Successful Business Dissolutions For Partnership Disputes

Houston Business Partnership Dispute Lawyers

Houston Partnership Dispute Lawyer

A partnership relies on the efforts of all its partners to be successful. For that reason, a partnership can be a double-edged sword. When it works properly, each individual partner can add to the partnership, and the efforts of one can complement those of another. On the other hand, the actions of one partner can break an entire partnership and negatively affect all of the partners.

Partnerships Are Meant to Be Advantageous for the Partners and the Business

There are numerous advantages to a partnership arrangement between two or more parties. A partnership allows them to share in the profits and losses of their individual and common efforts. However, partnership law also presents risks to each of the individual partners. For example, unless the partners formed a limited liability partnership, a limited liability company, or a corporation, creditors can go after the partners’ personal assets if the partnership cannot afford to pay its bills or repay its debts. Additionally, an individual partner has the authority to bind the partnership, and other partners may pay the price for that partner’s mistake(s).

Usually, you would have a written partnership agreement that governs your relationship with the other partners. However, it is legally possible to be in a partnership without even realizing it. If two or more parties agree to work together and share the profits and losses, they could be considered partners under the law.

Common Reasons for Partnership Disputes

If you find yourself in the midst of a partnership disagreement, you cannot hope that it will just go away. You have to take action to protect your own interests because you may be in a dispute that cannot be resolved.

There are numerous reasons why partners may disagree with each other, such as:

  • One partner has breached the terms of an employment agreement
  • A partner has failed to uphold their own obligations to the partnership
  • There are disagreements about how to conduct business
  • Other partners may be dissatisfied with how one particular partner has acted in the name of the partnership
  • The partners believe one partner has breached the terms of the partnership agreement
  • A partner may have committed fraud or misappropriated assets of the partnership

Breach of Fiduciary Duty Is a Common Reason for Disputes

Crucially, each partner owes a fiduciary duty to the partnership as a whole and to their other partners. Fiduciary duties can be broken down into two main areas:

  • Each partner owes a duty of care, which means they must use ordinary care in conducting business on behalf of the partnership and in performing their duties under the partnership agreement
  • Each partner owes a duty of loyalty, which means they must place the interests of the partnership above their own personal interests and avoid conflicts of interest

When a partner breaches their fiduciary duty, they may be personally liable. In addition, other partners could be punished for one partner’s breach of this duty. There are numerous stories of unsuspecting partners who ended up in financial distress because they were not aware that one or more of their partners was breaching their fiduciary duty. It is essential that you remain vigilant when you are in a mutual business relationship with someone else.

Partnership Disputes Can Lead to Dissolution

One of the most common partnership disputes is when one or more partners decide they can no longer work together. This could lead to the partners dissolving the partnership. Dissolution could be an end in itself, or a result when the partners can no longer make the business arrangement work.

One partner may push to dissolve the partnership, even when others do not want it. Then, the partnership may need to fight to stay alive. Alternatively, the dispute could be about how to wind down the business affairs of the partnership and divide the assets between the partners because it is clear the partnership cannot continue in its current form. Dissolution is often a remedy when some or all of the partners go to court and a judge decides that the situation can no longer be salvaged and that the business arrangement should not continue.

How Partnership Disputes Are Decided

There are numerous things a court may look to when deciding a partnership dispute:

  • The first thing the court will scrutinize is the partnership agreement that gives each partner their rights and obligations within the partnership
  • The Texas Business Organizations Code has substantive legal requirements and procedures for partnerships
  • There is a rich body of common law that comes into play in partnership disputes. For example, the Restatement of the Law Third, Agency provides many principles that courts will rely on when deciding litigation involving partnerships.

The Partnership Agreement Is Crucial in Any Dispute

If a partnership dispute does go to court, the judge would first look at the exact language of the partnership agreement. This document is a contract between the parties, and its terms are given legal effect. If there is no clause in the partnership agreement on point regarding the disputed issue(s), or if the language is ambiguous, then the judge may look at external evidence to decide the dispute.

Each partnership agreement should have a disputes clause that would govern how individual disagreements are to be resolved. This clause would provide a resolution mechanism that would detail the steps the partners would need to take. Presumably, the partners would need to go through all the required steps before one could bring the matter to court.

The judge would then scrutinize each partner’s rights and obligations, as well as any restrictions on their conduct. If there is no language in the partnership agreement the judge could rely on to rule on the disputes, they may look to other legal principles.

As noted above, one of the main dangers is that a partnership dispute could cause the dissolution of the entire partnership. The partnership agreement may provide for dissolution in the event that the partners cannot agree on a course of action. In that event, one or more partners may have outsized power and leverage over the others because withholding their agreement to resolve the dispute could mean the end of the partnership.

Partnership Disagreements Are Often Bitter (But They Do Not Have to Be)

Partnership disputes can be particularly acrimonious. Partners are people who have worked together for years, and each of them has a significant individual stake in the success of the partnership. Each person may have their own views on the right way to do things, and perhaps their own set of personal circumstances pushing them to adopt those views. For these reasons, these disputes can get personal in a hurry. Oftentimes, partnership disputes can result from personality differences or disagreements about routine matters that grew into something bigger as a result of the partners’ history together.

It is crucial to get legal advice early in the process to obtain the best possible legal outcome. In many instances, the best possible legal outcome may be reached by the parties continuing to communicate openly about the dispute and their ideas for resolving it.

You Can Stay Out of Court (But You May Need to Go)

Here are some ways to resolve partnership disputes short of taking the case to court:

  • Each partner could hire an attorney who can communicate with the other partners’ attorneys to resolve issues.
  • The partnership agreement may mandate that individual disputes must be mediated first. Alternatively, the partners could opt for mediation on their own to help them work out their differences with the assistance of a neutral third party and take some emotion out of the picture.
  • The partnership agreement may require the partners to participate in binding arbitration to resolve a dispute in a relatively cost-effective manner compared to litigation.

Try to Communicate for as Long as You Can

There is no one clear answer as to the best way to address a particular partnership dispute. Communication and action are the two most important things that you can do when you find yourself in a disagreement with your partner(s). If at all possible, you should remain in communication with the other partner or partners in the hope that you can resolve the disagreement without litigation. At the same time, you should be prepared to take action to protect your own interests. The problems of the partnership can become your own personal problem quickly due to how the law works.

An experienced commercial litigation attorney can review a situation and provide objective professional advice about the best course of action. Usually, it is better to keep talking until it is apparent that there is nothing left to talk about. However, given the legal effect that a rogue or disgruntled partner may have (i.e., you could end up personally liable for their actions), sometimes you may have no choice but to take firm and immediate legal action.

Legal Remedies in a Partnership Lawsuit

Business partners filing lawsuits over partnership disputes could seek the following legal remedies:

  • Damages from the partner who breached the partnership agreement
  • Expulsion of one or more partners from the partnership
  • Enforcement of a buy-sell agreement to relieve a particular partner of their financial interest
  • Dissolution of the partnership
  • If monetary damages are not enough, a partner could seek an injunction from the court to order certain behavior (or to order certain behavior to stop)

You Need an Experienced Partnership Disputes Attorney

You should not attempt to navigate a partnership dispute on your own. Not only will emotions be running high, but what you do in the midst of a disagreement could affect your legal rights if the case is litigated. Here are some crucial reasons why you need an experienced business lawyer to guide you through a partnership dispute:

  • Depending on the outcome of the case, you could be found in breach of contract and ordered to pay damages
  • The continuing existence of the partnership could be at stake in the proceedings
  • If you must go through a “business divorce,” you will want the best possible result
  • The actions of an individual partner could affect the name and reputation of your business
  • Your share in the partnership could represent your life’s work, and could be damaged by the dispute
  • You can deal with the situation much more effectively when you get objective legal advice from a third party who does not have the same financial stake in the matter as you—or the same personal history with your partners
  • You need clear advice about what exactly the partnership agreement says and what you should do

Resolving Partnership Disputes

The business litigation attorneys at Feldman & Feldman are here when you need us. We help clients resolve complex partnership disputes, whether it is through a negotiated settlement or through litigation. Our lawyers take a strategic approach to your dispute, counseling you on how to conduct yourself and the legal options available to you. We look at the entire picture, both at a high altitude and at ground level, to put you in the best legal position possible.

The key is for you to contact us as soon as possible so you have the maximum amount of legal options. Partnership disputes do not always have to happen, but you need to be prepared and take action in case they do. You can contact us to schedule an appointment. Speak to a Houston partnership dispute lawyer to review your case.