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Disputes between business partners are a common source of commercial litigation matters. When one partner sues another, the fight can get messy and become disruptive to business operations. Disagreements tend to occur during times when the business is underperforming. In many cases, the dispute is over a partner’s share of profits, but can also arise when a partner has a different vision for the company or challenges a decision made by a copartner, or when a partner simply does not wish to continue with the relationship. 

It’s often said, “it’s not personal; it’s strictly business.” But much like a marital divorce, litigation between quarreling business partners can quickly deteriorate into trivial battles involving collateral personal matters. If you are facing a business divorce, you must act quickly to protect your legal rights and interests in the company. Here is what you need to know about business partnership litigation.

Breach of Contract

Partnerships are creatures of contract. The law contemplates a written agreement among the partners specifying the terms of their relationship. A good partnership agreement will set forth the overall vision of the company as well as the ownership stakes, financial obligations, roles, and responsibilities of each partner. The agreement should also address how important business decisions will be made. Ideally, the contract will provide a process for dealing with disputes. Otherwise, a breach of any terms of the agreement relating to these areas may result in a claim for damages arising from the breach of contract. Consequently, the outcome of most business partnership disputes will turn on what the applicable contract says. 

Breach of Fiduciary Duty

A business partnership is one of trust and confidence. All partners are fiduciaries of one another, subject to an obligation of the utmost good faith and integrity in their dealings with one another with respect to the partnership affairs. The members of a partnership owe each other a duty of loyalty, honesty, and good faith. As a fiduciary, a partner must consider his or her partners’ welfare and refrain from acting for purely private gain. Managing partners or directors owe a heightened duty of fair dealing and disclosure. Thus, the vast majority of lawsuits among business partners contain a cause of action for breach of fiduciary duty. These types of cases may involve the following issues:

  • Self-dealing
  • Embezzlement, misappropriation, or misuse of partnership funds 
  • Waste of business assets 
  • Neglect of partner responsibilities
  • Exposing the partnership to the unjustified risk of financial harm

However, not all decisions made by a fellow or managing partner will be subject to judicial scrutiny. Under the “business judgment” rule, a decision made by a fiduciary in good faith and without personal bias or conflict of interest is not actionable even if the decision does not work out.

Right to an Accounting

If a partner betrays his or her trust and converts partnership property to his or her own use, he or she may liable to other partners in an accounting. Accounting is a way of determining the amount of monetary damages in actions for breach of fiduciary duty and breach of contract by a partner when the amount is uncertain and cannot be calculated because that information is within the exclusive knowledge or possession of the other partners. 

Any partner is entitled to an accounting upon dissolution of the partnership. Parties may seek an accounting prior to dissolution where the partnership has ceased operations and the parties request a financial determination of their respective rights. Any partner has the right to a formal account as to partnership affairs whenever other circumstances render it just and reasonable, even prior to dissolution, such as when a partner is wrongfully excluded from the business.  

Choose Levy Goldenberg LLP

If you are being sued by a business partner or are facing the threat of such a lawsuit, you will need an experienced and knowledgeable commercial litigation and business law attorney to advise you of your rights. Contact Levy Goldenberg LLP, New York’s leading commercial litigation and business law firm, today to discuss your case.