Built to Break: Five Omissions That Turn Business Partnership Agreements into Future Litigation
Photo: William P. Gottlieb / Adam Cuerden, Public domain, via Wikimedia Commons
Partnership agreements are usually drafted in a spirit of optimism. The business is new, the partners are aligned, and nobody wants to spend billable hours discussing what happens if it all goes wrong.
That optimism is precisely the problem. In two decades of acting for small and medium-sized businesses, the disputes that reach our doors almost always trace back to the same handful of omissions — clauses that seemed unnecessary at the time and proved indispensable later. Below are the five we see most often.
1. No Exit Strategy
Two friends launch a company fifty-fifty. Five years on, one wants to sell and move abroad; the other does not. What happens next?
Without a properly drafted exit mechanism — a buy-sell provision, a right of first refusal, a valuation formula agreed in advance — the departing party may find there is no market at all for their shares. Nobody wants to buy a stake in a private company they cannot control, and the remaining partner has no obligation to purchase. We have seen founders effectively trapped in businesses they no longer wish to be part of, sometimes for years.
A good agreement answers the questions before they are asked: who can buy, at what price, on what terms, and what happens if the parties cannot agree on value. An independent valuation mechanism, specified in advance, is worth its weight in gold.
2. No Deadlock Resolution
Equal partnerships are elegant on paper and dangerous in practice. When two fifty per cent shareholders disagree and neither holds the casting vote, the company can grind to a halt — suppliers unpaid, decisions deferred, banks increasingly nervous.
Deadlock provisions might include a escalating negotiation process, mediation as a mandatory first step, a casting vote on defined operational matters, or ultimately a "Russian roulette" or "Texan shoot-out" clause requiring one party to name a price at which the other must buy or sell. These mechanisms sound brutal. In practice, they force compromise, because invoking them carries real consequences.
3. Silence on Intellectual Property
Consider a scenario we encounter regularly: a designer and a developer build a product together. The developer leaves, takes the codebase — which she wrote — and launches a competing service. The agreement says nothing about who owns what.
Intellectual property created during a partnership should be expressly assigned to the company, with clear provisions for what happens to IP developed before incorporation, after departure, or using third-party tools. This applies equally to brand names, client databases, domain names and social media accounts — assets that are frequently overlooked until someone walks away with them.
4. No Restraint of Trade Provisions
A departing partner who leaves with client relationships, trade connections and market knowledge can do enormous damage. Yet restrictive covenants — non-solicitation of clients and staff, non-compete provisions — must be carefully drafted and limited in duration and scope to be enforceable in England and Wales.
A clause that is too broad will be struck down entirely; a clause that is absent will leave you with no protection whatsoever. Getting the balance right requires professional drafting, not a template downloaded from the internet.
5. Nothing Said About the Unthinkable
What happens if a partner dies? Divorces? Loses capacity? Becomes bankrupt? Each of these events can trigger unintended consequences — shares passing to a spouse with no interest in the business, or a bankruptcy creating an unwelcome new co-owner.
Cross-option agreements, insurance-funded share purchase provisions and clear default rules ensure the business survives events nobody wishes to contemplate. Combined with suitable key person insurance, they give the remaining partners both the right and the means to buy out a deceased or incapacitated partner's interest.
Prevention, Not Cure
None of these clauses is expensive to draft. Litigating their absence is not. A disputed partnership or shareholder claim can consume tens of thousands of pounds, months of management time and — most damaging of all — relationships built over decades.
If your existing agreement was signed years ago, or worse, never signed at all, a short review now is one of the highest-return investments your business can make. Our commercial team is happy to talk it through.
