Mediators: New kids on the block to resolve SME disputes
Dispute resolution often fails to get to the heart of the issue, and only results in enriching the legal profession. In the first of a series of articles, Norman Younger argues it’s time for accountants to get a slice of the action.
Mediation. It’s a word many people will hear with increasing frequency in the coming years, especially accountants. That’s because the penny is finally dropping as people in all walks of life ‘get’ that there are ways of settling disputes that don’t involve enriching the profession.
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And the traditional approach to resolving disputes often doesn’t actually resolve the real problem at the heart of the dispute. So step forward mediation, and instead of the lawyer, now it’s time for the accountant to get a slice the action. Let me explain with real-life examples.
He and she, let’s call them Jack and Jill, fell in love. They then made the even bigger mistake of getting into business together. It was a good business model per se, which Jack had successfully operated in a different location. Jack invested 30% of the cash, Jill put up 70%, total investment being £500k. Jack gave over know-how and expertise in setting up and operating the business. They are both 50% shareholders and directors of the new company set up to operate in the second location.
After the business was up and running, Jill’s affection waned and she threw Jack out - from the house, not the business. So now Jack and Jill are equal shareholders and directors of a business but they cannot agree on either one buying the shares of the other. In fact, they cannot agree on anything, and Jack subsequently presents Jill with a list of demands with the threat of walking away from the company with the implicit result being the failure of the enterprise.
Some of the demands are reasonable but others are outrageous, such as his insistence that his original know-how and expertise be recognised as a loan to the company with a value of £150,000, to be repaid in cash.
It is clear to all neutral observers that the real problem here is not a point of law or of contractual obligations, but of a romantic relationship that has gone badly wrong. If both sides were to involve lawyers they would only be exacerbating the problem, because the lawyers would be arguing about phantom issues that are disguising the real ones.
Does this story sound familiar? The circumstances may be different, but the basic scenario is repeated almost daily up and down the country.
Well-meaning individuals have a good business idea, set up a company and start working towards the holy grail of untold riches. At this stage in the game, they are full of enthusiasm, optimism, and goodwill, both thinking that this blissful state will last happily ever after.
However, as it invariably happens, things start to go wrong. One partner thinks they are working harder or contributing more to the bottom line than the other; they disagree on the direction and development of the company; they don’t see eye-to-eye on remuneration; one partner decides to pull out and they need to value the business and shares.
These problems, and myriad others, afflict almost all partnerships, shareholders and boardrooms.
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So when is the law the correct option? I don’t have a hard and fast rule, but the general scenario would be where Party A has a claim/demand against Party B, and Party B rejects or denies the claim. In this scenario, there is no ‘dispute’, as there is only one party at the table. In such circumstances, it may well take a letter from m’learned friends to bring the other party to the table.
However, even in this situation, once battle has commenced it is still not too late to mediate. In all likelihood, when the Party B sees that Party A is serious about their grievance, they will more than likely want to mediate to find a resolution.
In most situations in the SME world, the law should be the last option. Not just because the real issues are deflected into legal arguments, but because of the time and cost implications of the legal process. The law is ponderous, complex and expensive, with lawyers being trained in an adversarial context.
Many businesses leave serious problems to fester because they can’t afford the costs associated with saying ‘Good morning, how do you do?’ to a lawyer. And no business can really afford the distraction and disturbance of dealing with legal proceedings.
In one mediation, which ironically was between the partners of a law firm who had fallen out, I asked each party how much the dispute had cost in cash terms. I then asked them how many hours they had spent on the dispute. When they added the cost of their charge-out rate for the hours spent on the dispute rather than with paying clients, the true cost of the dispute quadrupled.
Mediation is quick and cost-effective. A mediation can be booked within days of the initial inquiry, and the overwhelming majority of mediations result in a successful outcome within one working day spent mediating.
Mediation is also entirely risk-free. To explain: In both litigation and arbitration, the final award/decision is made entirely by the judge/arbitrator, with the parties having no control over that decision. In a mediation, the parties themselves design a tailor-made solution to their dispute. This always involves compromise and sacrifice on both sides, but it has the advantage of both parties being in control of the outcome and negotiating a settlement that they can both move forward with. Alternatively, they can walk away prior to signing a legally binding agreement.
That is why mediation is a growth industry, particularly with small businesses, and accountants should be looking take a chunk of the action.
In almost all cases, any accountant worth their salt would know early on that there is a problem brewing. Accountants are one of the primary sources of trusted business advice and guidance for their clients. Almost every commercial mediation will require some sort of financial input or business nous from the parties’ accountants, who can also attend the mediation.
You can add great value to your client’s business by adding insight into dispute resolution to your advice portfolio. You will save your clients a lot of headache and frustration, and earn the kudos and credit in the process.