Partnership Disputes
Partnership disputes are a pretty niche but often challenging area of law. The informality of partnerships can make them really attractive when establishing a business, however this very characteristic then creates significant problems when disagreements arise. Without formal documentation or clear agreements in place, disputes can become extremely fraught, affecting both the partnership’s operations and its participants.
A partnership is formed when two or more individuals agree to carry on a business with a view to profit. Unlike sole proprietorships or companies, a partnership can exist without formal documentation, relying instead on the default provisions of the Partnership Act 1890. Unfortunately, this lack of formality often leads to confusion and disputes. For example, individuals may inadvertently enter into a partnership without realising it, only to discover the consequences when disagreements arise.
Even where partnership agreements exist, they need to be carefully drafted and regularly updated. Over time, the addition of new partners, the departure of existing ones, or the evolution of the business’s scope can lead to disagreements about roles, responsibilities, and profit-sharing arrangements. Partnerships that rely on outdated or poorly drafted agreements risk disputes that can jeopardise their continuity and success.
Common Causes of Partnership Disputes include:
- absence of a written partnership agreement;
- changing business scope;
- profit distribution;
- partner exits;
- liabilities and debt;
- restrictive covenants; and
- breach of duties:
Partnerships governed by well-drafted agreements have a significant advantage when disputes arise. These agreements typically include provisions on:
- profit sharing and capital contributions;
- decision-making processes and management roles;
- procedures for admitting new partners and handling retirements or expulsions;
- dispute resolution mechanisms, such as mediation or arbitration; and
- restrictive covenants to protect the partnership’s interest’s post-exit.
When disputes occur, these agreements provide a prescribed framework for resolution, thereby reducing the likelihood of litigation.
In the absence of a written agreement, partnerships operate as “partnerships at will” under the default provisions of the Partnership Act 1890. These provisions include:
- equal profit-sharing and management rights;
- The right of any partner to dissolve the partnership with notice; and
- Lack of mechanisms to expel a partner or restrict post-exit activities.
These default rules often lead to litigation, which are time-consuming, expensive, and potentially damaging to the partnership’s reputation.