Justice You Can Afford

Family business disputes involve a complicated mix of legal and emotional issues that should be kept out of court. The best alternative to long, costly lawsuits is mediation.

By John S. Powell

“I was never ruined but twice: once when I lost a lawsuit and once when I won one.” —Voltaire

All healthy organizations have to deal with conflict, and a family business is no exception. In the typical first-generation company, the founder resolves disputes by fiat and acts as judge, jury, and enforcer. As the business expands and moves into the second generation, relationships among family members become more complex and new mechanisms are needed to handle the inevitable disagreements. Too often, when the founder is no longer around, family conflict ends up in court.

Disagreements among family members in business usually involve a complex combination of legal and emotional issues which are best settled in private by the parties themselves. The matters in contention are often personal grievances dressed up as legal issues. Such problems cannot be constructively resolved by judicial trials.

Take the brother-in-law, who is vice-president of finance and has to testify in court that he thinks the executive vice-president, the founder’s son, is totally incompetent and just a figurehead. Obviously, it will be difficult for the two to continue to work together after the trial. Linda Singer, an experienced attorney-mediator, writes in her book, Settling Disputes: Conflict Resolution in Business, Families and the Legal System: “The emphasis of courts and other traditional forms of pronouncing right and wrong and naming winners and losers necessarily destroys almost any preexisting relationships between the people involved.”

Fortunately, there are alternative ways of resolving disputes. More and more, courts around the country are resorting to mediation and arbitration to help disputants avoid long, costly litigation and to unclog court calenders. These alternative dispute resolution (ADR) processes can be lifesavers for family businesses threatened with divisive lawsuits. Unfortunately, many families do not know how ADR processes work, nor are they aware of the principal advantages and disadvantages.

The disadvantages of litigation are well known: Lawsuits are emotionally exhausting and usually result in win-lose outcomes based solely on narrow legal issues. They are also expensive. Just the costs of the initial legal filings, preparing and answering lawyers’ written interrogatories, and transcribing depositions can be astronomical. The joke is all too true about the attorney who, after listening to his client explain his case, said “Mr. Hamblin, you indeed have a good case. How much justice can you afford?”

The most common and least disruptive way of resolving conflicts is by negotiation between the family members, before the case goes to court. Yet, the ability to settle deep, emotional issues through negotiation requires a maturity and wisdom that is sometimes lacking in new, inexperienced family managers.

Once they see their legal bills start to mount, however, family members may become more conciliatory. At some point in the pre-trial maneuvering, one litigant may try to open the door to negotiation by making a settlement offer through his attorney. But because such an offer is typically conducted through a series of telephone calls and letters, the process is often slow and ineffective. In one recent family business case in North Carolina, it took nine months to get a response to a settlement offer.

A major hindrance to a settlement may also be the lawyers themselves, whose training and mindset is geared to advocacy on behalf of a client and not the art of compromise. As skilled litigators, they often interpret any desire to settle as a sign of weakness. The reluctance to start negotiating sometimes results in last-minute, poorly planned settlement attempts “on the courthouse steps.”

The best alternative is mediation. This is an informal, voluntary process in which both sides agree to use a neutral third party to assist them in reaching an agreement. While the use of a neutral third party is not new, judges in many areas of the country have increasingly brought pressure on litigants to try it before resorting to a trial.

Mediation can take place either before court action is contemplated or after a court action has started. In both instances mediation allows the parties themselves to decide the outcome of the disagreement. The mediator has no vested interest in the outcome and is not bound by inflexible legal rules. He or she does not act as a judge but merely helps the parties search for settlement terms that are acceptable to both sides.

A mediator is thus free to search out hidden problems, to consider emotional issues, and to develop solutions based on the parties’ true interests. Often just bringing the parties together at one time, in the same room is all it takes.

If the parties are unwilling or unable to negotiate, they can consider a third option—arbitration. Arbitration is a more formal process in which both sides agree in writing to submit their dispute to a neutral third party. The arbitrator acts as judge and usually makes a binding decision that is final. In this process, the parties can structure the format to meet their needs. For example, they can choose to make the arbitrator’s decision non-binding. The proceedings are private, both sides are usually represented by counsel, and a record is kept of the hearing. The arbitrator’s decision is usually rendered within two weeks after the hearing.

The main disadvantage to the use of arbitration is that it gives a third party, who is not as familiar with the business and family dynamics as the parties themselves, the responsibility for making the final decision. In addition, many arbitrators tend to compromise and “split the baby down the middle.” Compromise, however, is a necessary part of all ADR processes. Until the parties are prepared to make concessions and tradeoffs, any attempt at a settlement is doomed.



The most desirable use mediation is when the parties decide to do it on their own initiative, prior to beginning any legal action. The earlier a disagreement can be settled the better it is for the business and the family.

If the dispute goes to court, the parties may be under pressure to go to mediation. Currently, in some judicial districts, judges can order the parties to try mediation. For example, North Carolina in 1991 began a pilot program which permits superior court judges in eight judicial districts to order mandatory mediation. Preliminary results of the program show that approximately half of the cases settle at the end of the mediation sessions. Another 30 percent settle after mediation, but prior to trial. In one district, not a single case that has been ordered to mediation since November 1991 has gone to trial.

The format of the mediation process is extremely flexible and can be structured by the parties. The emphasis in the proceedings is on cooperative negotiation rather than adversarial confrontation.

Once a mediator has been selected, he or she contacts both sides to establish a convenient time and place to conduct the session. It can be held on a weekend at the business office, at night at one of the attorney’s offices, or at any mutually agreeable location and time.

To be successful, those who have decision-making or settlement authority must be present. It does little good to convince the president of a family company that the firm should pay a dividend to minority shareholders if Dad, the chairman, is the one who makes that decision and he is unwilling to participate in the sessions.

For the first meeting, the mediator brings all the parties together in one room, explains the process, and establishes the ground rules. Next, the mediator asks participants on each side to fully explain their view of the disagreement and the issues involved. This is an important step, since it will probably be the first time that both sides have considered the other’s point of view.

At this time, for example, brother Bob, a passive shareholder in the family company, can explain that the real reason he is suing sister Connie, the president, is because the buy-sell agreement covering the company’s stock has him boxed in. He desperately needs money to pay for his wife’s back operation and the local bank will not take his stock as collateral for a loan as long as it is subject to the buy-sell agreement. While it would seem that Bob surely has told his sister about his wife’s need for surgery, such is often not the case when family relationships become strained. When the owners of a family business are deeply divided, communication frequently breaks down; some members may not be on speaking terms for years.

Emotions tend to run high during the initial part of the mediation process. The venting of feelings and frustrations at the opening session is encouraged by the mediator, who is attempting to determine the real issues involved. The opportunity to fully express one’s view often produces a cathartic effect on the participants, which clears the air and allows the settlement process to move forward.

After all parties have stated their views, the mediator will usually separate the groups and meet with each side alone. During these sessions the mediator encourages candor and promises to keep confidential any private information disclosed to him. He urges the family members to identify and explain their real priorities, apart from the legal issues in the case. Does sister Claudia really want to force brother Fred out as chairman of the board? Or is she really more interested in receiving a pay raise and promotion for herself?

During the separate meetings, the mediator may challenge family members’ perceptions of one another, which often trace back to childhood and are no longer valid. The mediator also acts as an agent of reality, correcting possible misinterpretations of statements made by the other side. As the discussions progress, he encourages the parties to honestly evaluate their underlying interests and to make reasonable settlement offers. Shuttling between rooms where the disputants wait, he communicates each offer and encourages counter-offers.

If the conflict can be resolved, an agreement will be drawn up that all parties sign. The agreement can then be enforced in court as a valid contract; it can be appealed only in exceptional circumstances, if, for example, it was based on fraud or material factual errors made in the mediation sessions.

If a settlement cannot be reached, the mediator will declare an impasse and the dispute will proceed to trial. The mediation sessions have not been recorded, and, at trial, neither side may introduce details of the various settlement offers as evidence against the other side.



By participating in the decision-making, the parties feel responsible for the final outcome. They are also more likely to grasp the realities of their situation and are more open to accepting a reasonable settlement offer. Grandpa Maynard might not like having to sell the family farm to pay estate taxes, but at least he now understands why it has to be done.

The mediation process does not dwell on the past and try to assign blame for what has happened. It looks to the future and seeks solutions from the parties themselves which will help restore damaged family relationships.

A 1953 Nebraska case illustrates the courts’ limitations in dealing with family issues. In McGuire v. McGuire, a wife with a miserly husband tried to sue him for adequate support. Since the woman was still living with the old skinflint, however, the state court refused to entertain the suit. The court reasoned that it had no legal authority to determine support arrangements for couples who have not separated. By contrast, if such an issue had arisen during a mediation session, the wife’s need for additional living expenses would have been acknowledged and discussed as seriously as any legal issue.

Some other advantages of mediation:

• Guaranteed privacy. This provision is of particular importance to the typical family business, which likes to keep financial information and the personal lives of family members out of the media.

• Retained control. In a family company, it seldom makes good business sense to give an outsider, such as a judge or arbitrator, control over important decisions that could affect the company. The best decisions can be made by family members themselves.

• Quick decisions. Most mediations can be scheduled to begin within a month and can be completed in one to three sessions. When a settlement is reached, the agreement is enforceable as a contract. This permits family members to put the disagreement behind them and get on with business and their lives. When the parties resort to litigation, they can be tied up in court for years.

• Relatively low costs. The costs of mediation depend on the complexity of the case and the number of sessions. Depending on their background and qualifications, mediators usually charge an hourly rate of $100 to $175 or a daily rate of $800 to $1,200. The per-session expense is about the same as that for the deposition of a party in pretrial discovery, which includes the lawyer’s fee and a transcription of the testimony.

There are some instances when mediation is not appropriate. For example, a mediator must postpone or discontinue mediation when it becomes evident that a full disclosure of material facts has not been made by one of the parties. Likewise, if a power imbalance between the parties exists—and the weaker side is not represented by counsel—the mediator may decide not to proceed. Some parties are not capable of negotiating for themselves because of emotional problems, lack of training, timidity, or chemical dependency. For example, mediation may be impossible when a minority stockholder who is young, immature,and financially unsophisticated is pitted against an experienced, aggressive CEO who has unlimited access to corporate resources.

Divorces also commonly present power imbalance problems. And as more states adopt community property laws, which require the division of assets when a marriage is dissolved, divorces are increasingly becoming a major threat to the stability of a family business.

In one recent divorce, a mediator, whom we’ll call Betty, became concerned about a possible power imbalance between the husband, David, and his wife, Caroline. Neither spouse had brought counsel to the first session. David stated that lawyers cost too much and that there was no need to waste money since Caroline already “knew what she wanted to do.” But in a private meeting with Caroline, Betty learned that Caroline felt intimidated by David. He had threatened her with a “messy divorce” if the case went to trial. He also had told Caroline that he would seek custody of their only child if she did not give him half of her stock in her parent’s family restaurant. Caroline confided that she thought that David had stolen most of the money from their joint savings account.

After hearing from both spouses, Betty believed that Caroline’s stock in the family business should not be considered marital property. However, as the mediator, she could not offer legal advice to Caroline. Instead, she advised David that she would have to withdraw as mediator unless he provided Caroline with counsel during the mediation session. He refused and the divorce was consequently scheduled for trial.

Sworn testimony obtained by deposition has a way of ferreting out the truth. In a pre-trial deposition conducted by Caroline’s attorney, David admitted that, in fact, he had hidden substantial funds, and that he planned to force Caroline’s parents to buy him out once he obtained the restaurant stock. With this sworn testimony in hand, Caroline’s attorney was now ready to go back into mediation. At the next mediation session, the attorney negotiated for her and an equitable divorce settlement was quickly reached.



The growing cadre of professional mediators includes numerous lawyers and retired judges. But many of the best and most experienced mediators do not come from legal backgrounds. The Society of Professionals for Dispute Resolution in Washington, D.C., has studied the problem of mediator qualifications and has determined that there are no specific degree requirements for a good mediator. At present there are no bar exams or national accreditation programs for mediators.

To be effective, a mediator must be a neutral outsider who is perceived as impartial by all parties. The family lawyer, accountant, or banker is usually not the ideal choice. These professionals are rarely trained in mediation, and their past association with the business and various family members tends to compromise the perception of their neutrality. However, these service providers are often familiar with the mediation process and can frequently recommend good mediators. Many modern attorneys and law firms now recognize ADR processes as useful alternatives to litigation and are able to advise clients on when and how to use the appropriate procedures.

For family business disputes, the mediator should be knowledgeable about business, sensitive to the unique problems faced by family groups, and experienced working with owner- managers. A good mediator will be attuned to the emotional issues in family disputes and have the skill to design creative solutions to resolve family business problems. If a gender issue is involved, using male and female co-mediators can be helpful.

The personal styles and expertise of mediators vary, so you have to shop around to find one who is right for you. Someone qualified to handle a personal injury suit may be over his head trying to settle a family business shareholder case.

If a dispute enters litigation, the courts can be helpful in finding a mediator. For example, the Massachusetts court system screens, trains, and supervises mediators assigned to its cases. In New York State, each of 62 counties has established a walk-in center to mediate small community disputes. The program is overseen by the New York State Unified Court System, which trains the mediators. In judicial districts with mandatory mediation—such as those in Florida and North Carolina—the court usually appoints the mediator or provides a list of trained mediators from which one can be chosen.

The American Arbitration Association, which has offices around the country, is one of the best sources of names of qualified arbitrators and mediators. The association also publishes various helpful background materials, such as “A Guide to Mediation for Business People.” Another national organization, the Center for Public Resources in New York City, also maintains lists of mediators. Finally, some of the best mediators can be found at regional firms, such as Judicate, based in Philadelphia; the Bates Edwards Group, with offices in San Francisco, San Diego, and Portland, Oregon; and Endispute, in Cambridge, Massachusetts, New York City, and Washington, D.C. The challenge in the mediation of family business disputes is to develop a constructive means for resolving conflict in a manner that does not damage the business or the continuing relationships of family members. As a general rule, when negotiations fail, family members should try mediation before resorting to arbitration or adjudication. If the dispute does result in the filing of a legal action, mediation should be used as early as possible in the adjudication process to resolve the conflict before it wreaks havoc on the family business.

In their authoritative text, Dispute Resolution: Negotiation, Mediation, and Other Processes, Stephen G. Goldberg, Frank E. A. Sander, and Nancy H. Rogers point out that family disputes are prime candidates for mediation, since family conflict involves a complicated mix of hidden, emotional, and legal issues. Also, the disputants know one another and will have a continuing relationship after the settlement. As family businesses become more familiar with the ways in which mediation can help them settle disputes, its use will become more and more common.

John S. Powell is a certified superior court mediator for the state of North Carolina. He is president of Family Business Mediation Services in Burlington, North Carolina, and the director of the Elon Family Business Forum.


When “Hardtack” Jack Everett died in a light-plane crash at the age of 58, his will left one-third of the voting stock of his highly successful textile manufacturing company to his son, Bynum, one-third to his son, Richard, and one-third in a trust for the benefit of his wife during her life. At the death of his wife, the stock in the trust was to be divided equally between Bynum and Richard.

The trust instrument appointed the sons co-trustees. Hoping “the boys” would be able to work together, Hardtack had made no provision in the trust for breaking a tie vote. Moreover, he had not developed a plan for succession in the business. Both sons were active in the company, Bynum as manager of the manufacturing operations in Greensboro, North Carolina, and Richard as head of the sales office in New York.

While he was living, Hardtack had settled all disagreements between the brothers. As a result, the brothers’ had little experience handling conflict between themselves. When Richard tried to fire the company’s financial vice-president, who was one of his brother’s closest advisors, Bynum brought a lawsuit seeking operational control of the company.

Before long, the family was split into two feuding camps. The mother refused to side with either son. Interrogatories were filed and answered, motions were made, depositions taken, and continuances sought. As legal fees skyrocketed, the brothers spent their time and energies preparing for trial. The board of directors was paralyzed, and important decisions in the family business were postponed.

After the brothers had spent a total of more than $65,000 in legal fees, Bynum’s lawyer suggested mediation. Although both brothers were reluctant at first, because of all the time and money they had “invested” in the suit, they finally agreed to give it a try. The brothers chose a mediator experienced in family business dynamics, and the first session was held a month later. After three concentrated sessions, spread over a two-week period, the dispute was settled.

Under the agreement, the brothers restructured the firm into a parent company with two separate divisions. Bynum, whose real interest was in production, was elected president of the parent company and placed in charge of the manufacturing division. Richard, who liked the social aspects of the business, was elected chairman of the board of the parent company and head of the marketing division. To break tie votes, the brothers placed the common stock in a voting trust that provided for the annual election of a third trustee.

By using mediation and concentrating on their interests and not their legal rights, the brothers were able to craft a creative win-win resolution to their dispute.— J.P.


Robert Clark passed away at age 75, leaving 51 percent of the voting shares of the Halifax Land Co. to his wife, Bessie, who was appointed executor of his will. The remaining 49 percent was distributed equally among his two sons, Bob Jr. and Tom, and his daughter, Clara. Shortly after the will was read, a dispute developed among the three siblings over how the company should be managed.

Over a period of 20 years, Robert had purchased 2,400 acres of timber and farmland surrounding his parent’s old homestead in Halifax County, North Carolina. He had paid for the land by renting half of the acreage for the purpose of timber growing to his successful furniture company, Clark Classique Furniture Co., situated in Mebane, North Carolina.

Bob Jr., who was president of the furniture company, considered the Halifax Land Co. an unnecessary hobby farm created by his father solely to preserve the old homestead and to impress his former childhood friends. Bob wanted to cancel the 10-year rental contract between the furniture company and the land company and to sell the land. Tom, who had sold his stock in the furniture company to Bob, wanted the rental payments to continue and the furniture company to pay several escalator rental payments that he argued were past due. Tom also wanted to convert part of the acreage in the land company into a hunting preserve and tree farm. Clara, who was not active in either company, wanted to sell the Halifax Land Co. property to raise some much needed personal cash.

When Tom threatened to sue Bob and the furniture company over the escalator clauses, their mother stepped in to prevent what she considered “an embarrassing family squabble.” Bessie Clark told her offspring that she would give all of her stock to charity before she would allow the family name to be dragged through the mud in the local courts. When Mrs. Clark discussed her problem with the family attorney, Mark Crawford, he advised her to resolve the dispute by the quickest possible route, to avoid permanent damage to the family. He arranged for a meeting between Mrs. Clark and a member of his law firm’s Dispute Resolution Practice Group.

Two weeks later, at a meeting attended by all the family members, Mark outlined a multi-level dispute resolution process to settle the dispute. He recommended that the family try to settle as many of the issues as possible through mediation, and to submit any unresolved issues to binding arbitration. After a brief discussion, everyone agreed to the proposal.

Mark immediately contacted an outside mediator who specialized in family disputes. The first mediation session was held two weeks later at the lodge on the old homestead. After a second all-day session, held a week later, all but one of the issues were resolved. Bob agreed to have the furniture company prepay five years’ rent to the land company. Tom agreed to cancel the outstanding leases between the furniture company and the land company. Tom was elected president of the land company and authorized to plant trees on all open land. His plans for a hunting preserve were deferred for future consideration.

The family also agreed to sell enough timber to buy out Clara’s shares of stock in the Halifax Land Co. Finally, they decided to convert the company into a Subchapter S corporation. Mrs. Clark’s only requirement was that the old homestead be maintained in good physical condition and that all family members be allowed to use the lodge for vacations. Mark drew up a contract covering the agreement that everyone signed.

The only remaining issue was how much back rent, if any, was owed under the escalator clauses. Mark contacted the American Arbitration Association in Charlotte and arranged for an arbitration of the issue. The association provided a list of qualified arbitrators from which the family selected a retired judge. By agreement, neither side was represented by counsel at the hearing.

The arbitrator decided that the escalator clauses were invalid and that no additional rents were due to the Halifax Land Co. All of the issues in the dispute were now settled. The whole mediation and arbitration process cost a total of $7,375, and was settled in only seven weeks.

This example, along with others in this article, is based on an actual case. Names and details have been changed to protect privacy.-J.P.

Sources On Mediation

American Arbitration Association

140 West 51st St.

New York, N.Y. 10020-1203



Center for Public Resources

366 Madison Ave.

New York, N.Y. 10017-3122