When you start a business, you and your partner may have the same goals. However, unexpectedly, relationships may sour. Before you make any major moves, you should consult with a lawyer to determine how you should address the situation. There are times when bringing a lawsuit is appropriate, but here are other times when there simply are not proper grounds to do so and filing suit could backfire on you.
There are various grounds for suing a business partner. These grounds are geared toward remedying damage to the business caused by one partner through a breach of contract, fiduciary duty, negligence, or abandonment.
You cannot, and should not, bring a lawsuit simply because you no longer get along. You must understand and evaluation your reasons.
COMMON GROUNDS FOR SUING A BUSINESS PARTNER
Breach of Partnership Agreement / Operating Agreement / By-Laws
Business partners typically share in business decisions. However, if one business partner breaches a partnership agreement, its effect may be disastrous. If you sue your business partner for breach of a partnership agreement, operating agreement or other governing documents of your business, you must be able to make your case by meeting certain elements.
- A valid, enforceable partnership agreement, operating agreement, or By-Laws exist;
- Your business partner has breached a term or terms of that contract;
- You or your business has suffered damages resulting from the breach.
If the above elements are present, then you may have the grounds to sue your partner. A strong partnership agreement/operating agreement provides clauses addressing courses of action regarding contract breaches. Typically, there is a period of time build into a business’ governing document that requires that notice of an alleged breach be given, and then allows for a certain number of days for a partner to cure the breach.
In some situations, a business partner may continue to collect a paycheck despite not actively working. Abandonment may be considered a breach of a fiduciary duty. There are nuances in Ohio law, but generally speaking all partners have a duty to place the interest of the business before their own. Well written governing documents should discuss the finer points of this general rule. Additionally, if a business partner is performing certain work that is considered competitive with your business, this may be grounds to sue.
A negligence claim might exist against your business partner if their actions harmed the business. The following elements must exists for a negligence claim:
- The partner owes a duty a care. This duty of care requires that the partner make business decisions in good faith.
- The partner breached the duty of care and acted negligently when acting on behalf of the partnership.
- The breach caused harm to the business.
Violation of Intellectual Property Rights
A violation of intellectual property rights belonging to the business also gives you grounds to sue your business partner. The governing documents of your business may provide that all copyrights, patents, trademarks and trade secrets are the businesses’ property. However, if your business partner has used this intellectual property for personal gain, their misuse may give you grounds to sue them.
Sometimes a business partner engages in criminal activity, such as fraud or theft. Criminal acts may include stealing money from the business or stealing money from a customer. These activities can cost your business money and undermine its reputation. Therefore, you would have a valid reason to sue.
ALTERNATIVES TO SUING
You may consider negotiating with your business partner to arrive at terms of settlement to which you both agree. Settlement may mean the termination of your business relationship and the repayment of any losses by your business partner. An experiences business attorney can help you identify certain terms and arrangements that may result in settlement rather than litigation.
Mediation may be another alternative to resolving conflicts. Mediation is confidential and voluntary. Therefore, if your business partner will not in good faith engage in mediation, then this could be a waste of time. If you do try mediation, selecting a mediator that is seasoned in the area of your dispute is important. A good mediator will be able to grasp the issues and be accustomed to problem solving those particular type of disputes.
Do your governing documents include an arbitration clause? If so, you may not be able to sue to address certain disputes. It’s possible, you must handle disputes in arbitration. It is advisable to have a business attorney who is experienced in litigation assess your particular situation.
CONTACT WICK LAW
Considering whether to sue your business partner is a difficult decision. To really understand what you should do requires an attorney to sit down with you and focus on the details of your particular situation. Contact Wick Law today to understand your businesses governing documents, to draft them if you don’t already have them, and, to understand when, if ever, it is a good idea to sue your business partner.
Wick Law, LLC is a small business legal practice, representing owners, investors, and entrepreneurs in all aspects of commercial, corporate, and business law, estate planning, contracts and negotiations, business litigation, and real estate. For more information: Contact 614-572-6366, visit www.mwicklaw.com, or email us at email@example.com. Wick Law, LLC is located in Columbus, Ohio.
(Materials in this article have been prepared by Wick Law, LLC for general informational purposes only. This list is for educational purposes and is not to be considered exhaustive. More items could be added to this checklist based upon the type of transaction or industry standards. These materials do not, and are not intended to, constitute legal advice. The information provided is not privileged and does not create an attorney-client relationship with Wick Law, LLC or any of the firm’s lawyers. This checklist is not an offer to represent you. You should not act, or refrain from acting, based upon any information in this checklist. Wick Law, LLC maintains offices in Columbus, Ohio, and has lawyers licensed to practice in Ohio and in the United States District Court, Southern District of Ohio. The firm does not intend to practice law in any jurisdiction where the firm is not licensed.)
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