Pride comes before a claim – The Psychology of Dispute Resolution
30 January 2008
This article was first published in Company Secretary's
Review, on 23 January 2008.
Field Fisher Waterhouse recently commissioned research to
analyse how companies handle the process of dispute resolution and
specifically the role of psychological and emotional aspects of
dispute resolution. The respondents to the survey were UK companies
which had been involved in disputes in the last three years.
The purpose of the survey was to see if we could identify any
common themes which emerged from the experience of those who had
been involved in disputes. The stark message which came across from
the survey was that disputes are still not handled well, with 79%
of respondents believing that dispute resolution is not handled
very well in many organisations.
The survey showed that one of the primary reasons for the
failure to handle disputes efficiently was the impact of emotion
and psychological factors on dispute resolution. The research
indicated that personal concerns and emotions often play a major
part in driving companies into disputes. 47% of respondents
conceded that a personal dislike of the other side has led them
into expensive and time consuming litigation.
Emotional factors also play a role in escalating disputes once
they have arisen. Over two thirds of those surveyed admitted that
emotion and personal pride adversely effected their chances of
reaching a commercial solution. This raises two important
issues. Is it surprising that psychological factors play such a
prominent role in the approaches adopted by companies involved in
disputes? How can those organisations best overcome the impact of
emotion and personal pride? We should stress that this article is
concerned solely with companies (and not individuals) involved in
The Project Team – Now it’s personal
In any company, there will be a defined individual or project
team responsible for dealing with and reaching agreements with a
particular business partner. Depending on the size of the project,
this process may also involve legal advisers. That same
individual or team will often be responsible for the ongoing
operational aspects of the project. This means that the same
individuals responsible for negotiating a contract and forging a
relationship with a business partner will often deal with any
issues which arise out of the contract. Those issues may lead to a
As a result of the personal involvement with the project, what
can happen is that a negative comment or action by the business
partner can all too often be perceived as a direct criticism of the
company’s team responsible for the project. This then, almost
inevitably, leads to a defensive reaction from the project team and
senior management may feel pressured into supporting their
operational team at all costs. In other words hurt
pride and emotion start to influence the process.
Minimising the Impact
Businesses would benefit from having in place a set procedure to
minimise the impact of emotions on decision making when a dispute
arises. The research commissioned by Field Fisher Waterhouse
indicates that the impact of these psychological factors can
manifest itself in several negative ways including:
- sub-optimal decision making by management on resolving
- a distraction from running the business; and
- a lack of objectivity on what is best for the business.
In the event of any conflict arising with the business partner
which is not quickly or easily resolved it is important to take
steps to consider the issues in dispute in a rational and
commercial way. It is unrealistic to expect the parties to approach
a dispute entirely dispassionately because to do so would be
contrary to human nature. However, companies can introduce a
management structure for dealing with disputes which helps them to
recognise and minimise the impact of personal disputes.
One way to do this is to ensure that a report of the conflict is
made by the operational team to someone “independent”. That
person must have sufficient standing within the company so that
their views will be respected and followed. The ideal person
is in-house counsel. Where there is no in-house legal team
the most appropriate independent person will depend upon the nature
and importance of the project – there can be no hard and fast
rule. It will often be appropriate in the absence of in-house
counsel to involve outside counsel even at this early
The role of the independent person is to ensure an objective
approach. However that does not mean ignoring the emotional
factors at play. It is important the independent person does not
approach the project team with an absence of enthusiasm or
support. Indeed support is an important ingredient of team
work within a company. Team leaders are keen to ensure that
they and their colleagues are not ignored or subjected to
unnecessary criticism. It is important that they feel that their
position vis-à-vis third parties is supported. The
independent person has to respect that need for support – it
materially determines morale, collegiality and the inclination and
willingness to report issues in the future. But the need for
support must not override the need for objectivity.
When disputes arise both parties frequently consider themselves
to be in the right and they often fail to consider the material
facts objectively. The lack of objectivity can worsen as the
dispute escalates. Indeed, rather than being objective and
rational, key players can either become emotionally involved and
entrenched or disengaged and unable to take the tough decisions
necessary to resolve the situation.
The survey results uncovered a reluctance on behalf of senior
management to take the necessary tough decisions to resolve
disputes. 69% of respondents revealed that senior management in
their company actively disengage from disputes once lawyers become
involved. Tough decisions might include early decisions to
settle, which could be wholly contrary to the views of the
operational team. As already discussed the views of this team may
well be marred by negative emotions and personal antipathy.
On the other hand, the tough decision may be the decision
immediately to embark upon litigation or another formal dispute
resolution procedure, in circumstances where the operational team
do not want to fall out with the business partner or rock the boat
of their day to day dealing. In both cases it is important to
have a clear rationale for taking the approach which is not
influenced by emotion, internal politics, egos or misplaced
The survey highlighted the role of lawyers in providing focus to
a dispute as well as removing the emotional aspects of it. External
lawyers should be involved as early as possible in a dispute so
that issues can be tackled head on. External lawyers are able to
give objective advice and provide a range of solutions unaffected
by internal political considerations. It is then the role of
in-house counsel or those instructing the lawyer to help mould the
strategy to take into account the particular sensitivities of any
The objectivity and the role of the independent is key.
The survey results suggest that it is an area which most companies
need to improve. In our view a team approach is
necessary. The operational team, the independent, the senior
management, in-house counsel and outside counsel all need to be
involved in the decision making process. With the shift to
Alternative Dispute Resolution and early resolution, all members of
the team need to understand the importance of their continued
involvement in resolving disputes when they arise.
At the end of the day it’s the result that
The role of the independent person and the lawyers is to work
together to clarify the issues in dispute and identify the
company’s objectives. These objectives must be realistic and
justifiable on a commercial basis. The goals must also be clearly
understood by all those involved. The goals and the strategy to
achieve those goals must demonstrate a clear understanding of what
constitutes a good result for the company. This does not always
mean going to court and often will not. The result for the company
means not only the outcome of the actual dispute, but the cost (in
terms of time and money) of its achievement, the impact on the
company’s business and people, the impact on the company’s
reputation and other knock-on effects.
Clearly the dispute resolution plan must take into consideration
the time and cost of achieving the desired result. However it is
important that clients are supported so that they are not afraid of
going to court and are not "blackmailed” by time and cost, to
accept an unjustifiably low result. What is clear is that these
decisions must be made on a rational basis by weighing up the
costs and benefits of pursuing each potential course of action.
Companies Act 2006
The changes introduced by this Act have opened the door to more
prevalent derivative claims brought by shareholders against
directors on the grounds of a breach of their duty of care and
skill to the company.
Directors must consider their obligations carefully when
engaging in a dispute and taking steps to resolve it. In the new
legislative environment it is imperative that companies and their
advisors consider and make a note of the reasons for taking key
dispute resolution decisions.
The independent person together with any external legal counsel
should review key dispute resolution decisions to identify and
minimise the impact of emotions on the decision making process.
This can be achieved by conducting a risk versus reward analysis at
key stages of the dispute to maintain commercial objectivity
throughout the process.
Where does this leave us?
It is a trite observation that disputes are disruptive to
business and they are costly in the widest sense. The real issue is
how to address that cost. The research has shown that one of the
factors contributing to the escalation of disputes is the “emotion”
involved in a dispute that effects decision making.
It is important that the decision to embark on litigation is
approached in the same way as any investment decision. The key is
to work as a team and to conduct a form of objective risk versus
reward analysis, ideally as soon as a dispute appears likely. The
overarching aim of this is to enable the business to determine both
the outcome which it would like to achieve and the outcome which it
would be prepared to accept, and then to assess the legal
likelihood of this achievement.
For further information, please contact Peter Stewart or Alexandra Underwood.