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Partnership Litigation

April 21, 2014

Posted in Business Litigation, Business Start Ups, Partnership Law

Partnership disputes are very common and can be caused by a number of reasons. They can potentially destroy a business if not handled properly and sour personal relationships that may have lasted for years.

A partnership is two or more “persons” (individual, corporation, company, another partnership or entity) engaged as co-owners of a for profit business. A formal written contract isn’t required to create a partnership, but getting one is highly recommended. If you’re operating a partnership without such a written agreement, there are legal obligations for the partners in the Uniform Partnership Act in the absence of such a written contract.

Partners owe each other a strict duty of good faith, candor and there is a general prohibition against him using the relationship for one partner to benefit his personal interests except if there is full disclosure to the others.

Legal action when partners can’t do business with each other any longer

Lawsuits often are often based on alleged breaches of these partnership obligations.

  • This can start when a partner acts in bad faith towards other partners or takes advantage of an opportunity for personal gain.
  • A partner may hoard customers, set up a competing business, get side deals with vendors or be involved in outright theft.
  • One partner may also accuse another of breach of the partnership agreement.
  • Partnership litigation can get very personally and emotionally heated.  There are feelings of broken trust and disloyalty and the process can be similar to a business divorce.

Make a plan and stick to it

If you feel you may need to file a legal action because of problems with your partnership, contact my office so we can discuss the situation. You need to decide what you want from the litigation, consider the costs and we can come up with a plan.

  • Partnership litigation can be expensive and time consuming.
  • Legal action could drain partnership funds and potentially destroy the business.
  • If the dispute involves property, the financial situation of the business may become even more volatile.

With a reasonable plan and sensible goals, and if you stick to them, you might be able to see things objectively and avoid an overly emotional response. Partnership litigation should be a rational decision to reach quantifiable goals, not an exercise in revenge or an attempt to get the proverbial “pound of flesh” from a business partner.

Avoiding litigation

Emotional responses will dilute your objective analysis and ability to implement a best strategy to a reasonable resolution. Resolving disputes short of legal action could include,

  • Disputes around money might be able to be addressed through accounting, either internally or through your accountant.
  • Mediation or negotiation may avoid litigation, resolve the dispute or bring partners to the point where they are willing and able to buy each other out.
  • The business could be sold, assuming the business is worth buying and the partners can agree on a sales price.

If you feel your partnership has reached a point of no return and something needs to be done to remedy the situation, contact my office. Depending on the parties and issues involved, there may be a resolution short of full blown litigation that will allow all the parties to move on with the least disruption to their lives and to the business.