The Essential Role of Alternative Dispute Resolution in a Partnership Split

A successful and revenue-rich partnership is scaffolded by a healthy and commercially orientated relationship between partners. When this support system collapses, how can alternative dispute resolution (ADR) be used to format an orderly exit?

David Tattersall of Handpicked Accountants shines a spotlight on the importance of introducing ADR as a form of damage control in a partnership split.

Business partnerships are often the solution to a fruitful and profitable commercial relationship between partners. However, not all come to a natural end. The majority of partnership splits are attributed to a relationship breakdown between partners due to irreconcilable differences which can lead to both voluntary and involuntary departures. It is essential to resolve disputes pragmatically and without delay, as the future of the partnership will be at risk.

The extremity of the dispute in question and the fragility of the relationship between partners will determine if alternative dispute resolution (ADR), such as mediation or arbitration, is suitable, or if addressing the matter through formal court proceedings is likely to bring finality to the matter. The circumstances under which a partner leaves will also dictate if the partnership can be revived or must be dissolved.

The governing factor in a partnership is the partnership agreement, which is legally binding and can be used as a handbook to guide partners through major transitions. The basis of a partnership agreement is to establish the roles and responsibilities of partners, in addition to the correct way of leaving a partnership agreement to avoid unexpected disputes.

Partnership disputes and alternative dispute resolution

If informal efforts to resolve a long-running dispute have been exhausted, the matter may be escalated and addressed further through mediation or arbitration. Alternative dispute resolution as a means to remedy a dispute can help address the root of a disagreement and subsequently bring outstanding affairs to a close.

It is essential to resolve disputes pragmatically and without delay, as the future of the partnership will be at risk.

Common reasons for a partnership split can often include personal hardships and general disagreements, or termination as a result of criminal activity or a conflict of interest. As partners are often personally related, dispute resolution must be handled with extra care.

There are many forms of dispute resolution that can provide a safe space for parties to shed their concerns in a controlled environment. The flexibility provided by ADR can help re-establish the lines of communication between partners and help reach a favourable outcome when disputes appear unresolvable. In comparison to legal remedies, ADR can often present a cheaper and less time-consuming solution that is conducted in private to protect the reputation of both partners.

The power of partnership agreements

The exit procedure will be determined by the partnership agreement, including the distributions of company assets, liabilities, and the percentage of profits due to each partner. A partnership agreement is the cornerstone of policy in a business partnership as it addresses strict terms all partners must abide by when navigating a partnership split. The power to expel a partner and terminate a partnership may also be drafted into the partnership agreement, which is vital as it can help navigate future claims.

If a mutual agreement cannot be reached under self-determined terms outside of the confines of ADR proceedings, ADR can be employed to bring order and introduce a neutral party to the playing field. Partners may agree to partake in dispute resolution proceedings with the view to negotiating the future of the partnership and distributions.

The flexibility provided by ADR can help re-establish the lines of communication between partners and help reach a favourable outcome when disputes appear unresolvable.

During mediation or arbitration proceedings, a partnership settlement agreement may be discussed to set restrictions on the activity and interactions of the exiting partner following their departure.

Typical clauses in a partnership settlement agreement may include:

  • Non-compete
  • Non-poaching of staff
  • Non-solicitation
  • Protection of reputation
  • Confidentiality

Implementing such clauses can regulate future business activity to ensure that the exiting party does not enter into an unfair competition or operate to the detriment of former partners. By aligning the trading advantage between all parties, the dispute can be resolved peacefully.

If the partnership continues following the exit of a partner, these clauses can help restrict unsolicited behaviour that could result in existing clients disengaging with the partnership and diverting their custom to the expelled or departed partner.

The Partnership Act 1890

If a partnership agreement is not in place, the rulings will automatically default to that under the Partnership Act 1890.

A partnership can be dissolved under the following circumstances, as governed by The Partnership Act 1890:

  • Fixed-term partnership expires
  • Project fulfilled for which the partnership was formed
  • Bankruptcy or death of a partner(s)
  • Share of profit for a partner charged for a separate debt
  • Partnership deemed illegal
  • Fraud or misrepresentation
  • By order of the Court
  • Partner presents notice to dissolve partnership

If a partner issues notice to dissolve the partnership, the partnership will be dissolved with immediate effect.

The Act also sets out the rules for distribution of assets on final settlement of accounts. Company liabilities must be paid out of profits, next out of capital and then by partners in proportion to their share profits, if necessary. Payment of advances must be repaid and any capital due to partners. Any remaining funds will be divided among the partners in the proportion in which profits are divisible.

 

Creating a direct entrance into dispute negotiations

Upon resolving the dispute, if the partnership continues with the remaining partners or a replacement partner, care must be taken to reassign company liabilities accordingly. If a partnership agreement is not in place, this may be revisited to reduce risk exposure.

Different forms of alternative dispute resolution can be entered into voluntarily by all partners, such as mediation. If mediation is unsuccessful as partners fail to cooperate, arbitration may provide an alternative that can help bring about a legally binding solution. Partnership splits are often the outcome of deteriorated relationships and can therefore blur reason as emotions remain high. ADR can provide a protective platform for negotiations to progress and can ease the separation between commercial partners.

 

David Tattersall, Head of Client Relations

Handpicked Accountants

340 Deansgate, Manchester, Greater Manchester, M3 4LY

Tel: +44 0800 063 9258

 

David Tattersall is Head of Client Relations at Handpicked Accountants, with over 35 years of experience in professional services working in finance, accountancy and corporate insolvency.

Handpicked Accountants is a UK SME support specialist. An initiative created by Begbies Traynor Group, the company operates more than 100 offices across the UK to deliver corporate recovery and professional services to businesses, financial institutions and professional advisers.

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