Before discussing how to deal with a partnership dispute, it is important to establish whether your business qualifies as a partnership.
Does my business qualify as a partnership?
A partnership is a business carried on by two or more persons in common with a view to profit. Partnerships in Western Australia are governed by the Partnership Act 1895 (WA).
Whether a particular business is a partnership will depend on the intention of the parties, based on all of the facts in each case. Some of the rules that apply to whether a partnership exists include (not exhaustive) that:
- joint ownership of property does not, in itself, create a partnership;
- receipt of a share of the profits of a business is evidence that the recipient is a partner in the business but does not, by itself, make that person a partner in the business.
One of the easiest ways to avoid disputes about whether or not a partnership exists is to enter into a partnership agreement or a contract that expressly excludes the formation of a partnership (this is often found in employment contracts).
How do partnership disputes arise?
Partnership disputes can arise in various ways. Some common areas of conflict are:
- One partner incurring partnership debts or making secret profits without the knowledge or consent of the others.
- The partnership refusing to repay a partner for expenses legitimately incurred on the partnership’s behalf.
- Management or personality conflicts between partners.
- Differences between partners when one wants to leave the partnership and receive payment for its equity in the partnership.
Is a partner breaching its duties or obligations towards the other partners?
Partnerships are established by an agreement between the partners and disputes arise when partners breach the terms of the agreement. The agreement can be in writing, oral, or implied from the conduct of the parties.
The partnership agreement usually sets out the partners’ duties such as each partner’s contribution, share in profits, and authority regarding the partnership.
In the absence of a specific agreement, the Partnership Act will regulate the partners’ rights, duties, and interests. For example, the Partnership Act provides that partners must share equally in the partnership’s profits and losses, and the partnership must indemnify a partner against payments made or liabilities incurred on behalf of the partnership.
In addition, a fiduciary relationship exists between partners, and they must act with the utmost good faith to their co-partners. This implies making full disclosure regarding partnership matters and accounting for benefits received from a partnership transaction.
What steps should I take to resolve a partnership dispute?
Unless urgent action is required, for example, where a partner acts fraudulently or a former partner breaches a restraint of trade clause, the dispute can often be resolved through negotiations, mediation, or arbitration. Once a dispute arises, it is preferable to obtain legal advice on how to best resolve the dispute.
Usually, the first step is to establish if the business has a partnership agreement with a dispute resolution clause. If the agreement has such a clause, the partners should follow the dispute resolution process prescribed by the clause.
Where there is no written agreement or the agreement does not have a dispute resolution clause, the usual steps taken to resolve a dispute are:
- First attempt to resolve the dispute by negotiations.
- If negotiation fails, decide whether to engage a mediator to facilitate the dispute resolution process. This is a quick and relatively inexpensive process compared to litigation.
- If mediation is unsuccessful, the parties can consider arbitration or litigation. Litigation and arbitration are expensive processes and should not be embarked upon without first obtaining legal advice.
What orders can a court make to resolve a partnership dispute?
A court can make the following orders to resolve a dispute between partners:
- An order dissolving the partnership where the partner’s conduct prejudices the business or breaches the partnership agreement.
- An order that the partnership indemnifies a partner for liabilities lawfully incurred on behalf of the partnership.
- An injunction prohibiting a partner from taking specific actions such as breaching the partnership agreement.
If you have questions concerning a dispute between partners or if you have to protect your interests in a partnership you are welcome to contact us to discuss the best way forward.