The nature of running a law firm means being able to handle conflicts. Typically, though, these conflicts occur between clients, not partners. However, partnership disputes are a natural byproduct of operating a business, whether it’s a legal practice or something else.
But without structured guidelines or processes, these partnership disagreements could jeopardize the entire firm. So, it’s imperative to manage these conflicts with early intervention and a calm, measured approach.
The best time to implement these systems is before a conflict arises, so let’s break down some of the most effective ways to resolve partnership disputes.
Understanding Partnership Disputes in Law Firms
A business partnership dispute is a disagreement between two or more co-owners of a business. Sometimes, these disputes are minor and can be resolved quickly. In other cases, they may escalate, requiring outside intervention, such as a neutral third party.
Common triggers for partnership disputes include financial disagreements, strategic differences, personal conduct, leadership clashes, or workload imbalances. Regardless of the cause of the dispute, it’s critical to resolve it as quickly and as seamlessly as possible.
Extended partnership disputes can threaten the entire firm, disrupting operations, inflating costs, and potentially causing fractures among employees.
Graduated Response Options: From Mediation to Litigation
One way to ensure a business partnership dispute doesn’t get out of control is to implement graduated response tactics. Here’s a quick overview of common dispute resolution methods.
Mediation
In most cases, mediation can help resolve disputes before they escalate too far. Sometimes, the mediator can be someone internal from within the firm, but it may be best to seek outside help. This way, the mediator isn’t influenced by personal relationships with the parties involved.
Typically, mediation is a cost-effective option that can resolve partnership disputes relatively quickly.
Arbitration
While mediation between business partners can often yield productive results, it may not be enough for lasting conflict resolution. Outside legal counsel or arbitrators can provide valuable insight and help reach a mutually agreeable solution.
Depending on the circumstances, binding arbitration is legally enforceable by the courts, while non-binding agreements don’t take effect unless both parties sign off.
Compared to mediation, arbitration is more expensive and time-consuming, but it may achieve more effective, long-lasting results.
Buyout Agreement
Sometimes, business partnership issues can’t be resolved, which may mean one partner has to leave the firm. In this case, a buyout may be a practical financial solution, especially if the partnership agreement outlines terms and steps for one partner to buy out the other.
That said, this option can be expensive and disruptive to the firm, depending on the steps involved and the size of the buyout package.
Business Litigation
In extreme cases, partnership disputes may lead to full-blown litigation, with each partner seeking legal counsel to handle the conflict in court. Not only can this option destroy the business relationship and potentially threaten the firm, but it’s also the most expensive and time-consuming method.
Preventive Infrastructure: The Partnership Agreement
Often, the best way to avoid serious conflicts between business partners is to draft a comprehensive partnership agreement. While the details of this agreement can vary from one firm to the next, it should include elements like:
- Rules regarding decision-making and governance for the firm (i.e., who has the final say on certain business decisions).
- Buyout procedures are based on capital contributions and the partners involved.
- Dispute resolution clauses that outline how conflicts will be addressed and when to escalate.
But creating a customized partnership agreement is only the first step. It’s also imperative for partners to check in with each other and communicate regularly. It may also be necessary to document these communications for reference if a problem arises later on.
Alternative Dispute Resolution (ADR) in Practice
Because business litigation is so expensive and disruptive, it’s usually better to focus on alternative dispute resolution methods instead, such as mediation and arbitration.
Mediation is the preferred method, as resolutions can stay private. When necessary, though, utilize confidentiality protections so partners can have open and honest dialogue throughout the mediation process.
If mediation fails, non-binding arbitration can help create finality and offer more practical solutions. In both cases, these dispute resolution methods help preserve the partner relationship and minimize financial risk.
Managing High-Risk Claims: Breach of Fiduciary Duty
Partners have an obligation to protect the law firm both legally and financially. If one partner has breached their fiduciary duty, it’s imperative to document every aspect of the conflict and its resolution. This documentation can include:
- Preservation of internal communication and financial records
- Investigation of accounting practices
- Sending structured demand letters with detailed accounts
While a breach of fiduciary duty is a serious problem, it may still be possible to resolve the dispute internally. Usually, you should only seek injunctive relief if absolutely necessary, as this can both destroy the relationship and, potentially, the firm itself.
Financial Remedies: Buyout Agreements and Valuation
If partnership disputes can’t be resolved with mediation or arbitration, triggering a buyout agreement can still be preferable to business litigation. While a buyout ultimately means removing one partner from the law firm, it shouldn’t be seen or implemented as a punitive measure. Since buyout procedures are part of the partnership agreement provisions, this move can help stabilize the business. Typically, this process involves:
- An independent business valuation to determine the value of each partner’s stake.
- Negotiation of the buyout payment structure, such as quarterly or annual payments.
- Documentation of the ownership transfer in clear, detailed language.
Post-Resolution and Ongoing Governance
One factor that many business owners overlook is what happens after a partnership dispute is resolved. Depending on the situation, you’ll need to take action to ensure smooth operations moving forward, such as:
- Updating your partnership agreement to reflect any changes discussed during the dispute.
- Reassigning leadership duties or re-evaluating workplace roles.
- Communicating any decisive outcomes with employees or other partners as necessary.
- Ongoing monitoring to verify that changes are taking hold and minimize the potential for future conflicts.
To recap, here is the process for how to handle partnership disputes, step-by-step:
- Have an internal discussion regarding the issue.
- Use mediation with a neutral third party to address concerns.
- Escalate to non-binding or binding arbitration to ensure finality of the resolution.
- Trigger buyout or settlement procedures.
- Use business litigation only as a last resort, if all other steps fail.
Again, the best time to review conflict resolution strategies is before a dispute arises. Now may be the time to review your partnership agreement or invest in a workplace culture consultation to create a more cohesive, productive firm.
