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  • Katherine Bullock

The Family Charter – War and Peace

No matter how tight knit the family or how professional the business, there comes a time when disagreements arise. While often a chance for healthy discussion, it is a good idea to have a procedure in place for disputes which are less cordial.

Do I need to have a dispute resolution procedure? As always, there are upsides and downsides. Agreeing a procedure to accomplish clear and early communication should nip problems in the bud. It should minimise the risk of public and expensive litigation. A formal process can create the emotional distance which allows calm decisions to be made. It can diffuse any obligation to take sides and stop family members getting involved unnecessarily.

"A formal process can create the emotional distance which allows calm decisions to be made…"

But even without a dispute resolution clause, the charter should reduce the risk of future conflict by clarifying the roles and responsibilities of family. Adding an exit route for family members may head off future conflicts. Even unused, an escape hatch provides peace of mind, especially where disposing of unquoted shares or other family interests may be difficult.

Formalising how conflict can be resolved may sacrifice the inherent flexibility which is one of the unique advantages of managing family wealth collectively. Also, consider: the consequences of including a dispute resolution clause and then bypassing it may be worse than not having one at all.

Does it have to be legally binding? As a rule of thumb, the contents of a family charter are not legally binding. The dispute resolution clause may be an exception. A legally binding procedure leaves no ambiguity about what will happen in the event of a disagreement.

However, for the procedure to hold up in court, care is needed. This requires expert advice which may not be the best use of resources. Flexibility must either be written into the clause or else sacrificed entirely. The risk is that the charter is overly restrictive or lengthy and impractical.

Is the procedure better set out elsewhere and do other procedures conflict? For example, in a Shareholder’s Agreement or a Contract of Employment. Yes, with care you can have your cake and eat it too.

But how should disputes be resolved? There are many steps which can be taken to deal with conflicts before they become catastrophic. They range from an informal chat through to litigation, and each step has its upsides and downsides to consider, as well as who can escalate matters at each stage, and who will foot the bill for doing so. To be effective, each step must be viewed by all as capable of solving the matter and not just a formality. If no genuine effort is made, they merely rack up additional costs and may hinder more than help.

If the issue is minor, having a mechanism to arrange a meeting and talk it out may be enough to solve things before they get worse. A more serious matter may require a formal procedure to bring the issue to the internal body or designated person best suited to decide it quickly and efficiently. However, it is important to carefully consider the composition of that body and whether to utilise family or non-family members.

The next stage is to enlist a professional mediator. This process is quick, cost-effective in comparison to litigation, and both flexible and relatively informal, allowing both parties to have their voices heard and to find a compromise that works for everybody. It is advisable to find an expert mediator well versed in resolving family disputes. However, this is still a process of agreement, requiring compromise.

The last resort before court is normally arbitration, a similar procedure to a court case but with the notable difference that it is a voluntary process. The arbitrator can be a person with specific experience in the same business sector, knowledge of family businesses and dynamics and can judge the matter while remaining completely impartial. Compared to litigation it is more cost-efficient and confidential, allowing a judgement to be made in serious disputes without taking the “nuclear option”.

If all else fails you may need to resolve the dispute in court, and sometimes this is the only way to deal with a conflict. However, litigation may be more costly than the matter it seeks to resolve. It may deal often irreparable damage to the family in the process, and the entire affair may become a matter of public record. Perhaps worse still a case may result in no outcome at all, taking several years to leave the matter right where it started except with several thousands of pounds of additional legal fees.

The key is to find the balance between formality and flexibility that best suits your business and family ethos without drafting war and peace.


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