Expert: Timmy Chou - 8/30/2010

Question
Hi,

I have an issue with my partner.  In the p&s agreement it says that our duties are to supervise the operations of the hospice and that we will never be paid for that supervision.  We have since had to take on roles of the Administrator, Clinical Coordinator and CFO and we are not getting paid.  It has been three years now that we have essentially funded these positions and we believe it is unfair and we should get paid because we are doing more than what we signed up for in the P&S.  Also it would cost us about 2x as much as we are asking to fill these positions with people from the outside not to mention the damage of replacing all of us at once.

Can this be arbitrated or would this just sit with the P&S agreement and we can never be paid?

Thanks

Answer
Thank you for your question!

If you have looked at some of my previous answers you may know that I always advise questioners that 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 mediation, management and consulting experience. Note that this issue may certainly have legal ramifications and you may wish to consult an attorney.

Well let first observe that the entire partnership, capital structure space can be very murky and ill-defined space PRACTICALLY speaking.  The reason I say this is because there are no business structure "police".  It is always up to individuals to enforce business agreements, and this usually takes money since it is often a "he said, she said" proposition.  No one will care if you are willing to perform duties for free.  

I usually recommend that whenever businesses are using "sweat equity" from anyone, that these efforts be accounted for in "market replacement" terms.  Therefore, if you are performing the duties of the CFO, what would it cost the company to hire a CFO at market rates?  This represents your value to the company.  I also usually recommend that a mechanism always be in place to compensate people.  If you cannot be paid market rate for your work, you should be given additional stock or equity for your work in lieu of cash payments.

Any business that is relying on "free" work in order to survive and is not viable in "market terms" is usually not a sustainable venture in the first place.    

Disputes such as these CAN be mediated if all the parties are willing, but there are no independent rules OUTSIDE of a credible threat to file suit to enforce your agreements.  You could make a demand for compensation of course, and you would have a strong position, but you would have to mount this case and fund it as well.  

I would suggest you try to get more equity in the company as compensation, and then try to work out an agreement going forward that either stops the practice or continues to provide acceptable compensation.  

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