Mediation in a family business: when it fits and how it works
In a family business dispute the parties stay connected after the proceedings end. The right tool is therefore not the one that decides fastest, but the one that leaves the business and the family able to function afterwards.
"A court establishes who is right. Mediation also establishes what is driving each side, and that is usually what actually resolves the dispute."
Adv. Ester Efrati · Head of the Family and Inheritance Department
Why mediation suits a family business dispute
A dispute in a family business is not an ordinary commercial dispute. The parties will go on meeting after the proceedings end, and sometimes go on working together. An outcome that decides who was right resolves the legal question and leaves the relationships broken, and in a family business the relationships are part of the asset.
Three features make mediation particularly suited here:
- It addresses what is not a cause of action. A sense of unfairness, seniority, a promise a father made that was never written down. None of these can be sued upon, yet they are usually what drives the dispute.
- It is confidential. What is said in mediation does not become evidence, so things can be said there that would never be said in a courtroom.
- It allows outcomes a court cannot order. A change of roles, a future distribution policy, a retirement timetable, or a review mechanism two years out.
Mediation is therefore not merely a cheaper way to settle a disagreement. In many cases it is the only route that lets the business keep operating while the dispute is resolved.
The common types of conflict
Conflicts in a family business repeat themselves, and most arise where the family system meets the commercial one. Identifying the type helps in choosing the right tool.
- A family member or spouse joining the business. With no written admission rules, every entry is decided afresh and becomes a precedent for the next one.
- Disagreement between sibling shareholders. Especially where one manages and the others do not, and as the third generation begins to arrive.
- Salary against dividend. An argument over the manager's pay that is in substance an argument over profit distribution.
- The pace of the handover. The founding generation thinks it is too early; the next generation thinks it is too late.
- A personal event entering the business. A shareholder's divorce, illness, or a death that has left heirs unfamiliar with the business.
Each of these has a commercial layer and an emotional one. Litigation addresses only the first, which is why it often closes the file without ending the dispute.
What mediation is, and what it is not
Mediation is a process in which a neutral third party helps the parties reach agreement. The mediator does not decide and does not rule. The power of decision stays with the parties throughout, and either of them may withdraw at any stage.
The distinctions from other processes matter:
- Mediation and arbitration. An arbitrator decides and the decision binds. A mediator decides nothing.
- Mediation and advice. An adviser gives an opinion to one side. A mediator serves both sides and advises neither.
- Mediation and settlement in court. A settlement is reached in the shadow of the proceedings and within their limits. Mediation is not confined to the pleaded causes of action and can cover matters that are not in the case at all.
The Courts (Mediation) Regulations, 1993 govern the mediator's conduct, including duties towards the parties and limits on the use of information given to them. The parties and the mediator sign a mediation agreement setting the rules of the process before it begins.
Confidentiality and admissibility
Confidentiality is what allows mediation to work. Section 79C(d) of the Courts Law [Consolidated Version], 1984 provides that what is said in the course of mediation shall not serve as evidence in civil proceedings. A party can therefore make a proposal, concede an error or give up a position without it being used against them later.
Alongside this, the Mediation Regulations impose express duties on the mediator. Regulation 5 provides that the mediator shall not use information given during the mediation for any other purpose, and shall not disclose such information to anyone who is not a party. Where a party gives information in a separate meeting and asks that it be kept confidential, it stays between the two of them.
Two qualifications are worth knowing:
- Confidentiality does not make an existing document privileged. A document that existed anyway and could be obtained by other means does not become privileged simply because it was shown in mediation.
- The settlement itself is not confidential. Where the parties ask for it to be given the force of a judgment, it is filed with the court.
How the process runs
There is no single mandatory structure, but most mediations in a family business follow the same sequence. Knowing it helps the parties arrive prepared and not be alarmed by a stage that looks like deadlock.
- Approach and consent. The parties agree to mediate, choose a mediator and sign a mediation agreement setting out the rules of the process and the mediator's fee.
- Separate preliminary meetings. The mediator meets each side alone, to understand the picture and the underlying interests before the parties meet together.
- A joint session. Positions are presented, undisputed facts are established, and the real gaps are identified.
- Further separate meetings. Most of the work usually happens here, because options can be explored without committing to them.
- Shaping the settlement. Drafting the agreed terms, checking them against the company documents, and signing.
In a family business it is common to bring professional advisers into the process, such as an accountant or a valuer, where the dispute turns on financial data. They are brought in with the consent of both sides.
Choosing the mediator
Choosing the mediator is the decision that most affects the prospects of the process, and in a family business it is more complex than in an ordinary commercial dispute. Familiarity with two worlds is needed, not one.
- Commercial understanding. A mediator who does not follow ownership structures, dividend policy or what a right of first refusal means will struggle to lead the parties to a workable solution.
- Understanding of family dynamics. Birth order, the place of the parent, and what goes unsaid at the table. That layer is usually what drives the positions.
- Neutrality that is seen as such. It is not enough that the mediator be neutral; each side has to see them as neutral. Any prior connection with either side, however remote, should be disclosed in advance.
It is common to fix the identity of the mediator, or the method of appointment, in advance in the family charter or the shareholders agreement. Where that is not done, the choice itself becomes a further dispute at the very moment agreement on anything is hardest.
The settlement and the force of what is agreed
A successful process ends in a mediation settlement, which is an agreement between the parties. Like any agreement, its force flows from the consent and from the drafting, so the drafting stage is not a technicality.
Three questions are examined before signing:
- Does the settlement sit with the company documents. An agreed term that conflicts with the articles or the shareholders agreement requires those to be amended too, or a gap opens between what was agreed and what can be carried out.
- Is court approval needed. The parties may ask for the settlement to be given the force of a judgment. That makes enforcement easier, but it means filing the settlement with the court.
- Does the settlement provide for what follows. A good settlement states what happens if a party fails to perform, and when the arrangement is reviewed.
Each party should be separately represented at the drafting stage. The mediator represents nobody, and cannot advise a party on how to protect their own interest.
A mediation clause in the charter and the articles
The most effective way to use mediation is to provide for it in advance, while there is no dispute. A mediation clause in the family charter and the company documents sets a route rather than merely an option.
A well drafted clause has four components:
- When it is triggered. A definition of the disputes it covers, and of what counts as the start of a dispute.
- Who the mediator is. A name, or an appointment mechanism that brings in a third party where the sides cannot agree.
- A timetable. Within how many days the parties convene, and how long the process runs before the next stage becomes available.
- What happens if mediation fails. Arbitration or court proceedings, as provided, and what happens to the running of the business meanwhile.
This arrangement forms part of the overall structure of the family business. See family businesses and intergenerational transition. Where a dispute is already before the family court, see also request for dispute resolution.
In summary
In a family business the parties remain connected after the proceedings end. The right tool is therefore not the one that decides fastest, but the one that leaves the business and the family able to function afterwards.
- The mediator does not decide. The power of decision stays with the parties, and either may withdraw at any stage.
- Section 79C(d) of the Courts Law provides that what is said in mediation shall not serve as evidence in civil proceedings, and that is what allows people to speak openly.
- A mediation settlement has to be aligned with the company documents, and it can be given the force of a judgment on application.
- A mediation clause agreed in advance is worth more than any attempt to agree on a mediator after the dispute has erupted.
A family business dispute touches company law, family law and sometimes succession law. Advisers who know all three can build a solution that can both be signed and be implemented.
If you are in the middle of a family business dispute, or want a mechanism in place before one arises, contact us for an initial assessment. We will review the circumstances and set out the options available to you.
Questions that recur about mediation in a family business
These answers are general and do not replace advice on your own file.
Does the mediator decide the dispute?
Can what I say in mediation be used against me in court?
How long does mediation in a family business take?
Who pays the mediator?
Can we mediate while court proceedings are already running?
What happens if the mediation fails?
Is the settlement reached binding?
Do I need a lawyer in mediation?
How is a mediator for a family business chosen?
Can we agree in advance to go to mediation?
What is the difference between mediation and a request for dispute resolution?
Can an accountant or valuer join the mediation?
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An initial assessment call looks at the nature of the dispute, the documents in place and the stage it has reached, so that you can decide whether mediation is the right tool now.