Expert: Timmy Chou - 11/20/2009

Question
I am a 50/50 partner in a restaurant with a highly unethical and increasingly dishonest individual.  We have not seen eye to eye for many years now, and both agree we should no longer be partners.  He has an associate that has made an offer to buy me out, and I have also made a similar offer to buy him out.  Either way, I don't care as long as I have him out of my life.  Unfortunately, I have contributed about 40K more to the business over the years, which is all clearly documented.  Our operating agreement states that all member loans will be made even at time of sale.  He is flat-out refusing to acknowledge the discrepancy in either offer, whereas I believe my rationale is absolutely fair.  We are at a standstill, and I feel like I would have better odds negotiating with a nine year old.  Based on your answers, it sounds like arbitration or mediation Would be appropriate, but which?  And, would one or the other favor a fair solution as opposed to an uneven compromise?  How much does all this cost anyway?  Will it be worth it for me to pursue?  Thank you for advising - I'm at my wit's end!  

Answer
Thank you for your question!

As I always advise questioners, mediators act as neutral third parties to disputes and never "get involved" in judging the merits of conflict, but merely use special techniques to help the parties decide how to negotiate their own settlement.

I am not an attorney and cannot give you legal advice but can respond from my management and consulting experience.  Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

Naturally, it is best to have as much structure created at the outset of starting or building a business rather than in the middle because there are inevitable assumptions and expectations created by each party.  FYI the area of least development in small closely-held businesses is in break-up or dissolution contingencies, where partners specify what the rules are in case of problems.

Consider doing the following preparatory and proactive steps right away.  Here are my recommendations:

1.  Document a chronological timeline noting the creation of the business, the promises made and your individual contributed work products or other contribution.  Also document the rise of this dispute and record how this plays out.

2.  Review your documents.  Review what ever written agreements, operating agreements or other governing documents you have for any guidance about rules for disengagement.   

3.  Look at your legal options.  You don't say how much money is involved here but any litigants will incur a large cost to file suit, and you have to count the possible cost to yourself to pay for or defend this.  Remember that nearly 90% of lawsuits settle BEFORE trial so the question is usually not IF you will settle, but WHEN AND AT WHAT COST!  Both parties would be better off to wisely choose a cheaper, faster mediated settlement.

4.  Go see a lawyer.  The local Bar Association usually has a referral service that will give you access to an attorney for free.  You need to understand the legal landscape, but if there are not extensive documented agreements then you are in a "he said, she said" war that will not be easily litigated.  

Once you understand where you are legally you are in a position to begin to try to find solutions.  

I would absolutely recommend mediation first.  You will pay a mediator about $100-200 an hour, and the mediator will only help you to try to come to a solution.  It is very cheap to try this approach first compared to the other options, and you are not precluded from seeking redress in other venues if it does not work.  Remember that mediators work with these type of "intractable" disputes all the time and are skilled at moving through these kinds of impasses.  

Arbitration is another option, though I often see these rulings as a "split the baby" solution where neither party is really happy.  You can agree that the arbitration is binding or not.  It is usually more expensive for this process.  

These are some ideas.  Feel free to follow up with additional questions.

For your general information, the pros and cons of the types of dispute resolution methods follows.

GOOD LUCK!

Arbitration, Mediation, and Litigation

Arbitration: the referral of a dispute to one or more impartial persons for final and binding determination outside of the judicial system

Benefits of Arbitration:

   Confidential, no public record
   Limited exchange of documentation, information
   Quick, don't have to wait for a court date
   Arbitrators have expertise in the subject matter and are trained in conflict resolution
   Cheaper than litigation
   Preserves business relationships

Negatives of Arbitration

   It's often a compromise, no 100% winner
   Complex arbitration can be costly
   If not satisfied, may litigate the arbitration procedure
   Poor results with an unskilled arbitrator
   Both parties must agree to cooperate in the process

Mediation: the process by which parties submit their dispute to a neutral third party (the mediator) who works with the parties to reach a settlement of their dispute.

Benefits of Mediation:

   Neutral mediator can objectively suggest alternatives not considered before
   Parties are directly engaged in negotiating the settlement
   Can be quicker than litigation
   Less costly than litigation
   Preserves business relationships
   85% of American Arbitration Association cases mediated find successful solutions

Negatives of Mediation

   may not reach a binding decision
   unskilled mediator

Litigation: using the judicial system to resolve disputes

Benefits of litigation:

   a clear winner and loser
   uses a prescribed set of procedures
   more predictable outcomes
   is final

Negatives of Litigation:

   waiting for court dates can do more harm
   usually more expensive than mediation and arbitration
   part of the public record