Is Mediation A Viable Option for Partners Disputes?

By Rick Gould, CPA, JD

When partners do not agree on major business issues, such as compensation or equity percent, it is emotionally draining and counterproductive to the firms’ health, profitability and success. Any type of dispute can be potentially destructive.

What options exist to move partners from conflict to resolution? This discovery process should start with an honest conversation (ideally an in-person one), or an email or letter. It would then evolve into a negotiation. However, if this doesn’t work what is next?

Ending the business or pursuing litigation as a means to achieve resolution are costly and time-consuming options. I’ve seen these options to be mostly ineffective. All parties end up losing out exponentially more, both from a financial and emotional perspective, than if other resolution options had been pursued. And there is usually an implosion of the brand that results, especially in this day and age where conflict is so easily detailed in social and traditional media outlets. Reputations get undoubtedly tarnished, no matter who is perceived to be right or wrong. In my experiences, litigation should be an absolute last resort and it is to be avoided.

The best option, especially among partners, is honest negotiation through mediation. The partners will control the process, the time-frame and the overall cost. But to be effective, negotiation must lead to a final conclusion that all partners can agree to. This is often not doable, especially when a partner (or partners) allow themselves to be controlled by ego and emotion.

The middle and higher-ground, the better option, is to take the ego and emotion out of the mix and to mediate. Binding arbitration can also be pursued if mediation does not achieve a mutually agreeable outcome.

In mediation, a third party acts as a facilitator in negotiation between the partners. The mediator is trained to take emotion out of the dispute. He/she is tasked to come up with tangible solutions and an overall equitable resolution. The mediator may end up fully agreeing with one partner, or he/she may conclude that a compromise is in order. Either way, a fresh and outside perspective is critical to infusing clarity (and sanity) into the situation. Partners must recognize their managerial and personal limitations, and a mediator is just the one to provide that insight.

The mediator’s recommendation is not binding. However, it will often bring about a resolution, especially if outsiders, or even other partners, are eagerly watching. The mediator attempts to break the impasse to allow all parties and the firm to successfully move forward. Mediation is far less expensive than litigation.

A skilled and experienced mediator uses processes and techniques that lead to a successful outcome. And an ethical mediator will agree up front that, if not successful, he/she may not represent either party in an ensuing litigation. This incentivizes the mediator to resolve the conflict quickly and effectively.

Before you opt for mediation, be sure that all partners are honestly committed to achieving a resolution. Each partner should ultimately want to resolve the dispute from both a business and a personal perspective.