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We are all optimists at heart. People underestimate their chances of experiencing a divorce, serious illness, or losing their job — even immediately after being informed of the statistical average likelihood of those events.
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Business partner disputes — COVID is adding fuel to the fire
25 June 2021
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13 minute read
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In light of this, it’s hardly surprising that the vast majority of people don’t enter a business partnership expecting it to fail, even though that is the case for up to 80 per cent of business partnerships. People see the potential “good” in a business partnership but conveniently (or inconveniently) close their eyes to the “bad” and the “ugly”.
To compound the above, the COVID pandemic has accelerated the demise of many business co-ownership arrangements. Some of the main catalysts include:
- an increasingly uncertain business outlook;
- snap changes to government restrictions (often with significant impacts on businesses);
- communication via technology being preferred over face-to-face meetings;
- blurred lines between personal and business boundaries with working from home;
- the lack of an overseas “escape” causing business owners to defer holiday plans; and
- challenges with international customer and supplier arrangements.
Below are some cautionary tales in co-ownership based on what I have seen in my work as an Accredited Specialist in Commercial Law.
- Personal relationships
The main cause of co-ownership disputes is a relationship breakdown.
In the past, I have acted for clients who were forced to take out intervention orders against their violent business partners. I have acted for business partners who had their car keyed by the opposing party. I’ve seen death threats made against my clients. The husband of one of my clients was even called by a disgruntled business partner who claimed my client had committed infidelity (although this was easy to prove as a lie). Suffice to say, things can get messy in business partner disputes.
It is remarkable how often business partners disregard the personal side of the dispute, and focus myopically on legal rights and obligations. In my experience, it is rare to come across a co-ownership dispute that is solely concerned with rational, commercial considerations – there is always an emotional element that can neither be described nor solved on paper alone.
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My recommendation is to not disregard the personal aspects of the dispute, but to investigate them to see if they unveil a solution (or potential leverage) that otherwise would have been overlooked.
1 Tali Sharot, The Optimism Bias: A Tour of the Irrationally Positive Brain (Pantheon Books, New York, 2011), 189.
- ‘There’s no way they’ll do that!’
One fatal mistake that you can make as a co-owner is making assumptions about what your business partner will or won’t do. In one case I’ve come across, Jerry* was looking to remove an obstructive co owner, Tom*, from the business.
Tom made an assumption that Jerry would not under any circumstance give up one particular client relationship (Mr Simpson)*. The negotiations were structured by Tom’s solicitor in a way that provided an absurdly beneficial deal for the partner who gave up the client relationship with Mr Simpson.
The strategy used by Tom’s solicitor backfired. Jerry made it clear that he would relinquish that one client relationship with Mr Simpson given how favourable the other terms were, and accepted the offer put forward by the other side.
The other side was shocked - they tried to take the offer back, but they were unsuccessful in doing so. A single incorrect assumption completely shifted the landscape and created an exceptionally good exit for Jerry, and an exceptionally bad exit for Tom.
The upshot of this cautionary tale is that you should never assume your opponent’s intentions or investment in the business. There is also immense value in having a strategic advocate who can see the forest for the trees in these disputes (particularly when there is a lot of emotion involved).
- Theft of company property before the business is dissolved
The theft of company property by a co-owner is something that occasionally occurs. Company property that might be stolen includes cash and business assets. It also gets precarious from a legal perspective where the company’s intellectual property or client list is taken by the exiting partner.
It is rare that a co-owner can lawfully take it upon themselves to draw funds out of the business bank account or take a company asset with them (even if they originally contributed those funds or that asset). Despite this, I’ve seen situations where cash is shamelessly and openly ripped out of the company bank account, more covert situations where company assets are leveraged to indirectly obtain personal benefits, and many things in-between.
So, don’t get tempted to take assets out of the business (even if you contributed them in the first place) and ensure appropriate protections are in place from prevent any other business partner from doing so.
So, what do I do when a dispute arises?
A few words of advice for when a dispute arises:
- Tip 1: Understand the boundaries. The earlier you get legal advice to understand the boundaries of the situation, the better. Business partners often find themselves in a precarious legal position when they engage in conduct which breaches their legal obligations.
- Tip 2: Remember, it’s business. Try to remove any personal emotion or animosity from the situation. Although there will no doubt be important personal issues to resolve because of the dispute, you should be careful to not jeopardise your chances of a relatively smooth exit by losing your cool.
- Tip 3: Keep in mind what is at stake. Business partners often get caught up in fighting ‘on principle’ and lose sight of the consequences of doing so. Failing to strategically navigate the dispute can create unnecessary pain.
- Tip 4: Lawyer up. Find a lawyer who specialises in this space. Benefit from their experience and insights. Allow them to help create a separation between yourself and your business partner.
With my clients, the focus is on developing a clear strategy and executing it meticulously. The strategy naturally needs to factor in the legal boundaries, the unique pressure points, the potential upside and the consequences (e.g. time, cost, stress and distraction).
Scott McKenzie (director at Velocity Legal)
With contributions from Robert Wilson and Fiona Bucknall
Scott is an Accredited Specialist in Commercial Law (Law Institute of Victoria). Scott has been recognised as a leading commercial lawyer in Australia. He is held in high regard for his strategic mindset and is renowned for being technically sharp. One of Scott’s core focus areas is complex business co ownership matters (including disputes).
*Client names, identifying details and circumstances have been changed.
Scott McKenzie, director, Velocity Legal
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