Partnership Dispute Resolution Procedures
Partnership dispute resolution procedures are necessary in the event of a conflict between partners.3 min read
Partnership dispute resolution procedures are necessary in the event of a conflict between partners. The conflict may eventually lead to a full-blown dispute that threatens the continuance of the partnership. The cause of partnership conflicts vary but they usually involve:
- One party overstepping their authority/bounds.
- Misappropriation of company assets.
- One party shirking work or responsibilities.
- One party holding different views as to future or current business operations.
- Diversion of company assets or funding.
- Misappropriation of business opportunities belonging to the company.
- One party secretly competing with the company.
- Unhealthy addictions.
- Lack of respect.
- Divided opinions on an employee.
- Loss of trust.
Before engaging in a partnership, each partner must clearly understand their obligations and responsibilities. There should also be a clear agreement for the management of partnership liabilities and assets, and the resolution of disputes. This should be clearly defined in the partnership agreement.
A partnership agreement and other related documents help in the management of partners' expectations as to business operations and the responsibility of other partners. To avoid partnership conflicts or keep them to a minimum, a comprehensive partnership agreement should be drafted.
Hire Legal professionals to Draft the Partnership Agreement
To ensure that the partnership agreement is comprehensive and addresses all the operational aspects of the partnership, you should hire a good attorney to assist in drafting the agreement. A well-drafted agreement helps to reduce the intensity and frequency of disputes. A discussion with an expert legal counsel also helps clarify the legal obligations of partners to the business and to each other.
The counsel should ensure that the partnership agreement is drafted in accordance with relevant state laws. The agreement should also specify how the business affairs of the partnership will be managed, as well as all dispute resolution procedures. The terms of the agreement must be understood by all relevant parties (i.e. controlling shareholders and the partners themselves).
The procedures and policies of the partnership must also be included in the official business records of the partnership. For partnership agreements with no provision for dispute resolution, the partners should get together and discuss how to develop one. If partners can reach an understanding on how to handle future disputes, they will be better prepared to amicably handle important partnership issues such as allocation of resources and management of business operations.
The dispute resolution process also informs how aggressively partners can push disagreements, especially on less significant issues. Not all disputes need to be resolved through a formal process. There may be areas of responsibility where a partner is authorized to make the final decision on any dispute. Alternatively, the partners can agree to have an attorney — or other mutually respected persons well-versed in the partnership's business operations — to mediate and handle the resolution of disputes.
To avoid conflicts of interest, the attorney designated to resolve disputes should be different from the counsel that drafted the partnership agreement.
Establish Buyout Agreements
When creating the partnership, it is a good idea to establish a buyout agreement. This agreement specifies the conditions under which a partner may buyout other partners or shareholders or force out non-performing managers or partners who refuse to leave voluntarily.
If there are no buyout agreements or other similar provisions in place, the partners should get together and draft one. The provisions of the buyout agreement should also make room for arbitration or mediation in the event of a dispute over its implementation.
There should be an open discussion between partners as to expected future increase in business activity. The discussion should center on the fair division of the increased workload among the partners. This helps to avoid building resentment that usually occurs when one partner does (or believes that they do) more work than the other partner.
Major Business Decisions
Partnership operating agreements usually stipulate the types of decisions that require the consent of other partners or major shareholders before they are made. To prevent the possibility of dispute, consent should be sought even in cases that the agreement does not specify that consent is necessary. This helps to foster trust among partners and/or shareholders.
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