When preventive medicine fails, it's time for serious dispute resolution

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Sometimes disagreements at family enterprises can escalate into conflicts between family members or those working with them in the business. Fault lines can emerge between family members of different generations, or between siblings or cousins within the same generation, or between family members and non-family members, which could include in-laws or employees or outside shareholders.

The conflict may be about the direction or performance of the enterprise – such as whether to exit a particular lackluster business, the compensation that people are receiving, or the roles and level of control that people have.

If the conflict has not been headed off by preventative measures, steps can be taken to effectively and efficiently resolve it. Choosing the best dispute-resolution process depends on the circumstances of the conflict, such as how contentious it is, and what is important to the parties involved, whether that is confidentiality, cost, speed or the degree of control the parties want over the process and the outcome.

Mediation

In mediation, parties voluntarily work with a neutral third party, the mediator, who is paid to help them come to a resolution. It is a structured, facilitated negotiation.

The parties might be tempted to use a family member as the mediator, perhaps someone authoritative who is removed from the immediate conflict, such as an uncle or aunt. While such a person may bring a deeper knowledge of the family members and the dispute, they may lack the objectivity that comes with distance and risk becoming entangled themselves in the dispute.

Mediation can be helpful if communication has broken down but the parties are not yet so dug in as to be incapable of compromise and collaboration. Mediation works well if parties need to air their grievances and eventually come together on a joint solution. This can be particularly appropriate for a dispute in which individuals hold multiple roles in the business and in the family. The dispute may have substantive business aspects but also include relationship conflicts.

A mediation can help get to the root source of the dispute, and in that way lower the chances of future conflicts. The mediator, however, does not make any decisions but only helps persuade all parties to reach a consensus. If the parties are not willing to compromise, a mediation will not be effective.

Litigation

Here, the parties go to court to ask a judge to make an order that resolves the dispute. The parties put forward evidence in a formal proceeding and make legal arguments. The evidence and the court’s decisions are generally public. Unlike mediation, it is not a consensual process, as one party can start litigation against another without the other’s consent. The end result of litigation is generally a judgment ordering money to be paid between the parties, or ordering the parties to do or not do something.

The process can be slow, and the result may not please any party. For example, in the recent Libfeld v. Libfeld decision in Ontario, four brothers were at odds over their family’s property development group. The brothers proposed competing solutions to the court such as dividing the group into four, or one set of brothers buying out the others. In the result, the court rejected all the brothers’ proposals and ordered that the group be wound up and sold under the supervision of the court.

Arbitration

Arbitration is similar to litigation in that an independent third party, the arbitrator, makes decisions that bind the parties based on the law and evidence. Unlike litigation, arbitration is confidential, but the parties have to agree to it. Arbitration may be required in various agreements such as shareholders agreements.

And like litigation, an arbitration may not solve the fundamental source of a conflict. This can be seen in the decision of Wilfred v. Dare et al, a court decision. It involved a family food business that was jointly owned by fourth-generation family members: two brothers and their sister. All three sporadically received relatively small dividends, but the brothers also worked in the business and received a salary.

The sister wanted to sell her shares, but the brothers refused. The sister sued her brothers, arguing that their refusal to purchase her shares breached her reasonable expectation of liquidity and that the dividend policy was unfair. The court ruled against the sister, finding that a shareholder who is gifted a minority interest in a closely-held company has no reasonable expectation of liquidity and no reasonable expectation to dividends in excess of the company’s dividend policy.

This court decision, however, did not release the siblings from the circumstances that had caused the conflict. The parties remained at the end what they were at the beginning: siblings with different roles in a family enterprise, with different visions of how they should be compensated.

Help from external lawyers

Lastly, independent counsel in the form of external lawyers can be brought in to assist, advise and investigate. These lawyers can bring a fresh perspective and, if hired by the company that has no interest in the dispute, can help bring objectivity and creativity to solving the problems at hand.

Conclusions

It is never too late to undertake dispute resolution processes, even if a conflict has already arisen. They can be used at different stages of a conflict.

A conflict may be diffused with help from an independent lawyer. If not, mediation and arbitration can be attempted prior to going to court (in the case of mediation) or as an alternative to court. In these ways, privacy and confidentiality can be maintained over personal matters and business dealings, minimizing the reputational damage done to the enterprise and individuals from the conflict. The parties may start litigation against each other, but then decide to mediate.

Even when it seems conflict is inevitable, you have options for resolving it effectively.

Eric Morgan is a partner at Kushneryk Morgan LLP, a law firm specializing in corporate governance and dispute resolution (www.kmcounsel.ca).