, as an arbitrator, judge or jury does.

Accordingly, mediation offers the following advantages:

Control/Risk Avoidance - the parties determine the resolution to their dispute. A third party (such as a judge, arbitrator or jury) will not dictate the result to the parties.

Safety - the mediation process can be structured to best suit the parties. They jointly select a mediator and can determine up front with the mediator how the process will generally proceed, how long the process will be pursued by the parties, and what they expect the mediator's role to be in the process (e.g., facilitative and/or evaluative).

Confidentiality - the parties agree up front that the mediation process is confidential, including the discussions of each party with the mediator and the final settlement reached by the parties.

Saving Time and Money - the mediation process lacks the formality (and the complex and costly discovery rules) of litigation or even arbitration; thus, saving time and money for the parties.

Preserving Relationships - mediation offers the parties a less adversarial and contentious way to reach a settlement of the dispute and in turn provides the opportunity to preserve the relationship of the parties (which is virtually impossible to achieve in litigation or arbitration and very difficult to accomplish in direct negotiation between the parties' legal counsel).

Creativity - the control that the parties have in this process, along with the skills of an experienced mediator, allows for the possibility of creative solutions to their dispute, which is not otherwise available in litigation or arbitration.

Facilitated Communication - the use of a skilled, experienced, third party neutral facilitates the parties' communication and discussion of issues, interests and solutions, which would not otherwise be available in arbitration, litigation or even in a direct negotiation between the parties' legal counsel.

Recently, I was asked to serve as a mediator of a dispute that developed between the owners of a closely held service business that had been in existence for about one year through the combination of each owner's respective businesses. While the owners of the new business had thought that the combination of their respective businesses into a new venture would prove to be beneficial for each of them, it turns out that one of the owners did not have that same view after about a year of operation. That individual preferred to leave the business and take a couple of key customers with him (despite prohibitions on such competitive activity in the company's operating agreement). The owners discovered they had different goals and objectives (both professionally and personally) that made the continued operation of the new venture very difficult. Each owner also understood that for the sake of client service and their individual business objectives, they needed to come to a resolution of their differences quickly.

In this particular case, the parties decided to participate in the mediation without the direct involvement of their respective counsel in the mediation sessions. The process did not have to be structured this way. The parties could have elected to have counsel participate in those sessions; but, they chose not to do so. Each party was, however, encouraged (and did in fact) consult with their counsel and other advisors as they saw fit during the mediation sessions and in between the sessions. Additionally, given the time constraints of the parties, they were able to schedule three sessions over a four-week period, which resulted in a settlement determined by the parties with my assistance as mediator.

This mediation resulted in significant savings of time and money for the parties as well as preserving the relationship of the owners as they moved forward in different directions. The parties recognized at the end of the process that it would have been impossible to achieve these results had they elected to go to litigation or arbitration to try to resolve it or had they tried to negotiate a settlement in a more adversarial setting with their respective lawyers.

Here are examples of a few other situations where mediation (before litigation or arbitration has commenced) can prove to be very beneficial for the parties and the resolution of their differences:

Key Customer/Supplier Issues - a dispute between a business and a key customer or supplier, especially where a long-term relationship exists and/or should be preserved or where the customer/supplier is a foreign person or entity.

Family Ownership/Succession Disputes - disagreements among closely held business owners who are family members, particularly if it involves valuing the business and/or someone's contribution to the enterprise.

Joint Venture Disputes - a dispute involving joint venture partners over the operation or direction of the joint venture company.

Professional Partnership Disputes - a dispute involving one or more partners in any professional service business, where emotions and egos often get in the way of productive communication and the potential for significant damage to client relationships is high (especially if the dispute is allowed to linger and remain unresolved).

Key Executive Issues - problems with a key executive who has a long-term contract or has other circumstances that make litigation or arbitration an unattractive option, which problems (if left unresolved) will likely distract the company from its mission and/or create morale problems for other employees.

If you think that mediation might be appropriate for resolving a dispute involving your business, you need to give thought to the selection of the mediator. The following three general areas should be considered:

Qualities Expected of the Mediator - There are several critical qualities that every mediator should have. The most important one, for obvious reasons, is impartiality or neutrality. Another important attribute is experience with the type of subject matter that is involved in the dispute. In closely held business disputes of the type mentioned above, it is very helpful to have a mediator who has had experience counseling closely held businesses. Such experience allows, among other things, the mediator to understand quickly the issues underlying the dispute and to bring a higher level of creativity to the parties' deliberations. Yet another important quality is strong people and leadership skills. Each side needs to feel that the mediator understands and empathizes with their positions and concerns. Also, there will undoubtedly be times during the mediation process, when the discussions of the parties need to be directed in a positive, productive fashion and when there will be an impasse over an issue or issues, and such skills are essential to help the parties work through such impasse.

Role Expected of the Mediator - The role of the mediator in the mediation process depends on the nature of the dispute and the desire of the parties. From the perspective of mediation styles, the mediator can act in a facilitative and/or evaluative manner and can also seek to frame the discussion of issues in a narrow and/or broad fashion within either of those manners. Without overly generalizing, closely held business disputes often require the mediator to utilize all of those styles. The big question is when each of those styles will be utilized in the mediation process. In these types of disputes, a skilled, experienced mediator should have the ability to call upon each of those styles at the appropriate times in the process in order to maximize the prospect of the parties coming to a resolution of their dispute.

The Individual's Ability to Satisfy the Qualities and Role Expected - Once the parties have decided what role they want the mediator to play, they need to assess the mediator's ability to satisfy the key qualities discussed above and the role expected of mediator. As for assessing the key qualities, the parties may know the mediator or if not, they should try to get references from others who know the mediator. As for determining if the mediator can satisfy the role that the parties want him or her to play, there are two things that the parties should do. First, ask the mediator if and why he or she can satisfy such role. Second, give consideration to the background experience of the mediator. Again, without overly generalizing, if the parties in a closely held business dispute want the mediator to be primarily facilitative (or both facilitative and evaluative) and the individual being considered is a former judge or a litigator (no offense intended to the judges and my litigation brethen!), the selection of such individual may not be the right one, as former judges have had to be highly evaluative by the nature of their past work (and the same might be said of litigators). As a result, such an individual may not be well suited to perform the type of facilitative skills needed in such disputes. Obviously, there are always exceptions; but, these issues should be considered by the parties and their counsel in the process of selecting a mediator.

In the closely held business dispute that I described above, the parties desired my role to be facilitative and evaluative. As you might imagine, being facilitative in the early stages of the process was critical to getting the parties to discuss fully their positions, concerns and interests, which was helpful later in getting the parties to fashion a resolution that they could both agree to. However, as the process moved along, there was a need for me to be evaluative in individual caucus sessions with each party in order to provide a reality check on their positions and to get them to consider movement towards resolution, which they successfully did.

Steven A. Scolari has been with Stradley Ronon for twenty years and is a partner in the Business Department of the firm, currently residing in its Malvern, Pennsylvania office. He has worked as corporate counsel for a large number of closely held businesses in a variety of industries over the years. As a member of the firm's ADR practice group, he also serves as a mediator of disputes involving closely held businesses and is a recent graduate of the professional mediation skills program at the Strauss Institute for Dispute Resolution at Pepperdine University School of Law. If you would like to know more about how mediation can serve your business, please feel free to contact the author at (610) 640-8005. ©Stradley Ronon, 2004.

Please email the author at sscolari@stradley.com with questions about this article.