A deteriorating relationship among business partners can eventually culminate in potentially catastrophic litigation that can ruin a business. To avoid this outcome, partners should recognize the signs of a brewing dispute to prevent problems from escalating and protect their hard work.
Poor Communication and Growing Trust Issues
One of the first signs of a brewing partnership dispute includes declining communication and an erosion of trust between partners. Signs of declining communication include partners responding inconsistently to communications, waiting longer and longer periods to respond, or avoiding discussions about difficult or complex topics. Signs of festering trust issues between partners may include growing suspicions over partners’ actions on behalf of the business or their intentions for the company’s future.
Financial Disputes and Differing Visions
Another common sign of a looming partnership dispute includes disputes over company finances or the vision for the company’s future. Financial disputes may arise over the use of company profits, including disagreements over whether to reinvest profits or distribute them to partners. Financial disputes can also include unexplained transactions or missing records, creating suspicion or mistrust between partners.
Partners may end up in a legal dispute due to differing visions or goals for their business. For example, one partner may want to aggressively expand the business by reinvesting profits, capital calls, or seeking out outside investment, while other partners may prefer a more cautious approach. Partners may also develop differing exit strategies, especially when outside parties come to the partnership with offers to invest or buy the company. Unfortunately, a misalignment of goals and vision can quickly escalate other simmering conflicts among partners.
Lack of Transparency
Suspicions between partners can arise due to a lack of transparency. Partners may stop keeping accurate or detailed records of financial and other transactions. Partners might also fail to report material information to their fellow partners, such as potential liabilities that may affect the business. Unfortunately, when partners start believing that their fellow partners have something to hide, disputes in other areas can eventually explode into litigation.
Breaches of Fiduciary Duties and Contractual Obligations
Partnership litigation may also arise when one or more partners breach their contractual obligations under the partnership agreement or breach fiduciary duties owed to fellow partners and the business. Breaches of the partnership agreement can include failing to meet capital calls, usurping business opportunities, or violating restrictive covenants like non-compete/non-disclosure/non-solicitation agreements. Partners also owe fiduciary duties to each other and their business, such as the duty of good faith and fair dealing, the duty of candor, and the duty of loyalty. Failing to act prudently in managing the business or usurping company assets or benefits for personal profit to the partnership’s detriment can also lead to litigation.
Other Warning Signs
Other potential warning signs of brewing partnership litigation include:
- Market factors putting external pressure on the business: Economic factors that adversely affect the partnership’s performance, including declining sales or profits, can increase strife between partners by diverging their visions for the company’s future or creating mistrust.
- Third-party inference: Third parties such as investors, suppliers, or the partners’ family members can exert pressure on partners, ultimately eroding their relationship.
- Involvement of legal counsel: A sign of potential legal disputes includes partners involving their legal counsel in internal discussions, including directing fellow partners to forward all future communication to their attorney.
- Threats of legal action: Finally, one of the most evident signs of imminent partnership litigation includes one or more partners explicitly threatening legal action against their fellow partners or the business.
Contact Our Firm Today for Help Resolving Looming Partnership Disputes
When you have a looming legal dispute with your business partners, get the experienced legal representation you need to protect your and your company’s interests. Contact Levy Goldenberg LLP today for a confidential consultation with a business attorney to discuss your options for resolving a partnership dispute in Manhattan before costly litigation occurs.