What to do when your business partner is suing you?

Sometimes business partnership or co-ownership is a lot like a marriage, which works only if the partners are willing to maintain a relationship and participate with each other. Despite the best intentions and plans, there is always the possibility of bad things happening, leading to a contentious nightmare at some point. If your business partner is suing, don’t panic.

Business partner may sue another partner for various reasons but it is crucial to understand the root cause of the conflict to address it properly, says Andy Gillin, an Attorney & Managing Partner at GJEL Accident Attorneys.

In this article, we will understand:

• Grounds for Suing A Business Partner

• What should I do when my business partner sues me?

• Strategies for Dispute Resolution

• Preventative Measures to Avoid Conflict

Grounds for Suing A Business Partner

Disputes among business partners can arise from various sources, including financial disagreements, differences in management styles, or conflicting visions for the company's future. Recognizing these triggers early on can help in addressing issues before they escalate.

Jonathan Steele, a family law attorney with expertise in cybersecurity and privacy at Beermann LLP, cautions that it's a mistake to ignore the dispute, hoping it will resolve itself.

Garrett Ham, an experienced attorney and real estate professional, shares that a business partner might sue for various reasons, such as breach of contract, misappropriation of funds, or violation of fiduciary duties. For instance, I once helped a client who was sued because their partner alleged they were siphoning off company funds for personal expenses. It’s common in such cases for one partner to feel that their investment or contribution isn't being respected or fairly reciprocated.

There are several common reasons why one business partner sues the other.

1. Breach of Partnership Agreement: If a partner violates the terms of the partnership agreement, such as failing to fulfill their duties or misusing the company’s assets, the other partner may sue for breach of contract.

2. Breach of Fiduciary Duty: Business partners owe each other a fiduciary duty to act in the best interests of the company. If a partner places their own interests above the company’s, such as engaging in self-dealing or misappropriating opportunities, the other partner can sue for breach of fiduciary duty.

3. Negligence: If a partner’s negligent actions or inactions cause harm or financial losses to the company, the other partner may sue for negligence.

4. Abandonment: If you leave the partnership without proper dissolution or fail to participate as required by the partnership agreement, your partner may sue you for abandonment, says Nicolas Tang, an Advocate & Solicitor and Founder and Managing Director of Farallon Law Corporation.

5. Criminal Activity: If a partner engages in criminal activities like fraud, embezzlement, or theft related to the company, the other partner can sue for damages resulting from those unlawful actions or to distance themselves from the crime.

6. Intellectual Property Theft: Using the company’s intellectual property without permission, such as trademarks or patents, can lead to a lawsuit from other partner for violating intellectual property rights.

According to M. Denzell Moton, Esq, founding partner of Moton Legal Group, business partners generally sue over breaches of fiduciary duty, misappropriation of assets, or contractual obligations. For example, during my time at Cumberland School of Law, I dealt with a case where a partner sued because they felt profits were being unfairly distributed due to hidden expenses. Such disputes stem from financial discrepancies, mismanagement, or perceived unfair practices affevting the business’s wellbeing.

What should I do when my business partner sues me?

1. Stay Calm

Although a partnership dispute is technically business, litigation between business partners can quickly deteriorate into trivial battles involving collateral personal matters, so you must stay calm and professional by avoiding communicating directly with your partner unless you are advised by attorneys. Even if you do so, you must ensure all interactions are professional and meticulously record them, as these discussions could be relevant in the future.

2. Review Your Partnership Agreement

When forming a partnership, there is often a partnership agreement outlining the rights and responsibilities of each party. You may want an attorney to help explain the legal terms. Sometimes, such a document also outlines terms for managing conflicts between partners.

3. Consult a Legal Professional & Explore Options

Choose a business attorney with experience in handling the type of claim you are facing. You may want to read this blog post on what questions to ask your attorney before approaching one.

Conventional court proceedings are costly and time-consuming, and may harm your company’s reputation. Hence, you may want to explore more options with attorneys apart from litigation, such as out-of-court settlements, typically through mediation or arbitration. Here is a blog post that discusses alternative dispute resolution (ADR).

4. Be Diligent about Gathering Business Records

Business records are important in any business dispute, which may include formal documents such as partnership agreements and financial statements, or supporting materials such as emails, chat messages and meeting notes. As one partner may limit access to these records, you should retain a copy of all the relevant information for your interest. Your attorney needs as much information as possible in order to provide comprehensive advice.

Scott, an attorney and founder of Grand Exit Property Acquisition Group, advises that it's essential to maintain transparency with employees, clients, and other stakeholders about the situation to minimize any disruption to business operations

Strategies for Dispute Resolution

When disputes do occur, it's important to approach resolution constructively. Options such as mediation, arbitration, or even legal intervention can be considered, depending on the severity and nature of the disagreement.

Depending on the nature of dispute, there could be many possible outcomes caused by the lawsuit. It is essential to acknowledge the consequences of every choice to help you make wise decisions.

• Dissolution of the partnership: This is potentially the most severe outcome where the court orders the complete dissolution and winding up of the partnership. This typically happens when the severity of disputes makes the business relationship no longer tenable. Generally, the court will appoint a receiver to oversee the liquidation of business assets and distribute proceeds to partners after paying off creditors and liabilities.

• Breach of contract liability: If the suing partner can prove that you violated the terms of the partnership agreement or other contracts governing the business relationship, you may be held liable for damages caused by that breach. The damages may include lost profits, out-of-pocket expenses incurred by the partner, and in some cases punitive damages.

• Expulsion of a partner: The court may order the expulsion or removal of one partner from the business if their actions constitute a breach of fiduciary duty, abandonment, fraud, or other serious misconduct detrimental to the company. The expelled partner typically has to sell their ownership stake back to the company or remaining partners at a court-determined price.

• Settlement: Instead of going through a lengthy and costly trial, some parties may choose to negotiate outside the court. Typical settlements may include one partner buying out another partner’s share of the company or paying monetary damages.

Preventative Measures to Avoid Conflict

Implementing clear partnership agreements and communication channels can significantly reduce the likelihood of disputes. Regular meetings and transparent decision-making processes are essential for maintaining a harmonious business partnership.

A well-drafted and comprehensive partnership agreement is the backbone of any successful business partnership. Developed by experienced attorneys qualified in various common law jurisdictions, DocPro's templates for partnership agreements follow industry best practices and prevent costly disputes down the road. Not only DocPro provides variations of documents favouring different parties, but also caters to all common law jurisdictions. If you want to create a partnership agreement, why don’t you read this blog post detailing the features of a partnership and the relevant templates to use?

While dealing with the stress of a lawsuit, remember to stay focused on your core business goals and make decisions that align with those objectives. The key is to act quickly, seek legal guidance, and explore all options, especially alternative dispute resolution, for resolving the dispute while protecting your interests. Don’t leave the fate of your partnership to chance - secure your business with one of our tailored partnership agreements.

FAQs

1. How can I protect my business while my partner is suing me?

You should communicate with your partner only through your attorney to avoid saying anything that may hurt your case and follow all instructions from your attorney, especially regarding business operations.

David J Greiner, Esq., an accomplished transactional lawyer, advises that the first step is consulting a lawyer to assess your legal standing. Document everything: contracts, emails, and meeting notes. It’s vital to secure and protect your business’s financials and operational documents, ensuring your case has a strong foundation.

2. Can I continue running the business while being sued by my partner?

It depends on the circumstances and the court’s decisions. In some cases, a court may issue an injunction or impose restrictions on business operations until the lawsuit is resolved. If there is no intervention from the court, you may establish ground rules for daily operations or appoint a neutral third party to manage operations temporarily to prevent further disputes. You should keep clear records of all transactions and decisions during this period to avoid future complications.

David Brillant, a certified Specialist, Estate Planning, Trust and Probate Law by the State Bar of California Board of Legal Specialization, advises clients to appoint a neutral third-party manager to oversee daily operations and reduce conflict. Clear and transparent documentation of all business activities during the lawsuit is crucial. This approach helps maintain business continuity and demonstrates that you're acting in the business’s best interest.

According to Michele Ross, the founder of  M. Ross & Associates, LLC, a leading boutique business law firm based in Englewood Cliffs, you can continue running your business while being sued by your business partner. However there are several factors to consider when doing so:

• Legal Guidance: First and foremost, seek legal counsel. An attorney can provide specific advice tailored to your situation, helping you understand your rights, obligations, and potential risks.
• Operational Continuity: As long as there are no court orders or legal restrictions preventing you from managing the business, you can continue operations. Ensure that business activities remain compliant with relevant laws and regulations to avoid further complications.
• Protecting Business Interests: Safeguard the business assets and interests. This includes ensuring that critical operations, finances, and client relationships are not negatively impacted by the lawsuit.
• Focus on Core Business: Ensure that the legal dispute does not detract from the core operations and growth of the business. Delegate responsibilities if necessary, so that the legal matter does not consume all of your time and energy.
• Documentation: Keep thorough records of all business transactions, communications, and decisions. This documentation can be crucial for legal proceedings and protecting your interests.

Ashley Connell, the founder of Lease Extensions, and a member of ALEP (Association of Leasehold Enfranchisement Practitioners, highlights that if the lawsuit challenges your authority to manage the business, your ability to run it may be restricted. But if there is a provision that you can still be a part of the management until proven guilty then you can continue the business.

3. What are some common mistakes when dealing with a lawsuit from a business partner?

Some common mistakes to avoid include ignoring or downplaying the seriousness of the lawsuit, failing to gather and preserve evidence, making statements without consulting your attorney, and missing court-imposed deadlines.

Jonathan Feniak, J.D., M.B.A., serving as General Counsel and Head of Finance at LLC Attorney, advises that two common mistakes are attempting to handle the lawsuit without legal representation and reacting emotionally rather than strategically. These mistakes can escalate the issue, lead to an unfavorable settlement, or cause further harm to the company's long-term viability.

Mark Pierce, Founder & CEO of Wyoming Trust & LLC Attorney with over 30 years of legal experience, has observed that some of the common mistakes are hiding of assets, distancing from legal advice, making direct settlements without understanding legal repercussions, and ignoring the role of a mediator for settling disputes out of court. He advises that it's essential to approach such situations strategically, maintaining emotional balance, and seeking appropriate legal guidance.