Disputes distract. Be it with a supplier, contractor, customer or even at Board level, disputes draw attention away from management and leadership of a business, impede strategic process, divert resources, and hamper directors from their focus upon vision and purpose.
With that in mind, how should directors respond to a dispute when they’ve tried all they can and it reaches the point that a third party needs to intervene?
From a corporate governance perspective, is there a right or a wrong course of action?
All directors must act in accordance with duties set out in the Companies Act 2006 and its various subsequent amendments.
Specifically, directors are to: –
- Promote the success of the company
- Exercise independent judgement
- Exercise reasonable care, skill, and diligence
In addition to the Companies Act, the UK Corporate Governance Code states that a company should be led by a board that promotes the long-term sustainable success of the company, generates value for shareholders and contributes to wider society.
The Institute of Directors add to this with the following: –
“In the long term, successful companies will have build strong relationships with key stakeholder groups such as customers, employees, business partners, shareholders and the community. In today’s fiercely competitive business environment, stakeholder management is often decisive in determining whether or not a company is, and will remain, successful. Good relationships with customers and business partners, a healthy corporate reputation, committed employees and efficient internal processes are seen as essential in competing successfully in an increasingly global business environment.”
There are many benefits of good corporate governance. Improved decision-making processes and enhanced performance are just a couple. As part of the conformance function of the Board, accountability, and assurance during any significant dispute for a company will be important.
When factoring in their duties as a director, it may be appropriate to:-
- Consider any potential damage to the reputation of the company and if the confidentiality of the mediation process could be beneficial.
- Take legal advice
- Ensure that all the background facts have been ascertained and researched – take witness statements if necessary and appropriate as soon as possible
- Secure any specific external expert advice required to weigh up the risks and overall position
- Consider whether an insurer needs to be advised or involved at this stage
- Take the proverbial step back from the issues and risk assess from a position of independence to obtain a fair balanced insight into the company’s position
- Consider a cost benefit analysis of a resolution
- Factor in the impact on management time and any current or future planned projects
- Weigh up any PR implications
- Consider the stakeholder impact
Litigating could be seen as a bold step of strength. There is however a price. The costs of litigation, even for those parties that succeed, are rarely recovered in full. It can also drain resources and lead to a lack of focus on the strategy aimed at propelling the company into its future with instead an action that holds it back in its past. Also, it is worthwhile speaking with your lawyer as to whether you will in any event have to mediate if your case goes to court.
Mediation provides a quick, cost-effective solution to a dispute with the outcome being agreed between the parties – they can decide what is relevant and important to them rather than have a Judge determine what the law permits. The parties at a mediation can be creative and find a solution that works for them.
There is no legal requirement for a director to opt for mediation over litigation at the outset of a dispute. There is no specific duty that states what step is the right one to take – it will always be a decision to weigh up alongside the facts. It is of note though that by the time litigation has begun, both parties will have to confirm that they have tried to resolve the dispute and tried some form of alternative to court proceedings. This becomes part of the court process, and the Judge can order the parties to mediate. Wouldn’t it therefore be prudent to start as soon as possible and avoid unnecessary costs and loss of time?
Whilst there may be some situations when it is appropriate and necessary to litigate before mediating, it does however raise the question as to whether when a director considers what is in the company’s overall best interests and all the factors, opting for mediation at the outset may always be the right choice for the business.
