Peace on Earth (or at least the Estate): Managing Family Farming Business Disputes Effectively

Running businesses with family can be a rewarding experience: knowing your “colleagues”, having in-built relationships and working together towards goals that can benefit the whole family can feel like a blessing.  However, family businesses are also uniquely vulnerable to some types of disputes. Intermingled personal relationships and business, undefined roles and perceived family favouritism, can create fertile ground for disagreements. Familial bonds – and resentment, which in some cases can be rooted in sibling rivalry or in a perception that one sibling is a parent’s “favourite” can heighten any commercial struggle. In this week’s edition of Field Notes, Karin Mouhon flags some of the common issues that can damage family relationships and derail family businesses, as well as setting out some preventative steps that can be taken to provide peace of mind and options for dispute resolution when things go wrong.

Typical Scenarios

One scenario could include a farming family, the Brown family.  The Browns have farmed Brownacre Farm for decades. Father Brown farms in partnership with his eldest son. They have a written partnership agreement in place, and the partnership doesn’t automatically dissolve on the death of one of the partners.  Father Brown, an active farmer until his death, passes away, leaving a will that leaves his estate to his four children equally.  The will is not entirely consistent with the terms of the partnership agreement.  Further, Brownacre Farm is registered in Father Brown’s sole name and it’s not clear whether it’s held by him personally or whether it is a partnership asset. The eldest son who worked the land alongside Father Brown for years, expecting to inherit the farm, and control of the farming business run by the partnership, may find himself sharing ownership with siblings who have not worked on the farm at all, or there may be a significant difference of opinion about what Father Brown intended. 

Another scenario could include a family food company, Smiths Veggies Ltd, run by the Smith Family. The mother and company founder is the managing director and majority shareholder, and her children collectively hold the remaining shares in the company. Mother Smith wants her youngest child to take over as managing director, a decision which she believes would nominate the most suitable successor, but which is perceived by her other adult children as being based on favouritism.  The older siblings suggest a “merit-based” process for selecting her successor. Both parts of the family are unable to agree on the future of the company and the older children feel that they are being unfairly treated and excluded from the running of the company.  

Both scenarios are common examples of disputes within family businesses. Both examples involve warring family members and situations which could have a lasting impact on the businesses’ future continuance and their future success. Early intervention and careful forward planning is the most practical way for family businesses (whether run as partnerships or incorporated) to avoid disputes and set themselves up for future success.

Prevention Methods

Clarify your expectations

The beauty of family business relationships may be the lack of paperwork, but paperwork can be a great safety net when it comes to the prevention of disputes. Put in place legally binding agreements like shareholder agreements, partnership agreements and business supply contracts to keep roles and expectations clear. Such documentation can provide a good vision of what the business relationship will be in the future.

Succession Planning

A key factor in familial disputes is succession planning. Make sure to plan your succession early and update your documents regularly as situations change. Similar to the example with Smiths Veggies Ltd, if you are a business founder, then is there a child you wish to take over your business, perhaps because they have been most involved or because others are focussed on outside interests or pursuing alternative careers? Name them in a Letter of Wishes or Will and let them and your Executor know your plans. Consider how company decisions will be made, would appointing a family council be appropriate? Having transparency about your succession planning can eliminate some of the mystery surrounding the future of your family business. This can avoid disappointment and dispute after your death. 

Tax Planning

Obtain early tax advice to get an idea of the consequences of any sale or transfer of the business or upon any succession plans. Understanding the potential liabilities in advance can help avoid stress and any unpleasant surprises in the future. 

Resolving disputes with ADR

When things really go wrong, litigation may seem like the only option, but the court can have a blunt instrument effect leaving all parties feeling unsatisfied and with irreparable damage. Alternative dispute resolution can be a more flexible, practical – and potentially more cost effective – way to go: 

Without prejudice communication

It may be possible for the parties to narrow or resolve matters between themselves or with the assistance of their advisors. That can include making written offers and/or engaging in conversations or meetings. 

Mediation

Mediation is popular due to its confidential and flexible nature. A mediator will work with both parties to meet in the middle to settle the dispute. Mediation is quick to organise and can take place at any stage of the dispute process (including at the outset of a family disagreement). The outcomes of mediation are non-binding unless and until recorded in a settlement. 

Arbitration

Arbitration is more formal and has the benefit of being held in private. The arbitrator will make an award at the end of proceedings and a binding decision which can be enforced internationally making arbitration suitable for more complex or cross border international disputes. It is also the default dispute resolution mechanism for many agricultural tenancy disputes, particularly those related to Agricultural Holdings Act tenancies. In England there are some practical limits to the use of arbitration in trust disputes – but that is something that is under review by the Law Commission. 

Early Neutral Evaluation

Early Neutral Evaluation invites an independent expert to give a non-binding opinion on the strengths and weaknesses of each party's case to give the parties a "reality-check" as to their respective cases and help them identify common ground where the facts of a case are not heavily disputed. 

Expert Determination

Expert Determination is private and held by a jointly appointed independent technical expert who can provide a binding decision on issues. This is another quick and cost-effective formal method of resolving more technical issues. Getting expert instructions and terms of reference right – and agreeing whether the expert is required to give reasons for their decision is very important.  Except in the case of manifest error, the expert’s decision is binding as between the parties even if the expert is negligent.  Demonstrating manifest error if the expert is not required to give reasons for the decision is extremely challenging.

Trusted Independent Advisors 

Trusted Independent Advisors is an unconventional option but where the dispute may be in its infancy or if the parties see fit, some disputes can be resolved by having a trusted independent person known to both sides who can act as a mediator. This method is cheap and fairly simple, though will only be appropriate where the parties could see the potential benefit. Another facet of this is the “family mediator” – a member of the wider family, not directly involved in the dispute, who may be able to facilitate meaningful discussions and help the parties find a solution. 

Practical takeaways

Even the most cohesive of family business units can face challenges, especially in times of change or flux – the death of a key individual or succession of the management of the business from one generation to the next being common flashpoints. When things start to go wrong catching the issues early provides the best chance of a positive outcome and the widest range of options to achieve that. Keeping lines of communication open and seeking advice promptly help too. As far as possible:

• Make plans and prepare and complete documentation
• Keep family informed about future plans – surprises store up disputes
• Maintain perspective - consider what is at stake, remember what is perceived as "right", "fair" or "just" will vary for different parties, and each side will have, and will most likely genuinely believe their own version of events. 

Even with careful planning, sometimes disputes will still arise.  Disputes can be business-critical but, if carefully managed and with proactive early engagement, do not have to destroy your family business or relationships.  Where necessary, seek legal advice sooner rather than later.

How can we help?

Our team of dispute resolution lawyers can help you to plan ahead to mitigate the risk of disputes and can help to resolve disputes that may have arisen. Please do give us a call if you’d like to discuss how we can help.

Field Notes is Charles Russell Speechlys’ weekly agricultural law blog, sharing plain-English insight into the legal and policy issues affecting agriculture, agricultural land and rural business life. From hints and tips on avoiding agricultural disputes, pitfalls to keep an eye out when planning for tenancy or family agri-business succession, to the latest agricultural legislative or policy changes and the most interesting farm-related court decisions, Field Notes makes the complex more understandable, always grounded in the realities of life on (and off) the land.

Field Notes comes out every Wednesday. Previous editions of Field Notes include:

• Licence to Till: what happens when a ‘Grazing Licence’ is really a tenancy? Accidental tenancies, shams and documents that just don’t do what they say on the tin…
• Scott v Scott Proprietary Estoppel, Reliance and Detriment in Farm Inheritance Disputes
• Farming on a handshake? What happens when things go wrong?
• Harnessing the Law: Equine Impoundment and Fly-Grazing Challenges
• What do agricultural landlords and workers need to know about the Renters’ Rights Act?