When business partners reach a point where they cannot resolve their disagreements internally, their concerns may end up in court. Judges are sometimes called upon to resolve partnership disputes when negotiation, mediation and other forms of alternative dispute resolution have failed. Understanding what this process involves—and what judges consider when making their decisions—can help business owners prepare for the possibility of litigation.
Partnership disputes often involve claims of breach of fiduciary duty, disagreements over financial management, allegations of misconduct or conflicts about business direction. If a partnership agreement does not clearly spell out how to handle such disputes—or if the agreement is silent or vague—judges must look at the facts of the case, the intent of the parties and the applicable state laws to determine a fair outcome.
The basics
One of the first things a judge will examine is the partnership agreement itself. This document should serve as the foundation of the business relationship in question, and its terms can greatly influence the court’s decisions. Judges will look at how profits and losses are allocated, how authority is shared and whether there are any provisions for resolving internal conflicts or removing a partner. If the agreement is poorly drafted or nonexistent, the court may rely on state partnership laws, which may not reflect the intentions or expectations of the parties.
Judges will also evaluate each partner’s conduct. If one partner has misused company funds, acted in bad faith or otherwise failed to uphold their responsibilities, the court may rule in favor of the wronged party. On the other hand, if both parties share responsibility for the breakdown in the partnership, the judge may look for a solution that preserves business operations while protecting each party’s legal rights.
Possible outcomes can include monetary damages, court orders for dissolution of the partnership or judicial intervention to force a buyout or sale of the business. In some cases, the court may appoint a receiver to manage the business temporarily.
Litigation can be costly and disruptive, so it is usually a last resort. However, when a judge does become involved, it’s important to be prepared.