People enter into business together to pursue a common vision born of common interest. The drive for success and unqualified hope in the future often seems to be the grease to ease all potential disagreements. However, discord frequently arises between business partners in the form of disagreements on a future course, a failure to uphold obligations, or acting in bad faith. At that point, you may be wondering, Can you sue your business partner? In this guide, we will go over the grounds for suing your business partner and how to evaluate the basis of that decision.
Common Reasons to Sue Your Business Partner
When you enter into a business partnership, each of you implicitly owes the other, and the business itself, a certain level of conduct and loyalty. These obligations can arise whether or not there is a written agreement. Accordingly, below we discuss the various contractual and non-contractual grounds to sue your business partner.
1. Breach of an Agreement
First look at any business agreements between you and your partner or between your partner and the business. A few agreements that commonly exist in any business partnership include:
- An operating agreement (for LLCs),
- A partnership agreement (for partnerships),
- The bylaws (for corporations),
- A shareholders agreement or buy-out agreement,
- A non-compete agreement,
- A confidentiality agreement, and
- An employment agreement.
Each of these agreements may have terms and obligations for each party to uphold in the business venture. Identifying a term in a written agreement that your partner has breached may be the clearest grounds for suing your business partner.
2. Breach of Fiduciary Duty
A fiduciary duty means that your business partner is required to perform their obligations and execute their duties with the utmost care and good faith. Wrapped into the fiduciary duty is also a duty of loyalty. A duty of loyalty means that the interests of the business come before your partner’s personal interests. A fiduciary duty arises even without a written agreement. Examples of a breach of fiduciary duty include:
- Competing with the business,
- Diverting a business opportunity,
- Sharing confidential information, and
- Acting against business interests.
If your partner is putting their own interests or those of a third party ahead of the business, they may have breached their fiduciary duty to you and your business.
When your business partner acts negligently in performing their duties on behalf of the business, you may be able to sue them for negligence. The elements of negligence are:
- A duty of care to the business,
- A breach of that duty, and
- Harm to the business resulting from the breach.
Part of not being negligent is to act in good faith and with reasonable care when performing business duties. A few examples of negligence include the failure to:
- Keep information confidential and secure;
- Maintain the requisite licenses or permits;
- Operate a company vehicle properly; and
- Implement workplace safety protocols.
Negligent behavior can frequently overlap with a breach of fiduciary duty. However, negligence can also be a standalone reason for suing your business partner.
Abandonment essentially means that a business partner has improperly left a business prior to its wind down and dissolution. When your partner just does not show up to work or is not engaged in what is going on with the business, they may have abandoned the business. Yet your partner is still reaping an economic benefit through their ownership interest or payroll. Abandonment is a solid and valid cause of action when you can establish that it has occurred.
Stealing money or improperly diverting business funds is almost certainly a fraud. Not only is fraud a criminal act, but it is highly damaging to the business, especially if it involves third parties such as a vendor or client of your business. You can sue your business partner for fraud as a standalone cause of action or as part of a breach of their fiduciary duty.
6. Misuse of Intellectual Property
Your business undoubtedly owns the intellectual property. That ownership can occur through a formal process such as a patent application or a less formal process such as the common law copyright of the material in a business pamphlet. If your business partner is using the intellectual property for their own benefit you may have grounds to sue them for improperly using that intellectual property.
The above six reasons to sue your business partner represent only the most common basis for a lawsuit. We encourage you to discuss your particular situation with an experienced business legal matters attorney to make sure that you have identified all your legal rights.
Alternatives to a Lawsuit
Of course, you can sue your business partner? But, you should think things through carefully before you do. Even if you are absolutely right, a lawsuit can be a drain on your business. Before you decide to sue your business partner, consider a few alternatives.
If your partner is willing to cooperate, you may want to enter into mediation. By mediating your dispute through a disinterested third party, you may be able to reach a settlement agreement. The benefits of mediation are that it is much quicker than a civil suit, thus bringing the harmful conduct to a swift end, and a settlement may significantly reduce the harm to the business’s reputation.
Frequently, business agreements, especially governing documents (e.g. operating agreements, bylaws, etc.), contain an arbitration provision that requires any dispute to go through arbitration prior to any lawsuit being filed. In the alternative, you may be able to convince your business partner to submit to arbitration. Many of the same benefits of mediation are also benefits of arbitration. Additionally, arbitration can give you the right to have the arbitration decision enforced by a court.
A Skilled Guide Gets the Best Results
Our business legal matters lawyer at 303 Legal, P.C. has decades of experience in helping business partners resolve disputes, protect the business they built, and hold others accountable. If you are faced with a partner who is harming your business, give us a call to see how we can help you help your business.