Partnership arrangements can be profitable and fulfilling. However, as with all relationships, partnership disagreements can and do arise as to what may be in the best interests of the venture. If you and your business partners are at odds as to whether it is time to dissolve the partnership and sell the related assets, it is important to know what your respective rights and obligations are under the partnership agreement and what options are available to you to resolve the dispute.
A. Am I in a partnership?
A disagreement between colleagues can lead to more serious ramifications if they are partners. In determining whether or not a business is structured as a partnership, courts are concerned with substance rather than form. This means that even if you and your colleagues do not refer to the arrangement as a partnership, if it meets the description of a partnership it may nevertheless be considered one. At its essence, a partnership is an unincorporated agreement between two or more parties to carry on a common business for profit. Factors that may speak to the existence of a partnership include property held for the benefit of the partnership, the sharing of profits and a mutual concern for each party’s ongoing financial stability. Please get in touch if you are unsure if your business may in fact be operating as a partnership rather than a corporation or other business structure.
B. What are my rights and obligations under a partnership?
When conflict arises in the context of a partnership agreement, it is important to understand not only what your rights are but what obligations you owe to other partners. Partnerships import fiduciary obligations, meaning actions must be taken in good faith for the purposes of promoting and benefiting the partnership. Importantly however, if one partner takes an action on behalf of the partnership (such as entering a contract of sale or purchase), that action can be binding upon the rest of the partners. It is therefore important to resolve disputes and to ensure that all partners are on the same page when it comes to buying or selling business assets as one rogue partner acting alone can, in some situations, effectively make the decision for the others.
C. How Can Partnership Disagreements be Resolved?
Partnership agreements will often include clauses providing for some form of alternative dispute resolution, such as mediation or binding arbitration. Even if your partnership agreement does not contain such a clause, it may be a good idea to pursue such a course before looking to dissolve the arrangement or pursuing litigation. A simple negotiation or mediation process can ensure that the working relationship survives the dispute and can continue once the existing issues are resolved. If a continuing relationship is not an objective or if such methods are unsuccessful, a partnership agreement can always be dissolved (subject to the terms of the agreement) by one party giving notice to the others, by a court order that dissolution is fair and equitable in the circumstances or by the expiry of a particular time limit stated in the agreement. If you feel that a party has breached their fiduciary obligations under the partnership, taking them to court is also an option but one that almost certainly ends the working relationship.
It is not uncommon for partnership disagreements, but such divergences in views can become more serious in scope when they concern the existence of the partnership itself. It is therefore key to understand firstly the nature of the agreement and the rights and obligations it imparts and secondly, the best means for resolving the dispute in a way that meets your long-term interests.
This article was authorised by Warwick Heeson