What To Do When Conflicts Arise Between Business Partners

The Article is written by Asia Law Network. Asia Law Network has the largest network of lawyers in Singapore with more than 25% of Singapore lawyers in its network.

Business partner conflicts are common

Conflicts between business partners aren’t uncommon. While most disagreements are typically quickly resolved with some discussion, there are some more serious disagreements that can threaten the partnership and therefore the whole business. These disagreements can potentially stall or damage the business.

There are many reasons why conflicts arise between business partners

“We can complain because rose bushes have thorns or rejoice because thorn bushes have Roses.” – Abraham Lincoln (16th US President 1861 to 1865)

 Very often conflicts arise because different people have differing views/opinions/perception of what business they get themselves into, how the business is to run, what each is to get out of the business.

In another Asia Law Network’s article, Patrick Dahm lists the most common causes of business partner conflicts that he sees in Singapore and that includes, when your business partner:

1. used his company shares as collateral for a bank loan

2. is ‘moonlighting’

3. undervalues your contributions

4. is facing life-altering events

5. passes away and is replaced by his heirs

You can read the full article here.

Often, problems and conflicts arise because partners had not had the opportunity to articulate clear Objectives, Directions and Roles & Responsibilities before embarking on the partnership and over time, start to drift with all aspects/angles of the business operations.

Reasons for business partner conflicts could well include:

1. No clear separation of responsibility

2. Disagreements on how resources should be used in the company

3. A partner is doing less than his or her fair share of work

4. Different visions and directions for the company

5. One of the partners is secretly competing with the company on the side

6. Differences in management styles

What should you do if you find yourself in a conflict with a business partner?

 When a party finds him/herself in a situation of conflict, it is often critical to pen down full details of what transpired, put together all the relevant documents. If one takes the time to set these out (preferably in a table of chronology), that party may form some clarity on the issues (which may as a result of the exercise seem less serious than it may be).

Whether steps below are taken or if these do not work out, at the very least the material put together could be used as the foundation for reference taking the matter forward.

 There are a few steps you might follow if you find yourself at an impasse with a business partner:

1. Try to resolve the conflict internally between one another – review your partnership agreement

2. If not able to resolve conflict, get advice to understand your options (litigate, negotiate or mediate?)

3. Understand the implications of each option

4. Attempt negotiation and mediation first

5. Decide if you want to litigate and outline your ideal outcome

 

Try to resolve the conflict internally

Even a well-drafted partnership agreement may not exactly suit how the business has evolved over time. It is a good idea to have a sit down with your business partner to review your partnership agreement and try to resolve these business partner conflicts. It may be a good idea to refine and update your partnership agreement at this juncture if you are able to resolve these conflicts mutually.

If you both decide that the partnership is no longer tenable, you and your partner will need to decide if one wants to buy the other party out, or perhaps both partners will sell to a third party. Both partners need to agree on this next step for this to work.

You might not want to react and make decisions if tensions are running high due to the disagreement.

Don’t procrastinate resolving a serious partner disagreement

 You might not want to react and make decisions if tensions are running high due to the disagreement. You also don’t want to try to bury it under the carpet and hope that it resolves itself. Get your partner out of the office in a face-to-face meeting. Block enough time for a serious conversation and prepare for that meeting.

If that doesn’t work, it may be time to get advice 

If you’re not able to resolve the conflict with your partner, it maybe time to get legal advice to understand your options. You will want to carefully review your partnership agreement with advice from a lawyer who is experienced in these matters to know where you stand and what your options are.

You will want to understand the risks, costs and other consequences are for each of your options. Your decision can have an impact on the morale of the company, the business itself, investors and many other stakeholders. It can be further complicated if your partner is a family member.

Your decision can have an impact on the morale of the company, the business itself, investors and many other stakeholders.

Attempt negotiation and mediation 

Most of these disputes and conflicts are settled out of court without litigation. It is likely less disruptive and less expensive. You may want to hire an experienced mediator to help with this process. Negotiation with a mediator also has a significantly better chance of settling this dispute. The mediation process is confidential.

In some cases, the relationship between the business partners might still be salvaged. If that isn’t possible, it should be apparent early in this process. You and your partner should use this opportunity to work out the best way to separate without risking the business.

If negotiation or mediation still does not work, you may be left with litigation as the only option left.

Litigation – a final resort 

If negotiation or mediation still does not work, you may be left with litigation as the only option left. However, before you embark on litigation, think through the impact it will have on your business. While negotiation and mediation offer an opportunity for a solution that keeps the business intact, litigation in court is likely to mean that the likely outcome will not leave the business unscathed.

It may be very damaging to have these disagreements out in the open and have suppliers, investors, customers, and clients lose confidence in your business.

What is the outcome you are seeking if you litigate? What do you want out of it? Are you seeking to wind down the company or force your partner to exit?

You’ll also want to know other questions such as:

– What are the chances of you winning?

– Figure out how long it will take – it might end up being a complex, time-consuming and draining affair

-Estimate how much it will cost to litigate – is it worth it, factor in the damage to the business

What to cover when you speak with your lawyer about a conflict between business partners

As the majority of parties may not have dealt with a lawyer before, here are some important areas you will definitely want to cover and discuss with a lawyer should you need legal advice from one.

– What are the legal positions/issues – including what is the Cause of Action (if any) against the other party?

– What are the potential dispute resolution mechanisms in your case? Which would he recommend?

– Are there any legal issues that complicate the matter/claim?

– If the matter proceeds to court – which court would it commence in? How long would the whole matter take? What the different stages/steps both in and outside of Court?

– What would the Legal Fees potentially be? Can these fees be capped or controlled?

A better strategy is to proactively head off risk of huge conflicts

Partners should sit down and work through articulating and aligning on major issues such as the company’s vision, goals, customers, how they will run the business and how decision-making will happen.

Ideally, this should have happened before the partnership is formalized and then captured in writing in a well-drafted partnership agreement.

Ideally, your partnership agreement should cover:

– If and how much capital each partner is contributing

– Each partner’s roles, responsibilities, duties & obligations

– Compensation for each partner

– Mechanisms and procedures for decision-making

– What will happen in the case of business partner conflicts

– Lay out when and how the partnership can be dissolved

It is recommended that you hire an experienced lawyer to help you draft or review your partnership agreement

Many business partner conflicts can be avoided or quickly resolved if the partners had invested in a well-drafted partnership or founder’s agreement so your starting point is to work through all these issues before you start a new endeavor together. It can be uncomfortable to discuss these scenarios and details, but it is important to do so because it reduces the chances of a conflict by adding clarity for each of your partners and reduces any ambiguity if and when disputes do arise.

Partners should then have frequent discussions thereafter to make sure that none of the partners are straying too far.

To summarise:

1. Get a well-drafted partnership agreement before starting a new endeavor with a partner

2. Establish open and constructive communication

3. Regularly review your agreement

It is recommended that you hire an experienced lawyer to help you draft or review your partnership agreement to make sure that you don’t overlook including specific items and help work through working each of these with clarity.

“Peace is not the absence of Conflict, it is the ability to handle conflict by peaceful means.” – Ronald Regan (40th US President – 1981 to 1989)

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