Protecting Your Interests During Business Partner Disputes

Managing a successful business can be stressful: the stakes are always high, decisions about the business’s future are rarely easy, and business owners are required to be continuous problem-solvers as issues with suppliers, clients, or employees arise. In these challenging circumstances, it’s no surprise that business partners do not see eye to eye all the time. However, when disputes between business partners start to threaten the success of the company, the conflict should not be left unresolved. If you’re facing a business partner dispute that has become increasingly contentious, it’s time to explore the steps you can take to protect both your interests and those of your business.

Consult Your Partnership and Management Agreements

Before you resolve to take any action against your partner, it’s important to consult the text of your partnership and management agreements to confirm whether their conduct amounts to a breach of contract. Not all business partner disputes involve a breach of contract, partners often simply disagree on which direction the business should take, but both are acting from a place of concern for the business’s interests and simply have a difference in commercial judgment. In other cases, however, one partner is acting against the long-term interests of the enterprise for their own financial gain. This kind of conduct would amount to a breach of fiduciary duty and would give rise to a legal claim against the partner in breach.

It may also be the case that your partner is not breaching material provisions of your management agreement, but rather that you have both developed a certain way of doing things that does not conform strictly to the letter of your agreement. Taking a fresh look at your and your partner’s legal obligations will give both of you clarity on how you should be managing your enterprise and how future disputes can be avoided. If you are unsure whether your partner’s conduct could be a breach of your partnership or management agreement, it is a good idea to consult with an experienced business law attorney who can help you interpret the agreement in light of the facts.

Assess The Threat To Your Enterprise

The standard advice to those facing a business partner dispute is to attempt to resolve the matter through mediation or negotiation. However, this advice is not appropriate in all cases. For example, if you discover that your business partner has been sharing trade secrets with another enterprise that they have a financial interest in, has appropriated for themselves a corporate opportunity that rightfully belongs to the business, or has been stealing corporate assets, negotiation and mediation are not appropriate. There is no negotiating with someone who has violated some of the most fundamental ethical rules of corporate governance: if what you are facing is less a good-faith business partner dispute and more akin to corporate sabotage, you need to act quickly to launch proceedings to protect your interests and business as a whole.

Attempt Mediation

In cases where your partner is not in egregious breach of their fiduciary duties, but there is nevertheless significant contention between you, it is in both of your interests to attempt mediation. Mediation is especially appropriate in circumstances where you have an existing personal relationship with your business partner (for example, they are a close friend, sibling, or spouse). Mediation will allow you to attempt to resolve your business partner dispute with the help of a neutral third-party mediator who will bridge communication gaps and help you to find common ground, to reach an amicable resolution that also preserves the underlying relationship.

Mediation often involves an element of negotiation as well, as the mediator explores potential areas of compromise to help resolve the dispute. Mediation is ultimately in the best interests of your business, as business partner litigation can be highly disruptive to the day-to-day operations of your enterprise and is also very expensive.

Decide On An Appropriate Dispute Resolution Forum

In cases where mediation has failed, or where it is not an appropriate dispute resolution mechanism given the gravity of your partner’s conduct or the nature of the dispute, you need to prepare for litigation. Litigation is lengthy, expensive, time-consuming, and often emotionally exhausting, so it should ideally be treated as a last resort. If you are contemplating litigation, it is crucial that you carefully examine your partnership agreement to check whether it includes an arbitration clause. If so, the courts will not have jurisdiction over your dispute, and you will need to initiate arbitration proceedings instead.

Even if your agreement does not require you to pursue arbitration, it may nevertheless be the best way to resolve your business partner dispute: arbitration is quicker than court litigation, involves less formal procedures, and, importantly, allows the dispute to be kept confidential as the documents filed in the proceedings do not become part of a public record. Particularly where trade secrets and sensitive IP is involved, it will be in your long-term interests for the proceedings to be confidential. Arbitration also allows the parties to the dispute to select an arbitrator with a strong commercial background, making them a more appropriate adjudicator than a civil court judge who may not have much commercial experience.

Know When It’s Time To Exit

In some circumstances, a business partnership cannot be salvaged, but litigating the dispute is also not an option, as it may result in the entire enterprise going under. In such a scenario, the best solution may be for one or more partners to exit the business. Exiting a business can bring up its own issues, especially in relation to the valuation of the business and each partner’s share. Appropriately qualified accounting and legal professionals must be consulted to ensure a smooth dissolution of the partnership that protects the long-term success of the business while also ensuring that each partner receives their fair share.