Partnerships are a common and often successful business structure in England and Wales, particularly among small and medium-sized enterprises (SMEs). The collaborative nature of partnerships allows for shared responsibility and resources, creating opportunities for business growth and development. However, the same collaborative nature can also lead to disputes, which, if not handled effectively, can threaten the stability of the business.
At Slater Heelis, we understand that partnership disputes can be stressful and time-consuming. Our dispute resolution team is here to guide you through the legal frameworks governing partnerships and offer solutions to resolve conflicts in a way that preserves relationships and ensures the continued success of your business.
Common Causes of Partnership Disputes
Partnership disputes arise for various reasons. Understanding the common causes can help partners anticipate potential issues and take preventative measures. Some frequent sources of conflict include:
- Financial Disagreements:
Disagreements over profit allocation, financial contributions, and business losses are among the most frequent causes of partnership disputes. Partners may differ on reinvestment strategies, dividend payments, or the legitimacy of personal expenses charged to the business. These financial discrepancies can lead to significant tensions if left unresolved. - Roles and Responsibilities:
Unclear or conflicting expectations about each partner’s role within the business can result in friction. When roles and decision-making authority are not clearly defined, partners may feel that others are overstepping boundaries or failing to fulfil their duties. This confusion can quickly escalate into a dispute. - Breach of Fiduciary Duties:
Partners owe each other fiduciary duties, including acting in good faith and in the best interests of the partnership. Allegations of misconduct, dishonesty, or conflicts of interest can damage trust and lead to serious legal conflicts. Such breaches can involve self-dealing, where one partner prioritises personal gain over the business, or failure to disclose key information that affects the partnership. - Changes in Business Circumstances:
As businesses grow or face challenges, circumstances change, and these changes can lead to disputes. A partner may want to exit the partnership, or the business might need to take on additional debts. Disagreements over how to handle these situations, whether to expand or change direction, can result in a breakdown of the partnership. - Lack of a Formal Partnership Agreement:
Many partnerships operate without a written agreement, relying on verbal understandings or outdated documents. In the absence of clear legal terms, disputes over rights, responsibilities, and profit-sharing often arise, leaving the business in a vulnerable position.
Legal Framework Governing Partnerships
In England and Wales, partnerships are primarily governed by the Partnership Act 1890, and Limited Liability Partnerships (LLPs) are regulated under the Limited Liability Partnerships Act 2000. Understanding these laws is crucial for managing disputes effectively.
Common Partnerships (Under the Partnership Act 1890):
A partnership is defined as a relationship between two or more people who carry on a business with the aim of making a profit. Unless otherwise agreed, partners share profits and losses equally, and each partner has the authority to make decisions that bind the partnership. Disputes often arise when partners’ intentions or expectations differ from the legal default rules set out by the Partnership Act 1890.
Limited Liability Partnerships (LLPs):
LLPs combine elements of traditional partnerships with corporate structures. Partners have limited liability, meaning they are only responsible for the partnership’s debts up to the amount they have invested. While this offers some protection, disputes may still arise over how the LLP is managed or how profits are shared, making a well-drafted LLP agreement essential.
Resolving Partnership Disputes
Disputes can escalate quickly, potentially disrupting day-to-day operations or even leading to the dissolution of the business. Resolving conflicts early and efficiently is vital to maintaining the partnership’s success. Common methods for resolving partnership disputes in England and Wales include:
- Negotiation:
The first step in resolving most partnership disputes is through open negotiation. Partners should aim to resolve their disagreements through constructive discussions. By addressing issues directly, partners may be able to avoid legal action, which can be costly and time-consuming. - Mediation:
If negotiations fail, mediation is a recommended alternative. A neutral third party, the mediator, helps facilitate discussions between partners to find a mutually acceptable solution. Mediation is typically faster, less formal, and less adversarial than litigation. Any agreements reached in mediation are legally binding, providing partners with a clear resolution to their dispute. - Arbitration:
For more complex disputes, arbitration may be a suitable option. An arbitrator listens to both sides and makes a binding decision on the dispute. While arbitration is less formal than litigation, it shares similarities with court proceedings and can provide a quicker resolution than going to court. - Litigation:
If other methods prove unsuccessful, litigation may be necessary. Disputes involving partnerships are usually heard in civil courts, where a judge will decide the matter based on the relevant legislation or partnership agreement. Litigation is often seen as a last resort due to its high costs and potential to damage business relationships. - Dissolution:
In some cases, partners may decide to dissolve the partnership. This can be done voluntarily, through mutual agreement, or involuntarily by court order. A partnership can be dissolved if one partner gives notice, if the partnership was for a fixed term and that term expires, or if one partner dies or becomes bankrupt. For LLPs, dissolution is a more formal process and usually requires agreement among partners.
Preventing Partnership Disputes
The best way to manage disputes is to prevent them from arising in the first place. At Slater Heelis, we recommend taking the following proactive steps:
- Create a Comprehensive Partnership Agreement:
A clear and detailed partnership agreement is essential for avoiding disputes. This document should outline profit-sharing arrangements, roles, decision-making processes, and mechanisms for resolving disagreements. A well-drafted agreement ensures that all partners are on the same page and provides a legal framework for resolving any issues that may arise. - Maintain Regular Communication:
Open, honest communication is key to preventing disputes. Regular meetings where partners discuss business performance, financial matters, and future plans can help ensure that all partners are aligned and aware of any issues before they escalate. - Seek Legal Advice Early:
Engaging legal professionals from the outset can help ensure that the partnership is structured correctly and that potential legal pitfalls are addressed early. In the event of a dispute, having access to experienced legal advice can help guide partners through the complexities of partnership law and provide solutions that protect the business.
Get in touch
Partnership disputes are a common challenge for businesses across the country, but they don’t have to result in the breakdown of a partnership or the dissolution of a business. By understanding the legal framework, recognising common causes of disputes, and taking proactive steps to prevent conflicts, businesses can manage disputes effectively and preserve valuable relationships. At Slater Heelis, we are committed to helping businesses resolve their partnership disputes in a manner that is efficient, amicable, and focused on long-term success.
Get in touch with our Dispute Resolution experts by filling out our online contact form or by calling us on 0330 111 3131.