Texas Business Dispute Blog

Monday, October 31, 2016

Partnership Disputes: He is Heavy and Is Not My Brother; Paths for Partners to Avoid and Resolve Business Conflicts

By: Ladd Hirsch 

Most relationships involve conflict at some point, and business partnerships are not immune.  In fact, the intense pressure on businesses makes it more likely that business partners will have disagreements from time to time.  The key question therefore is not whether business partners will ever have conflicts, but whether they can take steps to ensure that the conflicts that inevitably arise between them can be promptly resolved in a way that does no lasting harm to the success of the business.

 This is the first in a two-part series regarding partnership disputes.  This Post focuses on how to resolve partnership conflicts, and steps business partners can take to provide a healthy means for resolving their conflicts. The second Post will look more closely at exit strategies and litigation issues when partnership disputes become insurmountable.

Pre-Planning to Lessen or Avoid Conflict

 The best way to minimize conflict is to plan for it ahead of time.  Specifically, business partners can take affirmative steps to avoid and lessen future conflicts between them by putting a written partnership agreement in place that provides a roadmap for avoiding potential areas of conflict and resolving disputes. 

The Partnership Agreement

Business partners who are serious about avoiding conflict will spend time with legal counsel to develop a partnership agreement that deals with all of the following issues:

  • The role that each partner has in the business, and the duties and responsibilities of each partner;
  • What capital contributions are required initially and the extent to which the partners are required to provide any additional capital in the future;
  • Who has the ultimate authority to make decisions, and what procedures exist for breaking deadlocks between/among the partners;
  • The circumstances under which the partnership can be terminated and/or dissolved; and
  • The procedures for the partners to sell their partnership interest or increase their holdings in the business.

Resolving The Inevitable Disputes

Good partnerships will also spell out what mechanism should be used to resolve any dispute that arises. The following are some of the most common tools partnerships use to resolve disputes.

  • Advisory Boards – If the company has created a good advisory board, this group of experienced outside advisors can provide the partnership and its partners with valuable input, advice and recommendations, including guidance about resolving disputes that arise between the partners. 
  • Tie-Breaking Provisions – The partnership agreement can include provisions that resolve certain disputes by a vote of a single outsider or by a group who have been designated by the partners in advance for this purpose. 
  • Mediation – Requiring any disputes that arise to be mediated by a third-party outside the business can force the parties to consider alternatives to resolve their disputes that avoid legal action and other steps harmful to the business.
  • Binding Arbitration – By including an arbitration provision in the partnership agreement, especially one that fast-tracks the resolution of the dispute, disputes can be resolved promptly, confidentially, and finally.

Conclusion

While conflicts between partners are common in partnerships, these disputes should not create harmful or lasting disruptions.  Instead, disagreements between partners should be anticipated and plans adopted that avoid and resolve these conflicts at an early stage.  There is a win-win resolution available to resolve most partnership disputes if the partners will set aside ego and emotion in favor of selecting a business outcome that serves their mutual best interests.

The conflict resolution procedures discussed in this post have the goal of keeping the partners focused on achieving success rather than becoming embroiled in unproductive conflicts that distract from the goals of their business.  


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