Partnership disputes are common in the restaurant industry, where high-stress environments, financial pressures, and differing business visions can create tension between partners. If not handled properly, these disputes can disrupt operations, damage the restaurant’s reputation, and even lead to costly litigation. This guide outlines the key legal considerations for resolving partnership disputes in New York restaurant businesses.

Common Causes of Partnership Disputes

1. Financial Disagreements – Disputes over profit distribution, investment contributions, or financial mismanagement.
2. Operational Control – Conflicts regarding decision-making authority, staffing, and business direction.
3. Breach of Fiduciary Duty – Accusations of self-dealing, conflicts of interest, or unethical behavior.
4. Unequal Work Contributions – One partner feels overburdened while another does not contribute equally.
5. Exit and Buyout Terms – Disagreements on how a partner should exit the business and what compensation they should receive.
   
   

Legal Framework for Resolving Disputes

1. Review the Partnership or Operating Agreement

Most restaurant partnerships operate under either:

• A Partnership Agreement (for general partnerships)
• An Operating Agreement (for LLCs)
• A Shareholders’ Agreement (for corporations)

These agreements typically outline:

• Decision-making processes
• Profit-sharing arrangements
• Dispute resolution mechanisms (e.g., mediation, arbitration)
• Exit strategies and buyout provisions

If an agreement exists, it should be the first point of reference in resolving disputes.

2. Mediation and Alternative Dispute Resolution (ADR)

New York courts encourage mediation and arbitration as cost-effective ways to resolve disputes. Many partnership agreements include an ADR clause, requiring partners to attempt mediation before pursuing litigation.

• Mediation: A neutral third party helps partners negotiate a resolution.
• Arbitration: A binding process where an arbitrator makes a final decision.
  
  

3. Litigation and Judicial Dissolution

If mediation fails, litigation may be necessary. Under New York Partnership Law and Business Corporation Law, courts may order dissolution if:

• The business is no longer viable due to internal conflicts.
• One partner is engaging in fraud or misconduct.
• There is a deadlock in decision-making that threatens the business.

Partners can file a lawsuit for breach of fiduciary duty, fraud, or mismanagement if a partner’s actions harm the business.

4. Enforcing a Buyout Agreement

A well-drafted buyout clause in the partnership agreement can help resolve disputes by allowing one partner to purchase the other’s interest at a pre-determined valuation method. If no agreement exists, partners may need to negotiate terms or seek court intervention to determine a fair buyout price.

Best Practices for Preventing Partnership Disputes

1. Draft a Clear Partnership Agreement – Ensure the agreement outlines roles, decision-making authority, profit sharing, and dispute resolution methods.
2. Maintain Transparent Financial Records – Open communication about finances reduces suspicion and conflict.
3. Define Exit Strategies Early – Establish clear buyout provisions to handle partner departures smoothly.
4. Use Mediation First – Avoid costly litigation by pursuing alternative dispute resolution whenever possible.
5. Consult an Attorney – An experienced business attorney can help structure agreements and resolve disputes efficiently.
   
   

Conclusion
Partnership disputes in restaurants can be highly disruptive but are often preventable with well-drafted agreements and open communication. When conflicts arise, reviewing existing agreements, pursuing mediation, and seeking legal counsel can help ensure a smooth resolution. Restaurant owners should take proactive legal steps to minimize risks and protect their business interests.