Business Partner Dispute Laws

Disputes between business partners are common. However, business partners’ dispute becomes a legal problem when sabotage, stealing, misappropriation, embezzlement, or violation of employment and business partnership laws.  

Author: Brad Nakase, Attorney

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Business Partner Dispute Example

Connie and Elliot have owned the graphics and animation company RoboRise Games for the past ten years. As partners, they have worked together to create unique, stunning graphics for games and movies. However, Connie has recently made a disturbing discovery. She has learned that Elliot has been selling information to a competitor, putting RoboRise’s market dominance at stake. As Elliot’s business partner, Connie does not know how to resolve such a sensitive dispute. She wonders what the laws are surrounding partner disputes, and whether she can solve the problem without being forced into a messy court battle. She first tries to discuss the issue with Elliot, but this results in a screaming match where Elliot accuses Connie of trying to oust him. Connie then hires a lawyer, to whom she presents evidence of Elliot’s unsavory actions. The lawyer helps Connie come to an agreement with Elliot, by which he leaves RoboRise in order to avoid paying exorbitant legal fees in court.

What Are Business Partner Disputes?

It is entirely normal and expected for there to be disputes among business partners, and for these arguments to cause difficulties for their companies. While these problems are not unexpected, they can be difficult to handle. Often the issue concerns whether to deal with a business partner dispute in an informal, casual way, or to hire the help of an attorney and file a civil suit against the other partner.

Business partner disputes may arise from a number of sources. These include the following:

  • Inequality of pay or work
  • The misappropriation of business assets
  • Destroying business goodwill
  • Competing with the business
  • Failing to act as a fiduciary to the partner and the business

Understanding the Cause of the Dispute Prior to Confrontation

It is critical that a business partner endeavor to understand the source of the disagreement prior to confronting his or her partner. The partner should carefully review company documents, which might include the shareholders agreement or the LLC operating agreement, in addition to formation paperwork. These documents indicate which individuals own which parts of a business, including who owns what profits and how the business is managed from a bird’s eye view and day to day. It is possible that one of these documents includes a provision that addresses how to deal with business partner disputes.

After reviewing these documents, a partner should consider the following questions:

  • What issue is the partner worried about?
  • What actions did the other partner perform that led to the current issue?
  • What actions did the partner take that led to the current issue?
  • What resources are at risk?
  • Is there anything that can be done to prevent current or future losses?
  • How should the issue be resolved?
  • Does the partner wish to keep working with the other partner, or is best to separate?
  • Does one partner wish to buy the other one out?
  • Does one partner wish to sell the company?

What Actions to Take Before Approaching the Other Partner

Before confronting one’s business partner about the dispute, one should ensure that he or she has fulfilled all their legal obligations and duties. This would include not deleting records and emails, as well as making sure that he or she is fulfilling their day-to-day obligations for the company. It might also be an appropriate time to book a consultation with an attorney to discuss one’s legal duties.

How to Try to Resolve the Dispute Informally

Once a business partner comprehends what is at stake due to the dispute, how he or she would like to resolve the argument, as well as his or her legal obligations, the next step would be to sit down with the other partner for an honest discussion of the issue. If talking it out does not work, then it may be better to try mediation to resolve the conflict. If this proves successful, them this path could create a stronger business relationship and provide a blueprint for future conflict resolution between partners. It may also be the appropriate time to analyze whether company documents require updating, perhaps to include provisions regarding partner disputes.

When It Is Appropriate to Involve an Attorney

Hopefully, by following the steps described above, a business partner may resolve a dispute without having to hire an attorney. However, one may find themselves in need of legal advice. Or it could be that legal action is the only way forward for a business.

It is important to find an attorney that has experience with resolving business disputes with speed and efficiency. Preferably, the lawyer should be involved from the beginning of the dispute so that he or she can help guide the partners toward an informal resolution. It is important to be detailed about problems, describing them in depth to one’s attorney so that he or she can understand the business and the relationship between partners. It is also crucial to discuss any relevant statutes of limitation or deadlines if a case is pending.

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