Partnership disputes: How can I avoid a litigation case arising from a bad partnership agreement?
A well-drafted agreement forms the basis of a strong partnership. By clearly setting out the rights and responsibilities of each partner, partnership disputes can often be avoided.
When a new partnership is set up, sometimes the partnership agreement is not substantial enough to deal with changes in the future. Originally, partners may have all had the same vision and been confident in their ability to work together to deal with difficulties.
When the situation changes as both the business moves forward and the world around it evolves, partners may find that they are at odds. This is the point at which they need to be able to refer to their partnership agreement to see exactly how they can proceed and what the agreed process of dispute resolution is. Where the partnership agreement fails to adequately set out the details, a disagreement can escalate. This can be extremely damaging to a business, both financially and to its reputation. At its worst, a partnership dispute can destroy an otherwise flourishing business.
The risks of having an inadequate partnership agreement, or none at all
If a partnership agreement fails to set out what should happen in a particular eventuality, the Partnership Act 1890 (the Act) will apply by default. The Act also governs what happens in any partnership without a written partnership agreement.
Examples of some of the provisions of the Act are as follows:
· Partners will be jointly liable for the partnership debts or wrongful acts of another partner;
· All partners can take management decisions;
· All partners will have an equal say in business decisions;
· Any partner can end the partnership at any time by giving notice;
· A partner cannot be expelled from the partnership.
It is usually beneficial to a partnership for issues like these to be dealt with differently. For example, by limiting liability for wrongful acts to the partner who committed them and specifying who is responsible for making particular management decisions.
Without a carefully tailored partnership agreement, a partnership can reach a point where it becomes paralysed and it is impossible for partners to continue in business together.
Review your partnership agreement
If you believe that your partnership agreement maybe inadequate, it is advisable to have put a new one in place, even if you are not currently experiencing difficulties. Particular areas to look at when considering whether your existing agreement is sufficiently robust include the following:
· Who has authority and is responsible for each type of decision-making;
· Who owns which assets;
· How are profits and losses to be allocated?
· Who is liable for a bad decision which leads to a loss?
· How can a partner leave or be required to leave?
· The process for adding new partners;
· Dispute resolution procedure.
It is good practice to review your partnership agreement from time to time in the light of new developments, both within your business and partnership and within the wider commercial environment in which you are operating.
Alternative dispute resolution
If a disagreement does arise between you and your partners, seeking legal advice as soon as possible usually helps to limit a dispute before too much damage is done and before the different parties become entrenched in their views.
We can advise on the merits of your position and the possible outcome of any formal action. By clearly understanding the situation and the rights and responsibilities that have arisen, it is often easier to see a way forward.
A partnership law expert will be able to negotiate on your behalf to try and resolve the issue. If this is not possible, there are other methods of dispute resolution available.
Mediation is the most popular method. It involves putting the case to a trained mediator who will work with all of the parties involved to help them reach an acceptable solution.
There are several advantages to this. Firstly, it is usually quicker and cheaper than litigation, which can involve lengthy preparation as well as time spent in court.
Secondly, the solution will be something that has been agreed upon by all parties, rather than a decision imposed by the court that may be unwelcome. A skilled mediator may even be able to mend a partnership so that the relationship can continue once new parameters have been defined.
It is often the case that a court will require parties to at least try to mediate before bringing a case, so engaging in this as soon as possible is always a good idea.
Avoiding litigation by having a new partnership agreement drawn up
If your partnership agreement does not fully deal with all of the issues you believe may be of concern, it is advisable to have it redrawn. This can be done at any time throughout the partnership, provided the other partners are agreeable.
It can be helpful to sit down with your partners and look at the areas that may cause problems at some stage in the future before a serious problem arises. It is easier to talk things through rationally and dispassionately before an issue arises and gets blown out of proportion. It may be that all that is needed is some negotiation and compromise and for everyone to settle on a new agreement that they are happy with.
Having this drafted into a clear, unambiguous document as a roadmap for future dealings will help partners know exactly where they stand and give them a clear path if they wish to raise a dispute or consider leaving the partnership. It can also help limit their actions to their particular areas of knowledge and expertise.
As with any dispute or potential dispute, early intervention is key. The longer difficulties drag on, the more damaging they will be and the harder they will be to resolve. Involving a legal expert as soon as possible can minimise problems and help a partnership find a successful way forward.
Get in touch with us
We have wide-ranging experience in commercial litigation and partnership disputes, and were named as the ‘Commercial Disputes Specialists of the Year” in the Corporate Livewire Innovation & Excellence Awards 2020 as well as ‘Boutique Litigation Law Firm of the Year’ in both the 2019 and 2020 Global Awards by ACQ5.
If you would like to talk to one of our expert legal team about any queries you may have regarding a partnership agreement, partnership dispute, or legal measures to put in place to ensure your business is successful, contact the author, Dipesh Dosani, or call the team today on 020 3968 6030 and we’ll be happy to help.
The above information is for general guidance on your rights and responsibilities and is not legal advice. If you need more details on your rights or legal advice about what action to take, please contact a legal advisor.