Arbitrating Deadlock: A Conversation with Arbitrator Erica Garay

March 25, 2019

When 50/50 co-owners of a business are deadlocked on a major business decision, unless they have a written agreement in which a declared deadlock triggers a buy-sell process or appointment of a specific third person to cast a deciding vote, the unresolved deadlock may lead to litigation or even dissolution of the business entity.

In many instances deadlock is not the cause of a dysfunctional relationship between the 50/50 owners but, rather, is symptomatic of an irreconcilable breakdown of their personal relationship and/or divergence of interests. In those cases, either the owners will negotiate an amicable separation or they will end up in court litigating claims for dissolution, breach of fiduciary duty, accounting, etc. Or, if the owners have an agreement with an arbitration clause, their legal claims will be litigated privately before an arbitrator.

But what if the deadlock isn’t just a signpost on the road to dissolution? What if co-owners who otherwise have a healthy working relationship simply can’t agree on a particular business issue of importance, such as fixing an annual budget or opening or closing a business location or expanding a product line? If their agreement has no mechanism for breaking it, how can the deadlock be resolved without allowing the disagreement to fester into something bigger and potentially more disruptive?

It’s a question arbitrator/mediator Erica Garay of Garay ADR Services tackles in a recent article published in the Nassau Lawyer called Using an Arbitration Clause to Break Corporate Deadlock. Her solution is addressed to transactional lawyers: broaden the scope of the arbitration clause in the shareholder or operating agreement, beyond the standard references to disputes and claims, to mandate binding arbitration of deadlock if good faith negotiations don’t do the trick.

I was both intrigued and puzzled by Erica’s proposal. On the one hand, I’m a big believer in alternative dispute resolution in most if not all business divorce matters, particularly mediation. On the other hand, unless the clause names as arbitrator someone known to the owners and who’s familiar with the business, the idea of putting a pure business decision (as opposed to resolution of a legal claim) in the hands of a law-trained arbitrator who’s a stranger to the business struck me as a hard sell to business owners.

My own solution was to invite Erica onto my Business Divorce Roundtable podcast for what turned out to be a lively and thought-provoking interview on the subject of arbitrating deadlock. I came away from the interview more convinced, at least for certain types of deadlock where an arbitrator who doesn’t know the business can decide the issue based largely on objective criteria, that Erica’s idea has validity, although it would require forethought and definition in the agreement of the specific types of deadlock that would trigger a duty to arbitrate.

You can listen to the interview with Erica by clicking on the link that follows. You also can subscribe to the podcast on iTunes, SoundCloud, Stitcher, or wherever you listen to podcasts. If you’re a lawyer, business appraiser or business owner with a business divorce story you’d like to share for a future podcast, drop me a line at pmahler@farrellfritz.com.