For a litigator, disputes in family-owned businesses may at first appear like any other business disputes. Such superficial similarity soon breaks down, however. The web of personal relationships involved in a family-owned business changes the context. How the dispute is resolved has much broader consequences for participants than is typically true where "arm's length" business relationships are the norm.

In my experience, when family business disputes are resolved short of litigation, much of credit for successful resolution goes to the clients, who have the courage to address important issues before they become crises. This success is the product of willingness and ability to work hard at resolving important business differences while simultaneously working to preserve and even enhance family relationships.

Where family business litigation has ensued, mediating the dispute has in my experience been extraordinarily difficult. While in most such cases the dispute has been "resolved" in a legal sense, the process ultimately has been inordinately costly, both financially and in the toll it has taken on family relationships.

This repeated and troubling experience has persuaded me that mediation should be pursued prior to commencing family business litigation, and that the parties should resort to litigation only if mediation has totally failed (rather than commencing litigation as a strategy to get the parties to the mediation table).

ATTORNEYS NOT THE PROBLEM

Contrary to popular mythology, in my experience the attorneys involved have not been obstacles to the mediation of family business disputes. Rather, in every case in which I have been involved, it is the attorneys who have sought a mediated resolution. Unfortunately, in virtually every case where the opposing attorneys initiated the search for an effective dispute resolution environment, the move to mediation has been made after, rather than before, commencement of litigation.

This phenomenon seems to be attributable simply to the "conventional wisdom" about how to conduct the dispute resolution process: first attempt negotiation, then commence litigation, then explore a mediated resolution. My strong belief is that, in family business disputes, it is essential that mediation be initiated and exhausted before the commencement of litigation.

NOT JUST ABOUT BUSINESS

One of the distinguishing features - and principal strengths - of family-owned businesses is the loyalty and commitment that arises out of the family relationships. When dealing with difficult issues, most of the family members involved share the dual goals of finding mutually satisfactory solutions and maintaining satisfying family relationships. Litigation of family business disputes is usually an obstacle to achieving such dual goals.

In virtually every family business matter in which I have been involved, including even the most collaborative consultations, there are critical events and relationships in the family's history - beyond the business issues - that need to be surfaced and addressed in the dispute resolution process. This "overlap" of the family factor onto the business issues is not something that can be effectively addressed in a litigation context, nor do most attorneys claim to be knowledgeable or skilled in dealing with such issues.

LIMITS OF RATIONALITY

For many attorneys, the primary motivation for initiating mediation in a family business dispute is the attorneys' realization, at some point in the litigation process, that such disputes are not amenable to rational resolution such as experienced in other business litigation. In fact, the attorneys experience their role in family business litigation as akin to representing a husband or wife in a marriage dissolution action.

Although the emotional "feel" of the two environments - family business litigation and divorce - can be very similar, there are critical differences between the two:

In a divorce, the parties can initiate the proceedings with generic allegations regarding the breakdown of the marriage, and without the necessity of making accusatory and derogatory allegations in the pleadings. And, given that such actions are (unfortunately) commonplace in our society, the mere commencement of the proceedings is not necessarily experienced by the parties as a provocative act.

In contrast, in family business litigation, the initiating party must recite facts and allege legal conclusions (e.g., fraud, misrepresentation, self-dealing, undue influence) in order to maintain an action. And the opposing party almost always responds in kind, especially if counterclaims are asserted.

In our society, family litigation is viewed as shameful and contrary to the conventional notion and values of the institution of the family. Thus, the simple act of serving a detailed complaint and answer, hanging out the family's "dirty laundry," significantly stokes the parties' emotional "thermostat."
These important differences are at the root of the problems created by commencing litigation before rather than after attempting to mediate family business disputes.

WHY MEDIATION FIRST

Commencing litigation before initiating mediation creates enormous obstacles for both the parties and their attorneys.
For the parties: Once accusations and counter-accusations have been made by family members in the context of litigation, they cannot be taken back and are never forgotten. The insult, hurt feelings, and sense of betrayal cannot be erased by the explanation that "my attorney said I had to do it" in order to maintain the action. The normally positive "family factor," which is the single most important ingredient in finding a respectful, negotiated win/win outcome in family business disputes, becomes a huge barrier to rational problem solving.
For the attorneys: For attorneys representing clients in dispute resolution, the most challenging task is to serve effectively and simultaneously (a) as the client's loyal and committed advocate, and (b) as a "reality tester," helping the client maintain realistic goals and expectations. The emotional charge of family business litigation seriously exacerbates the normal challenge of striking this often-delicate balance.

Thus, the unintended consequence of deferring mediation until after commencing litigation is to make the task of seeking a mediated solution incredibly more difficult.

It is not my purpose to argue that family business litigation is never appropriate. There are no doubt cases where, even after adopting the approach suggested here, there is no alternative. Rather, the intended message is that if family business mediation is to be successful, it must precede rather than follow the commencement of litigation. In addition to the other reasons I have advanced, litigation unavoidably creates "winners" and "losers," which is an intolerable situation in most families.

FAMILY BUSINESS MEDIATION

The key to the successful mediation of family business disputes is keeping the parties focused on achieving both of their dual goals: resolving the business issues and maintaining their family relationships. Achieving these dual goals requires an active collaboration among the parties, the attorneys, and the mediator.

This collaboration is enhanced by clearly defining the process and the roles of each of the participants. A written document, made part of the engagement documentation, that sets forth the process and the role of each participant, can be helpful in this regard. The goal of such a form is to reduce the adversarial atmosphere normally surrounding litigation, and to focus on a collaborative effort to find win/win solutions.

In the context of the dual goals of most families - solving business issues and sustaining satisfying family relationships, litigation is not capable of resolving family business disputes. Because of the negative impact of the normal litigation process on family relationships, it is essential that attempted mediation of such disputes take place prior to the commencement of litigation. Doing so will not only serve the clients' interests and goals, but also avoid unnecessarily complicating the attorneys' task of both advocating the clients' interests and joining the exploration of possible win/win outcomes.

STEVE SWARTZ is a former practicing attorney and an experienced family business consultant. His firm, Swartz Consultants, specializes in "business relationship" mediation. He can be contacted at (763) 544-4424 or steveswartz@email.com.