Partnership disputes can happen at any time during the lifecycle of a partnership. They are often caused by disagreements over roles, the division of partnership assets and property, finances, breaches of fiduciary duties and misuse of partnership assets.
The risks of not resolving business partnership disputes as swiftly and amicably as possible include operational disruption, financial instability, expensive and time-consuming litigation, broken relationships and a negative impact on staff morale.
This guide considers strategies on how to prevent and resolve partnership disputes effectively, protecting the interests of both the business and its partners, including:
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how to navigate partnership disputes using a well-drafted partnership agreement containing preventative measures;
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using alternative dispute resolution (ADR) methods such as mediation and arbitration to reach an amicable settlement; and
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seeking legal assistance to maximise your chance of achieving successful dispute resolution.
Different types of partnership disputes and their impact
Partnership disputes, if not addressed and resolved, can cause significant harm to a business. It is crucial to identify and address any issues promptly and at an early stage to prevent them from escalating. Putting off issues until a later date can result in decreased productivity, damage to your business reputation and becoming involved in legal proceedings. This can become a major distraction from running your business and create avoidable stress and disruption.
A partnership can either be governed by a partnership agreement or, if there is no partnership agreement, be a partnership at will.
A partnership agreement (also referred to as a partnership deed) creates the rules which set out how the partnership will be governed. It should be reviewed on a regular basis and updated to reflect any changes to the partnership from time to time. As well as setting out how to manage disputes, it establishes shared expectations, defines roles and outlines a plan for decision-making and dispute resolution. A well-structured partnership agreement promotes positive relationships and helps prevent conflicts from escalating. Other areas it governs include:
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partners’ duties and obligations;
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the rights of different classes of partner;
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capital contributions;
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financing and profit-sharing arrangements;
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management structures and procedures;
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the expulsion or exit of a partner;
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partner dismissals, resignations and retirements;
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restrictive covenants - these protect the partnership by placing restrictions on a partner’s activities after they have left the partnership. Restrictive covenants can cover non-solicitation of a partnership’s clients, staff and suppliers; and
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the dissolution of a partnership by which it comes to an end.
It's particularly important to be aware of partnerships at will, where disputes can arise more easily due to different rules automatically applying under the Partnership Act 1890. Those rules may well not reflect the agreement between the partners which they think they have made. They include automatic sharing of profits, rights of participation in management and dissolution of the partnership, meaning that it ceases to exist.
Identifying the root causes of disputes
Disputes often originate from factors such as profit distribution, changes in business direction and ill-conceived or unintentional partnerships. Understanding these causes can help lessen the chances of severe conflicts from arising. In unintended partnerships, individuals may enter into a joint venture without fully understanding the potential consequences, leading to a series of disputes.
The Role of a Partnership Agreement in Dispute Resolution
A written partnership agreement is likely to create a better relationship between partners, especially when there is only one other partner creating a potential deadlock between the two of them. A comprehensive partnership agreement clarifies roles, responsibilities and benefits. It also creates decision-making processes and conflict resolution mechanisms, which mitigate the risk of disagreements occuring and turning into formal disputes.
The partnership agreement may include clauses to deal with potential breaches of it by a partner. One example is an expulsion clause, which permits partners to expel a partner who has materially breached the agreement. If there is a dispute, the partnership agreement describes the contractual steps that must be taken, which might include attempts to resolve the issue through alternative dispute resolution (ADR) methods such as mediation or arbitration before commencing any legal action.
Using Alternative Dispute Resolution (ADR) Methods to resolve partnership disputes
Before resorting to legal proceedings, partners involved in a dispute should consider alternative dispute resolution methods such as mediation, arbitration or negotiation. These methods can often resolve disputes more amicably, without the need to go to court.
Mediation involves the appointment of a neutral third party mediator who facilitates communication between the parties with the aim of enabling them to find a mutually acceptable settlement. If a party to a dispute refuses to participate in mediation or another form of alternative dispute resolution, this can result in a financial penalty being imposed on them, so mediation or another form of alternative dispute resolution should be carefully considered. In arbitration, the parties appoint an arbitrator who gives a binding decision in private. Negotiation can be conducted either directly between the parties or by the parties with the assistance of their lawyers.
It's important to find common ground and work towards a solution that is acceptable to all partners. If one of the partners feels they are not being treated fairly, it could make it harder to resolve a dispute and jeopardise the long-term success of the business. Possible solutions outside of court proceedings and ADR include re-negotiating the partnership agreement to terms acceptable to all partners, agreeing a settlement value, the retirement of a partner, or, as a last resort, dissolving the partnership.
Legal Proceedings and Types of Remedy
If alternative dispute resolution methods fail, court intervention may be necessary. Depending on the nature of the dispute, this could involve filing a claim for breach of the partnership agreement, breach of fiduciary duties or applying for an injunction to prevent a partner from taking the partnership’s clients. Legal proceedings can be complex and time-consuming, so it's essential to seek legal advice before going down this path.
It is important to understand the potential impact of court proceedings and make an informed decision about how to approach them. They create uncertainty and stress, take place in public, require management time and involve payment of legal fees and potentially damages.
In all cases, it's crucial to remember that every partnership dispute is unique. The most appropriate course of action will depend on the circumstances of each case, the specific provisions of the partnership agreement and whether you are making a claim against another partner or defending a claim brought against you.
How should I handle a partnership dispute and when should I seek legal advice?
The first step is to refer to any written partnership agreement and obtain legal advice on how it applies in practice. A specialist solicitor will be able to explain to you how the clauses of a partnership agreement are likely to be interpreted by a court and what court orders are likely to be made. This will involve reviewing any relevant documents, evaluating the legal merits of your case, advising you on court procedure and preparing court documents.
It is important to obtain expert legal advice from an experienced lawyer at the outset of any dispute. This will provide you with an objective analysis of your legal position, allow you to assess your legal options and give you the best chance of achieving your desired outcome.