When a partnership is first formed, the focus is usually on how to get the business going. No one likes to think about possible problems that may occur sometime in the future. However, the best time to plan for the worst is when all is going well, so everyone is thinking logically about how they would resolve potential conflicts. Whether a partnership dispute is major or minor, it pays to establish guidelines in advance to minimize disruptions to the business and loss of revenue.
What Are Common Causes of Partnership Disputes?
There are many reasons conflicts arise among partners. Typically, they involve disagreements over how the business is being run, allegations of partner misconduct or a breach of a partner’s obligations to the partnership.
Breach of Contract
Partnership agreements are complex, establishing the roles and responsibilities of the partners as well as the financial arrangements governing their relationship. In addition, partners may sign other contracts related to the partnership, such as employment, confidentiality, non-compete and operating agreements. If a partner violates a contract term, a breach of contract action can result.
Breach of Fiduciary Duty
Partnerships create fiduciary duties between the partners and the partnership. A fiduciary duty is an obligation that a person act in the best interests of another person or an entity. Typically, there are three categories of fiduciary duties: duty of care, duty of loyalty and duty of candor. However, the Revised Uniform Partnership Act of 1994 (RUPA) § 404 provides that a partner only owes the duties of loyalty and care to the partnership and the other partners. A party suing for breach may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.
Misappropriation or Other Partner Misconduct
A partner’s misconduct can be harmful to the business. Partners are prohibited by law from misappropriating company funds, assets or partnership opportunities. In addition, partners cannot compete with the partnership or have an adverse interest. Other types of misconduct include concealing information about the business, gross negligence or recklessness in managing the business, or committing a crime or fraud whether it relates to the business or not.
Typically, the partnership agreement sets forth the responsibilities of the partners with respect to the work required to operate the business. However, if the agreement is not sufficiently clear or detailed, disputes can arise among partners regarding their respective share of the workload.
Disagreement over Operations of the Business
Conflicts can arise among the partners regarding how to run the business. This can consist of disputes over day-to-day operations, investments in and allocation of resources to the business, and decision-making authority.
How Can Partnership Disputes Be Avoided?
A well-drafted partnership agreement is the best way to avoid disputes. It should establish the parties’ rights and obligations, clarify expectations and provide guidelines for how disputes should be resolved to minimize adverse impacts on the business. However, the partners must also cooperate. Honesty, transparency and a willingness to compromise are essential in any business relationship.
A buyout agreement can also help avoid disputes. It sets forth when a partner can buyout another partner’s interest or force out a partner. The provisions should explain under what circumstances the buyout can occur and the partner’s and partnership’s rights to purchase the interest. The agreement should also indicate how the partner’s interest should be valued.
How Can Partnership Disputes Be Resolved?
Some conflict among partners is probably inevitable, but in most cases, it should be able to be resolved amicably. Negotiation is the first step and allows the parties to come to a settlement where everyone wins and loses something.
Alternative Dispute Resolution
Where the parties cannot settle the matter themselves, the partnership agreement may require that disputes be resolved through some form of alternative dispute resolution. Mediation and arbitration both rely on the use of neutral third parties. In mediation, the neutral helps facilitate discussion and agreement between parties, but he or she does not impose a decision. Arbitration results in a decision by the neutral party, but whether the award is legally binding depends on the parties’ agreement. Where it is legally binding, the courts can enforce the arbitration award.
Dissolution of the Partnership
The dissolution of the partnership is a final solution to disputes. If all partners agree to dissolve the partnership, it is considered a voluntary dissolution. Where only some of the partners want dissolution, it is involuntary, and the partner requesting dissolution must get a court order to dissolve the partnership and divide the assets and debts of the business.
In either case, it is important to wind down the business properly, which includes dealing with existing contracts, vendors, clients, bank accounts, intellectual property rights and other matters. A receiver may be appointed by the court to manage the business until the dissolution is final.
Partnership disputes can lead to a disappointing end to a business. However, the right planning can make a significant difference in avoiding or minimizing conflict. Working with an attorney can help partners understand their rights and responsibilities and quickly address potential problems before they do irreparable harm to the business.
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