What to consider with litigating partnership disputes

Often the best way to resolve a dispute between partners is through negotiation or another means of what is called “alternative dispute resolution” such as mediation. This is a confidential process where a neutral third party will try to facilitate the parties in reaching a voluntary resolution to their dispute.

However, you may reach a point where a deal seems impossible, or there may be an urgent need to prevent damage being done, such as the dissipation of partnership assets or misuse of confidential information by a partner.

In these cases, there may be no option but to commence court proceedings. The court has a number of powers which can include making declarations about legal matters, ordering someone to deliver up property, or even winding up a partnership and deciding how the proceeds should be split.

Be prepared

Partnership disputes can be very complex, legally and factually. Even if there is no other realistic option but to issue court proceedings, it is important to be properly prepared.

You will need to understand the legal position – for example, whether there is a written partnership agreement, or an arrangement governed by the Partnership Act 1890. You’ll also need to understand the powers of the court, so you can understand what you can and cannot achieve from the litigation.

It is also important to check that there is no express agreement to refer any disputes to arbitration. If there is, the court may not have the power to decide the case. Arbitration can be similar to the court process in many ways and it provides a binding outcome, but it has some key differences. For example, arbitration is private, and it may be quicker and simpler – but there may be no opportunity to appeal.

Before starting proceedings, a formal “letter of claim” should be sent outlining the legal and factual basis of the claim and what you will ask the court to do. This gives the defendant the opportunity to understand the claim against them and set out any matters in dispute. This process is intended narrow down the legal and factual issues in dispute and may lead to a resolution. Failure to comply with this process can lead to costly sanctions.

If it is necessary to issue a claim, it is essential that the court documents are properly drafted to set out the key elements of your case and make sure that the court would be able to grant what you are asking.

Be flexible

Taking a court case to trial can take 18 to 24 months, sometimes longer. During this process, there will be lots of steps to take to prepare the case for trial. These include “disclosure”, a process in which the parties exchange relevant documents in their control – including those documents which may harm their case – as well as the exchanging of written witness statements. There may also be expert evidence.

During this time, evidence may come to light which changes the strength of your case.  There may also be external changes affecting the partnership business. It is essential to be prepared to adapt and consider all options as the dispute progresses. For example, do you need to make any applications relating to evidence, or even amend your claim?

Keep considering settlement

Issuing court proceedings does not and should not prevent the parties reaching a settlement.  Most Court cases settle before trial, not least because of the risks of having to contribute to the other party’s costs if the case is lost.

Once court proceedings are issued, a party can no longer bury their head in the sand and may choose to come to the negotiating table. Evidence which comes to light may also force a party to reevaluate their position and look to negotiate.

Trying to settle a court case is not a sign of weakness but a sensible commercial decision – the court can even give costs penalties to a party who unreasonably refuses to engage in settlement. Mediation after the court case has started is a common step.

The parties can generally negotiate a much more creative and “win-win” settlement than the court can impose. Try to take the emotions out and take an objective view on how the case could be settled.