How to Handle Partner Disputes Without Litigation

Collaborating with a partner is a popular and effective route to take when starting a business. The partners may have complimentary strengths that will enhance the business’s potential for success, and they may be personal friends and family, which can make the startup process exciting and fun. However, when a personal relationship exists, there may be little or no discussion of what to do should a dispute arise.

The best way to handle partnership disputes is to establish a written partnership agreement from the beginning. These agreements should, at a minimum, outline the following terms:

  • Ownership Percentage
  • Division of Profit and Loss
  • Length of the Partnership
  • Partner Authority
  • Buy and Sell Agreement
  • Decision Making & Resolving Disputes

Nobody should feel uncomfortable determining how to handle disputes in advance. Doing so has saved many a business—and relationship. There are many dispute resolution tools available aside from litigation. Here are a few examples.

Solution-Based Discussion

When you disagree with your partner, do you focus on the problem? Or the solution? Sometimes switching the direction of the conversation can produce a more productive dialogue.

You both acknowledge a problem exists. If you both agree to put what’s best for the business first, and are able to avoid placing blame on one party or another, you may be successful in finding a solution that is acceptable to all involved. Your solution may be as simple as a change in the way you communicate.

Legal Advice

If discussions between partners are getting contentious, it is a good time to speak to an attorney about your options, which may include having a partnership agreement drawn up to govern your rights and responsibilities going forward. If you cannot agree and failure seems unavoidable, then options include buying the partner out, selling your shares, or dissolving with a settlement agreement. Having an attorney on your side is especially important and could protect assets and protect your share of the business until a final resolution has been determined.

Mediation

One popular dispute resolution in a partnership agreement is commonly referred to as a “Mediation Clause,” This is a provision that requires partners to seek mediation to resolve partnership disagreements without the need for court intervention.

Meditation allows a neutral third-party to moderate discussions, discuss alternative solutions, and encourage compromise in discussions between partners to help partners come to a mutually agreeable resolution. Mediation is, more often than not, the most favorable route to take in the event of a partnership dispute as it offers the strongest possibility of reconciliation between partners. If you and your partner are unable to find common ground in private discussions, it may be time to consider mediation.

Arbitration

If a mediation results in an impasse, which is when the parties cannot reach a settlement agreement, it might be possible to seek a determination by a private court, through arbitration. In arbitration, a judge who has specialized knowledge of your industry or profession weighs the facts of the dispute and makes a decision as to what should be done. In this context, the judge is called an “arbitrator” and may define the rights and obligations of each partner, or even compel dissolution.

The benefit of arbitration is that it protects the privacy of your business and keeps the dispute out of public eye. However, arbitration is expensive. The filing fee alone is about $1500, and you have to pay the judge’s hourly rate, typically over $500, along with other expenses.

For questions regarding current or future partnership agreements, give us a call at 1-786-533-1100. We can provide customized agreements to protect your business, and your partnership.