Navigating Partnership Disputes: A Practical Guide for Non-Lawyers
As a general matter, a partnership is an arrangement between two or more people to oversee business operations and share its profits and liabilities.
Partnerships are often likened to marriages. Like any relationship, they can encounter rough patches which can result in a “business divorce.” Disputes among partners are not uncommon. However, how you handle a dispute or disagreement with your partner can make all the difference in the health and longevity of your business.
Whether you're in a business partnership or contemplating one, it is incredibly important to understand how to navigate and resolve disputes. In this short guide, we'll walk you through practical steps to tackle partnership disputes effectively, even if you're not a lawyer.
How Do You Prevent A Dispute?
It is critical that you know a prospective partner’s background, experience and training before “getting into bed” financially with them. Are they people who you know by reputation or from personal experience? What makes you think your prospective partner would be a good business partner? Even though you may think you know someone, you really don’t know them unless you have seen them deal with setbacks or failures.
Partnerships should be reduced to writing although the courts generally recognize a partnership that was orally agreed to or “de facto partnerships.” The de facto partnership may be recognized by a court where the individuals have agreed to share the profits and losses of the partnership and operate the partnership based on their understanding of who-does-what” and “who-makes-what.” This is generally a disaster in the making.
Regardless of whether you have a written or oral partnership, address the major issues up front. While friction or conflict may be inevitable, a partnership agreement that has the following basic provisions will go a long way in resolving future disputes:
How ownership will be divided (e.g., 50/50, 50/25/25, 60/40);
Each partner’s duties and obligations;
Each partner’s capital contribution;
How to address the need for future capital contribution;
Partnership compensation or profit distribution;
Procedures for decision making;
Procedures for conflict resolution;
Procedures for dissociation;
Procedures for termination;
Procedures for dissolution.
The Cochell Law Firm has both basic and comprehensive partnership agreements that it can tailor exactly to your needs.
When Conflict or Disputes Arise Between Partners
It is not unusual for partners to have a falling out over money or performance by their partner(s). We recommend the following steps:
1. Open Communication:
Communication is the cornerstone of any successful partnership. Create a safe and respectful environment where all partners feel comfortable expressing their concerns and viewpoints. Listen actively to understand each other's perspectives fully. The goal is to resolve any disagreements but “agree to disagree” when you reach an impasse.
2. Define the Problem:
Clearly identify the root cause of the dispute. Sometimes conflicts arise from misunderstandings or differing expectations. Take the time to articulate the specific issues at hand. Writing ourt a description of the conflict, identifying solutions and understanding the business priorities can help clarify the situation and avoid further confusion.
3. Explore Alternative Solutions:
Be open to exploring creative solutions that address the interests of all parties involved. This might include restructuring roles and responsibilities, revising financial arrangements, or seeking outside expertise to address specific challenges.
4. Seek Mediation:
Consider involving a neutral third party to facilitate discussions and help find common ground. Mediators are trained professionals skilled in conflict resolution. They can assist in uncovering underlying interests and guide the negotiation process toward a mutually beneficial resolution.
5. Consider Legal Advice:
If the dispute escalates and cannot be resolved through mediation or negotiation, seeking legal advice may be necessary. A lawyer experienced in partnership law can provide guidance on your legal rights and options, as well as help navigate any formal legal processes that may arise.
6. Focus on the Future:
Keep sight of the bigger picture and focus on finding a resolution that allows the partnership to move forward in a positive direction. Learn from the dispute and use it as an opportunity to strengthen the partnership and improve communication and decision-making processes.
Conclusion:
Resolving partnership disputes requires patience, empathy, and a willingness to compromise. By fostering open communication, seeking mediation when needed, and/or exploring alternative solutions, partners can overcome challenges and build a stronger, more resilient business together. Remember, the goal is not just to resolve the current dispute but to lay the foundation for a healthier and more productive partnership in the long run.
If you have any questions regarding partnerships and navigating partnership disputes, please contact The Cochell Law Firm.
This article is a general informational statement of partnership based on Texas law and does not constitute legal advice or create an attorney-client relationship. Readers should not consult an attorney to determine their rights and obligations about partnerships in their state.