Business partnerships are founded on cores of trust, objectives, and mutual understanding of responsibility. When two or more persons combine ideas building a business, often growth, innovation, and long-term success come into mind. However, even the most successful partnerships face their test of time, and when disagreements arise; they do mushroom into legal disputes if not carefully addressed.
Business partner disputes are far more common than one thinks. These disputes may involve fiscal issues, breach of contract, difference in vision, or even personal disagreements. All these disagreements, with two major stakeholders, may jeopardize not only the stability of the business but also the very relations that have been built throughout the years. So much is at stake since unresolved disputes can lead to dissolution, financial loss, and damage to one's reputation.
Equally important is the skill of an entrepreneur or businessman to legally handle disputes in business partnerships. This goes beyond knowledge of the law; it is about knowing how to protect your interests while maintaining the highest integrity of your business and, where possible, keeping the partnership together. It takes legal knowledge, strategical negotiation skills, and emotional intelligence to achieve effective resolution.
In this blog, we discuss necessary steps when a business partnership has reached a legal impasse: everything from the need for free flow of information to reconsideration of partnership agreements; the option for mediation, arbitration, and even litigation-we give multi directional guidelines. We are going to touch on some real cases of business partnerships that have been through legal disputes and how such cases were settled amicably, thereby underlining some key lessons learned and the strategy which came in handy when we looked out for resolution.
The following blog post will take you through a process of understanding how partnership legal disputes can be approached in less harmful manners, with easier paths to resolutions for the benefit of both the business and the individuals. Whether you are just embarking on a partnership and want to avoid potential future disputes, or whether you are in dispute, this guide will provide you with the tool set and perspective necessary to navigate both highs and lows effectively when it comes to business partnerships.
Understanding Common Causes of Business Partnership Disputes
Before touching on how to deal with disputes here are some of the few reasons why people fall out in a business partnership.
Conflicting responsibilities: Problems may also derive from partners not agreeing about their roles, responsibilities, and expectation in the business.
Financial Issues: The most common areas in which conflict can arise are profit-sharing, investments, and financial management.
Decision-making conflicts: This includes various opinions and decision-making processes, which can also cause disagreements regarding the direction of the business.
Breach of Agreement: If either of the partners does not abide by what has been agreed upon in the partnership agreement that may result in certain legal disputes.
Partnership exit issues: This arises when there happens to be a difference in the vision of the partners regarding how to exit a partner into retirement, sale, or dissolution of the partnership.
This understanding helps partners address a common issue before it escalates to a court problem.
How to Deal with Disputes among Partners in Business
Open Communications
Any dispute can be resolved through open and candid communication. Partners should discuss the issue at hand and reach an acceptable solution for both parties. Many a time, a small disagreement gets blown out of proportion and goes to the courts just because proper communication was not utilized.
A relevant illustration of this would be that, Snapdeal was one of the most known e-commerce websites in India. The issue escalated and turned public between the co-founders due to disagreement over the future of their business; however, it settled in the interest of the moving business.
Review the Partnership
Agreement
If there is a partnership agreement, review it as a possible way to resolve a dispute. Reread it to see how ownership responsibilities are spelled out, so that perhaps they can find a way out from disagreements.
Example: A long-term partnership agreement, in the case of the famous ice-cream company Ben & Jerry's, allowed its founders to iron out disagreements in the process. Most valuable, however, were the decision-making process and the profit sharing, specified in the agreement in the times of crisis of the company.
Mediation and Negotiation
If for some reason, direct communication does not work, then mediation and negotiation are good dispute resolution methods without going to court. A neutral third-party mediator may lead the discussion to assist in arriving at a settlement between the partners.
Example: The founders of the fashion brand Nasty Gal settled the dispute in 2014 through mediation. The mediator helped the parties get a settlement, which most probably would have saved the long legal battle that could have damaged the reputation of the brand.
Arbitration is more formal than mediation. Third-party intervention listens to the stories of both parties regarding the dispute and reaches a binding decision. It can be done very quickly and cheaply without going to court.
Example: The partnership dispute between entrepreneurs dealing with the technology company, called Yahoo!, reached arbitration. It was a process wherein both parties can present their side in a formal setting where a binding decision finally brought that dispute to an end.
Litigation
This will be the very last resort if everything else fails. It should be the last resort because litigation can be time-consuming, expensive, and irreconcilable in business relations.
A case in point is the infamous lawsuit between the two founders of Facebook. The call taken by Eduardo Saverin against Mark Zuckerberg over the ownership and shares in the company had really turned out to be a major lawsuit. But then, although Saverin won a settlement, this seems illustrative of the risk and cost of litigation.
Exit by a Partner
At times, perhaps the most proper resolution is that one of the partners should simply leave the partnership. The foundation can be something written in the partnership agreement about, say, a buyout by the partner, or dissolution, among other preconditions.
Example: After some opposing issues, one of the co-founders of PayPal, Peter Thiel, exited the company. His exiting enabled the company to simply move on with business without being in a constant state of conflict; sometimes it's better that way.
Legal Dispute Prevention Best Practice
Draft a Comprehensive
Partnership deed/Agreement
A good partnership agreement can avoid many disputes by clearly specifying the roles, responsibilities, financial contributions, and decision-making power of each partner.
Regularly review and Updating
of Partnership deed/Agreements
By the passage of time, with business growth, an agreement must be updated according to the changes in the business structure or otherwise with respect to the partner's role.
Establish Communication Channels
Good communication among the partners avoids so many misunderstandings and conflicts. Regular meetings and open decision-making processes support people in staying at the same frequency.
Dispute Resolution Clauses
When containing a dispute resolution clause in the partnership agreement, the document can outline procedures to follow when a dispute arises, including options such as meditation, arbitration, or litigation.
Seek Early Legal Advice
The early advice from a legal perspective, whenever a dispute is envisioned, shall help the partners understand their rights and responsibilities, and the best avenue of resolution.
Conclusion: Prevention and Resolution of Business Partner Disputes
Differences of opinion are an unwanted part of a business partnership but can be made bearable if one takes the best approach: having a well-structured partnership agreement, early conflict resolution, and alternative dispute resolution. Issues can be amicably resolved by the partners without affecting their relationships or the venture itself.
However, increased dispute cases, professional legal advice, and preparation for litigation become very good alternatives. Be it either way, the key to dealing with disputes arising in business partnership lies in the art of communication, cooperation, and understanding your legal rights and responsibilities.
