Starting a business partnership is more than just signing a contract; it’s about forming a bond of trust, aligning on common objectives, and sharing duties. Despite the best intentions, disagreements can occur on business partnerships, and the impact can be significant. It’s essential to address these disputes head-on to avoid the potential fallout, which could include expensive legal disputes and damage to the business’s foundation.
Table of Contents
In this guide, our civil litigation experts explore the essentials of partnership agreement disputes and effective approaches to resolve them. The objective is to provide you with a clear understanding and the necessary resources to effectively manage and settle disagreements, ensuring the protection of your interests and business integrity.
What Is a Partnership Agreement?
A partnership agreement is a formal contract that outlines the nature of the business relationship between partners, detailing each partner’s duties and the distribution of ownership. It includes a clearly defined method for resolving conflicts, providing specific guidelines for managing disputes and procedures for the potential dissolution of the business.
A formal written agreement is particularly important, even when going into business with those you trust, like friends or family. This is not only a draft of the partnership’s terms but also includes the dispute resolution process. This process can be invaluable when disagreements surface, providing a clear protocol to follow, which can help avoid the stress and costs of legal proceedings.
If you go on a business partnership without an agreement, you’re essentially leaving your business’s fate to the provisions of the Partnership Act 1890. This could mean, for example, that in the event of a dispute or dissolution, profits might have to be divided equally, regardless of each partner’s contribution or agreement.
Common Causes of Partnership Disputes
Partnership disputes can arise for various reasons, reflecting the complexities of business operations and human relationships. Below, we will explore some of the most prevalent causes that can shake the foundation of a business partnership.
A partner’s improper behaviour in business can occur in various ways, such as disrespectful or hostile actions, fraudulent activities, misappropriation of company resources, or unethical dealings. Along with deteriorating mutual confidence between partners, these actions may also result in complex legal issues and financial setbacks for the company.
Partners may disagree on the strategic direction of the business, resource allocation, or even day-to-day management decisions. These disagreements can be particularly challenging when partners have different skill sets and priorities, leading to a deadlock that hampers business progress.
Breach of Fiduciary Duties
The law sets fiduciary duties on partners to act in the partnership’s best interest. Conflicts often burst when one partner acts dishonestly, uses the partnership’s resources for personal gain, or enters a conflict of interest. Breaches of these duties can deteriorate the partnership’s trust and integrity, potentially leading to legal disputes and financial losses.
Not Pulling Their Weight
A partnership is based on the premise that each partner contributes equitably to the business. Issues arise when one partner is perceived as not contributing their fair share, whether in effort, time, or resources. This can create bitterness and imbalance, weakening the partnership dynamics.
Substance Abuse or Addictions
When a partner struggles with substance abuse or addiction, it can affect the business as well as the partnership. This may comprise an effective contribution to the business l, causing stress on the other partners and potentially affecting the operations.
Poorly Drafted Partnership Agreement
A well-drafted partnership agreement is crucial in preventing and resolving disputes. If the agreement is vague or incomplete, it can lead to disagreements over its interpretation, as well as the extent of each partner’s rights and responsibilities. Therefore, clear and comprehensive agreements are essential in minimising the potential for conflict.
What Happens in a Dispute Where There Is No Partnership Agreement in Place
The Partnership Act of 1890 is the foundational statute governing business partnerships in the UK when a formal partnership agreement is absent. Under this Act, several default rules apply to partnerships, which can often be surprising to those unfamiliar with the law.
Firstly, the Act specifies that profits must be shared equally among partners, regardless of each partner’s investment or effort in the business. This can sometimes lead to contention, especially when partners contribute unequally or have differing expectations.
Secondly, the Act does not permit simple exit or expulsion of partners from the business. This includes situations where a partner may face bankruptcy or imprisonment. In such cases, unless an agreement states otherwise, the partnership must be dissolved if a partner cannot fulfil their role.
Moreover, the Act requires that a partner cannot retire or leave the business without leading to the dissolution of the partnership. In case of dissolution, the business’s assets must be divided, and if the remaining partners wish to continue the business, they must form a new partnership agreement.
The Act also highlights the importance of having a tailored partnership agreement. Such an agreement can specify the terms for resolving disputes and making certain decisions regarding the partnership. It works as a customised legal framework that can override the default rules of the Act, allowing partners to set terms that are more suited to the specifics of their business and working relationships.
What Do I Need to Claim a Breach of Partnership Agreement
To make a claim, you will need to demonstrate that your business partner has failed to uphold either a contractual obligation within the agreement, a fiduciary duty, or in some cases, both. It is also important to prove that this breach has resulted in a financial loss to you or the business.
Your agreement paper is the most important document you need to claim the breach. This document verifies the establishment of a legal business partnership and outlines the exact responsibilities that all partners have agreed to.
Depending on the disagreement, you might need various other documents as evidence. This could include:
- Correspondence: Any relevant communications between the partners or with third parties that relate to the breach.
- Internal Records: This could be minutes from partnership meetings, internal memos, or other records that reflect the dispute and the obligations that were breached.
- Financial Documents: Detailed records that demonstrate the financial impact of the breach, such as profit and loss statements or capital contributions that were affected.
Process for Bringing a Claim for Partnership Disputes
The process starts with your business dispute lawyer creating and sending a ‘letter of claim.’ This document is crucial as it outlines the nature of the breach in detail and clearly specifies what actions are required to fix the situation. This letter details the breach and outlines the necessary actions for resolution. It also serves as a formal notice to declare that failure to comply could lead to legal action.
If the partner fails to correct the breach or the issue cannot be settled during this initial communication, the next step is to issue proceedings in court formally. If the partner does not respond to the court claim, you may be able to apply for a Judgment by Default.
This may result in the court granting the relief you desire without a trial. However, if your claim is challenged, the court will schedule the necessary pre-trial steps. Typically, these steps include exchanging witness statements and disclosing all relevant documents.
If a business partnership dispute proceeds to trial, the court will examine the evidence presented by both parties. This includes the partnership agreement, documentation of the breach, and any financial records relevant to the claim. The result will be based on the quality of the evidence and the legal merits of the case.
If the court rules in favour of the individual making the claim, they may be entitled to remedies such as financial compensation, specific performance of the agreement’s terms, or dissolution of the partnership. After the trial, either party can appeal the decision if they believe the court made a mistake.
Throughout this process, continuous legal guidance is vital to deal with the complexities of the litigation process for a successful outcome.
Alternative Dispute Resolutions to Resolve a Business Partnership Dispute
Alternative Dispute Resolution (ADR) are various methods that can be used to resolve conflicts outside the courtroom. ADR is often favoured in business partnership disputes because it provides a less formal, more collaborative approach to conflict resolution, preserving business relationships and saving time and money.
Here are some of the primary ADR methods:
Mediation involves an unbiased third party, the mediator, who promotes dialogue between the disputing partners to help them reach a voluntary, mutually satisfactory solution. The mediator doesn’t decide the case but helps guide the conversation and assists in exploring potential solutions. Mediation is particularly beneficial for partners who wish to continue their business relationship post-dispute.
Arbitration is a process where an impartial arbitrator hears the evidence and statements from both sides and gives a conclusion, which can be binding or non-binding based on the agreement. It’s more formal than mediation but still offers more flexibility than court proceedings.
Negotiation is the most casual ADR method and involves the parties articulating directly with the adversarial nature of litigation, ADR aims to find a resolution acceptable to all parties and preserves the underlying business relationship whenever possible.
Learn more about the civil litigation and dispute resolution process.
Seeking Legal Assistance to Solve a Business Partnership Dispute?
If you’re facing the challenges of a business partnership dispute, remember that you don’t have to face it alone. Our team of experienced legal professionals is here to equip you with the assistance and support you need. From drafting a solid partnership agreement to guiding you through dispute resolution clauses and representing you in ADR proceedings, we’re equipped to assist you at every turn.
Don’t let disagreements intensify to a point where they threaten your business. Reach out for a consultation today. Together, let’s explore all your options, from mediation to arbitration, to find the most effective path to a resolution that defends your interests and preserves your business relationships.
A business partnership dispute can be resolved without dissolution through alternative dispute resolution methods such as mediation, negotiation, or arbitration. These approaches aim to find a mutually pleasing solution while avoiding the need for court proceedings.
While having a written partnership agreement can provide clarity and guidance in resolving disputes, it is possible to resolve a partnership dispute without a written agreement. However, the process may be more challenging and may require legal intervention.
A business partnership mediator acts as an unbiased third party who enables communication and negotiation between the partners. Their objective is to help the partners reach a consensus and find a mutually beneficial solution to the dispute.
It is advisable to involve a business dispute lawyer as soon as conflicts or disputes between partners arise. Early intervention can prevent the escalation of issues and increase the likelihood of finding a resolution that satisfies all parties involved.
Business partners may prevent disputes by maintaining clear communication, establishing mutual expectations, regularly reviewing and updating their partnership agreement, and seeking legal advice when necessary. Proactive measures can help foster a harmonious and successful partnership.
Our legal team has an extensive range of civil litigation matters. We can guide and represent you through most kinds of litigation and dispute resolution areas, such as resolving issues related to slander and libel, handling disagreements over property ownership and rights, assisting in the recovery of unpaid debts, navigating conflicts in commercial settings, suing businesses or commercial entities and addressing violations of contractual agreements.
Ask our Expert Legal Team
Share This Post
At Gulbenkian Andonian, we pride ourselves on “Excellence, Experience and Efficiency”. With over 35 years of experience on your side, our team of London based lawyers and solicitors have a wealth of experience advising individuals, families and businesses of all sizes to find clarity on UK law.
Call us on +44 (0) 207 269 9590 or fill out the form below. We usually reply within a few hours.
Dr Bernard Andonian – the Co-Founder of Gulbenkian Andonian Solicitors, is an experienced Immigration Solicitor, former Judge, and recipient of a PhD in Law from the University of West London. He has over four decades of experience practising UK Immigration, Human Rights and Civil Litigation Law. He has served on the Law Society Immigration Law Panel, achieved numerous groundbreaking decisions in higher courts and is featured in the Legal 500’s Hall of Fame.