INSIGHTS: Partnership Agreements – do you have one and is it up to date? Is it a dispute waiting to happen?

Most business partnerships do not last forever. Each year Meridian deals with many disputes between business partners.

Disputes often happen because the relevant documentation is unsatisfactory or out of date, resulting in the partners having different views on how to deal with commercial matters.

Business partners part company for many reasons. They could simply wish to retire, have a change of career, cash in on the fruits of their labours or just change focus. Parting ways does not mean business partners need to fall out and end up in a costly dispute. However, in reality this is often what happens.

We deal with many disputes between business partners and we have noticed that there are some recurring factors that are the catalysts for conflict. There are relatively simple measures that can be put in place in order to limit the risk of costly disputes in the future.

Common causes of partnership disputes

Disputes among partners are often caused for the following reasons:

• a lack of an appropriate and well drafted partnership agreement. In Meridian’s experience we often see circumstances in which partners enter into a partnership on good terms where trust and the representations of fellow partners are relied upon, but the partners omit to reduce critical terms of their agreement to writing which is signed by the partners;
• the partners have an existing partnership agreement but it has not been updated to reflect the changes that have occurred to the partnership over time. We often see partnership agreements which have not been updated since the parties first went into partnership notwithstanding the fact that there have been significant changes over time to the way in which the partnership is conducted;
• the uncertainty of respective rights and obligations of each partner as a result of not having a well drafted partnership agreement;
• the underperformance or breach of an obligation of a partner;
• one or more partners have contributed financially to the partnership but there has been no documented agreement as to how this financial contribution is to be treated: is it a loan or is it a purchase of further equity in the partnership. If it is a loan, when is it repayable and does interest accrue on the loan?
• management and personality conflicts between partners; and
• unforeseen changes to the dynamics of the partnership.

Safeguards to prevent a partnership dispute

There are a few simple steps that business partners can undertake in order to limit the risk of becoming engaged in a costly partnership dispute. It is important to remember that it is much easier to update a partnership agreement when the partnership is going well. If partners have already started to fall out with each other, it is then often too late to try to update the partnership agreement.

Ensure that you have a well drafted and up- to-date partnership agreement that accurately reflects the business relationship between the partners.

A well written partnership agreement should at a minimum:

• clearly articulate the ownership interests of each partner, should specify any commitment that has been made by a partner such as capital investment and should set out a process for the control of any business loans to or from a partner;
• provide simple procedures for partnership meetings to take place, the number of partners necessary for the meeting to go ahead and for decisions of the partnership to be made and should provide a mechanism for dealing with the decision making process when not all partners agree;
• clearly state the basis for partner remuneration and profit distribution;
• detail what commitments are required from partners. For example, are all partners required to work in the business for the same amount of time? Do certain partners have particular obligations that are different to others?
• clearly detail a process for when a partner decides to leave the partnership;
• deal with any restrictions that are to be imposed on retiring partners;
• have a clear and workable dispute resolution clause.

The best time to review your partnership agreement and business structure documents is when things are going well.

Resolving a Partnership Dispute

Every partnership agreement should include a dispute resolution clause which details how the partners are to go about resolving any dispute that arises. Nevertheless, if a dispute ensues, it is recommended that you seek legal advice as soon possible to ensure you understand the processes and implications of any decisions made.

When partnership disputes occur there will be things that you should do and things that you should not do.  It is for this reason that you should seek legal advice early.

Court litigation is an expensive and time consuming option and should not be commenced without careful consideration. In the interests of saving our clients significant costs and time, we recommend that partners firstly consider alternative dispute resolution avenues such as arbitration, mediation or negotiations before commencing court proceedings. However, we appreciate that not all disputes can be resolved through alternative dispute resolution and relief from the Court is sometimes more suitably sought.  Meridian Lawyers’ commercial litigation team can assist you in undertaking any alternative dispute resolution, and if necessary, can represent you throughout the court litigation process.

For more information regarding partnership disputes or for assistance in drafting a partnership agreement or resolving a dispute, please contact our Commercial Litigation Principal Douglas Raftesath.

This article does not constitute legal advice and does not give rise to any solicitor/client relationship between Meridian Lawyers and the reader. Professional legal advice should be sought before acting or relying upon the content of this article.