Avoiding Partnership Disputes
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Posted on 26 September 2022
Maddison Thomson
AVOIDING PARTNERSHIP DISPUTES: 3 Reasons Why Your Business Should have a Partnership Agreement
As Commercial Lawyers, clients often come to us for advice because of a dispute with their business partner which is causing significant distress to their business.
In these situations, the first question we ask is, ‘Do you have a partnership agreement in place?’ and the answer is often ‘No’...
Starting a new business can be an exciting venture for everyone involved. It is easy to maintain a good relationship with your business partner at the outset, however, what happens when the honeymoon period is over?
A partnership agreement is a legally binding agreement between the owners of a business that allows the parties to structure the relationship in a way that suits their particular business needs. Drafting a partnership agreement should be at the top of your list of things to do if you are thinking of entering into a business relationship with someone else.
So, let us take the guesswork out of your commercial pursuits. Here are 3 reasons why business partners should have a partnership agreement:
1. To Establish Control of the Business
Disagreements surrounding the control of a business most often arise in 50/50 partnerships. If you are thinking of going into business with a friend or family member in equal shares, a partnership agreement should be drafted to clearly state how the business is to be run and how decisions are to be made. This will avoid miscommunication and make sure everyone is on the same page with regard to the day-to-day operation of the business.
- A good partnership agreement will include:
- The roles and responsibilities of each partner;
- The division of ownership between each partner;
- The compensation of each partner, and how this will be distributed;
- How the capital of each partner is to be dealt with (if applicable);
- The procedures the business will adopt and follow when making decisions;
- What is required from a partner who wishes to terminate the agreement;
- The process for dissolving the partnership; and
- What the procedure is in the event of a dispute or stalemate.
Put simply, the more detailed the partnership agreement, the more protected you and your business partner will be moving forward.
2. To Avoid Legal Disputes
No two people will always agree on everything, and this holds true in a business setting as well. Business partners will likely feel passionately about how certain things should be done and in the event of a dispute, a partnership agreement is a means of prescribing clear procedures to avoid costly litigation.
When a disagreement arises, the best course of action is to talk honestly and openly with your business partner/s. Ignoring a potential dispute will only lead to hostility, which in turn can affect the productivity and commercial output of your business. After attempting to address a disagreement, you need to be able to rely upon a well drafted partnership agreement to determine how to settle a dispute. The agreement should outline the different issues that may arise, and which partner is responsible for overseeing it. This alone could be enough to stall a potential dispute before it has a negative impact on your business.
If the agreement is not clear on how a specific disagreement is to be handled, the agreement should outline a general process for dispute resolution. This may include the partners entering mediation, or another form of alternative dispute resolution (ADR), prior to commencing litigation or dissolving the partnership.
When mediation or another form of ADR is not enough to settle the dispute, it is important that each partner engages the help of their own independent Lawyer. Litigation is never an easy process, and an experienced Lawyer can assist with navigating the process, the partnership agreement (or lack thereof) and perhaps even bring the parties to an amicable decision on how to move forward.
3. To Ensure the Protection of the Business
Partnership agreements are a great way to separate the interests of the business partners and the interests of the business. In the event of a disagreement or stalemate between partners, a partnership agreement will protect the business and help streamline the resolution process, as discussed above.
In the event that a partner elects to terminate the partnership, a well drafted agreement will make provisions for:
- Confidentiality;
- Non-competition; and
- The restraint of trade (in some instances).
A confidentiality provision means that a former business partner cannot share or on sell confidential information relating to the business; such as client lists, details of referrers and suppliers as well as, staff information. This is especially important in circumstances where a former partner may seek to terminate the agreement in order to set up in direct competition with your business. Non-competition and restraint of trade provisions are a means of limiting their ability to commence work on a competing commercial opportunity, maximising the protection of your business in the event of a dispute or stalemate.
How Can Omnia Legal Assist with Drafting a Partnership Agreement?
The Commercial Law team at Omnia Legal are trusted business advisors that can assist with drafting your partnership agreement. We will liaise with the relevant parties to ensure that the final agreement reflects your key interests and protects your business venture.
Contact Omnia Legal today for your complimentary consultation to discuss your business needs.
This article provides general information on legal topics for educational purposes only, and should not be considered legal advice or recommendations. While we have taken care to ensure accuracy, Omnia Legal is not responsible for any errors, and makes no guarantees about the accuracy or completeness of the information. Links to third-party websites do not constitute an endorsement, and we are not liable for any damages that may result from using inaccurate or incomplete information. It's always best to seek legal advice for specific situations.