Partnerships are a common business structure in England and Wales, particularly among small and medium-sized enterprises (SMEs).
They offer flexibility and allow for shared responsibility in running a business. However, disputes can often arise between partners, threatening the stability of the business and leading to legal complications. Understanding the causes of these disputes, the legal framework governing partnerships in England and Wales, and the resolution mechanisms available is crucial for managing or avoiding conflicts altogether.
Common causes of partnership disputes
Partnership disputes can arise for several reasons, including differences in opinion on business strategy, finances, and personal relationships. A few of the most common causes include:
1. Financial disagreements: Disputes over the allocation of profits, financial contributions, and how business losses are managed are frequent. Partners may have differing views on reinvestment, dividend payments, or personal expenses charged to the business.
2. Roles and responsibilities: Confusion or disagreement over each partner’s role within the business can cause friction. When expectations around decision-making authority or operational responsibilities are unclear or unmet, tensions can escalate.
3. Breach of duty: Accomplices owe each other fiduciary duties, such as acting in good faith and in the best interests of the company. Allegations of misconduct, such as dishonesty, self-dealing, or conflicts of interest, can lead to significant disputes.
4. Changes in business circumstances: Changes such as one partner wishing to exit the partnership, expansion plans, or taking on new debts can create disagreement over the future direction of the business.
5. Lack of a formal partnership agreement: Many partnerships are formed without a formal agreement, relying instead on verbal understandings or outdated documents. Without clear legal terms, disputes can arise over rights, responsibilities, and profit sharing, leading to uncertainty.
Legal framework governing partnerships in England and Wales
In England and Wales, partnerships are mainly governed by the Partnership Act 1890, whereas Limited Liability Partnerships (LLPs) are regulated by the Limited Liability Partnerships Act 2000.
– Common partnerships: In the Partnership Act 1890, a partnership is characterized as a relationship joining two or more people who run a company in common with the point of making a profit. Unless otherwise agreed upon, partners share profits and losses equally, and each partner has the power to bind the partnership to business decisions.
– LLPs: The Limited Liability Partnerships Act introduced LLPs as a hybrid between a traditional partnership and a company. In an LLP, partners have limited liability, meaning they are not personally responsible for the debts of the business beyond their capital contribution. However, the internal workings of LLPs, including the management structure and profit sharing, are largely governed by an LLP agreement.
– Partnership agreements: A significant number of disputes occur due to the absence of a well-drafted partnership agreement. A well-drafted partnership agreement can address potential areas of conflict by clearly defining the roles, responsibilities, profit-sharing ratios, decision-making processes, and mechanisms for dispute resolution. If there is no partnership agreement, the default rules of the Partnership Act 1890 will apply, which might not align with the partners’ intentions or preferences.
Resolving partnership disputes
Partnership disputes can escalate rapidly, disrupting daily business operations and potentially resulting in the dissolution of the business. Therefore, it is essential to resolve conflicts as efficiently and amicably as possible. The following mechanisms are commonly used in England and Wales to resolve partnership disputes:
1. Negotiation: The starting step in addressing a partnership dispute is via negotiation. Partners should strive to address their disagreements through open dialogue and negotiation before resorting to legal action. This approach can save time associated with litigation and help preserve the business relationship.
2. Mediation: If negotiation fails, mediation is a popular alternative dispute resolution (ADR) method. It is advised to have an outsider as the neutral third-party mediator who will facilitate discussions between the partners to help them reach a mutually acceptable resolution. Mediation is often faster and less adversarial than going to Court, and agreements reached are legally binding.
3. Arbitration: Arbitration is another ADR process where an arbitrator makes a binding decision on the dispute after hearing both sides. It is less formal than litigation and can be quicker, though it shares many characteristics with Court proceedings.
4. Litigation: If all other methods prove unsuccessful, partners may turn to litigation. Disputes involving partnerships are usually heard in the civil Courts, where a judge will decide on the issues based on the Partnership Act 1890 or the LLP agreement. Litigation is often seen as a last resort due to its high cost, time consumption, and the potential damage to the ongoing business relationship.
5. Dissolution: In extreme cases, partners may choose to dissolve the partnership, either voluntarily by mutual agreement to close the business or involuntarily through a Court order. A partnership can be dissolved by notice, by the expiry of a term (if it was for a fixed period), or if one partner dies or becomes bankrupt. In LLPs, associates may choose to dissolve the company if they can no longer work together.
Preventing partnership disputes
The most effective process to manage partnership disputes is to prevent them from arising in the first place.
Some proactive steps partners can take include:
– Creating a detailed partnership agreement: Having a clear and comprehensive partnership agreement is crucial. The contract ought to address profit sharing, roles, decision-making processes, and mechanisms for managing disputes.
– Regular communication: Open and regular communication among partners is key to addressing issues before they escalate. Regular meetings to review business performance, financials, and future plans can help align partners’ expectations.
– Consulting legal professionals: Engaging with legal professionals from the outset can ensure the partnership is structured correctly and prevent legal pitfalls later on. In the case of a dispute, seeking legal advice can provide guidance through the complexities of partnership law.
Comment
Partnership disputes in England and Wales can arise from a variety of sources, but they can be mitigated or resolved through clear agreements, open communication, and the use of alternative dispute resolution mechanisms. While the legal framework, including the Partnership Act 1890 and LLP Act 2000, provides guidance, each partnership is unique, and careful planning is essential to ensure long-term business success. When disputes do arise, early intervention through negotiation or mediation can preserve business relationships and avoid the costly implications of litigation.
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Daniel Brumpton is a Partner in our Dispute Resolution team, specialising in professional negligence and commercial litigation. Daniel heads our Commercial Litigation and is recognised by the independently researched legal directory, The Legal 500.
For more information on the subjects discussed in this article, don’t hesitate to get in touch with Daniel or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or contact us via our online enquiry form.
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