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Practices

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 commercial disputes. 

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 dispute. 

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 disputes;
  • 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 stage. 

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. 

Get Tough

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 loyalty.

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 organisation.

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 counts

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.