Grounds for Suing a Business Partner

A business partnership always begins with trust and shared goals, but as time moves on, issues like financial disagreements, misconduct, or breach of duty may arise. When irreparable conflicts threaten the business, legal action may become necessary to protect the company and your interests. But what are the grounds for suing a business partner? This article explores legal grounds for seeking restitution against a business partner through a lawsuit.

Fiduciary Duty to a Business

California Corporations Code § 16404 outlines the legal duties that partners owe each other when establishing a business partnership. These duties include the following:

• Duty of Loyalty – This entails the following:
  • Accounting for Profits: Partners must account for and safeguard any profits or property gained through partnership activities, ensuring they benefit the partnership rather than personal gain
  • Avoiding Adverse Interest: Partners must not engage in actions that conflict with the partnership’s interests or prioritize personal gains at the expense of the business
  • Refraining from Competition: Partners are prohibited from engaging in activities directly competing with the partnership’s ongoing business operations.
• Duty of care – Partners must avoid gross negligence or making reckless decisions that intentionally cause harm.

Grounds for Suing Business Partners in California

The primary legal grounds for civil lawsuits against business partners often involve the following:

Breach of Contract

The most common reason for filing a lawsuit against a business partner is breach of contract. When a partner fails to meet their obligation as outlined in the agreement, they are said to be in breach of contract and can be sued for damages. For example, if you and a partner started a catering business as a Limited Liability Partnership (LLP), splitting responsibilities, but your partner failed to honor their end of the bargain, such as to procure supplies or staff, leading to a cancellation of already secured events and reputational harm, you could sue for damages. This might include recovering your initial investment, covering expenses like kitchen rentals and client reimbursements, and seeking legal remedies such as dissolving the partnership or removing the partner.

Breach of Fiduciary Duty

When a partner prioritizes their interests instead of the partnership’s, this is grounds for suing. For example, if they misuse company resources for personal purchases, withhold critical information, or engage in a competing business, you may have grounds to sue them to recover losses.

Fraud or Misappropriation

Fraud can occur when a partner gives false information or withholds key facts to gain an unfair advantage, misappropriation, or conversion of business assets for personal use without the other partner’s consent. An experienced attorney can help you trace misappropriated funds and assist in filing a lawsuit against your business partner for recovery.

Negligence

You can also use your business partner if they do not exercise adequate care to fulfill their duties, causing financial harm to the business. For example, if they fail to secure required permits or ensure compliance with industry regulations, leading to fines, penalties, or disruptions to business operations, you may have grounds to file a lawsuit.

How a Business Litigation Lawyer Can Help

A business litigation lawyer can assist you in several ways, including:

• Reviewing your partnership agreement and advise on your options based on the terms outlined
• Assessing the validity of your claim
• Advocating for you in court
• Guiding you on other viable dispute resolution methods, such as mediation or arbitration.

Legal Help is Available

If you are involved in a dispute with your business partner, contact our San Francisco business litigation attorneys at SAC Attorneys LLP for help.