Can't we all get along?

As anybody involved with a start-up can attest, they are stressful. With constraints on resources and capital and pressures on time, there are many opportunities for disputes & disagreements to arise between the various stakeholders. Professional mediation, which has long been used in other areas such as family counseling and labour relations is becoming an increasingly more popular mechanism to be used for technology business related issues. I recently spoke with Michael Erdle, managing partner at Deeth Williams Wall and director at the Alternative Dispute Resolution (ADR) Institute of Ontario to learn more on the subject. Michael is a Chartered Arbitrator and Qualified Mediator who specializes in business and technology disputes. Again, standard disclaimers apply that this is purely meant as an informational discussion and not meant to imply specific legal advice.

Craig: Thank you for taking the time to speak today. For technology start-ups, what types of disputes would a mediator get involved with?

Mike: Disputes can be internal or external to the company. For example, founders of the company may disagree on the product strategy the company should pursue. Investors may get into a dispute with the company on whether a company should accept a buy-out offer or continue to let the company grow. The company may get into a disagreement with a supplier over project deliverables due to missed milestones or poor quality.

Craig: So in these situations, what typically happens and how is professional mediation coming in to play?

Mike: In any relationship, a small disagreement can easily escalate over time if the two parties stop communicating and lose trust in each other. Often when this happens each party turns to their respective lawyers and things escalate from there. Since start-ups are typically short of money, getting into a protracted legal dispute can be a company killer.

Craig: We’ve seen many times in business where a larger entity uses its financial position to try crush a smaller entity through its ability to hire better and more numerous lawyers, incur the costs as the legal process works its way through courts, etc. Why would the larger entity be interested in entering mediation?

Mike: If any party in a dispute is interested in winning at all costs, then there is not much that will compel them to mediate. But in most cases, cooler heads will prevail. At some point in the relationship between parties, both parties entered into an agreement because they felt it could provide benefit. If things have fallen off the rails, both parties should hopefully still see value in the original premise of the engagement and want to work to get things back on track. If things have gotten to the point where one side feels they must win at all costs (i.e. slighted investors feeling wronged and they want to cause the company to fold), if they are willing to spend time and money they can probably achieve this. However, in addition to the original promise of the investment being wiped out, this will have potentially larger implications in terms of reputation, future business relationships, etc.

Craig: What should companies be doing to better protect themselves?

Mike: In most disputes I get involved with, a small issue snowballs into a large issue. For example, one party is under the expectation to get something from the other party, this is not delivered to the expectation level of the first party, people do not communicate, and time goes by to the point where both parties lose trust, start to take positions, etc. Something as simple as having a board committee or steering committee structure in place to monitor important projects and ensure regular communication goes a long way to catching issues early and preventing them from escalating.

Craig: When would a professional mediator be brought in?

Mike: If a dispute has gotten to the point where the parties cannot find agreement themselves, a neutral third party facilitator or mediator can help find common ground. Building provisions for use of a mediator into contracts is a good practice as it allows either party to step back and suggest mediation as per the contract terms without feeling as if they have ‘backed-down’ by looking for a solution.

Craig: What happens during mediation?

Mike: Most mediation sessions are between a half day to a full day. Everything in the mediation is agreed to be confidential so cannot be used in any future legal proceedings. Each party prepares a brief on what they feel the issue is, what their position is, reasons for their position, and what they would like as an outcome. Both sides and the mediator start in the same room and review their briefs. This gives them the chance to express their positions face-to face. It also allows the mediator to develop a better understanding of the underlying issues and interests of each party. There are often big hidden elements beneath the surface. Generally the principles involved in the dispute do the talking and their respective lawyers take a back seat role just to provide legal advice for specific issues like interpretation of a contract.

After this initial period parties often split into separate rooms and the mediator starts to go back and forth between the parties. This allows for confidential discussions between the mediator and each party over possible options to resolve the issues. The main job for the mediator is to identify the issues where there is deadlock, get parties to look at the problem differently, come up with alternative suggestions on how to approach a problem, and find common ground on which a solution can be achieved.

Most mediations are resolved within the day with only more complex mediations or mediations where there are many parties involved requiring additional time. Sometimes, the parties need to line up other elements to make the proposed solution work. For example, if the settlement of a shareholder dispute is to have one party buy out the other, the buyer may need some time to arrange financing.

The outcome of the mediation is a course of action that both sides can accept and more importantly a re-building of the trust between the parties to provide a firm foundation for future interactions.

Craig: A related discipline is arbitration. Can you talk about this?

Mike: A mediator or facilitator works interactively with both parties to find a common solution. An arbitration hearing is more like a court case where both parties present evidence, and call witnesses. Based on the evidence, the arbitrator will then pick one side as the winner. Arbitration is used where the situation is more defined in nature (i.e. in the interpretation of a clause in a contract). In this, both parties have a position and just want an impartial entity to provide a decision. By going through an arbitrator, the issue can be settled far quicker and cost effectively than if it went through the courts.

Arbitration has been quite commonly used in a business context and many contracts have clauses in them calling for arbitration to be used when there is a disagreement. Mediation or facilitation is a newer discipline for use in business situations that gives parties a mechanism to work through more complicated differences in opinion. This is especially useful when it is important to re-build a broken relationship since both parties see the value in continuing the relationship forward.

Craig: Its been great talking with you today Mike, thank you for taking the time. In my next post I’ll be talking about how to engineer better exits.

craig at mapleleafangels.com