Do I Have Grounds for Suing My Business Partner?

If you’re dealing with problems with your business partner you might be wondering whether you have grounds to sue them.

This article will provide an overview of the questions you might have when considering suing your business partner such as:

• What Are the Most Common Grounds for Suing a Business Partner?
• Can I Sue My Business Partner for Abandonment?
• Can I Sue My Business Partner for Negligence?
• Can I Sue My Business Partner for Breach of Fiduciary Duty?
• Can I Sue My Business Partner for Using the Business’s Intellectual Property?
• Can I Sue a Business Partner for Criminal Activity?
• Can I Sue My LLC Partner?

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. 

How is a Business Partnership Defined by Law?

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.

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. 

RELATED: Business Disputes Between Majority and Minority Shareholders

What Are Common Grounds for Suing a Business Partner?

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:

• Breaching a provision of a contractual agreement;
• Abandoning promises and obligations;
• Negligently handling business resources;
• Infringing on, counterfeiting, or misappropriating intellectual property rights;
• Committing a criminal act, like fraud or embezzling company money;
• Asking for a court to perform an accounting or declare who owns what part of the business;
• Enforcing access to records; or
• Breaching a fiduciary duty owed to the partners or the business.

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.

Can I Sue My Business Partner for Abandonment?

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.

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. 

Can I Sue My Business Partner for Negligence?

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.

Can I Sue My Business Partner for Breach of Fiduciary Duty?

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.

Can I Sue My Business Partner for Using the Business’s Intellectual Property?

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.

Can I Sue a Business Partner for Criminal Activity?

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.

Can I Sue My LLC Partner?

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.

RELATED: Leaving a Partnership or a Limited Liability Company (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.

What Are Alternatives to Suing a Business Partner?

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.

What Is a Settlement?

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.

What Is Mediation?

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.

RELATED: When Can One Business Partner Force Out the Other?

What Is Arbitration?

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.

How Might a Business Litigation Law Firm Help Me?

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.

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.

Contact us online to schedule a consultation to discuss your business partnership dispute with an attorney.