What Happens To Business Partnerships When There Is A Dispute?

Thursday, March 21st, 2019
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Starting a business is exciting. You are embarking on a new adventure with your partners. The future is full of opportunity and ways to make money, get new clients, and expand. However, running a business is more complicated than enjoying these benefits.

Getting along with your business partners when the company faces challenges can be difficult. Every business will face issues at some point, which is why you need to prepare to settle disputes cooperatively and efficiently. Here are some common types of disputes, techniques to prevent or soften issues, and some helpful information on how to deal with them.

How business partnership disputes happen

Disputes can happen when a major problem arises or during normal, day-to-day activities. The following are three of the most common disputes that you may experience when running a business.

Breach of fiduciary duty

Partners owe one another fiduciary duties, which means they must put the interests of the partnership ahead of their own. These are designed to ensure the partnership continues to survive. But, when one partner puts their self-interest above those of the partnership, then a breach of fiduciary duty can occur.

A typical example of this is when a partner gets a lead on a sale or property and completes it for himself before telling the partnership of the potential deal. The partner is said to be engaging in “self-dealing” which is a breach of duty. Another example is embezzlement or taking money from the company without permission. These are two extreme scenarios in which it is difficult to resolve the dispute easily.

Disputes over the allocation of resources

A more common dispute is how to spend the partnership’s money. Do you spend it on new properties or hiring more employees? Should you spend it on marketing? All partners must decide on matters equally to avoid these types of business disputes.

Failure to assign authority

Resource disputes naturally pair with another common source of problems – failure to appoint authority. The way you avoid authority disputes is by assigning someone to handle different tasks. For example, Partner 1 handles clients A-F, Partner 2 takes clients G-P, and Partner 3 handles the accounting and organizational operations. Each partner has a critical role, and each is responsible to the others for their duties. The partnership continues to function and the partners are not getting in each other’s way.

Alternatives to litigation

Your automatic reaction to a business dispute or breach of partnership contract may be to sue or seek litigation. But, litigation can take years and you may never make the partnership whole again. Alternative dispute resolution techniques like negotiation, mediation, and arbitration offer cheaper and faster alternatives to litigation.

Negotiation is exactly what it sounds like except you might bring in a neutral third party to oversee the process. Mediation is like negotiation except you deal with the neutral mediator, never with the other side. Finally, arbitration is like a mini-trial. You can have lawyers, there is a panel of “judges” (i.e., arbitrators), and a decision is issued. The decision is binding on the parties and can be enforced by the courts.

Preventing expensive litigation through a partnership agreement

Alternative dispute resolution is a choice – it cannot be imposed. So, how do you ensure that everyone agrees to go? You can include helpful clauses in the partnership agreement. The partnership agreement should define everyone’s role at the company and how that role can change – i.e., the mechanism to change the business as needed. The agreement should also include dispute resolution techniques like negotiation, mediation, and arbitration. It can pre-select a service to administer these techniques and even identify specific people to be mediators and arbitrators.

In short, a partnership agreement is critical to ensuring that your business stays operational and that you can reasonably resolve disputes with your partners. You can hire a lawyer to help you draft and confirm the meaning of the language to ensure the agreement can do all these things. Even if a partner no longer works within the business, the disagreement can be handled.

Get professional legal help for your business

If you need help creating or modifying your partnership agreement, contact the professionals at Brown & Fortunato, P.C. today. Our Finance & Corporate and Litigation teams provide advice and representation to small, medium, and large businesses. Give us a call at (833) 228-6300 or contact us via email today.