Disputes bad for business, cautions advocate
15-APR-09
By Adv. Hendrik Kotze
Disagreements, disputes and conflict are a normal part of human interaction. How you deal with these events during the course of running your business may have a major impact on your bottom line.
Generally:
1. Disputes are bad for business
2. Settling disputes is better for your business than litigating them
3. An early settlement is better than a late settlement
You may not agree with these tenets. If not, chances are that you have not experienced a lot of litigation, or if you have, that you actually like the thrill of combat. Even if the latter is the case, you should reconsider, as your shareholders may not have the same appetite for this activity.
The days are long gone where business leaders can ignore disputes and litigation, or simply place these functions in the hands of subordinates and forget about them. Disputes can, and often do, have serious consequences for a business.
These include:
• Reputational damage
Dispute and conflict make for good press. Even if a business thinks it is on the moral side of a dispute (be it with an employee, a client, a supplier or a competitor), this may often not be the way that it is portrayed in the press.
The resulting impact on your business’s reputation – the way that people see and think about you - may be catastrophic. The loss of future business may far outweigh the actual value of the dispute.
• Snow-balling legal expenses.
Litigation is almost like farming. You need to put in substantial preparation (at usually underestimated costs) for an uncertain outcome. No lawyer can accurately determine the full expenses to be incurred during the course of litigation.
More often than not, the estimates (if any are given) tend to be on the low side, and clients end up with huge legal bills that were not anticipated – even if the case is successful!
• Serious financial losses as a result of misplaced optimism
Lawyers are a bit like weathermen. They work from the known and try to predict what the likely outcome might be. When the litigation process commences, the lawyer typically has only heard your side of the story.
There may be documentation that illuminates the facts, but still, he has not heard the full case. His predictions about your chances of success therefore tend to be optimistic, and you are encouraged to push your uncertain little boat out into the litigation ocean.
The closer you come to trial, and the more your lawyer learns about the case, the more realistic the views regarding the strength of your case will become. In many cases you will have to accept a negotiated settlement – rather than a defining loss in Court.
Unfortunately, by that time you will have incurred very substantial legal costs that have to be paid – in addition to any settlement amount.
And always remember, there are many businessmen out there who will woefully (perhaps over a couple of whiskeys too many) tell you his tale of the sure thing, the perfect case, that went against them.
• Loss of profitable relationships
Litigation very often destroys relationships – even ones that were previously mutually beneficial. The importance of any dispute should be weighed against the value of the relationship, as you may “win the battle but lose the war”, should the relationship go sour.
The days are also long gone where you can engage in litigation “out of principle”.
These days most businesses can’t afford to fight for their “principles” out of a sense of idealism. Litigation for a business should never be about principle. Litigation should always be a business strategy that is only used to achieve a specific business objective.
Litigation is not there to satisfy your ego, or to prove your point. Your shareholders are not interested in financing such activities. Their interest – and therefore yours as well – is to maximise the sustainable profitability.
In order to do this, litigation may from time to time be necessary – but then the business objective of why you are engaging in litigation should be clearly defined, and be kept in mind at all times.
If we then accept the two tenets stated above, how do you as a prudent businessman, go about avoiding these pitfalls? In other words, how do you avoid differences turning into disputes; how do you go about planning for settlement?
A good starting point would be to understand the typical life cycle of a dispute. This understanding will enable you to anticipate and deal effectively with some of the typical reactions to conflict that you are likely to encounter.
Dispute and conflict by nature evokes emotions in people. It is often these emotions that stand in the way of rational and effective decision making in such situations.
If you know and understand this, you will notice these reactions in your colleagues and staff. However, the most critical element is that you learn to recognise these symptoms within yourself.
The life cycle of a dispute can broadly be divided into 5 phases:
A) Disagreement
An issue has arisen between the parties. They are still discussing the matter with each other. There is still some hope that an agreement can be reached. Usually the issue is being dealt with by a line functionary who has the relationship with the other party.
At this stage emotions are still contained, though tempers may become frayed, and the parties may be losing patience with each other.
B) Conflict
The issue now seems to have developed into an impasse. Your member of staff dealing with the
issue now realises that he needs assistance. This is often when you first come to hear of the matter. Your staff member feels threatened – he needs to justify and defend the position he has taken, and wants you to back him up.
The parties have difficulty in communicating with each other without open hostility. Lawyers may have become involved on one or both sides. At some point one party decides that enough is enough, and issues a summons. The lawyers may try to achieve some agreement between the parties, but most often, at that point, the matter slides into full-blown litigation.
C) Litigation
The parties are now locked into battle. At this time the parties do not talk, and all communication tends to be between the lawyers. The focus is on the trial – both parties are keen to have someone decide the dispute, and are certain of victory.
The parties usually regard each other as being completely unreasonable, and the perceived differences between them are
such that there is seldom any thought or talk of settlement.
The matter has been properly explained to the lawyer, and he is effectively handling the matter. You become reactive, and respond to his questions and promptings (and also pay over substantial amounts of money into his trust account). Legal documents are drafted and exchanged, and eventually a trial date is applied for.
D) Preparation for Trial (or “Reality Dawns”)
The day of reckoning is nearing. Both sides are preparing for the battle of trial. Your lawyer is briefing advocates, and they are preparing to present your case in the best possible light (and you are required to pay further even more substantial amounts of money into the lawyers’ account).
This is the time that doubt starts to creep in. You – and unfortunately mostly your lawyer as well – only now start to seriously question the strength of your case. Can we win this thing (do we have a few weaknesses?) What if we lose? What are the costs, even if we win?
This boat that was launched with such comparative ease a few months (or even few years) ago, has now come back to haunt you. Reality is setting in, and this thing must be dealt with. Suddenly this thing is your responsibility – and no longer that of your aggrieved staff member.
E) Trial This is the day of reckoning. A judge will listen to the facts, consider the law, and make a finding – for or against you. At best an uncertain outcome – you could win big, or lose big. Doubt is now partnered with fear.
The only way of avoiding this uncertainty is by settling the matter – that is, by negotiating an agreement with the other side that you both can live with.
Very often cases settle at this point – that is just before or on the day of the trial. At that stage most of the costs of litigation have already been incurred.
Should the matter not settle at that point, you often find the parties becoming firmly entrenched in their positions, and committing to a long and expensive battle.
This breakdown of the life cycle of a dispute gives us several pointers to planning for settlement:
1. Settle issues before the point of impasse and real conflict is arrived at. Early on emotions are generally contained, and settlement should be possible. This seems self-evident, yet very often differences are allowed to escalate. There are several reasons for this:
• Neglect: Most often differences escalate into real disputes because they are neglected. It may be a case of your organisation simply not listening and responding to a complaint, or a case of the complaint or issue being left in the hands of someone who is not competent to deal with it (ie no effective internal escalation path).
• Egos and personalities: Differences very often escalate because the egos of the parties involved are offended, and now stand in the way of sound decision making. The personalities involved, and also history between people, often have a way of firing differences into disputes.
• Blind optimism: People often allow differences to escalate because of blind optimism – either that the dispute will go away eventually, or that they are so right (and the other side so wrong) that they need not bother to try and settle this thing. All will become clear and be resolved eventually.
If any of the above happens in your business, your organisation probably has structural and/or business process design problems that urgently need to be identified and rectified.
You will need to ensure the following:
o That there is an early warning system that identifies and escalates differences to a level where they can be dealt with effectively. A customer complaint system that is known and familiar to your customers is one way of ensuring that issues are raised and dealt with in a controlled environment
o That decision making about differences is centred at a point in your business where emotions do not cloud the decisions. Final decision making should also be in the hands of a senior manager, whose mandate it is to settle differences.
o That you have a defined decision matrix that your senior manager must apply in decision making on differences. This matrix should list all the considerations that you organisation must take into account when deciding on the future of disputes.
These should include:
Evaluation of the legal merits – how strong is my case?
Evaluate the moral case – were we in the wrong? If so, admit to it, and do something about it. (Very often this admission is the key that leads to settlement. It may cost you a bit of money in the short term, but makes for sustainable and responsible business practices)
Value of relationship being affected – is this guy important to us?
Cost of escalation - and calculate the
direct and indirect costs (e.g. management time, reputation risk, financial risk)
Cost of settlement – what will it take to make this thing go away now?
The final decision should be a mandate to settle – based on an objective assessment of all of the above factors.
o That your organisation knows when to call on help from outside professionals, such as qualified mediators, who can assist in resolving the difference.
The old adage of “your first loss is your best loss” often also applies here. The cost of an early settlement will almost always be less than any other option. So if you do go ahead and allow the matter to escalate, you should be very specific about why this is being allowed to happen. And you should be prepared to defend and justify that decision.
