In last week’s post, entitled "Winning the Dissolution Battle, Losing the War," I wrote about two cases in which business partners remained locked in protracted litigation even after one side’s gambit for dissolution failed. I was very pleased to get an email from Leona Beane who read the post and commented, "Your ending statements refer to both situations with utter gloom and despair. It’s a perfect segue-way into describing the benefits of mediation as an alternative."
Leona Beane, you see, is a former law professor turned full-time mediator/arbitrator based in New York City. I first met her when she was assigned by the court as mediator in a difficult business divorce case of mine pitting sibling against sibling. Much to my surprise, the case settled after a long day of candid dialog led by Leona.
I’ve long thought that mediation is under-utilized in business divorce matters. So inspired by Leona’s email, I decided to ask her some questions about mediation in general, and about mediating business divorce cases in particular. I think you’ll find her answers enlightening.
PM: I find that many people are unfamiliar with mediation. How do you describe it?
LB: Mediation is an informal, voluntary, confidential process whereby a neutral impartial third party (the mediator) assists the parties to resolve their dispute by means of facilitating discussions to consider different options so that both parties can craft an agreement that will be acceptable and agreeable to them.
PM: How does it differ from arbitration?
LB: Arbitration is another informal process to resolve disputes, but it is very different from mediation. The concepts underlying each are entirely different. With arbitration, the arbitrator renders a decision based on sworn testimony and evidence presented at a hearing. The arbitrator’s decision (referred to an “award”) is binding on the parties. There is also “non-binding” arbitration which is not utilized very frequently. Arbitration conducted pursuant to a court rule is generally non-binding, and the losing party generally has a right to a trial de novo. In many respects, arbitration is more similar to litigation as it is adversarial; the formal rules of evidence are relaxed, there is no absolute right to discovery, and no right to appeal. Arbitration awards can be reviewed by a court, and sometimes (although very seldom) may be vacated, but only on very limited grounds.
PM: In mediation, who dictates the outcome?
LB: The parties. In mediation the parties have the opportunity to craft their own agreement with the assistance of a trained mediator. The end result may not always be exactly what all parties want, but they will each have had input in the end result, as the process requires give and take from all parties. If one of the parties is not satisfied with the final agreement, he/she is not forced or pressured to sign it. Mediation is a confidential process; whatever is discussed in mediation is inadmissible.
PM: Does the mediator tell the parties what the settlement should be?
LB: No. Mediators in general should not. There are several different mediation styles; the one that has gained the widest acceptance as being most effective is the facilitative form of mediation (which I utilize). The mediator does not render any decision. The mediator does not decide who’s right or wrong. The mediator assists the parties in resolving their dispute by encouraging discussions, considering options, problem solving, and creative solutions. It’s the parties’ dispute and the ultimate decision should be that of the parties with the assistance of the mediator.
PM: Most cases in litigation also settle before trial, often with the assistance of the judge or other court personnel. What’s different about mediation?
LB: A settlement conference in court is not the same as mediation. In a settlement conference, generally only the attorneys appear, and they are on guard not to fully reveal aspects of their case. In mediation, the parties themselves must be present in order for the mediation to be effective, and the parties are encouraged to fully participate. There are different advocacy skills for attorneys in mediation as opposed to traditional litigation. A well trained mediator encourages the parties to consider creative options and solutions, to think ‘outside the box’. Mediation allows for a broader range of solutions than does litigation, which is limited to traditional remedies. Thus creative solutions are encouraged and entertained during the mediation process. In mediation, it’s possible for all parties to win. In contrast, by the time of the settlement conference in court, a great deal of litigation expense has generally already been incurred. In a settlement conference, many times the judge (or court personnel) put pressure on the attorneys to settle, as the court is primarily interested in reducing a case from the judge’s docket. In mediation, nobody is pressured to settle.
PM: Let’s talk about business divorce cases. Can they be mediated?
LB: Definitely. Practically all disputes and litigation are suited to mediation. In addition, disputes within the closely held business almost always involve inter-personal disputes, which are particularly well suited to mediation.
PM: What are some of the special problems you see in business divorce cases, and how do you as a mediator deal with them?
LB: Because of the inter-personal disputes between the partners that may have been festering for years, it’s necessary for the parties to have the full opportunity to “vent” and voice complaints. There is a benefit and value to venting — at least someone finally hears and listens to what a party has been complaining about all these years, and hopefully others will be able to better understand that party’s complaints. Some of the important attributes of a good mediator are being able to actively listen, and to have patience and perseverance. Disputes within the closely held business require the mediator to utilize those attributes in addition to others.
PM: Most business divorce cases involving viable companies lead to a buyout of one side by the other. Is a valuation dispute, which may require the involvement of appraisers, suitable for mediation?
LB: Definitely. Many times after a few hours of mediation, the parties realize they need additional information from experts such as appraisal reports. Thus, the mediation is adjourned a few weeks for the parties to obtain appraisal and other expert reports. Sometimes, each of the parties obtains a separate appraisal report, and sometimes they agree to utilize one common appraisal. Before the parties can seriously discuss settlement, they need to have the actual information so they know what they are each agreeing to.
PM: Can the court divert a business divorce case to mediation?
LB: Yes. In the Commercial Division (Rule 3, Practice for the Commercial Division; and Rule 202.70(g)), a judge can order the matter to mediation. There are additional local court rules. In the federal court, the court may direct most cases to mediation (Local Rule 83.11 & 83.12).
PM: Is mediation something lawyers should be thinking about when putting together a shareholders or operating agreement?
LB: Definitely. It’s important to set the framework in advance of what the parties should do if and when a major dispute arises; include provisions requiring mediation in the shareholders or partnership or LLC agreement. Also, any time there is a settlement agreement resolving a dispute or litigation, think of incorporating a contingency for mediation should a later dispute arise.
* * * * * * *
For those of you who’d like to learn more about mediation, a good place to start is the resources page on the website of the Dispute Resolution Section of the American Bar Association.