Partnership Disputes

While the ease of informal formation is often advantageous, it is also a common cause of partnership disputes. Challenges frequently arise when individuals find themselves party to a partnership without any formal written agreement, often without even realising they are in a partnership. As a result, partnership disputes can be complex to resolve.

What is a partnership?

A partnership arises when a relationship subsists between persons carrying on a business in common with a view to profit (section 1, Partnership Act 1890). Partnership disputes are therefore common in business arrangements, especially when expectations, goals, responsibilities, or liabilities are not codified in a formal partnership agreement or are otherwise unclear.

What governs partnerships?

Partnership disputes typically fall into two categories:

1. Partnership agreements

Professional partnerships are commonly governed by a formal partnership agreement, typically codified into a written deed. Such agreements usually include provisions covering:

• Each partner’s duties and obligations.
• Management structures and procedures.
• Financial arrangements.
• Profit and loss sharing.
• Dispute resolution mechanisms.

A well-drafted partnership agreement ensures that disputes between partners are managed internally, often avoiding the need for litigation.

2. Partnership at will

In the absence of a partnership agreement, the Partnership Act 1890 will essentially imply a default partnership agreement between the parties, commonly referred to as a ‘partnership at will.’ The Partnership Act 1890 will imply terms to the effect that all partners are entitled to and/or have the power to:

• Bind or be bound by the actions of the firm;
• Participate in the management of the firm;
• Are jointly liable with the other partners of the firm;
• Have an equal share of profit; and
• Not to be expelled by other partners.

Crucially, a Partnership at Will does not contain a prescribed dispute resolution process, unlike a formal partnership agreement. This can result in disputes being resolved in public forums, which may not be in the best interests of the business.

How can a partnership agreement help prevent disputes? 

A well-drafted partnership agreement sets clear expectations and addresses potential areas of conflict before they arise. To minimise the risk of disputes, agreements should be clear and unambiguous. Key provisions to include are:

• Profit and loss distribution.
• Decision-making processes.
• Dispute resolution mechanisms.
• Roles and responsibilities.
• Procedures for adding or removing partners.
• Exit strategies and dissolution terms.

What are the common causes of partnership disputes? 

• Financial disagreements: Issues related to unequal contributions, mismanagement of funds, or disputes over profit distribution.
• Strategic differences: Conflicting visions for the direction or growth of the business.
• Breaches: A partner failing to honour the terms outlined in the agreement.
• Misconduct: Fraud, misappropriation of funds, or unethical behaviour by a partner.
• Ambiguities: Poorly drafted agreements that fail to provide clear terms.
• Roles and responsibilities: Disputes over who is responsible for specific tasks or areas of the business.

Disputes between business partners are complex and often difficult to navigate. If you require support with a partnership dispute or wish to put measures in place to prevent one, the Dispute Resolution and Corporate team at Mullis & Peake are here to advise you.