Partnership Disputes | How to avoid them and how to navigate them.

Creating or entering into a Partnership is an exciting and entrepreneurial time. Partnerships are an informal avenue for individuals to carry out business with two or more people. While this informal approach is attractive, it can often lead to complicated Partnership disputes. Especially if you’ve entered into a Partnership without even knowing it.

What is a Partnership?

Informal Partnerships:

An informal Partnership comes into existence when two or more people enter into a business arrangement together with the intention of creating a profit. If the parties are unaware that they have entered into an informal Partnership, they are left in a weak position and more susceptible to clumsy partnership disputes.

The Partnership Act 1890 governs Partnerships in the absence of Partnership agreements. The Partnership Act 1890 is 134 years old and is very brief and vague for the number of matters that can arise with Partnerships, therefore expertise in the area of Partnerships and Partnership disputes is crucial. 

Formal Partnerships:

A formal Partnership is created by a Partnership agreement which is signed by each partner. The Partnership agreement creates safety for the individuals in the Partnership by setting out a clear understanding of the rules and arrangements applying to your business relationship.

The Partnership agreement should provide clarity on the following: the purpose of the partnership, the duration of the partnership, the capital contributions of each partner, the division of profits and losses, the decision-making process, and any other unique contents which the partners require clear rules or arrangements about.

If the Partnership agreement is poorly drafted, or non-actionable, then the Partnership is left vulnerable to messy disputes. Partnership agreements must be drafted carefully and with expertise to ensure the agreement is comprehensive and complies with laws and regulations, and most importantly the agreement must protect the partners for any potential future dispute.

Common causes of Partnership disputes:

Partnership disputes arise when the partners do not agree. The most common causes for Partnership disputes are misconduct of one or more of the partners, one or more partners not pulling their weight, a breakdown of the professional relationship, a change in the scope of the business, or a disagreement about assets and drawings. A comprehensive and thorough partnership agreement can assist in avoiding partnership disputes or make them easier to navigate. It may seem pessimistic at the outset of the partnership to consider all the things that could go wrong but in the long run a comprehensive partnership agreement can preserve a friendly and beneficial partnership relationship and, in turn, a successful business venture.

Our Commercial team can help draft an excellent, accurate, and detailed partnership agreement to avoid any messy disputes. Just call us on 01926 491181 or email: TimO@moore-tibbits.co.uk. 

What happens when the Partnership falls into dispute?

Even the most amicable and dynamic of Partnerships can fall into a dispute. It is crucial to know the options and when legal advice may be helpful.

The first point of call should be informal negotiation and communication between the partners. If this fails a more formal approach to negotiation should be considered, such as mediation, whereby a third neutral party helps to facilitate an amicable solution. Mediation is increasingly becoming the most common process for resolving partnership disputes. If mediation fails then an Alternative Dispute Resolution (‘ADR’) may be pursued, such as Arbitration. Arbitration is a very similar process to Mediation as both parties put their case to the independent arbitrator and the decision (or ‘Award’) is legally binding on the parties and enforceable unless the parties agree otherwise.  Mediation and ADR empower parties to resolve the dispute while maintaining their business relationship and avoiding the often expensive and lengthy court process. Professional advice from a commercial litigation solicitor is crucial for informal negotiation, mediation, and ADR as it can be difficult to remain objective and a commercial litigation solicitor can aid in the understanding and navigating the business dispute.

If ADR is unsuccessful, then the matter can be brought before a Court. At Court, the Judge will review the evidence submitted by all parties and make a binding, fair decision. While the process is more costly and protracted than negotiation, Mediation, or ADR, it offers a clear and formal resolution to the dispute. The Court system is complicated and errors in the court process can have undesirable consequences, therefore a commercial litigation solicitor is crucial to navigate the Court process and ensure the outcome is just and definitive in resolving the Partnership dispute.  

A Commercial Litigation Solicitor can be hired to find a satisfactory resolution for everyone involved. Whichever resolution route is chosen, it is essential to seek the correct legal advice from the correct lawyer at the correct time to minimise long-term damages and costs. 

Our Commercial litigation team can assist in navigating any partnership dispute which arises in a professional and efficient manner. Just call us on 01926 491181 or email: siobanc@moore-tibbits.co.uk.  

Key take-aways:

• Plan for the worst. Before a dispute arises, ideally at the start of the partnership, ensure you have a clear and concise partnership agreement in place which makes provisions to deal with any eventual disputes. This places the Partners and the Partnership in a protected position. The partnership agreement needs to be expertly drafted.
• Know your options when a dispute arises. Whether its informal negotiation, mediation, ADR, or court proceedings it is recommended that expert legal advice is sought to navigate the dispute and for it to result in a fair and clear outcome.

Article by: Florrie Talty-Sanghera.