United States: Business Divorce Part III: A Divorce Without Litigation

Last Updated: February 15 2018
Article by Kevin Pratt

In Part I of our four-part Business Divorce series, we discussed the value of knowing your options when pursuing a business divorce. Part II discussed the opportunity cost of discovery. Now, in Part III, we will address resolving a business divorce without litigation.

Business litigation takes a significant amount of time and money. In most instances, litigating a business divorce through a verdict at trial runs counter to a business's profitability goals. However, there are notable exceptions in which a business will benefit from litigation during a business divorce.

In this installment of our Business Divorce series, we will take a closer look at the calculus that goes into deciding whether to pursue a business divorce resolution without litigation, or whether to proceed to trial.

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Business Litigation Alternatives: Arbitration and Mediation

In most cases, there are two alternatives to litigating a case through trial in open court: arbitration and mediation. There are benefits and drawbacks to each choice, and the best option depends on the specific details of your conflict and business divorce.

Arbitration is a method of dispute resolution involving one or more neutral third parties agreed to by the disputing parties, whose decision is binding and, in most cases, cannot be appealed. Many business contracts include an arbitration clause. Arbitration is a strong choice because it can be significantly faster and more economical.  Also, the hearings are private. However, the informality that makes this process faster and less expensive also may make the decision hasty, which is complicated by the reality that, in many cases, there can be no appeal from an arbitrator's decision.

Mediation is a method of non-binding dispute resolution involving a neutral third-party who tries to help the disputing parties reach a mutually agreeable solution. Like arbitration, mediation is private as well as less costly and less time-consuming than a trial. Unlike arbitration, the two parties work together as a team to find a solution. The process is less rigid and creative problem-solving is often used. The downside of mediation is that it requires two relatively friendly and open parties who are willing to work together and compromise as well as a skilled, experienced, and unbiased mediator.

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Nine Questions Businesses Should Ask Before Deciding On Litigation

Taking another party to court is a big decision that could have serious consequences for your business, especially if the trial is related to a business divorce. Winning a case can be a boon, but it could also cost you time and resources that ultimately harm your company. Losing a case can be a huge setback that could even shutter your business.

When deciding whether to litigate a business divorce through trial, businesses should ask and answer the following questions:

Is there potential value with the threat of litigation versus the reality of litigation?

The uncertainties and costs of litigation may motivate an adverse party to be more accommodating in pre-litigation negotiations than the party otherwise would be if a lawsuit is underway. On the other hand, be careful not to threaten litigation if you are unwilling to follow through with the action when negotiations go bad.

Will litigation prevent immediate harm?

For example, if the adverse party is pursuing key customers, employees, records, or trade secrets, then a business owner may be forced to move immediately to protect those vital interests through active litigation. Otherwise, the business could be irreparably harmed by doing nothing.

Should litigation be pursued to force a break-up?

If it has become impossible for the owners to conduct business together, then a business owner may be forced to pursue a judicial dissolution of her company through an active litigation posture. This may be especially true if the other party is not willing to work with you on a solution.

Is there a possibility of your company becoming a defendant?

This question is counterintuitive because when you, as the business owner, are deciding whether to go to trial, you necessarily focus on all the ways you have been aggrieved. However, every business owner owes it to herself to evaluate whether and to what extent the adverse party will claim you aggrieved them. Understanding, and accepting the possibility of, an adverse verdict against you on a counterclaim must be considered before going to trial.

What is the respective financial strength of each party?

If there is a resource discrepancy between the parties, then the party with greater resources may derive a tactical benefit from pursuing litigation. There may be value in the threat of litigation if one party has significantly more resources.

How important is time in resolving the dispute?

If the parties are concerned about a protracted business divorce resolution and its impact on the business's viability, then the parties should consider an alternative dispute resolution because these alternatives adjudicate the dispute more quickly.

How important is confidentiality?

Confidentiality is maintained more easily through an alternative dispute resolution. However, if a party strongly desires to publicize the alleged wrongdoings of an adverse party, then a trial in open court likely will be more desirable.

How complicated and technical are the relevant business issues?

The more complicated an issue, the more value in resolving your business divorce through alternative dispute resolution because, in most instances, a third-party mediator agreed upon by both parties will have a better understanding of the sophisticated business issues than a judge, whose background may not be business-oriented.

Would the business divorce be resolved through equitable relief granted by a court?

Understanding what type of relief is being sought, i.e., your preferred outcome in the divorce is critical in evaluating whether to pursue a trial in open court or an alternative dispute resolution. Judges may be better suited to grant equitable remedies, such as a temporary restraining order, a permanent injunction, or specific performance.

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Discuss Your Business Divorce Legal Options With The Attorneys At Lincoln Derr

The team of business divorce attorneys at Lincoln Derr can help your business analyze the cost-benefit of the alternative dispute resolution process by analyzing your business divorce and helping you answer the above questions. Our experience includes trying hundreds of cases to verdict. Each of the above questions highlight which dispute resolution is most likely to provide your business with the preferred outcome. Once we understand your business dispute, its preferred outcome, and the best path to resolution, we will get to work.

To ask our North Carolina business attorneys a question, learn more about our legal services, or schedule a meeting, please contact Lincoln Derr today.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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