Building a business with a partner can be an exciting venture. You combine skills, resources and, hopefully, a shared vision. But what happens when disagreements arise and communication breaks down? Unfortunately, partnership disputes are a common reality, sometimes leading to the need to file a lawsuit.
That’s why, if you’re a partnered business owner, you should equip yourself with essential information on navigating business litigation in partnership disputes. Exploring common causes of disputes can help you determine when litigation might become necessary.
Common causes of partnership disputes
While every partnership is unique, some disagreements tend to spark legal battles across industries. The most common trigger for partnership disputes is a breach of contract. The partnership agreement outlines the rights and responsibilities of each partner. A breach can occur if a partner:
- Fails to fulfill financial obligations
- Diverges from agreed-upon management styles
- Competes with the business
Aside from having obligations as outlined in the partnership agreement, partners also owe a duty of loyalty and good faith to the partnership. This means acting in the business’s best interests, not for personal gain. Misusing company funds, withholding crucial information or self-dealing can be grounds for litigation. Additionally, embezzlement, theft or fraudulent activities by a partner can severely damage the business and lead to legal action.
Disagreements on business strategy, financial decisions or how to handle profits can also lead to impasses. In such cases, the partnership agreement might outline a process for resolving deadlocks or dissolving the business, which could involve litigation.
When litigation becomes necessary
Litigation might be the only course of action if ADR is unsuccessful or not an option. A clear sign that you should proceed with litigation is when your business incurs significant financial losses due to a partner’s actions. Litigation might be necessary to recoup losses.
It can potentially be wise to take legal action to hold your partner accountable for intentional fraudulent behavior or malicious intent. Moreover, litigation might be necessary to obtain a clear legal interpretation for intricate contractual disputes or disagreements on partnership rights.
Partnership disputes can be disruptive and stressful. However, you can more confidently navigate this challenging situation with a clear understanding of your rights and options under the law.