What Makes Family Business Disputes Different From Ordinary Commercial Disputes?

Family business disputes are different from ordinary commercial disputes. On the surface, they look the same. There are shareholders, directors, balance sheets and contracts. The legal claims are also the same ones that arise in any business. However, anyone who has lived through a family business dispute knows that they behave very differently. The legal issues sit on top of decades of family history. The people on opposite sides will still meet at Christmas. The business everyone is fighting over often started in a kitchen or a garage. As a result, treating a family business dispute like a commercial dispute is a common and expensive mistake.

This page explains why family business disputes are different. It also covers what these differences mean for how a dispute should be approached.

The legal issues are the same, but the context is not

In an ordinary commercial dispute, the parties are usually strangers. They came together for a transaction or a venture. Importantly, they had no relationship before the deal. They will have no relationship afterwards. As a result, the legal process is well suited to resolving the dispute.

In a family business dispute, the legal claims may be the same. For example, a minority shareholder may have an unfair prejudice claim under section 994 of the Companies Act 2006. Similarly, a partner may have a claim under the Partnership Act 1890. Likewise, a director may be in breach of fiduciary duty. However, the people involved are not strangers. Instead, they are siblings, parents and children, cousins or spouses. They have shared a kitchen table. Importantly, they have known each other their whole lives. Crucially, they will remain part of each other’s lives long after the dispute is over.

Lawmakers did not design the legal framework for this. Rather, they designed it for parties who can walk away from each other. In a family business dispute, walking away is rarely an option.

Family business disputes carry years of history

The dispute that ends up in court or mediation is almost never about the thing the lawyers are arguing about. Instead, it is about something older.

For example, a daughter who is excluded from the boardroom may be objecting to a breach of the articles of association. However, what she is actually expressing is decades of feeling overlooked. Similarly, a son who challenges his father’s dividend policy may be making a technical legal point. In reality, he is saying that he no longer trusts his father. Likewise, a cousin who refuses to sign a deed of variation may have a defensible legal reason. In truth, what is going on may be a grievance that goes back to a will, a wedding or a parent’s funeral years before.

Consequently, lawyers who treat the dispute as if it began the day the legal letter was sent will miss what is really happening. As a result, a resolution that addresses only the legal issue will not hold.

The cost of a family business dispute is rarely just financial

In an ordinary commercial dispute, the costs are financial. Specifically, they include the legal fees, the time, the disruption to the business, and the eventual judgment or settlement. By contrast, in a family business dispute the costs are wider.

For one thing, family relationships suffer. Often, the damage is permanent. Siblings stop speaking. Meanwhile, parents and children become estranged. Sometimes, weddings happen without one side of the family. As a result, the cost of a dispute often shows up not in the legal bill but in the social fabric of a family.

In addition, the business suffers. Energy that should be going into growth is diverted into the dispute. Meanwhile, key non-family employees lose confidence and leave. As a result, banks become nervous and customers notice. By the time the dispute is resolved, the business may be worth far less than it was. In severe cases, the business does not survive.

Furthermore, the personal cost on the people inside a family business dispute is significant. These disputes are unusually stressful. Specifically, the financial stakes are high and the family dynamics are difficult. Marriages have ended over them. Sometimes, people become ill.

The roles are blurred in a family business

In an ordinary commercial dispute, the parties have clear roles. For example, they are buyers and sellers, or shareholders, or contracting parties. Specifically, the documents and the law define the roles.

By contrast, in a family business dispute the roles are layered and overlapping. For instance, the same person may be a parent, a shareholder, a director and an employee. In addition, they may be a beneficiary of a family trust or the executor of a late parent’s estate. When a dispute arises, these roles pull against each other. Sometimes, the shareholder wants to act in one way while the parent wants to act in another. Meanwhile, the director may have legal duties that conflict with what the family member wants.

Consequently, the dispute often plays out across all these roles at once. A disagreement about dividends becomes a disagreement about who is loved more. Then it becomes a disagreement about Mother’s wishes. Finally, it becomes a disagreement about who deserves to lead the business. As a result, none of the issues can be resolved in isolation.

The decision-maker is often compromised

In an ordinary commercial dispute, there is usually a clear decision-maker on each side. For example, a board, a managing director or a general counsel. Generally, they can take instructions and make commercial decisions.

By contrast, in a family business dispute the person who should make the decision is often the person whose conduct is in dispute. Alternatively, they are too close to the parties to be neutral. For instance, consider the founder being asked to step down. Similarly, consider the widow being asked to choose between her children. Likewise, consider the eldest son being asked to acknowledge the better claim of the youngest. Crucially, these are not commercial decisions. Rather, they are deeply personal decisions. Often, the decision-maker is also the subject of the dispute and the person whose future is most affected.

For this reason, outside help is often needed in family business disputes. Usually, the family alone cannot reach a resolution. This is not because they are unreasonable. Rather, it is because the structural problem makes resolution almost impossible from inside.

Courts are not well suited to family business disputes

Litigation can resolve a family business dispute in the legal sense. Specifically, the court can make orders and the orders can be enforced. However, litigation cannot restore the family relationship. Often, it damages the relationship further.

For one thing, court proceedings are adversarial. Typically, parties exchange witness statements that contain accusations no one ever wants to hear about their parents or siblings. Then cross-examination forces family members to confront each other in public. Meanwhile, judges make findings of fact without any relationship to the family. As a result, the outcome is binary and often leaves both sides damaged.

In addition, costs in family business litigation routinely exceed the amounts in dispute. For example, in Re Solent Garage Services Ltd [2020] EWHC 1975 (Ch), an unfair prejudice petition between a separating couple about a 50/50 garage business, the share valuation was between £25,000 and £35,000. Notably, the legal costs of getting there are likely to have exceeded the gap between the parties’ rival positions. Indeed, the judge observed that the matter should have been bound up in a divorce rather than fought as a company petition.

For these reasons, mediation is almost always a better starting point than litigation. Specifically, mediation is structured but flexible. Importantly, it is confidential. In addition, it can address the wider family dynamics alongside the legal issues. Crucially, it avoids the binary win-or-lose outcome. As a result, mediation suits the situation far better than a court could. Mediation as the starting point in a family business dispute is covered on its own page.

Prevention works far better than cure

Finally, family business disputes differ from ordinary commercial disputes in that they are usually predictable. Typically, the triggers are well known and the patterns repeat. For example, a family business with no clear shareholders’ agreement, no documented succession plan, and no way of dealing with the disengaged family member is sitting on a problem. Sooner or later, the problem surfaces.

By contrast, ordinary commercial disputes often arise from external events that no contract could have anticipated. Family business disputes, however, are nearly always avoidable. At worst, they are significantly less damaging when there is proper governance in place. Importantly, organisations like Family Business United exist to support family businesses in exactly this kind of governance work.

Consequently, early advice on governance, succession and family agreements is one of the most valuable investments a family business can make. Notably, the cost of getting the structures right while the family is functioning well is a tiny fraction of the cost of resolving the dispute that would otherwise emerge.

What this means in practice

If you are involved in a family business dispute, the ordinary commercial template will not serve you well. Instead, the dispute needs to be approached on its own terms.

• First, take advice from someone who understands family business dynamics as well as the law. The legal advice on its own is not enough.
• Second, take that advice early. By the time the legal letters are flying, the cost of resolution has multiplied.
• Third, be honest with yourself about what the dispute is really about. Usually, the stated legal issue is the tip of something older.
• Fourth, consider mediation before litigation. In family business disputes, mediation is not a second-best alternative. Rather, it is almost always the better forum.
• Finally, think about the family as well as the business. A resolution that wins the legal argument but destroys the family is not a successful outcome.

Frequently asked questions

What is a family business dispute?

In short, a family business dispute is any disagreement between family members involved in the same business. Specifically, the family members may be shareholders, partners, directors or employees. Typically, the disagreement can range from a question about strategy or succession to a full legal claim. For example, the legal claim could involve unfair prejudice, breach of fiduciary duty, or partnership dissolution. Crucially, what makes it a family business dispute is the combination of commercial issues and family relationships.

How is a family business dispute different from a shareholder dispute?

In practice, a family business dispute is usually a shareholder dispute, but the reverse is not always true. Specifically, shareholder disputes can arise between any shareholders. By contrast, a family business dispute is between people who are also related to each other. Typically, they have decades of shared history bound up in the dispute. Importantly, the legal framework is the same but the human dynamics are very different. For the legal framework specifically, see my page on unfair prejudice claims and shareholder disputes.

Why does mediation work better than court for family business disputes?

In short, mediation works better because it is flexible, confidential and non-binary. Specifically, it allows the family to address the wider dispute, including the personal and historic issues. By contrast, a court cannot do this. For one thing, court proceedings are adversarial. As a result, they force the parties into opposing positions, which damages family relationships further. Importantly, mediation preserves the possibility that the family can continue to function as a family afterwards.

Can a family business dispute be resolved without anyone leaving the business?

Sometimes, yes. Generally, the right resolution depends on the dispute. For example, some disputes resolve through governance changes, transparency improvements or a renegotiated shareholders’ agreement. In those cases, everyone stays in their existing roles. By contrast, other disputes require one or more parties to be bought out. Occasionally, the business is demerged. Importantly, the point of a properly conducted mediation is to find the resolution that fits the situation.

Should I get a lawyer who specialises in family business disputes?

Yes, if the dispute is serious enough that legal claims are being considered. Specifically, family business disputes need someone who understands the legal framework. Equally, they need someone who understands the dynamics that distinguish these disputes from ordinary commercial disputes. As a direct access barrister, I take instructions in family business disputes directly from clients. Importantly, a solicitor is not always needed.

Further reading on this site

• Family Business Disputes (main page)
• The Three Circles Model: Family, Business and Ownership
• The Common Causes of Family Business Disputes
• Early Warning Signs of a Family Business Dispute
• The Legal Framework for Family Business Disputes
• Why Mediation Is Usually the Right Starting Point
• The Twenty-Five Most Important Family Business Cases
• Unfair Prejudice Claims and Derivative Actions
• Business Partnership Disputes
• Commercial Mediator

Get advice on your situation

If you are involved in a family business dispute, or you can see one developing, early specialist advice is one of the most valuable investments you can make. Specifically, I act as a direct access barrister, commercial mediator and mediation advocate in family business disputes throughout England and Wales.

Call 020 4538 0246, use the contact form, or book a call directly. In addition, my book Winning in Family Business Disputes (forthcoming) covers this territory in detail, alongside my published works on shareholder disputes and commercial mediation.

Important disclaimer: This page is provided for general information purposes only and does not constitute legal advice. The content may not be legally accurate for your situation or at all. You must not rely on anything on this page in respect of your legal rights. Before taking or refraining from taking any legal action, you should seek advice from a qualified lawyer. I disclaim any and all liability for any loss, damage or expense howsoever caused by reliance on the contents of this page. If you would like advice on your specific situation, contact me here.