A partnership is a legal business structure between two or more individuals who pool their resources, knowledge and skills to manage and operate a business. Different types of partnership structures vary in the amount of liability each partner takes on.
Partnerships can be complex to manage as decision making is split between partners and business owners inevitably have strong opinions about how their business should be run.
Partnership disputes can threaten the existence of a business at their worst. In any case, when partners fall out there is always disruption to the day-to-day operations of a business. So, tackling disputes early is essential to provide swift resolutions that mitigate the impact of disputes on the successful running of a partnership.
In this comprehensive guide on partnership disputes, we take you through the potential causes, legal implications, and resolution strategies of disputes in this business structure.
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Common causes of partnership disputes
Partnership disputes can be caused by several common circumstances and many are covered by a well-drafted partnership agreement, but not all.
The most common causes of partnership disputes are:
Breach of fiduciary duty – directors of any company have fiduciary duties, a series of responsibilities, including:
Protecting the interests of the business, including acting in the shareholder’s interests
Putting the company’s interests above their own
Overseeing the company
Acting in good faith
Taking care in decision-making by using adequate information
Breaching these duties can dissolve trust in the partnership, potentially leading to financial loss and disputes
Disagreements over strategic direction – disagreements over the strategic direction of the partnership or the allocation of resources can lead to an impasse and disruption to business operations
Financial mismanagement or fraud – including the misappropriation of company funds, fraud, and conflicts of interest can erode trust. cause significant financial loss and lead to complex legal issues which require time and resources to untangle
Unequal workloads and contribution issues – when a partner doesn’t pull their weight, disputes can arise. This is because a partnership is typically based on the idea that partners contribute equal effort to the business unless explicitly stated otherwise in a partnership agreement. Contributions can take a number of forms: effort, financial contributions, ideas/expertise
Poorly drafted or absent partnership agreements – when partnership agreements are poorly drafted, or absent, partnerships can lack clarity and direction. Poorly drafted agreements, especially when they are vague or incomplete, can lead to uncertainty and different interpretations. Additionally, with a well-drafted agreement each partner can be clear about their and other partners’ responsibilities. Clearly drafted agreements minimise the potential for conflict and disputes
Changes in business circumstances – for example, the death or bankruptcy of a partner can lead to debate about what to do with the partner’s shares in the business
Partnership disputes and UK law
In UK law, partnerships where a business partnership agreement is missing are governed by the Partnership Act 1890. These are known as ‘partnerships by will’.
In these cases, several statutory rules govern partnerships. These are mostly outdated and don’t align with the scope of many modern partnership setups.
The act stipulates that profits must be shared equally between partners irrespective of their contribution. It also doesn’t allow the expulsion of partners, even when they cannot continue due to bankruptcy or imprisonment. In these instances, there is no other option under the legislation apart from dissolving the company.
On dissolution, the businesses’ assets must be divided. If the remaining partners want to continue the business, they must make a new partnership agreement.
The act emphasises the importance of having a tailored partnership agreement. Partnership agreements play a foundational role in modern business partnerships. They are the bedrock of partnerships, outlining the roles, rights and responsibilities of partners.
A well-drafted agreement also sets out the liability of each partner and contains key clauses on:
Capital contributions
Dispute resolution
Decision-making processes
Intellectual property
Partner addition and withdrawal processes
No-compete and confidentiality clauses
Accounting and taxation processes
The dissolution of the partnership
How to resolve partnership disputes
Disputes can be solved through two primary methods:
Alternative dispute resolution
Arbitration is often the preferred method of ADR. It is a process where an impartial arbitrator listens to the evidence presented by both parties and makes a decision. Their decision can be either binding or non-binding depending on the agreement. Compared to mediation, which we’ll discuss it’s a more formal process, however, it offers more flexibility and control than court proceedings. In arbitration, the parties can choose to follow pre-existing rules or make their own rules suited to the complexities of their specific dispute.
In partnership disputes, arbitration is a voluntary and confidential process, funded by both parties. It is a similar process to litigation in many ways, consisting of legal submissions, and a hearing where witnesses can be called and cross-examined.
Before considering arbitration, most individuals involved in partnership disputes will attempt negotiation. This is an informal process between parties, that can involve legal representation, where each side attempt to reach an agreement with mutual benefits.
Mediation is often the next step in business disputes, however, in partnership disputes, many skip this process in favour of arbitration due to its binding nature.
Early mediation can be beneficial to resolve disputes amicably and quickly. It can also preserve relationships as agreements are made willingly with the consent of all parties, otherwise mediation can be abandoned. It’s a more informal process than arbitration, where a mediator, an impartial third party, facilitates conversations and a possible agreement between the parties. Mediators unlike arbitrators cannot make decisions.
Adjudication is another form of ADR. It is a kind of halfway house between arbitration and litigation. This is because an arbitrator’s decision is partially binding. This means that it is binding until the time the case is taken to the court where it can be, and often is, enforced.
An arbitrator’s decision is binding and if a party wishes to challenge it they can take the issue to an appeal at the courts.
Litigation in partnership disputes
Now, when to consider court action? In all instances, it is important to attempt negotiation and other forms of ADR before resorting to court proceedings.
This is because litigation can be costly, time-consuming and potentially damage public relations.
Some partnership agreements may list litigation as the preferred option to resolve disputes under certain circumstances.
Litigation is inevitable when all else fails, including negotiation, arbitration and mediation.
When court action is inevitable, having the right legal support is crucial to help you build a strong case and protect your interests.
Remedies of litigation can include damages, an injunction against the offending party, or the dissolution of the partnership depending on the breach of the partnership agreement.
Dissolution of partnership
Speaking of partnership dissolution. It can be triggered under different circumstances.
Voluntary dissolution occurs when a partnership was formed to achieve a certain task or objective that has been completed. On the other hand, some partnerships are formed for an agreed-upon duration which ends. This will all be specified in dissolution clauses in a well-drafted partnership agreement.
Another circumstance that can lead to the voluntary dissolution of a partnership is when one partner issues a notice to the other(s) that they wish to dissolve the partnership.
Partnerships can also be dissolved when a partner becomes insolvent and declares bankruptcy, or if they die.
Courts may also order the dissolution of a partnership. This could be because the court decides that a business is prohibited from operating as a partnership.
Partnership agreements typically set out a procedure that must be followed for dissolving partnerships.
If there is no clause for dissolving the partnership in the agreement all partners must unanimously and at the same time agree to dissolve the partnership. This means a partner can take back consent they initially gave at a later date.
How to prevent disputes through partnership agreements
A well-drafted partnership agreement includes preventative measures to prevent and resolve disputes.
These include:
In short, the formalisation of the terms of a partnership in a partnership agreement facilitates trust, collaboration, and efficient partnership management.
Impact of partnership disputes on business
Partnership disputes can have wide-reaching consequences.
The most common are:
Financial
Operational
Reputational
Why choose Lawhive
Lawhive is an online platform that lets you work with a licensed solicitor instantly online. By making a partnership dispute through Lawhive, you'll get updates from your solicitor from anywhere and be able to check on the status 24/7. You can exchange messages and files with your solicitor directly through the Lawhive platform, and access our support team whenever you need.
Thanks to our online platform on average our fees are 30% lower than traditional solicitor firms. We also charge fixed fees for partnership disputes so you’ll always know what the costs are at the outset, and we never charge hidden fees.
How long does it take to resolve a partnership dispute?
How long a resolution takes depends on the terms outlined in a partnership agreement.
A swift resolution can be expedited through expert legal support, this limits the amount of possible disruption.
The more experienced a solicitor is plays into the length of time a dispute will take to resolve. Our expert solicitors can help you choose the best option for resolving your dispute quickly and their proactive nature will minimise delays in the process.
Legal services for partnership disputes
Partnership disputes can threaten the health of your business, especially if you’re operating without a partnership agreement in place.
Our partnership dispute solicitors can advise you on your best options to resolve a dispute early.
Contact our solicitors today for a free case evaluation and quote.