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By Tara Ollapally  Jul-30-2019

When Negotiations Fail: The Mediation Solution

Transforming disputes to opportunities takes mediation by a neutral mediator. There are several cases of disputing companies completing mediation with a decision to start a joint venture. Tara Ollapally explains why mediation works especially well for family businesses.

Araiyawali village in the state of Rajasthan is the first legal dispute-free village in the country. Its secret is a community mediation centre.  All local disputes, including those related to land and irrigation, have been amicably settled because a culture of mediation has been established within the community. Any dispute is first referred to mediation.

Mediation is increasingly being used in the Indian context. The recent referral by the Supreme Court of the historic Babri Masjid dispute for mediation is only the most famous case. Others in the business domain include the Shroff brothers in the famous Amarchand Mangaldas law firm dispute as well as the Ambani brothers, whose mother played the mediator. 

Globally, too, consider the Mark Zuckerberg and the Winklevoss twins’ dispute over Facebook. As author Ben Mezrich describes the mediation process in an extract from his recent 2019 book Bitcoin Billionaires, “Mediation didn’t feel like war. It was more like a really long bus ride that ended only when everyone on board got tired enough of the scenery to agree on a destination.”

Aggrieved investors also found remedy through mediation after Lehman Brothers filed for bankruptcy. In countries like the United States (US), an overwhelming majority of cases are settled out of court and most commercial disputes are either arbitrated or mediated.

The Mediation Approach

So what is mediation? Where does it work?

When disagreements arise, people try and negotiate their way out of the situation. A successful negotiation brings quicker, cheaper and more optimal solutions, which is why disputing parties try hard to end the dispute through successful negotiation.

If negotiation fails, however, the typical recourse is to more adversarial litigation or an arbitration process. For most businesses, that is not good news. Courts can take years and arbitration can be prohibitively expensive. Throwing in the towel or compromising unwillingly are not optimal options either. This is why when there is a failed negotiation, a facilitated negotiation i.e., mediation can be an attractive option.

Essentially a facilitated negotiation, mediation is a process focused on getting parties back to a constructive negotiation with the aid of a neutral mediator who is trained in communication and negotiation techniques and guides the parties, most often, into mutually acceptable solutions.

The logic of moving from a failed negotiation to a facilitated negotiation may oftentimes seem unclear. There are many reasons why disputing parties may question the value of mediation. For example, what is the value of negotiating with a neutral mediator when a negotiation has already failed? What are the dynamics of the process when there is a power imbalance between the parties? Does it make sense to focus on the resolution as opposed to justice? Can the voluntary nature of the process ensure a resolution?

When there is a failed negotiation, a facilitated negotiation i.e., mediation can be an attractive option

That said, having a neutral mediator in negotiation offers proven outcomes. Many jurisdictions with active mediation practices report that nearly 70% of facilitated negotiations end up in settlement with a majority of these settlements happening on the first day.

This article aims at providing insight into why businesses, especially family businesses, should resort to mediation to settle their disputes rather than taking the matter to an Indian court where it is bound to be stuck in the never- ending backlog of disputes. The uncertain and time-consuming route of legal remedy puts excessive stress on business needs and family relations. It leads to unnecessary financial expenditure and losses. Mediation, on the other hand, can help reach win-win solutions.

Why mediation works

Businesses choose mediation for several reasons including the control it allows over outcomes, its confidentiality, its time efficiency and a high likelihood of compliance. Most important, businesses can address the conflict and at the
same time secure their relationship.

Control over the outcome

One of the fundamental principles of good corporate governance is ‘control’. In an adversarial process like litigation or arbitration, the final outcome is determined by an external third party who neither owns the problem nor is familiar with the practicalities of it. There is always an inherent uncertainty in the outcome of the dispute, increasing the risk profile of the company and prejudicing its commercial stakeholders.

In mediation, on the other hand, parties control the outcome through self- determination. The flexibility of the process allows parties to be creative and craft terms of settlement that they find acceptable.

Confidentiality

Mediation creates a safe environment, where parties have control over the information revealed. They are therefore less guarded, posture less and feel free to share information honestly. The mediator uses the information without breaching confidentiality to navigate the parties to a resolution. He or she is careful to guard information shared confidentially.

In contrast, in an adversarial process like litigation or arbitration, there is discovery and summons. Much of the information relating to the impugned transaction is uncovered in public during the hearings and in the subsequent judgment. Parties indulge in destructive strategies which negatively impact the company’s business image and goodwill. For family businesses, especially, such strategies are immensely damaging. Mediation ensures that there is no airing of dirty laundry and that all disputes among family members about the business stay confidential.

Efficiency and a high degree of compliance

Mediation is time-efficient and can be completed in a couple of sessions. The majority of the disputes in private mediation can be resolved in one day.

In an adversarial process like litigation or arbitration, the final outcome is determined by an external third party who neither owns the problem nor is familiar with the practicalities of it

As the outcome of a mediated settlement is through self-determination, it has a high degree of compliance. Parties take ownership when they have worked hard and spent time discussing what is important to them, proposing solutions and crafting the outcome.  They develop an investment in upholding the terms of the agreement.

The desire to uphold an agreement in a ‘win-win’ scenario where both benefit is greater than in a ‘win-lose’ scenario where one side wins and the other side loses.

Relationship maintenance

The adversarial nature of our formal legal systems positions family members against each other – there are winners and losers. Relationships are greatly affected by such a dispute resolution framework. Through mediation, a dispute with a vendor or employer or shareholder, for instance, need not result in the termination of the relationship. One can find acceptable and workable solutions to continue the relationship. There are several cases of disputing companies leaving the mediation with a decision to start a joint venture.

Through mediation, a dispute with a vendor or employer or shareholder, for instance, need not result in the termination of the relationship.

This aspect of the mediation process is of particular relevance for family businesses. In the win-win framework of mediation, families get reunited while businesses fall back on track. Nothing is sweeter for a mediator than a family being able to host a reunion after 10 years in court.

 How mediation works

So what are the key components of the mediation framework?

Mediation is an assisted negotiation

Mediators view disputes as failed negotiations. When disagreement sets in, parties are unable to effectively communicate with each other. The result? Polarised positions and difficult negotiations. Advocates of the process believe that dialogue is the most effective way of resolving conflict.

Using numerous techniques, the mediator moves parties from ‘positions’ to ‘underlying interests’, helps rebuild communication channels and settles parties back into a constructive negotiation. The mediator is not a judge nor an arbitrator who pronounces a judgement or decision for disputing parties.  Instead, he or she is an independent, impartial third party whose main role is to encourage disputing parties to engage in active, direct communication of their issues, both factual and legal as well as discuss their needs, interests, concerns and goals so that they can come to a mutually agreeable solution to their dispute.

Mediation is a Flexible Process

Unlike a traditional dispute resolution process that is structured and bound by rules and codes, mediation is a flexible process aimed at supporting parties to find their own mutually acceptable solutions. The flexibility of the process is indicated in the following ways:

Mediation allows the right people into the negotiation

Apart from the disputing parties, every other individual whose contribution is necessary for effective resolution of the dispute can be an active participant in the mediation.  Inclusion of key participants helps the disputing parties who are the ultimate determiners of their dispute, to reach a fully informed settlement.

In one recently mediated case, one brother brought a suit of oppression and mismanagement against the other. The mediator was able to understand the perspectives of both brothers and support them in constructive negotiation. Unfortunately, the negotiation hit an impasse. During discussions with the brothers, the mediator identified the strong positive influence of an aunt on both brothers. Inviting the aunt into the mediation was critical to helping the brothers overcome the impasse in one of the issues involving property distribution.

It allows the right information to be brought into the negotiation

As the neutral third party, the mediator works hard to ensure that the right information is available to support the negotiation. A core focus of mediation is understanding the perspectives of all the parties, without judging them. Therefore, the information brought to the table is not guarded and defensive. This makes for constructive negotiations. The neutral mediator helps parties not only understand each other better but also makes them more open to receiving proposals for possible resolution.

In another mediation involving brothers of a very successful family business, the older set of brothers were running the business. They believed that the younger ones were lazy, had lavish lifestyles and were unwilling to take responsibility. The younger brothers believed that the older brothers were elitist due to their boarding school education, which the younger brothers did not receive. They saw them as usurpers of the family business, unwilling to let the younger brothers take business decisions.

The mediator reframed the communication between both sides. The older brothers were able to understand that the younger brothers felt excluded and wanted more responsibility in the family business. The younger brothers realised that the older brothers felt overburdened and unsupported whilst running the business. With this important information, the brothers were able to find a resolution and save their family business from being stuck in litigation for years.

It allows for an improved quality of negotiation

When parties disagree, they take positions. As the dispute escalates, they lock themselves into these positions, making productive negotiations increasingly challenging. The mediation process moves the parties beyond their positions, to their underlying needs and interests.  Parties are therefore guided by the mediator to move from position-based negotiation to more holistic and meaningful interest-based negotiation.

When parties disagree, they take positions. The mediation process moves the parties beyond their positions, to their underlying needs and interests. 

Mediation is a party-centred process

The mediation process is controlled by the mediator but the outcome of the process is controlled by the parties. Parties are free to decide whether they want to reach a settlement and what that settlement should be. It is a completely voluntary process. If at any time during the mediation process, the parties feel that they cannot reach a settlement and wish to withdraw from the process and seek recourse to arbitration/court litigation, they are free to do so. It is their process and they are ultimately the decision-makers. No document disclosed or statement made will reach the arbitrator/ judge without the consent of the parties. Even the mediator cannot be invited to testify in open court.  Thus, confidentiality in the process encourages candour, and candour is more likely to result in a resolution acceptable to both parties.

The Legal Framework

Keeping in mind the desperate need for alternatives, several laws have been promulgated in the recent past encouraging parties to use mediation. Amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2018 mandates that commercial disputes first exhaust the remedy of pre-institution mediation if no interim relief is required before accessing the courts. This is an indicator of the seriousness with which the government is trying to push mediation. Similarly, amendments that include mediation have been proposed to the Insolvency and Bankruptcy Code, 2016, the Income Tax Act, 1961, and the Consumer Protection Bill, 2018.

Conclusion: Choosing Mediation

Running any business means navigating disputes on a regular basis. Additional complications are presented when it is a family-run business. Tough decisions that are made in the interest of the family business have ramifications beyond the commercial. They affect family relationships and other members, who are not involved in the day-to-day affairs of the business. There is, therefore, a pressing need when in dispute to find quick, cost-effective, relationship-enhancing and business-friendly solutions.

Businesses can become ‘dispute-wise’ by equipping themselves with the option to pursue mediation before going into the adversarial mode of arbitration and litigation. Legal agreements with dispute resolution clauses that follow a negotiation-mediation-arbitration/litigation pathway will ensure that disputes that arise from legal agreements will be guided to mediation after a failed negotiation. Businesses are encouraged to support a culture of collaboration and view participation in a facilitated negotiating table as a sign of strength. Processes that allow the intervention of a neutral mediator at an early stage of disagreement would prevent the dispute from escalating into an entrenched legal war.

Legal agreements with dispute resolution clauses that follow a negotiation-mediation-arbitration/litigation pathway will ensure that disputes that arise from legal agreements will be guided to mediation after a failed negotiation.

Inspiration must be drawn from Araiyawali village. With the culture of collaborative dispute resolution gaining popularity, we believe that a time will come in the near future when a dispute is viewed as an opportunity for parties to come together and through discussion and dialogue, find solutions that are mutually acceptable.

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