Partnership disputes can arise for any number of reasons and can seriously disrupt business operations. One of the trickiest situations is a deadlock. These standstill situations are surprisingly common, especially in businesses owned and run by friends and family. If not handled carefully, they can cause a company to fall apart.
Understanding Partnership Deadlocks
Deadlocks occur when partners disagree on something major related to the business and can’t find common ground. Since the partners are unable to move forward until the issue is resolved, they are essentially in a gridlock situation that can effectively paralyze operations. Deadlocks often stem from disputes over money, business strategies, or personal differences.
If you encounter a deadlock with your business partner, knowing the legal ropes is key.
Start by reading over your partnership agreement. A well-written one will spell out how to handle deadlocks through various outlets. If the agreement doesn’t address deadlocks, you’ll have to rely on your state’s laws for guidance or get help through the courts.
Alternative Dispute Resolution (ADR)
Alternative dispute resolution methods can prove effective in resolving partnership disputes through mediation and arbitration. In mediation, a neutral third party (known as a mediator) helps the parties reach a voluntary, negotiated resolution. In arbitration, the parties select a neutraul third party (known as the arbitrator) to make a legally binding decision.
Both methods are generally quicker and less expensive than litigating the matter in court.
Buy-Sell Agreements
A buy-sell agreement can prove highly valuable if you run into a deadlock. This type of agreement outlines the terms for when one partner can buy out the others if things go south. It can help to quickly sort out hard-to-resolve issues while allowing the business to continue operating smoothly and without interruption.
That being said, buy-sell agreements need to be carefully drafted and should include clear procedures and fair methods for valuing the business. Having such an agreement in place ahead of time — ideally when you form the company — will provide peace of mind and could save everyone involved a lot of trouble later on.
When the Courts Get Involved
Sometimes, no matter what business partners do, they just are unable to resolve the issue. In these cases, a judge may need to step in and break the deadlock. The courts can order a partnership to terminateappoint someone else to run the business, or even order the partners what to do to fix their problem.
Keep in mind that going to court is a slow and expensive process, so it is best to consider this as a last resort. You will need to consider whether the benefits are worth the time and costs involved.
Stopping Deadlocks Before They Start
It is much easier to prevent a deadlock than to untangle one.
Throughout the course of their working relationship, partners should speak openly and frequently to tackle any issues that arise before they have a chance to escalate. Setting clear steps for decision-making and conflict resolution is the best way to prevent a deadlock from happening in the first place.
It is also a good idea to keep your partnership agreement up to date to reflect your organization’s evolving needs. Furthermore, strive to create an atmosphere where all partners feel heard and valued within the company.
Dealing with partnership disputes can be challenging, especially when there is a deadlock involved Understanding your legal options and trying different means of resolving conflicts can go a long way towards avoiding disputes and helping your business to thrive.
Get Help Breaking a Business Deadlock
If you find yourself facing a deadlock with a business partner, contact The Kohan Law Group.
We work with business owners in Suffolk and Nassau County in Long Island, the five boroughs of New York, and Westchester and Rockland Counties. Our experienced attorneys can provide the guidance and representation needed to help you resolve your disputes effectively.