Six tips to avoid partnership disputes2-December-2015 Commercial Disputes By Evatt Styles
Disputes are an inevitable part of doing business, particularly in a scenario where parties agree to work together in order to advance their own mutual
Mr Evatt Styles, Streeterlaw, Senior Solicitor – Commercial Dispute Resolution provides six methods that will help you manage (and even avoid) Partnership
1. The structure
The honeymoon period of any business venture is an exciting time. Parties are often continuously thinking positively and calculating their projected profits.
Structure is often one of the last words to be mentioned, unless the parties have obtained legal advice.
It is important to consider whether the arrangement will be structured via:
- A Partnership;
- A Proprietary Limited company; and/or
- A Unit Trust/ hybrid arrangement.
Each has its benefits and shortcomings and the parties should be aware of their duties, rights and obligations, particularly, when considering becoming
a director of a company.
2. The system
Having identified the proposed structure, common questions raised by parties include:
- How do we decide who is going to do what and when? and
- What happens if my partner/s do not do what they said they were going to do?
Generally, these scenarios are defined either under the Corporations Act 2001 (Cth) (for companies) or the Partnership Act 1892 (NSW).
However, parties may choose to expressly articulate their agreement via documents called Partnership Agreements and/or Shareholder Agreements. These documents
provide clarity between the parties by providing a system for delegating responsibilities, providing accountability and articulating how (and what)
disputes are managed.
3. Keep it simple
To avoid deadlocks or confusion in the decision-making process, it’s important the agreement uses simple, plain English where possible. This ensures that
the parties and signatories can clearly navigate and understand their roles and responsibilities. This also helps avoid a dispute in the future.
If you read your agreement and do not understand something, ask your legal representative to explain it to you. If you do not understand what something
means, it is likely that the other parties may not either. You may be agreeing to a process that neither party had originally intended.
With the introduction of the Personal Properties Security Register (PPSR) in 2012, there is a straightforward method of registering and securing charges
over the company or over any assets via a Security Agreement. For example, if you are an investor of a company, you may wish to obtain a security interest
(similar, to the old concept of a fixed and floating charge) over that company as a secured creditor.
In other words, if there is an insolvency event (the company goes into liquidation) and you have created a security agreement and deregistered your interest,
you may be one of the creditors who will be paid with a priority over unsecured creditors.
5. SOS – dispute resolution
When a partnership seeks external help to resolve a dispute, both parties can become overwhelmed by the choice of arbitration clauses, forms of dispute
resolution and various forms of mediation.
It’s important all parties take the time to understand the differences between mediation, litigation and arbitration. In short:–
- litigation involves airing disputes through the court system;
- mediation involves a non-binding resolution of issues and an outcome by a third party mediator; and
- arbitration involves a decision by a third party “arbitrator” who will hear both sides and make a decision, without generally having to go to Court.
It’s important both parties consider the following questions: How and where do I want to resolve this dispute? And what happens if we do not agree?
6. The exit plan
Streeterlaw’s Mr Evatt Styles said from the very beginning, anyone entering into a business agreement should also have an exit strategy.
“Parties seeking advice in relation to drafting partnership and shareholder agreements need to start with the end in mind,” Mr Styles said. “What do they
want to achieve and how can they get out on their own terms? Some parties often want to avoid litigation and simply exit gracefully.”
Parties should think about their plan and seek appropriate advice from their legal representative to ensure the appropriate strategy can be drafted into
Parties seeking advice in relation to drafting partnership and shareholder agreements need to start with the end in mind
Lessons to be learned
Costly litigation proceedings are often the result of parties failing to adequately document their agreements.
“This lack of clarity results in costly litigation when disputes need to be resolved, these costs involve attempting to re-construct or remember what exactly
what was agreed between the parties and when,” Mr Styles said.
For parties who don’t yet have a written agreement, it’s important you take steps now to reduce your costs and the risk of disputes arising by putting
your agreement in writing.