Breaking up a Business Partnership Doesn’t Have to Be a Trial

Men fightingA few months ago I wrote about Sam and John. They built a successful app together but personal conflict lead to a break-up of their business relationship. A large portion of their profit went to pay legal fees.

The legal mess cost them in other ways, too. It took up so much time and energy that other projects each wanted to pursue had to be put on hold. There were personal costs as well. The constant stress caused both men’s personal relationships to suffer.

Even if Sam and John had decided that they didn’t want to work together anymore, things could have ended differently. Too many business partnerships end up in costly litigation. It doesn’t have to be that way. Doing things differently can save money, time, preserve relationships, and protect your reputation.

Most people now know that, if your marriage breaks down, you don’t have to fight it out in court. But there is less awareness about alternative dispute resolution (ADR) for business partnership break-ups.

The two main forms of ADR are mediation and arbitration. Both are private, and both are likely to save you time and money.

In mediation, the parties sit down together with a neutral third party whose role is to facilitate discussion.  Mediation is very flexible and allows for creative solutions.  In the best case, mediation is a collaborative process; the parties exchange information and work towards a solution together.  Because the parties are working together to reach common goals, mediation can preserve and even strengthen relationships.

Arbitration is like a private trial, with the arbitrator acting as a private judge chosen by the parties.  (If the parties cannot agree on an arbitrator, one side may be able to ask the court to appoint the arbitrator.)  An arbitrator’s judgment is binding, like a court’s judgment, and can be appealed only in very special circumstances.  The arbitrator also has the power to decide costs.  This means that he or she can determine that one of the parties (usually the losing side) will have to pay the other side’s legal costs as well as their own.

Arbitration is more risky than mediation, because a third party is making the decisions. In mediation, the parties have control over the outcome, and you don’t have to agree to anything you don’t want to. Arbitration also tends to be more expensive than mediation.  Arbitrators charge more for their time than do mediators, and legal costs tend to be higher because it takes lawyers longer to prepare for an arbitration than for a mediation.  The advantage of arbitration over mediation is that, at the end of the process, there is an enforceable judgment and the dispute is over.  If mediation fails the parties may be left without a resolution.

As in the case of marital separation, each business partner should have independent legal advice. This is to make sure that each person understands their legal rights and responsibilities. (A lawyer cannot give “independent” advice to two parties in the same dispute.) Finding the right lawyer is crucial, if you mean to stay out of court.  When you’re consulting a lawyer, make sure that he or she is open to options other than litigation. If not, then the lawyer may not be a good fit. (Not convinced you need your own lawyer – or any lawyer? Read my “I’m in mediation. Why do I need a lawyer?”)

Finally, “Begin with the end in mind.” When setting up a business partnership agreement, include a clause that, in the event that the partnership is to be dissolved, the partners will try ADR before heading for court.

About the Image: Drawing by George Fitch, Internet Archive Book Images [No restrictions], via Wikimedia Commons.

Can this Partnership be Saved? (2)

(This is the second in an occasional series. Don’t miss the first installment.)

Sam and John are working together on an app they hope will dominate in its category on iTunes. Actually, John is doing most of the work. Sam is more an “ideas” guy. He also put up some capital to seed the project. Besides, Sam doesn’t have the time to do the actual development work. He has a family, a full-time job, and plays guitar in a pick-up band on the weekends. This collaboration with John is just one of several side projects. John is the “execution” guy. He’s single, has a part-time job to pay the bills, and spends the rest of his time on the app.

At the start, Sam and John agreed that they would share future profits from the app on a 50/50 basis. A couple of months in, both are unhappy about the arrangement although neither has said anything to the other. Sam is frustrated that the app isn’t ready yet and feels that John hasn’t worked hard enough. He also believes that, since the idea for the app was his and he put up the initial investment, his profit share should be greater than 50%. John feels like he is the one doing all the work and that Sam is treating him like an employee rather than a partner. He doesn’t see why Sam should be eligible for half of the profits, based solely on the strength of his idea and a little start-up money. Neither has any idea that the other is unhappy with the arrangement.

Can Sam and John’s partnership be saved?

Probably not, and almost certainly not without some drastic change or an outside intervention. Sam and John have two major challenges to overcome: Differing ideas as to what is “fair” and a pattern of conflict avoidance.

The perception of unfairness is one of the main sources of workplace conflict that I see. The idea that one person is working less hard or less effectively than someone else in the same role, or that rules are being applied in an arbitrary manner, can be corrosive of workplace relations. Similarly, the perception that a partnership structure is unfair, if not addressed, is likely to result in the dissolution of the partnership.

Sam and John are making different kinds of contributions to their business, and different kinds of contributions are notoriously difficult to measure against one another. Each of us has a bias towards thinking that our own contribution is the more valuable. So Sam thinks that ideas are the core of a successful business, and John thinks that the elegant software  development is the key to success. And if they were to join forces with a designer or marketer, that person would likely believe that her contribution was the most significant. This is only natural. Each of us knows how hard we’re working and what kind of a contribution we’re making. And we all too often have little insight into the work that goes into contributions made by others.

Now, this difficulty in itself can be overcome. There are lots of successful partnerships where the partners make different kinds of contributions and they’re able to come to a distribution of profit that seems fair to all. But it is unlikely that Sam and John will be able to overcome their differences and come to a shared understanding of what is fair if they continue to avoid the issue.

I can think of at least three ways in which their story might end.

1) Sam and John continue their pattern of non-confrontation. Neither tells the other how he feels. Sam doesn’t talk about his frustration that his ideas aren’t yet a reality. John doesn’t talk about how he feels undervalued. Resentment builds on both sides. John stops working on the app and the friendship deteriorates. Sam looks for another developer and chalks up the loss of time and money to experience.

2) Sam and John continue their pattern of non-confrontation until the app gets built and is a huge success. Money starts coming in. John’s friends tell him that the deal he made for half the profits wasn’t fair and advise him to get a lawyer. The lawyer files suit. Sam is outraged and hires his own lawyer. The former friends now only speak through their lawyers. A large portion of the money that the app has brought in goes to pay legal fees.

3) John tells his girlfriend about his frustration with Sam and with bringing the app to market. She advises him to confront Sam and tell Sam what he’s been feeling. She reminds him that not speaking up has cost him in the past. John realizes that, as much as he dreads conversations like the one he needs to have with Sam, knowing how to handle them is important. Another friend puts him in touch with a coach. They work together. When Sam finds out how John has been feeling, he’s pretty taken aback. Yet the two of them are able to sit down and work out a new delivery schedule and a profit sharing agreement that works for both of them.

Which ending would you rather see?

Will Mediation Make it Worse?

Elephant Charging by Vikram Gupchup

Sometimes the people who reach out to me recognize that they’re in a bad situation, but they fear that trying mediation (or some other type of intervention) will only make things worse.

There is a powerful appeal to simply living with the devil one knows. These people are coping. They know that things could be better, but they haven’t reached a crisis point where some kind of intervention seems necessary. If you’ll forgive another cliché, they see the elephant in the room but they fear that talking about it might provoke the elephant and cause a scene. And so they resolve to handle things as best as they can, sometimes venting to sympathetic friends and family.

The fear that intervening in a situation will make it worse is far from irrational. Sometimes an intervention does makes things worse. We’ve all heard about the person who went into hospital for some relatively minor matter and ended up with an antibiotic resistant infection.

Hospitals aside, for the most part only ill-timed or inept interventions make a conflict situation worse. When I first meet with clients and hear the history of their conflict, there is often a point at which a bad but stable situation deteriorates and becomes untenable. I can often trace that point of deterioration to some kind of intervention that went wrong. Maybe a manager intervened between two co-workers in a way that revealed a bias. Maybe harsh things were said that the speaker now regrets. Maybe an investigation didn’t probe deeply enough and felt more like a whitewash than an impartial inquiry.

So I can well understand the feelings of those who would rather put up with a difficult situation than take steps to change it. Once the elephant in the room has been acknowledged there is no going back to the days when everyone could see it but said nothing. That anticipation can increase anxiety.

When I’m working with a client who is struggling about whether to raise an issue or continue to live with things as they are, I often ask them to do this: Imagine it is one year from now. You’re getting up and getting ready for your day, and you know that this same issue is still alive. Nothing about it has changed. How do you feel?

Sometimes, when I ask someone to do this thought experiment, their face falls and they look stricken. The thought of living another year and confronting the same issue is just too much. At that point, they realize that they had better do something. Inaction and “coping” are no longer viable options, and they’re ready to let me help them.

An intervention by a mediator who has the skills, experience, and objectivity to assess a situation is unlikely to make things worse. A good mediator will help you send the message that you want to send, make sure that everyone has a chance to share their perspective, and generally ensure mutual respect.

Conflicts rarely go away on their own. You have to take action to resolve them, but you don’t have to do it on your own.

Moving On after Conflict

By BrokenSphere (Own Work)

While conflict can end a relationship, sometimes people have no choice but to continue their relationship after a conflict. Management and labour must work together after a strike, separating couples share decisions about their children and feuding neighbours may go on living side-by-side. Even opposing sides in a civil war must find ways to co-exist in the aftermath. How a conflict is managed makes a big difference in whether or not an ongoing relationship is tolerable.

Mediation is an excellent choice for resolving many kinds of disputes because it can preserve and even strengthen relationships. A mediation is basically a structured conversation. Mediators facilitate negotiation and help parties communicate with one another effectively so that they can craft their own resolutions. Mediation does not create “winners” and “losers.” Everyone can walk out of a mediation with dignity intact. Unlike judges or arbitrators, mediators do not impose solutions or make judgments. Instead parties in a dispute have control over the outcome of their conflict. This is important, because research indicates that people are more likely to respect a settlement if they have had a hand in shaping it.

Yet mediation is not always possible or advisable and sometimes a friendly resolution is out of reach. There are still things parties in a dispute can do to minimize the harm done by conflict.

Pick your battles. Think carefully before initiating or joining in a conflict. Is the issue really important to you? If it is, then deal with it as soon as you can. Confrontation may be uncomfortable, but letting things fester almost always makes them worse.

Is the conflict structural? Are the conditions that led to the present conflict likely to recur? If so, see what can be done to change those conditions. For example, have misunderstandings arisen because people have not had the same access to information? If the conflict is in a workplace, has weak or ineffective managment failed to intervene in the early stages of a potential problem?

Recognize your own part in what has gone on. It might be comforting to believe that one “bad apple” is responsible for the conflict. This is rarely the case. While one-sided conflicts exist, it is much more common that a conflict between two or more competent adults has been fed by contributions from all sides.  This does not mean, of course, that the contributions are necessarily equal.  Avoiding a conflict can prolong it, just as surely as can angry words. Recognizing one’s own share in a conflict is part of ensuring that it will not flare up again. At the same time, be aware that disruptive behavior may be a consequence of mental illness or addiction. Seek professional advice if you suspect this is the case.

Acknowledge hurt feelings and apologize if appropriate. Nearly everyone finds conflict stressful. A sincere apology or an acknowledgement of the other party’s feelings can be a powerful first step in helping everyone move on. Remember that feelings are legitimate, even if the reasons for the feelings may not be. Yet don’t apologize if you can’t be sincere. Most people are good at detecting insincerity, and an insincere apology usually makes things worse. (And whatever you do, don’t say, “I’m sorry but….”)

Want to know more about apologies? Try Apologies 101, Apologies 201 (Advanced Course), Asking for an Apology and Asking for an Apology (Part 2).

Don’t gossip. Even if your conflict has ended without formal confidentiality provisions, resist the urge to discuss it with others who may have been involved. Gossip is prohibited by the ancient moral codes of many cultures, from Judaism to Buddhism to Confucianism, because our ancestors recognized that although we may have an urge to engage in idle talk about others, to do so can damage social relations. If you need to discuss the conflict, find someone who is not involved.

Focus on what you can control – your own actions and responses. You cannot make another person apologize, take responsibility for their actions, or do the right thing. Yet you can control your own actions. You can choose to put the conflict behind you and behave with grace. You can choose to treat others with respect. And you can resist the impulse to define yourself and others through the lens of the conflict.

Finally, begin with the end in mind. When Steven Covey, author of The Seven Habits of Highly Effective People, identified this as Habit No. 2, he had in mind the simple idea that we need to set a goal before taking action. This rule applies equally well to conflict situations. What kinds of relationships do you envision post-conflict? How do you want to see yourself when you think back over your actions? A clear sense of your own values and priorities should guide your behavior in the conflict and help you make decisions that you can be proud of later.

This post first appeared in a slightly different form in the May 2014 issue of Condo Business.

Review of Who Gets What: Fair Compensation after Tragedy and Financial Upheaval by Kenneth R. Feinberg

Kenneth Feinberg at the Miller Center ForumMoney is the medium of exchange, and it is the means by which victims in the civil justice system are made “whole.”  Even those who everyday speak of the “value” of injuries and cases (including lawyers, mediators, arbitrators and adjustors) must pause sometimes and find this strange.  Pain and loss seem incommensurable such that any monetary “value” put on them can only be arbitrary.  And yet how else might victims be made whole, if not with money?

Kenneth Feinberg has probably had more opportunities to ponder these questions than any of us.  He has had a remarkable career as an arbitrator in the aftermath of terrible and large-scale crises.  In 1984 he was appointed special master of the settlement that ended the class action suit of 250,000 Vietnam veterans against the manufacturers of the defoliant Agent Orange.  Years later he acted as head of the September 11th Victim Compensation Fund and was the target of considerable anger and frustration, when, as was certainly inevitable, there was disagreement over whom should be compensated and what compensation would be fair.  Either of these positions would have given Feinberg a abundance of experience and material for reflection.  Yet these two positions do not exhaust his experience.  He also managed the Hokie Spirit Memorial Fund (for victims of the mass shooting at Virginia Tech in 2007); he was appointed by Treasury Secretary Timothy Geithner to determine executive pay for companies that benefited from the Troubled Asset Relief Program (TARP); and he administered BP’s Gulf Coast Claims Fund in the aftermath of the 2010 Deepwater Horizon explosion and oil spill.

In Who Gets What Feinberg tells us how he came to be seen as the go-to person for resolving complex public legal disputes.  Then he reflects on his major appointments: The legal framework in which he worked and how that framework constrained him, how he arrived at decisions, and what he learned from each assignment.  (I have not read his earlier book, What is Life Worth? devoted to his tenure as special master of the September 11th Fund).  Although Feinberg has no formal training in alternative dispute resolution, his methods will be familiar to those who do.  He values his neutrality and the public perception of that neutrality.  A former aid to Senator Edward Kennedy, Feinberg was appointed to the September 11th Fund by the Bush administration, and then to the TARP assignment and the Gulf Coast Fund by the Obama administration.  He stresses the importance of listening and of making disputants feel heard.  In each assignment, Feinberg made considerable efforts to ensure that anyone who would be effected by his decisions had an opportunity to meet with him and plead their case. And when disputants are reluctant to settle their claims, Feinberg knows the issues well enough to be effective reality tester.  (He asks the lawyer of a retiring CEO if he wants his client “dragged before Congress to justify his salary as he departs?” when the lawyer has balked at accepting Feinberg’s recommendations.)  Feinberg also recognizes, as do all good mediators, that money also has symbolic value and that financial compensation is about more than a number of dollars.  This lesson is impressed upon him a number of times in his career, whether he is dealing with relatively poor Vietnam war veterans, or with wealthy Wall Street Executives (who, not surprisingly, give him his biggest headaches.)

Although Feinberg tells us something of his early life and career, I found that gained little sense of his personality though the book.  He writes well and clearly, if with little pizzazz.  Feinberg has had a unique and fascinating career as a mediator and arbitrator, and I think that anyone interested in public conflict or in alternative dispute resolution, or even in recent American history, will find the book of interest.

Why to keep talking (even if there is “nothing to discuss”)

Samuel Goldenberg and SchmuÿleI recently read the Ontario Human Rights Commission’s Policy on Competing Human Rights.  One of the things that struck me was that they recommend mediation or some kind of facilitated discussion, even if it is clear from the outset that a complaint may have little merit.  Why would mediation or discussion be a good idea even if no one’s rights are violated, or even when it seems obvious that one party is in right and the other party is in the wrong?

Some reasons why it might be a good idea to keep talking:

Even if it does not result in agreement, a discussion can clear the air.  People involved in a conflict sometimes often have a need to express their point of view.  They want the other side to understand their position, even though they realize that it may not result in any concrete change.  A frank discussion, with or without the help of a mediator, can help them achieve that.

A discussion can be educational.  Sometimes conflicts arise because people simply are not aware of the rules or of others’ rights.  Just as crucially, people may have no idea how others feel, or just how important others might find something that seems trivial.  A discussion can reduce the possibility of future misunderstanding and inadvertent offense.

Even if the rules are clear, the details of compliance might require a discussion.   I used to live near a playground where a posted sign proclaimed a single rule:  “Respect Everyone.”  A lovely sentiment, to be sure, but what does that mean in practice?  By their very nature, rules do not contain the details of their application.  Two people might have very different ideas about what it means to “respect” others.  A discussion of the specific actions that the rules require and forbid can go a long way toward preventing misunderstanding and conflict.

Considering a different perspective can help clarify your own.  Even if you never change your mind about an issue, listening to a different perspective can be useful.  It can remind you of the reasons why you hold your own view.  It can make your own view clearer to you.

It is important to be heard.  Just as it is important to hear another party’s point of view, it is important to have your own position heard.  Even if no one changes their mind, it is important to have one’s own view attended to and acknowledged.  This is impossible without discussion.

Mutual understanding and respectful acknowledgement is not a substitute for agreement, but it may be the next best thing.  The next time you think to yourself that there is “nothing to discuss,” please reconsider.

Is it ever “too late” for mediation?

your time is running outI was speaking with a potential client the other day.  He assured me that, as a reasonable person, he understood the many benefits of mediation.  But the conflict had gone on for so long, he said, that he feared it was “too late” for mediation.

His remark made me pause.  As mediators, we are eternally hopeful about the possibility of resolution.  (It would be hard to do this kind of work if we were not.)  Is there any point at which it is just “too late” for a negotiated agreement?

After thinking about this for a while, I realized that “is it too late?” is the wrong question.  Indeed, mediation may fail if it is attempted too soon as too late.  If a conflict is recent the parties may not yet be motivated enough to settle it.  In a long-standing dispute, the parties usually know exactly what the conflict has cost them and they may be eager to resolve things and move on.

Rather than ask when is it “too late” for mediation then, the right question to consider is, “under what conditions is mediation unlikely to be effective?”  I can think of at least two scenarios when reaching a mediated agreement is probably going to be particularly challenging.

First, mediation will be difficult if one (or both) of the parties has a strong psychological need for vindication.  Sometimes parties in a dispute feel it is important to be “right.”  (Of course, this is often combined with a desire to have the other party judged “wrong.”)  They want an authority figure – whether that is a judge, a member of the clergy, or the head of their family – to vindicate their version of events and proclaim their position the more compelling.

Second, mediation will be difficult if either (or both) parties disavow any responsibility for the conflict.  A party may see himself as a helpless victim who has done nothing to initiate or prolong the conflict.  If this is indeed correct – if we have a case of one-sided aggression rather than mutual hostility – then mediation is likely inappropriate.  The victimized party would be better off pursuing a rights-based approach.  While such one-sided conflicts exist, it is much more common that a conflict between two or more competent adults has been fed by contributions from both sides.  This does not mean, of course, that the contributions are necessarily equal.  Avoiding a conflict can prolong it, just as surely as can angry words.

Does the presence of either of these conditions mean that a mediated agreement is impossible?  I don’t think so.  A good mediator should be able to help parties reevaluate their priorities and question long-standing assumptions.  A mediator might help a party realize that an apology might be just as valuable (and more conducive to healing) than vindication by a third party.  A mediator can help both parties understand the origins of their conflict and accept shared responsibility.  These are just some of the ways in which mediation (and even good-hearted attempts at mediation) can empower parties and achieve more than the resolution of a conflict.

Apprehension of Bias: When Should a Mediator Step Down?

NEUTRAL [- +] Which side are you? I have been closely following the dispute between the British Columbia Teachers’ Federation (BCTF) and the BC provincial government over the appointment of Dr. Charles Jago as mediator. The teachers’ union and the government have been in disagreement for several months over wages and working conditions. The BCTF recently asked the B.C. Labour Relations Board to remove Dr. Jago because of an apprehension of bias.

One of the most important features of the mediation process is the mediator’s independence. Mediators are neutral parties, and not more or less sympathetic to any of the parties in a dispute. The ADR Institute of Canada’s “Model Code of Conduct for Mediators” is very clear on this point. Mediators are not supposed to have an interest in the outcome of the mediation process, or even in whether the parties reach a settlement at all. This is because mediation is meant to be a voluntary process in which the parties are self-determined. The success of mediation depends on the fact that people are more likely to respect agreements that they have entered into freely, and that they have had a hand in crafting.

The teachers charge that Dr. Jago’s links to the provincial government make it impossible for him to serve as an impartial mediator. According to the Globe and Mail, Dr. Jago told the union that he had agreed to serve as mediator in early February – before the BCTF was asked to put forth a list of acceptable mediators. (The union suggested two judges, neither of whom was available.) Dr. Jago also admitted to have seen and commented on the controversial new education bill before it was tabled in the legislature. These factors, coupled with Dr. Jago’s apparent lack of mediation experience, led the teachers’ union to suspect that the process as it has been structured is fundamentally flawed.

Dr. Jago, for his part, has refused to step down. As he wrote in a letter to the BCTF, “I assure you that I am impartial. From the outset, I have been clear that I will be fair and balanced in mediating this dispute.”

Dr. Jago’s unfortunate echo of the “Fox News” motto notwithstanding, he fails to show any realization that assurances of impartiality are beside the point. He may believe himself to be unbiased; he may in fact be completely impartial. But unless both parties in the dispute have confidence in his impartiality, it will be very difficult for him to succeed in mediating the dispute.

The Labour Relations Board has not yet ruled on the teachers’ request. (Indeed, it is not even clear that they have the jurisdiction to rule on it.) If the BC government is sincere in wanting a negotiated settlement to the dispute, they might do well to re-think the process of appointing a mediator. One possible strategy would be devise a list of three or more acceptable mediators and then invite the union to choose a mediator from that list.