A lot of small businesses or partnerships are similar to family. They get together, they’re excited, they start a business. Sometimes the potential partners are friends and sometimes relatives, but they are both excited about their venture. They work hard for many years and then something goes wrong. The question then becomes how does conflict in partnership disputes get addressed?
In a traditional model, each side hires an attorney and then they proceed to court. Or they try to negotiate and if their negotiations fail, they seek a court settlement. A lot of small businesses, however, cannot really afford to have lawyers representing the partners and do not want to create a hostile environment during adversarial negotiation or litigation. They would prefer to settle their disputes in such a way that there is the possibility of having a continuing relationship between the business survivors.
Mediation is a very good method for dealing with these disputes. Mediation, in general, works very well where there is a continuing relationship between the parties, where each party values the other in some way and wants to save the relationship at some level.
A lot of businesses start out by forming a corporation. A lawyer helps them form it and draft a standard shareholder agreement or, if it is a partnership, a partnership agreement. They often do not have separate lawyers negotiating or representing them and don’t anticipate and think through all the situations that they may find themselves facing in the course of their business.
Shareholder agreements and partnership agreements are fairly standard. If you have two partners, they have 50/50 decision making rights. Because they know each other and are friends from the start, there is often no mechanism in the agreements for what happens if there is a deadlock on a decision. Similarly, partners often fail to write down what happens if one of the partners dies or becomes disabled or there is a decision to close the business. Is there some sort of a succession plan? Are there any assurances that the partners should have to make, regarding the business’s standing if one of the partners becomes ill? Very often these things, especially with small businesses, do not get thought through and so when something unexpected happens, there is a problem.
I had a case where there were two working partners who were good friends. They owned a bagel shop together and both worked very hard. It’s a small business, really dependent on both partners working. They had a standard shareholder agreement that was basically boilerplate and didn’t provide solutions. Sadly, one of the partners became terminally ill. At first, he was able to work, but when he wasn’t able to, the other partner took on the extra load, while continuing to pay the share of the ill partner to him because she felt bad about his situation. The partner’s family members started to work in his place, but they weren’t really such good workers and it wasn’t clear what their function was; whether they were employees or whether they were partners. In other words, it was a real mess and went badly for everyone.
In a situation like that, one option is to go to an attorney who will review the shareholder agreement. Ordinarily their response is to say, “Look, you don’t have anything in this agreement that covers the situation. You need to renegotiate and add necessary language.” Unfortunately, if one of the parties is incapacitated, renegotiating the deal may be tricky. The lawyer may then advise you to go to court, close the business, dissolve the partnership, etc. in order to get the dispute resolved.
A much better alternative, is to come to mediation. The mediator who is sensitive to the actual issue between the parties, will have the flexibility and creativity to think outside the box and not just review the situation to determine what is enforceable and what should be litigated. In that process, a new arrangement could be worked out by the parties, their representatives or successors. Parts of the Agreement could be re-negotiated, additional provisions could be placed or insurance could be purchased. The disputes can be successfully resolved, and the business can be reorganized in such a way that the partners remain in a good relationship while the business survives and stays profitable.
When it comes to partnership disputes, I believe that mediation should always be the first step for small business owners and partners. Whether the conflict is of their own doing or whether it is caused by something unfortunate happening outside of their control, mediation will allow them to resolve the conflict in the best way for everyone.
The other way to effectively address this is at the onset when the business is being started. I wrote a blog called Mediation: Helping Achieve Clarity in a Business Formation Process. about how to mediate a partnership or business agreement when the business is started. If that is done, and an agreement formed in a very comprehensive, thoughtful way, then all of these eventualities could be accounted for so that these issues do not arise.
Even if the agreement was a standard boilerplate agreement and didn’t account for unforeseen eventualities, if there is a conflict, with mediation there is still a chance to get it resolved out of court which is definitely the best option.
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The Law Firm and Mediation Practice of Alla Roytberg, PC