Litigating Partnership Agreements
It is important when you enter into a business with someone that you have a well-drafted partnership agreement. For information on what you need to consider when entering into a partnership agreement, click here.
However, it becomes almost unavoidable to run into disputes, particularly when one partner does not understand their rights and obligations under the partnership agreement, or wants to move the business in a different direction than you.
This article is designed to help you identify the different types of disputes that may arise between you and your other business partners, as well as the different options that may assist you in resolving these disputes.
Types of partnership disputes
There are many common types of disputes that partnerships may face. These include:
1. Performance – one partner may not be performing their role assigned to them under the partnership agreement, causing frustration amongst the other partners;
2. Profits/remuneration – one partner may be taking a greater share of the profits of the business for their own personal use, or may have a greater remuneration than the other. Generally, all profits of a business are divided equally amongst the partners, unless otherwise stated in the partnership agreement;
3. Liabilities – one partner may not be happy/financially capable to meet the outgoings and expenses of the business, making it particularly difficult for the other business partners to take on this burden;
4. Personality conflicts – it is easier for people to get along outside a business setting. However, the pressures of actually running a business and the commitment to each other to have the business succeed may take its toll, leading to some business partners either wanting out of the business, or becoming disagreeable over how one person is running the business.
5. Ethical conflicts – one business partner may not be comfortable with some decisions that the other business partners are making, particularly when these decisions require ethical decision making. Whilst one business partner may be comfortable with taking risks, others may not.
Resolving Partnership disputes
It is always best to leave going to court as your very last option. Generally, the most important concern for you or your other business partners is to ensure that, whatever agreement can be reached, that it does not significantly impact on the running of the business.
Before going to court, there are a range of alternative dispute resolution processes that you may wish to engage in:
1. Negotiation – it is always the most cost-effective measure to negotiate between you and your business partners to reach an outcome in the dispute. This can be done between lawyers, without the need for any independent third party to assist.
2. Mediation – if you are unable to resolve the dispute between the partners, then you may consider engaging in a mediation. In this case, an independent third-party mediator will be able to guide the parties to reach an outcome in the dispute. It is sometimes necessary that a mediator assist the parties, as they are able to provide an unbiased outlook on the dispute and help parties to understand what their common goals are and whether an outcome can be reached that is fair for all parties.
3. Arbitration – if a mediator was not able to assist in reaching a solution in the matter, then you may want to consider appointing an arbitrator to decide the matter. In this situation, an arbitrator will listen to the arguments of the parties and come to their own decision on what is a fair outcome. This decision is then considered to be legally binding on the parties. It is noted, however, that an arbitration is only a discretionary choice, and you do not need to pursue this option.