When you go into business with a partner, you may end up getting far more than you initially bargained for. Partnership agreements bind you to someone else. For better or worse, you will reap the benefits and bear the consequences of their actions. What someone else does can affect you both personally and professionally. There are some cases in which you may need to sue a partner for wrongful actions. The special nature of a partnership adds an extra degree of potential complication to these lawsuits.
A partnership is unlike any other type of business arrangement. Here, the actions of one partner may bind the entire partnership and each partner personally. If one partner makes a mistake or gets the partnership into financial trouble, the other partners may end up being personally liable from their own pocket. Therefore, you must be vigilant when you are in a business partnership with someone else. Not only must you perform extensive due diligence before agreeing to be someone’s partner, but you should also not hesitate to take legal action if the partner is doing something wrong. Otherwise, you could end up in trouble. Here are some of the common reasons why you may sue a business partner.
The Partnership Agreement Controls Your Relationship with Other Partners
Your relationship with your business partner is governed by a partnership agreement. This document is the same thing as a binding contract, and each partner must closely follow the terms. If one partner has breached the agreement, they may be financially liable to the other partners.
The partnership agreement itself will state what may happen and the potential remedies for a breach. First, you should closely review the partnership agreement to learn your rights and potential courses of action. If the partnership agreement is well-written, it may reduce the overall risk of litigation between the partners. Conversely, if there are ambiguous terms or topics that are completely unaddressed, it may increase the chance of a costly lawsuit.
Reasons Why You May Sue a Business Partner
Here are some common reasons why partners may see each other for breach of the partnership agreement:
- A partner may act outside the scope of their authority and enter into a business agreement without the approval of the other partners.
- A partner may create a conflict of interest by entering into deals with related entities in which they have a financial interest.
- A partner may misuse the assets of the partnership, engaging in theft or fraud.
- A partner may use the intellectual property of the partnership for their own personal benefit.
Lawsuits for Breach of Other Agreements Between the Partners
There are other agreements you and your partner may reach. For example, your partner may have an employment agreement that requires them to work for the partnership. If they abandon the partnership, and they do not perform any partnership duties, they may be liable under that agreement.
Another example of an agreement between partners is a non-disclosure agreement. One or both partners may have pledged to avoid discussing partnership business or trade secrets with others. A partner may be personally responsible for damages when they breach the agreement.
Breaches of Fiduciary Duty in a Partnership
Partners usually owe each other a fiduciary duty. Any time there is a fiduciary duty, there are two elements involved:
- The duty to use a reasonable amount of care in conducting the business of the partnership. Although a partner is not expected to be perfect, and they may make mistakes, they must at least use a reasonable degree of care.
- The duty of loyalty to place the interests of the partnership ahead of their own. This duty requires the partner to abstain from conflicts of interest. They can breach the duty of loyalty when they engage in transactions with related entities or personally profit from the partnership’s business.
If you are suing a business partner, you may try to recoup the money that was lost due to the partner’s actions. Alternatively, you may try to expel the partner from the partnership. However, you must tread carefully because some partnerships may be dissolved in the event of a dispute between the partners. One helpful provision in the partnership agreement is a buy/sell clause that allows you to buy out a partner in the event of a dispute.
Consider All Possible Alternatives Before Suing a Business Partner
Just because you can sue your partner does not mean that it is the most prudent course of action. Lawsuits are expensive and complex, and they can mean the end of the partnership. There is always a risk that you can invest the time and expense to file a lawsuit and not win your case. Accordingly, you should consider alternatives to litigation if at all possible.
When you hire an experienced partnership disputes lawyer early in the dispute, they may be able to negotiate a solution on your behalf that enables you to avoid litigation. You do not need to surrender your rights under the partnership agreement and as a partner; however, there are multiple ways to enforce your rights, and litigation is only one of them. Your commercial lawyer may counsel you on a common sense plan that can keep you out of court.
At the same time, you may need to take decisive and quick action to protect yourself. In the end, you may be liable for something that your partner does, so you cannot let them continue a wrongful act indefinitely. In that regard, partnership disputes are different from other types of lawsuits.