How to handle disputes between business partners

As the proverb goes, “All is fair in love and war” and this is particularly applicable to disputes between business partners. Disputes between business partners have big stakes – the parties have usually worked hard to establish a business, and there are usually business assets and future earnings at risk. Depending on the financial structure of the business, personal assets can also be on the line.

Understanding common causes of disputes

When it comes to the operational mistakes we see made that also lead to dispute, these often include:

No incorporation or the wrong legal structure

The size of your business will often dictate what legal structure you use – i.e sole trader, partnership, company, family trust and the like. However, many business owners forget that using the incorrect legal structure for their business can place them in a position where they may be personally liable for the debts of their business, and more importantly that they may be placing their personal assets at risk by making them available to creditors of the business. When the economic climate gets tough or tight and other businesses around you start to struggle, their failures can so often lead to your own failure or significant loss to your business. Having the right legal structures in place can so often minimise or reduce the risk – getting the right legal and accounting advice when setting up, and then reviewing as the business grows are both critical.

No written agreements between business owners

Often we come across owners who go into business with a family member or a mate, believing that if there is ever a problem then because they are ‘family’ or ‘mates’ they will be able to sort it all out. It is our experience that this, more often than not, could not be further from the truth. There needs to be a written agreement between business owners dealing with a long list of issues including matters such as who owns what, how profits are to be distributed, how the business is to be managed, whether the business owners will have an active role in the business, what happens if one business owner wants to exit the business and how is their share of the business valued, what happens if the business owners want to bring in another business partner, what happens if the business partners are in dispute, etc. Unless these matters are addressed at the beginning while everyone is still getting along with each other, there is little or no hope of being able to agree on these matters after business owners begin to fight. With the benefit of hindsight, you will be grateful that you properly documented your business agreement with those you’re in business with.

Not having a clear understanding of the consequences of personal guarantees

Do you ever ask yourself if you are asked to provide a personal guarantee for a debt of your business, whether you should be giving that personal guarantee or not and what the extent of your personal liability may well be? Some personal guarantees are limited to an individual transaction but others may be unlimited due to a line of credit being extended to the business, meaning that rather than being liable for an amount of say $50,000, you may be liable up to the limit of the line of credit, which could be several times this amount. It could be that you need to consider how you hold your personal resources, such as your home, shares, investment properties or other assets before signing a personal guarantee. If you are what is colloquially referred to as “a person of straw” then it is likely all of these assets are not held in your name and if a personal guarantee is enforced against you, then there is nothing for the creditor to take. Likewise, if you seek personal guarantees from the directors of companies, do you seek any reassurance about what assets may be held personally in those directors’ names or do you wait to see if they are women or men of straw when you seek to enforce the guarantee? We have seen many personal guarantees fail because the guarantors have no assets in their own names.

Having no measures to protect against staff leaving your business and taking clients with them

What happens if an employee leaves your business and proceeds to take a significant number of your clients with them to another business? This can be prevented with a properly drafted employment contract that prevents your employees from taking clients with them or from working for clients of your business for a set period of time after they leave your employment.

Not protecting the secret sauce of your business

What protective measures do you have in place to protect the intellectual property and trade secrets of your business? Is there anything in your employment contracts that prohibits your staff from stealing your valuable intellectual property and trade secrets in order to work for the opposition or to set up their own business? If there is something contained within your employment contracts, it is much easier to enforce these terms against a former employee.

Getting caught up in the moment

When a business opportunity, partnership or deal comes up it can be exciting and often parties are keen to move fast to seal the deal as they jump ahead in their minds to implementation mode and what this could mean for their bottom line. Too often we see businesses who have drafted and signed contracts too fast without the right consideration or advice, particularly when it comes to the exit clauses or escape hatches they never really think they will have to rely on. Often these are the most important elements of the contract because if the deal sours these are the clauses you’ll be so thankful to have locked away. Take the time to work with us to plot out a number of scenarios and have the right legal life rafts in place.

Before diving into resolution strategies, it’s essential to understand the common causes of disputes among business partners:

1. A misalignment on vision, goals or ways or working: Partners may have conflicting ideas about the direction of the business, their roles, who and how to get the job done.
2. Disagreements over the dollars: Issues related to profit distribution, investment responsibilities, or expenses are common and are often the key reason behind frictions.
3. Management styles: Different approaches to decision-making and management can cause tension.
   Stepping out of line, or a breach of agreement: If one partner feels that the other is not adhering to the terms of an agreement, disputes can arise.
4. Interpersonal conflicts: just as they would on the home front, personal differences, communication issues, or a lack of trust can strain relationships.
   Recognising the root cause of a dispute, and nipping any in the bud early are crucial in determining the best course of action.

The framework

The best way to avoid disputes is to be proactive and make sure there is a written agreement in place. A lot of businesses are started on a handshake agreement, but this is definitely not the way they should stay! Whether it’s a partnership agreement, a shareholder’s agreement or a constitution, getting the right documents in place to govern the business, set out a dispute resolution mechanism and protect each party’s rights in a fair way is essential to avoiding disputes.

If there’s already a dispute on foot, the first thing to do is to be sure of your rights under the above documents. If you’re unsure, please give us a call and we can give you some advice on what rights and remedies are available to you.

The next step is to set out your strategy to resolve the dispute. The usual methods include negotiation, mediation, arbitration and litigation. Hybrid models that combine two or more of these methods can also be used effectively.

Dispute resolution mechanisms

If you have reached an impasse with your business partner, it may be time to seek legal advice. Here at Solomon Hollett Lawyers, we are able to provide you with legal evaluation to help you understand your legal position and advise you on the best path forward.

Our first approach is always negotiation. We can assist you to identify the issues, draft clear and respectful communications to the other party setting out those issues and make offers to negotiate to resolve the dispute in a collaborative manner. These first communication and negotiation between parties in dispute are useful mechanisms to narrow the issues in dispute in a cost-effective way and explore the boundaries of what terms would be acceptable to both parties involved.

Mediation is an alternative form of dispute resolution in which an independent third party (known as the mediator) is appointed to facilitate negotiations between the parties with a view to reaching an agreement – with the goal of a mediation being to reach an agreed settlement on some or all issues between the parties. The mediator has no power to determine any of the issues between the parties and can only seek to assist the parties to reach an agreed outcome or position. Mediation is a popular method for resolving disputes without resorting to litigation as it is confidential, cost effective and preserves business relationships on an ongoing basis. A trained mediator takes a neutral role in facilitating discussions between the parties, identify issues and explore solutions. The outcome is usually a binding agreement that both parties are on board with.

Mediation is often confused with arbitration, but they are very different things. Arbitration is an alternative method of dispute resolution in which an arbitrator is appointed to hear evidence and decide a case rather than a Court appointed judge. The decision of the arbitrator is usually binding, which offers a definitive resolution to the dispute but gives the unsuccessful party restricted grounds to appeal against the findings of the arbitrator.

Litigation should always be a last resort. There is significant uncertainty with litigation, and it is usually time-consuming, expensive and can damage relationships beyond repair. The first step is to consult with Solomon Hollett Lawyers, so that we can provide you with advice on identifying which Court your claim would be filed in, as well as outlining factors to consider before commencing proceedings such as time frames, potential costs and benefits.

A path forward in business disputes

Disputes with business partners can be challenging, but with the right approach, they can often be resolved amicably and effectively. Understanding the legal framework surrounding partnerships, engaging in open communication, and considering alternative dispute resolution methods are crucial steps in navigating conflicts.

Always remember that preserving relationships should be a priority, as the success of your business relies on collaboration and mutual respect. If disputes escalate, don’t hesitate to seek professional legal advice to protect your interests and ensure a fair resolution. By being proactive and informed, you can turn challenges into opportunities for growth and stronger partnerships.

We often see what we call a ‘commercial divorce’ where business owners, for whatever reason, end up in dispute with one another or decide to part ways. We’re on hand to advise once we understand your particular circumstances, the issues at hand and to understand your end game and the outcome you’re looking to achieve – we’ll work with you to get you to the best outcome, and best protect your assets you’ve worked so hard to build.