Once you gain an understanding of whether you may have valid grounds to sue your business partner, it’s wise to seek legal advice about your specific circumstances and goals from a qualified attorney.
At Wood Edwards we provide efficient legal support to help business owners obtain successful outcomes. We understand the law governing business partnership disputes and can help you navigate your options to overcome losses and harm.
A business partner is someone with whom you choose to open a business. The partnership forms when they agree to contribute money, property, labor, or expertise and share the earnings and losses.
Can You Sue A Business Partner?
In most cases, the relationship is governed by a contractual agreement, like a partnership agreement or company agreement. However, you can form a partnership without a formal agreement based on the partners’ discussions about working together.
Suing a business partner means holding them accountable for failing to meet their obligations or duties related to the business. One essential part of a lawsuit against a partner is proving what their duty was and how they failed to meet it.
You’ll also need to show actual damages (loss of money, goodwill, opportunity, etc.) to yourself or the business. Some common bases for suing a business partner include:
The Gloves Are Off
As mentioned above, contractual agreements govern most business partnerships. If a partner fails to comply with the agreement, you have a clear basis for your legal claim. Disputes can be more difficult but not impossible to resolve if you never had a written agreement. If so, you’ll need proof of an oral agreement or proof that they violated a provision of law.
Under the law, a partner owes a duty of care and loyalty to the partnership and the other partners. The duty of loyalty means partners cannot compete or conduct themselves in a way that is detrimental to the partnership.
Under the duty of care, the partner must complete their obligations in good faith and in a manner they reasonably believe to be in the partnership’s best interest. Thus, if your business partner disappears after you start the business, you may have a claim against them.
Remedies For Breach Of Partnership Agreement
However, you may have chosen to vary these duties in your partnership agreement. In that case, you are bound by the terms of your agreement.
Negligence means that a person owed a duty to act with a certain standard of care and, in failing to do so, caused harm to another. Sometimes the partner’s duty to act a certain way is formed by a contractual agreement, like the partnership agreement.
Other times, a partner failed to act as a reasonable person under the circumstances. If such an omission harms the partnership, you may have the basis for a negligence claim.
Suing For Emotional Distress: How And When To Sue
As we explained above, the law requires that each partner act in the best interests of the partnership. This responsibility is called a “fiduciary duty.” However, an error in judgment or the fact that a partner’s conduct furthers their interests does not automatically open them to liability.
You must show that the partner dealt with the partnership in a way that caused harm or that they failed to act with the care an ordinarily prudent person would exercise in similar circumstances. Again, remember that your partnership agreement (written or not) may vary the duties owed by the partners and your ability to sue.
An infringement of the partnership’s intellectual property rights may also offer you grounds to sue your business partner. Your partnership agreement likely makes all copyrights, patents, and trademarks partnership property. If your business partner uses this intellectual property to make money for themselves, you may have a reason to sue them.
How To Fire A Business Partner
Sometimes a business partner does something illegal, like theft or fraud. Even the brightest entrepreneurs can do bad things, like steal money from the partnership or a customer. These things can be expensive for your business and hurt its reputation. Thus, you could sue your business partner to recover these damages.
Because a limited liability company (LLC) is a separate legal entity from its owners (members), the rules for suing a member are more complicated. First, your company agreement may reduce the members’ liability, using a legal term called “indemnification.” Further, the law only enforces written promises to contribute cash or property to the LLC.
If you try to sue after orally agreeing that each member will provide cash to start the LLC, you most likely cannot force the agreement. Another important rule is that a member cannot sue for damages to the LLC without a 90-day notice unless the business is suffering an irreparable injury. An irreparable injury might include continual loss of money, property, or goodwill, but it depends on the circumstances.
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Before you rush to sue, you may want to explore alternatives to resolving your disagreements outside of court. Avoiding the expense of a lawsuit is almost always the preferable option.
First, talk with your business partner to find a way to settle that you both agree on. A settlement usually means the end of your business partnership and that your business partner pays back any money you lost. It may be in the partnership’s best interests to avoid going to court to save money on legal fees. Your business attorney will advise you on when you might accept a settlement and when to find another solution.
Mediation may be an option for settling your disagreements. Instead of going to court for months or even years, mediation can be a better way to get what you want. Rather than each party arguing for their side, a mediator helps them reach an amicable resolution. However, for mediation to work, both sides must be willing to work together to reach a compromise. There’s no point in trying to solve a problem through mediation if neither side wants to work with the other. If you can’t talk things out, your best next step may be to sue your business partner.
What To Do If A Business Partner Gone Rogue
Sometimes, your partnership agreement may require you to resolve ownership disputes through arbitration. Talk to a lawyer who specializes in business law to look over your partnership agreement. If your situation involves an arbitration clause, you might be able to avoid suing your business partner and still get a legally binding solution to your problem. Arbitration means each party will present their side of the disagreement to a neutral third party. That party will determine the facts and issue a legally binding decision awarding damages to one of the parties. Arbitration is usually a less expensive and time-consuming process than a civil lawsuit.
While you can attempt to resolve a business dispute on your own, an attorney experienced in resolving such disagreements will help you understand your rights and responsibilities. Many business owners want to avoid conflict and reach a resolution as soon as possible. They also believe involving a lawyer will make things more contentious. Usually, the opposite is true. An attorney can help you understand the heart of the legal issue and the most efficient options for reaching a solution.
Wood Edwards provides professional, efficient legal counseling to help you navigate the complexities of business law and contractual agreements. We support your goals and will work hard to settle without going to court. Still, we want you to consider all of your options. You deserve to obtain a fair resolution for your work running your business.
What Can I Do If My Business Partner Is Wrongfully Taking Company Funds?
If we find that litigation is in your best interest, we won’t stop until we secure a favorable outcome. And if you find a partner is suing you, we can help you defend yourself. Regardless of the circumstances, an experienced business lawyer will help you meet your goals throughout the process of the dispute.Business partnerships can turn sour for several reasons, including those that seem to warrant legal action. When that happens, you may wonder, what are the grounds to sue your business partner?
If you entered the business with a valid, enforceable partnership agreement and your partner breaches the agreement, you may have grounds for a lawsuit. This is especially true if you or your business suffered damages due to the breach.
Business partners may enter into a variety of contractual agreements, including non-compete, non-disclosure, employment, and others. If any of these contracts are breached, the victim of the contract breach may consider suing.
Legal Actions To Take When Your Business Partner Cheats
A breach of fiduciary duty may exist if your partner acts in his or her own interest instead of doing what is best for the company.
If your business partner stole property or money from the company, you or the business may have a claim to recover the funds or items. Embezzlement or theft is also a criminal matter.
If your company owns a trademark, patent, or copyright you may have grounds to sue your business partner if he or she uses this intellectual property without permission of the company.
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The attorneys at O'Reilly Rancilio are ready to assist you with matters related to business partnerships. For more information, please visit our website or call 586-726-1000.
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