The role of lawyers in assisting their clients to avoid disputes through poorly negotiated contracts, contract administration and risk management processes has been widely accepted in the business community. There is, however, growing evidence to suggest insufficient attention has been paid to the concept of dispute avoidance within lawyers’ own practices.

Given the costs incurred in partnership disputes, both financial and non-financial, there is a strong case to be made for focusing on dispute avoidance policy as well as exploring the main causes for disputes arising and exploring the common traps and key mechanisms for the prevention of partnership disputes.

It is not surprising that many disputes arising in partnerships do not escalate to litigation. Most law firms partnership disputes are resolved using alternative dispute resolution (ADR) processes based on the traditional Australian Standard on Complaint Handling.

2. A Case for Focusing on Dispute Avoidance

The cost to the partnership of engaging in a partner dispute can be enormous. There are the quantifiable costs of litigation, mediation, legal fees and external counsel as well as consultancy fees, but also the indirect costs of partners engaged in the dispute foregoing the opportunity cost of billable time. Further costs are incurred as the loss of a partner reduces revenue and the costs associated with recruiting a new partner are substantial.

There is also a non-quantifiable component of costs which include possible damage to reputation, loss of partnership and employee focus over the duration of the dispute and its associated uncertainties. The result in lost productivity, together with the potential loss of major client relationships and the risk of integrating partner replacement, can all place considerable strain on the immediate overall revenue for years to come. Whilst it is acknowledged that some partnership disputes may be unavoidable, it may be possible to minimise its occurrence.

3. The Nature of Law Firm Partnerships

Law firm partnerships are collectives of individual lawyers who band together for a common business purpose and in so doing relinquish individual control in return for various benefits. Some of the more obvious benefits come in the form of general financial administration, management and other infrastructure as well as a sense of community and moral support. Within this framework, partners enjoy the benefits of maximizing billing time, enhancing their business development and client relationships whilst minimising on-going business costs by cost sharing and associated efficiencies. Consequently, the partnership is able to develop a specialised level of expertise thereby attracting more talented and skilled individuals to join the practice.

4. Common Causes of Law firm Partnership Disputes

A number of complex factors can impact on the levels of mutual benefits intrinsic to the partnership which in turn can become the cause of disputes. In a survey of 97 partners of Australian law firms who have engaged in various forms of partner disputation, the top five most common causes were:

1. Change in business goals and strategy.
2. Individual partner underperformance.
3. Change in remuneration structure.
4. Change in, or breakdown of, individual relationships.
5. Partnership performance due to expectation including misleading enticement into partnership.

The above causes can be broadly divided into two common themes - those resulting from poorly managed change and those arising from performance related issues.

Change Management
Change, although an essential part of partnership business continuity and success can be the cause of great disharmony. Beer & Nohria in ‘Cracking the Code of Change’ estimate that 70% of all change initiatives in business fail.

Change is the response to (or the anticipation of) a range of internal and external forces. Internal reasons for change within the partnership include change in leadership, mergers and acquisitions, implementation of new infrastructure systems, changes in financial goals and cost reduction. Externally related causes of change are changes in external market forces, legislative and statutory regimes, government and the economy. Other factors include the emergence of new markets and social and generational change.

Change is an inevitable part of business success if not survival. However, change in itself is not the culprit for partnership disputes - it is the unwillingness to adopt and accept change. The key causes of this resistance to change can shed light on the potential solutions to overcoming resistance and thus avoiding partnership disputes.

Causes of Resistance to Change in Partnerships
It is impossible to divorce the realm of human behavioural psychology from the causation of disputes arising from change processes. In this context, it has been generally recognised that resistance to change is principally based on fear. Change can unleash a variety of fears mainly due to a lack of understanding or knowledge particularly in relation to the long term benefits of change for the partnership. High levels of communication employed through the adoption of sophisticated change management techniques has an essential role to play in managing individual partner resistance. The role of effective change management is critical in minimising resistance to change and in so doing addresses the leading cause of partnership disputes.

Change Management Techniques and Dispute Resolution
The key principles applied in the corporate sector may be applied to the law firm partnership environment. The use of partner retreats and other forum for communication is one way of achieving partner ‘buy-in’ to the benefits of implementing the impending change.  

An effective agenda for change management strategy aimed at preventing partnership disputes may encompass:

1. Focus on results not processes by maintaining a goal-oriented mind set.
2. Identifying and overcoming barriers to change such as organisational structures and existing incentive systems.
3. Identifying key influencers within the organisation and educating them about the change.
4. Repeatedly communicating a simple and powerful message to employees.
5. Creation and empowerment of champions and exiting senior managers who will inhibit change.  In most success stories significant changes in senior management were required.  Employee participation in committees will also assist in engendering acceptance.
6. Continuous monitoring of progress by measuring and tracking progress. Where required, additional measures should then be pursued to ensure positive outcomes.

Individual Partner Non-Performance
There are a number of reasons for partner non-performance. McKenna and Maister list the most common as:

1. Partner no longer competent.
2. Poor time management or other inefficiencies.
3. Haven’t kept up in their field and lost market share.
4. Not business savvy and therefore little or no knowledge as to how to succeed.
5. Making a quality of life choice.
6. Fear of failure in trying something new or the next step in career progress.
7. Externally driven reason such as downturn in a specific sector of the economy.
8. Withdrawn and unmotivated pending resolution of major uncertainties such as firm merger discussions.
9. Poorly managed.

Disputes may arise on the basis of non-performance when:

1. There is disagreement over whether the partner has in fact failed to meet agreed benchmarks.
2. There is disagreement over whether the benchmark was fair, reasonable and agreed to.
3. There is disagreement over whether the partner has been given adequate notice or support to rectify the non-performance.

A solid partnership performance program (serving as dispute prevention) in general terms will ensure that all partners:

1. Know what is expected of them, when and how well.
2. Receive regular feedback on their performance.
3. Are provided with adequate resources enabling them to fulfill their business plan objectives.

The above should be underpinned by an environment which provides clear, regular and timely communication strategies and processes. Nowhere is this more evident than in the ongoing role of negotiation beyond the initial formation of a partnership contractual arrangement.

The Partnership’s Failure to Perform
One of the most prominent (often litigated) partner disputes involves partner dissatisfaction with partnership performance as a result of perceived failure to deliver against promises made by the firm to the individual partner(s) during the initial partnership negotiations.

Clearly, the firm’s approach to managing partnership contractual negotiations is inadequate. The partner (s) negotiating on behalf of the firm needs a realistic view of the resources, client base and infrastructure support it is capable of offering the incoming partner(s). This cannot be taken as a given and negotiations should only be entrusted to someone in a sufficiently significant position of management to have the required level of knowledge. He or she should be engaged in appropriate levels of internal discussions to ensure there are processes in place and commitments agreed to by the partnership to deliver on commitments. Further, there is a requirement that following the negotiations, ongoing monitoring continues.

5. The Case for a Clearly Written Partnership Contract

There is little doubt that many disputes arise when the parties’ performance requirements are vague and unspecific and often the result of a lack of awareness or imprecision during negotiations. There is heavy reliance on commercial understanding and the parties’ reputation in negotiating terms of the partnership and little attention to the negotiation of legal terms.

The main requirement to avoid partnership disputes is a clearly written partnership agreement including a dispute handling process, a formalised partner performance and behaviour monitoring system to ensure early detection of potential causes of disputes and minimum performance and behavioural standards set and managed on a consistent basis.

Dispute Avoidance Clauses
The essence of a partnership dispute prevention clause should be to provide communication between the parties about issues as they arise and to consider each other’s views, provide feedback and to reconcile each party’s interests and rights before it escalates into a disagreement.

The underlying principles governing employment relationships in Australia are transferable to partnership arrangements. In particular, the dispute resolution procedure which forms part of the Workplace Relations Act’s Australian Workplace Agreement could be used as a model from which a dispute avoidance clause could be based.

6. Conclusion

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