Resolution of partnership disputes

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Resolution of partnership disputes

Partnership disputes are disruptive and need to be resolved as quickly as possible. We find the best solution by considering the legal rules and the delicate relationships between the partners. Unlike many solicitors, we mainly resolve partnership disputes through negotiation. But, if negotiation fails we do have litigation expertise to call upon.

We act for business partnerships and individual partners.  Many clients are from the professional services industry.

The consequences of no written partnership or LLP agreement

The majority of partnership disputes arise because partnerships and their partners lack an up-to-date written partnership agreement. If you do not have a partnership agreement then default provisions apply to both limited liability status partnerships (LLPs) and general partnerships. These default provisions may work to your detriment. Our partnership lawyers offer expert partnership law advice on your partnership agreement and what can be done to solve any issue. Our solutions are designed to leave your business running smoothly.

Triggers for a business partnership dispute

The partners define how the partnership or LLP is managed, and who manages it. Mostly disputes arise because the partnership or LLP agreement is deficient or non-existent. The legal framework offers little assistance. The following key acts are simply insufficiently comprehensive to cover every situation:

  • Partnership Act 1890 which regulates written partnerships; and
  • Limited Liability Partnerships Act 2000 which regulates LLPs.

Our experience and knowledge spans:

Mediation as a way of resolving a partnership dispute

Disputes between business owners can become bitter and expensive affairs and can impact on the profitability of the business and on the business owners individually.  There is a great emphasis under the UK legal system on finding ways to mitigate litigation costs and keep cases out of court.

Generally each party to a dispute will believe it has the stronger case and each may be encouraged in that belief by their legal representatives. However, although legal argument will always be important in any dispute there are often other key drivers in any negotiated settlement.

How mediation can assist

Unlike litigation, mediation can not only help to resolve the immediate partnership dispute but can also consider repairing relationships to assist the business to continue.

We have significant experience in this specialist area of law and we understand how businesses work.

Our strength is that we not only understand the legal aspects but – more importantly – we have commercial awareness and financial expertise including business valuation and taxation. In our experience mediation has been particularly useful for accountants, solicitors and participants in hedge fund businesses.

Costs of mediation

Our costs per day will depend on value, complexity and the number of parties to the dispute and usually start at around £950 plus VAT per day to act as mediator plus preparation time. Costs may also arise in respect of travel and room hire which we discuss with you. Similarly, if we are representing you before a mediator we charge per day plus preparation time and travel outside of London.

We do find that mediation can be incredibly successful and accelerate the resolution of disputes quickly. We organise the mediation and deal with preparation of the case. We do offer John Deane, who is an accredited mediator with 25 years plus experience of working in the profession to act as a mediator.

John Deane can be contacted on 020 7438 1060 for an informal chat to discuss whether mediation could be suitable for your partnership dispute.

Three common partnership disputes

  1. Partner’s liabilities owed to the business and/or to each other.
  2. Split of income losses & capital.
  3. Leaving a partnership or LLP.

Partners’ liability

The position between a partnership and a limited liability partnership is quite different. There are three cases:

Partnership

In a partnership, the partners face unlimited liability for losses and debts. The partners share in liability irrespective of culpability. All partners have ostensible authority to bind other partners. We deal with situations that are not covered by insurance either because the business is uninsured, the dispute is internal or the insurance company have found a loop hole and refuse to cover the claim.

Limited liability partnership LLP

In a limited liability partnership, the partners have limited liability protection. The liability of each partner is limited to the interest each partner has in the business’ assets.  Unlike the case with partnerships, the liability of LLP partners does not extend to personal assets. In addition, LLP partners have limited liability protection against claims arising from the actions of other partners.  Mainly we deal with internal disputes and claims under private agreements.

Hybrid partners

Hybrid partners are staff that are called partners to the public but are not actually signed up to formal arrangements setting out their actual liability to the partnership or LLP.  The question of liability can be blurred and is fact dependant on inncome, losses and capital

The partners of both partnerships and LLPs share income, losses and capital in accordance with what has been agreed. We are often involved in resolving disputes which arise because the split between the partners is not clearly agreed, or where the split has been inadvertently varied, often without all the partners’ consent.

A partner is not pulling his weight

A partner not pulling his weight is a fairly common problem. Partners will dispute the share of the partner’s drawings or income split. All sorts of reasons can spark a disagreement, although under-performance is the most common reason.

How we resolve this type of dispute depends upon the circumstances. Partners usually do not have the same rights as employees to claim unfair dismissal. Only in rare cases have partners established employment law rights in an Employment Tribunal. Partners have contractual rights. Identifying those rights requires unravelling and negotiation.

If there is no written partnership or LLP agreement detailing rights to expel a partner, then under-performance creates a difficult situation. If you cannot force a partner out then the drain cannot be stemmed. We usually find ways of managing the situation so the partnership flourishes.

Partner doesn’t act in the partnership’s best interests

There are almost limitless ways to accuse a partner of not acting in the partnership’s best interests. Typically a partner refuses to operate within the requirements set by the consensus of other partners. This includes client handling, professionalism and management functions.

Essentially there are duties of good faith. Questions arise as to whom the duties are owed to.

Partner leaves partnership

In some cases, a partner plans on taking what he sees as “his” clients to a new venture.  The remaining partners, concerned by a loss of revenue, don’t share this view. The solution depends on the facts and existing agreements. Many cases result from a lack of robust, enforceable non-compete post termination restrictions.

We tell you what can be done, and how much to pay a departing partner. An advantage to a negotiated settlement agreement is that it can be an opportunity to update or create effective non-compete restrictions.

Breach of the partnership agreement

In some cases, quick action is needed to stem losses, usually client losses, arising if the departing partner takes clients to a new business.  Similar issues arise if the departing partner is planning a team move.  We do have the expertise to launch court injunctions to stop losses.

As a first step we assess the likelihood of success.  Not all injunctions are successful due to lack of evidence or because the threat may be something that can be dealt with by way of a claim for damages arising from a breach of the partnership agreement.

Partnership disputes and LLP disputes – track record

Litigation is expensive. These days courts actively discourage litigation and encourage settlement. At Gannons, the majority of our cases settle. Recent achievements include:

  • Theatrical production partnership breakdown: sold assets to respective partners. There was no written partnership agreement.
  • Media partnership mediation: resolved the dispute between the parties through low-cost mediation.
  • Accountancy firm: wanted to remove a partner suspected of trading independently and diverting profits. The written partnership agreement was old, out-of-date, and so removing the partner was difficult. We also modernised the partnership agreement.
  • Limited liability partnership (LLP) partner’s departure: issues involved carried interest and his share of goodwill.
  • Partner leaves management consultancy LLP on good terms: our client, a partner, was joining a competitor. We carefully planned and negotiated his exit so the consultancy did not seek an injunction to prevent him competing.
  • Negotiated partnership’s practice manager’s departure:  The practice manager was forced out of the partnership because he knew about “shady” dealings.
  • Accountancy firm merger:  managed the turf wars and fall-out following merger of two accountancy firms.
  • Architect’s departure to another larger firm: Our client was given responsibility for a foreign office of a larger firm.  We devised a method for calculating the partnership share, and the foreign office’s funding,  without impacting our client’s profit share.