How to manage and resolve business partnership disputes
Disputes with business partners are common, but the steps you take to manage and minimise conflict can impact your organisation’s long-term success.
By Nicholas Witherow
P&B Law Partner Nicholas Witherow is a senior dispute resolution lawyer with significant experience in business partnership disputes and commercial litigation.
Starting a business partnership with like-minded colleagues is all about teamwork. However, although you share control and leadership responsibilities, you still need to manage, mitigate and mend business partnership disputes, starting with understanding the most common triggers. These triggers are also common in shareholder disputes, so there’s even more reason to understand how to handle them.
What are the most common types of business partnership disputes?
Common types of partnership disputes include:
- Financial disagreements, for example, profit distribution, capital contributions and financial management
- Decision-making disagreements about issues including strategic direction and operational decisions
- Unequal contributions, for example, imbalances in effort and time
- Breach of partnership duties including fiduciary duties, unauthorised profit skimming and breaches of the partnership agreement
- Ownership disputes, concerning assets, client relationships, intellectual property, and more
- End-of-partnership disagreements, including the timing and method of dissolution, asset division, and managing ongoing liabilities
- Management disputes, including conflict over different leadership styles.
- Disputes about partnership terms, including the meaning of the partnership agreement terms, or even whether a partnership legally exists.
Why do partnership disputes arise?
There are countless reasons for partnership disputes, but the most common causes include:
- Breakdowns in communication or trust
- Personality clashes
- Differing goals and expectations
- Unclear roles and responsibilities
- Ethical concerns.
However, the biggest reason for partnership disputes is the absence of a written (documented) partnership agreement.
How do documented partnership agreements help to avoid disputes?
Documented partnership agreements aren’t necessary to establish a partnership, but they are invaluable in clarifying and resolving many things, including:
- Operational matters
- Partner roles and responsibilities
- Circumstances and processes for dissolving the partnership.
Documented agreements typically anticipate common conflict triggers and include steps to manage or avoid them. Any dispute resolution procedures will usually:
- Set out a dispute resolution process
- Impose an obligation to negotiate in good faith
- Outline a decision-making structure
- Contemplate legal remedies for breaches.
What other tools are effective in managing partnership disputes?
Early intervention and communication are highly effective tools for preventing and managing partnership disputes.
Early intervention is about resolving a dispute before it escalates. It also minimises interruptions to the business, legal fees and lost productivity. It conserves trust and respect between the partners and protects other business relationships.
Maintaining open communication has similar benefits because partners can express and deal with any concerns before they turn into conflict. Focusing on communication styles and techniques is an important tool, and partners can seek help from an independent third party, such as a counsellor or mediator.
Other resolution methods may include:
- Negotiation
- Seeking legal help to establish a documented partnership agreement (this can be done at any time, even after the partnership has commenced)
- Seeking alternative ways to promote active participation, collaboration, mutual respect and sharing decision-making power.
Where there is a documented partnership agreement, check it for dispute resolution procedures and seek our legal advice.
Where the partnership agreement is undocumented, and you and your partners can’t resolve a dispute, it must be handled according to the Partnership Act. You may need to address the threshold question of whether a partnership exists, so we recommend seeking legal help.
Regardless of whether the partnership agreement is documented or undocumented, Federal laws may also apply, depending on the nature of your business. For example, laws relating to:
How do I maintain business continuity during a partnership dispute?
A partnership dispute may affect your business’s ability to maintain critical functions, minimise disruption, and limit downtime. So, planning how to support business continuity is important to running a partnership. The best time to prepare is before there’s a problem.
Some aspects of your planning could include:
- Creating a business continuity plan to ensure core business activities continue
- Conducting risk assessments to identify and address any possible triggers
- Setting up reporting structures and decision-making protocols
- Developing a communication plan so partners can communicate with each other, the workforce and the public
- Considering alternative dispute resolution (ADR), such as mediation
- Planning for financial continuity to ensure sufficient cash and resources
- Implementing secure data backup systems with clear instructions about who can access the systems
- Ensuring enough workplace and legal support to navigate a dispute.
What exit strategies should I consider?
We recommend planning exit strategies, regardless of whether you’re in a dispute or a dispute is imminent. This includes your own exit strategy as well as the removal of a partner.
If you have a documented partnership agreement, it’s likely to include clauses for dissolution of the partnership and removal of a partner. An important first step is to check the document. If your partnership agreement is undocumented, the Partnership Act will apply.
Some exit strategies may include:
- Formally dissolving the partnership in specific circumstances
- Buyout or sale arrangements
- Pre-emption procedures including notice requirements, valuation requirements and transfer processes
- Transferring assets, shares or ownership interests
Consider what exit strategies best suit you. Do this well before any dispute arises so you’re not making important decisions under the pressure of the dispute and its impact on your operations.
To remove a partner, a documented partnership agreement may set out conditions and procedures for removal, as well as voting requirements.
Where the Partnership Act applies to an undocumented agreement, there’s no specific provision for partner removal. However, there are provisions for dissolving the partnership. Seek our legal advice before attempting to remove a partner or engaging an exit strategy.
Summing Up
Financial issues, communication problems, or confusion about allocated roles are often triggers for business partnership disputes and shareholder disputes. They can be significantly stressful, especially if business continuity is affected. However, with careful planning, many of the worst aspects of these disputes can be minimised or avoided, and the business can continue to thrive.
Understanding your partnership rights and obligations is critical, and having a documented partnership agreement is ideal. However, regardless of how your agreement is recorded, seeking legal help to resolve your business partnership disputes is the best move. We’re practical, cost-effective business partnership lawyers with significant experience in helping our clients navigate business partnership disputes. Contact us for advice.
Please note: The information covered in this guide is general and should never be substituted for professional legal advice. Contact us for further information.