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Should You Mediate Your Family-Owned Business Dispute?

Disputes between and among owners of family-owned businesses are sometimes unavoidable. When such disputes progress to litigation, they can be extremely costly, time-consuming, and disruptive for the business and its owners. However, most civil lawsuits still settle before reaching a trial before a judge or jury. More specifically, many of those suits settle through mediation. Indeed, judges routinely encourage parties to attempt to settle their disputes, through mediation or otherwise, before setting a trial date.

Mediation is a process through which parties to a dispute select a neutral third-party – often a retired judge or an attorney with subject-matter experience – to attempt to broker a deal between the opposing sides. Mediation sessions are confidential and provide an opportunity for parties to explore a variety of options for resolving their dispute that otherwise may become unavailable once the case is put in a judge or jury’s hands. If done early in the life of a case, mediation can also allow the parties to avoid substantial litigation costs and business disruption.

Settlement agreements reached through mediation often provide for payment by one party to another, the exchange of releases of claims between the parties, and the dismissal of any pending lawsuits. Where claims regarding the ownership or management of a family-owned business are at issue, settlement agreements also can include provisions requiring, for example, transfers of shares, changes to corporate governance processes, or changes to a family member’s employment or other involvement with the company. Even if the parties begin to litigate their disputes, but then proceed to mediation, a judge will typically enforce a settlement agreement reached by the parties through mediation.

A recent decision illustrates how the mediation process plays out in the context of ongoing family-owned business litigation.

A recent decision from the Court of Chancery of Delaware illustrates how the mediation process plays out in the context of ongoing family-owned business litigation and the analysis of the enforceability of an agreement reached through mediation. In Robino v. Robino, one brother, Frank, sued his two brothers, Paul and Charles. Frank alleged that Paul and Charles breached a contract through which they purchased Frank’s share of a family business and also that they misappropriated a portion of their mother’s estate to Frank’s detriment.

The parties agreed to submit the claims to mediation and then appeared before an experienced mediator. As a result of the mediation session, the parties signed a settlement agreement which provided for payments from Charles to Frank over time and the dismissal of the pending lawsuit. The settlement agreement did not state that the parties would draft any additional or more detailed agreement memorializing the terms of the settlement. But the parties did in fact attempt to do so after the mediation session. When they were unable to agree on the terms of a further written agreement over the next several months, Charles responded by contesting whether any settlement had been reached at the mediation.

Frank then filed a motion with the Chancery Court seeking to enforce the settlement agreement. The Vice Chancellor noted that the “key to the analysis here is the question of whether the parties reached agreement on the material terms of the settlement.” On reviewing the settlement agreement from the mediation, the Vice Chancellor determined that it set forth all the payments Charles was to make, the deadlines for those payments, the consequences for Charles’ failure to make any of the payments, and Frank’s agreement, in exchange, to dismiss the lawsuit and not pursue criminal proceedings against Charles or other family members. The Vice Chancellor concluded that “[t]hese terms are definite and reflect all material aspects of the settlement” and that the terms “are, therefore, binding and enforceable.” The Vice Chancellor thus allowed Frank’s motion to enforce the settlement agreement against Charles.

The Vice Chancellor also acknowledged Charles’ argument that Frank “attempted to secure additional settlement terms from [Charles] following the mediation.” But, the Vice Chancellor did not need to resolve that dispute since Frank’s motion sought only to enforce the terms of the settlement agreement that was signed at the mediation and did not address any post-mediation negotiations. As a result of the confirmation of the settlement agreement, the Vice Chancellor entered an order dismissing the case, thus ending the lawsuit between the brothers.

Typically, when parties to mediation reach an agreement, those parties will abide by that agreement. By doing so, the parties can avoid the future expense, disruption and uncertainty that accompany litigation of complex claims. As the Robino case illustrates, though, even when a party later challenges a settlement reached at mediation, a court will likely enforce the settlement agreement in any future proceeding as long as that agreement contains all the material terms. In order to best ensure that a settlement agreement will be enforceable, parties should clearly identify, agree upon, and then document the terms of any settlement that they reach through the mediation process. With such clarity, the parties, and the court if necessary, can understand and enforce the rights and obligations arising from the settlement of a dispute through mediation.

© Copyright 2017 Murtha Cullina

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About this Author

Michael P. Connolly, Murtha Cullina, Shareholder Agreements Lawyer, Business Valuations Attorney
Partner

Michael Connolly is a partner in the firm's Litigation Department. He represents owners and managers of family-owned businesses and closely-held businesses in connection with disputes between business owners under LLC operating agreements, shareholder agreements, and partnership agreements; claims against directors and officers concerning company management and operations; and other internal disputes concerning business valuations, corporate distributions, and access to company information.

Mr. Connolly also has an active business litigation...

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