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A Guide to Business Partner Disputes

Operating a closely held or private business can be incredibly rewarding from both a personal and financial standpoint.  However, as our attorneys have repeatedly seen, conflicts between owners, partners, or shareholders inevitably arise, straining those relationships and potentially placing the entire enterprise at risk.  In cases where business partners include close family members or longtime friends, disputes can quickly become personal and even more contentious, which is why they are sometimes referred to as “business divorces.”

It may be the case that any differences you have with your business partner can be resolved through informal discussions, negotiations, and compromise.  When that proves impossible, however, it is likely in your best interest to seek legal representation from a litigator or trial attorney and, potentially, court intervention.  Should you find yourself at such a crossroads, having a clear understanding of your rights, options, and potential outcomes will significantly enhance your ability to effectively navigate the complex and potentially lengthy litigation that might lie ahead.

Does A Business Partnership Need to be Equal?

Business partners can find themselves at odds for any number of reasons.  However, situations in which disagreements become intractable and eventually reach a point where litigation is necessary are often due to how ownership is divided among the partners rather than the point of contention itself.  When you are preparing to launch a new business, an equal ownership arrangement might seem logical and fair.  But, in our litigation experience, the absence of a majority partner often leads an enterprise to become mired in gridlock and stalemate when the principals inevitably disagree.

If every partner is equal, the potential for deadlock (and resulting conflict) is ever-present.  Most partnership arrangements require a majority vote for critical decision-making.  Because neither partner holds a majority in a 50-50 corporate structure, a unanimous vote of both partners is therefore required.  All too often, one partner will use this leverage to extort concessions from the other partner.  In cases where the business or personal relationship between the two partners has deteriorated, one partner may effectively grind business to a halt by refusing to agree to the other partner’s proposals.  If this strife leads one partner to seek to exit the business, reaching an agreement on a buyout price and structure may prove impossible to achieve without outside help from an experienced attorney.

While an equal partnership does not preclude a successful business, the potential for disputes that bring a business to a standstill looms much larger. Even when partners have planned carefully and established formal structures for day-to-day management, dispute resolution, and exit protocols, it has been our experience that conflicts are more likely to result in a business divorce when every partner has equal control.

Does A Partnership Need an Agreement?

The short answer is yes.  Even if you are entering into a business venture with your closest family member or best friend, having a written partnership agreement in place is crucial for protecting not only your individual interests but also the overall health of the business.

A well-drafted partnership agreement can help head off conflicts by addressing each partner’s financial contribution, roles and responsibilities, profit allocation, and decision-making.  More importantly, a robust agreement will also include provisions for addressing disputes that arise between the partners, such as processes for mediation or arbitration, as well as terms for buyouts should a partner opt to leave the business or dissolution should the partners wish to wind down the business.

That is not to say that a robust partnership agreement will eliminate conflict or even prevent a business divorce.  In fact, many of our clients turn to us because a business partner willfully violated the terms of their agreement.  But assuming everyone is acting in good faith, a partnership agreement can help you minimize or avoid most common disputes and serve as a playbook for resolving those that do occur with minimal disruption to the business.

How Can I Resolve a Stalemate With My Partner?

Partnership disputes are characteristically complex, particularly when the partnership is 50-50.  If you and your partner have become embroiled in a seemingly intractable conflict, it is never too early to consult with an experienced commercial litigation attorney to explore possible paths to resolution and develop a strategy to maximize your desired outcome and safeguard your interests in the event of a business divorce.

Review Your Partnership Agreement

You and your attorney should begin by reviewing your partnership agreement to determine the partners’ respective rights and responsibilities, potential areas where your partners have fallen short of their contractual and fiduciary obligations, and specific mandatory protocols and mechanisms for resolving conflict.  Pay careful attention to the agreement’s dispute resolution provisions, as they may impact your legal strategy significantly.

Send a Demand Letter

A demand letter serves as a precursor to litigation and is often enough to bring a recalcitrant partner to the negotiating table. In your demand letter, your legal counsel will outline your allegations, claims and damages and formally request specific actions or remedies required to bring the dispute to a satisfactory resolution.  To demonstrate that our clients are serious about obtaining relief from a court or arbitrator, if necessary, our attorneys also typically prepare and include a copy of the complaint we intend to file on their behalf.  Investing time in crafting a well-drafted complaint can reap substantial rewards at the negotiating table and result in lower attorneys’ fees down the road.

Negotiate

If your demand letter does bring your wayward partner to the negotiating table, it may be tempting to negotiate on your own.  However, we strongly advise against doing so.  While you might be an excellent negotiator in situations where you are not as emotionally invested, any personal animosity between you and your partner could cloud your judgment and cause you to make a costly mistake.

Once at the negotiating table, we help our clients manage their emotions and ensure the discussions stay on track.  In addition, our experienced commercial litigators can suggest and implement bespoke, out-of-the-box solutions our clients might not have considered.

Consider a Mediator

Depending on the terms of your partnership agreement, you may be required to submit your dispute to mediation before going to court or arbitration.  Both mediation and arbitration are private dispute resolution mechanisms that utilize a professional third party.  However, whereas an arbitrator will decide how your dispute will be resolved, much like a judge, a mediator will collaborate with you and your partner to bring about a satisfactory resolution through consensus. Even if mediation is not mandatory, we strongly advise our clients to use a third-party mediator when both sides have agreed to negotiate or if initial discussions have not proven productive.

Working with legal counsel is critical when attempting to mediate a business partner dispute.  An experienced commercial litigation attorney will know the professional mediators in your geographic area and industry and can help you choose the best one for your situation.  As you work toward a resolution, your attorney will provide the necessary guidance and advice that will help maximize your outcome and leave you better positioned to exit the mediation with a successful settlement on your terms.

Take Your Partner Dispute to Court or Arbitration

In our experience, negotiation and mediation only work out when all parties are genuinely committed to resolving the dispute and the gap between the parties’ positions is manageable such that a compromise can be found.  When that gap is too large or personal animosity prevents reasonable negotiations, there’s a good chance that informal resolution efforts will fail. If you have reached such a point, heading to court or arbitration is the next step on the path to resolution.

Depending on the terms of your partnership agreement, your legal counsel will advise you whether to file a lawsuit in the courts or submit your dispute to arbitration.  Your lawyer should then craft a custom litigation strategy that will maximize your personal and professional goals.  While litigation can be a lengthy process, having a knowledgeable and experienced commercial litigation attorney in your corner will go a long way toward bringing your dispute to a successful resolution.

Do I Have Grounds to Sue My Business Partner?

If you are considering filing suit against your business partner, you must be able to prove that they violated the terms of your partnership agreement and/or failed to uphold a duty they owed to the partnership.  You will also need to show that their bad acts caused you or the business to incur actual damages (loss of money, goodwill, opportunity, etc.) due to their breach.

Some common grounds for suing a business partner include:

  • Breach of Partnership Agreement: The failure to uphold the terms or obligations of the partnership agreement is the most common basis for suing a partner and seeking a business divorce. Examples of breaches that might warrant a lawsuit include withholding profits, taking an excess share of profits, refusing to provide access to books and records, or entering into business deals without the approval of other partners.
  • Breach of Fiduciary Duty: You and your partner are legally required to act in the best interest of the business and each other. Your partner may have breached this fiduciary duty if they engaged in self-dealing, wasted corporate assets, failed to account for the partnership’s profits, or engaged in any other conduct that harmed the business’s interest.
  • Fraud: You may have grounds to sue your partner for fraud if they embezzled or stole from the business by falsifying bookkeeping entries, invoices, expense reports, or payroll records, through the misappropriation of business inventory, or by employing other deceptive means.
  • Accounting: If your partner is denying you access to the business’s books and financial records, you may have to sue to enforce your right to access those records. An action for an “accounting” would require your partner to account for any profits or benefits derived from the business’s operations or from any use of the partnership’s assets.
  • Misappropriation of Intellectual Property: Your partnership agreements should stipulate that any copyrights, patents or trademarks your business holds are the partnership’s property. If your partner used any of this intellectual property for personal profit or gain, litigation may be necessary to enforce your rights.
  • Criminal Activity: If your partner defrauded the business, stole from a customer, or engaged in other illegal activity that damaged your business or its reputation, their misconduct may rise to the level of criminal activity that you should bring to the attention of law enforcement.

Remedies for Breach of Partnership Agreement

As with any legally binding contract, a partner who fails to uphold their obligations as outlined in your partnership agreement can be held liable for the damage done to the business and to the remaining partners.  The specific remedies available to you will depend on the nature of the breach, and you will need to work with your attorney to explore the most appropriate path forward.

Some common remedies that a court may award in a business divorce case include:

Monetary Damages

You may be able to seek monetary damages to reimburse the business for any losses incurred due to your partner’s breaches of the partnership agreement, their fiduciary duty to you or the corporation, and other bad acts or misconduct.  The nature and extent of monetary damages awarded will depend on the nature of the breach and the terms of the partnership agreement and may include compensation for actual financial losses, lost profits, and other measurable harm.

Demand for Accounting

To determine the full extent of a breach, your attorney may file a claim for an accounting with the court.  If this request for relief is granted, you will be given the opportunity to conduct a comprehensive examination of the partnership’s financial records and transactions to establish the degree of the harm done to the business and the appropriate remedies.

Access to Books and Records

As an owner, you ordinarily have a right to review the partnership’s books and records. If your partner has been denying you access and continues to do so despite a formal written request, it may be appropriate to ask a court to issue an order directing them to provide you with that access.

Dissolution

If you have reached a point where continuing the partnership is no longer reasonable, ending the business venture might be your best course of action.  However, if your partnership agreement does not include a dissolution clause or your partner refuses to consent, your attorney may need to petition the court for a forced judicial dissolution.

Sale or Division of the Business

In a case where one partner wishes to cash out but the parties cannot agree on a buyout price, a court or arbitrator can order an appraisal of the business in support of a sale and otherwise direct the parties to comply with a partnership agreement’s processes for such a sale.

Why is Arbitration Frequently Used in Business Disputes?

The rising cost of litigation and the ever-present pressure to rein in legal expenses have driven many businesses to favor alternative dispute resolution (ADR) in business divorce cases.  One such method, arbitration, can offer many advantages over traditional litigation:

  • Confidentiality: Arbitration proceedings are typically confidential, meaning that the details of the dispute and any resulting decisions remain private.
  • Speed: Compared to litigation, which can take months or even years, arbitration may be faster and more streamlined. The discovery process is often more limited than in a traditional lawsuit, and litigation-related disputes can be resolved more quickly and informally by an arbitrator. 
  • Cost. Because cases are litigated more efficiently in arbitration, attorneys’ fees are often lower than in a traditional lawsuit.
  • Flexibility: Unlike a traditional lawsuit, the parties involved in arbitration can agree on the rules and procedures governing the process. This allows for flexibility and tailoring to the specific needs of the dispute.
  • Expertise: Arbitrators are often selected based on their expertise and knowledge of a particular industry or type of dispute. This can lead to a more informed decision than a jury of your peers, which may result in an outcome better suited to the parties involved.
  • Control: Parties in arbitration often have more control over the process and can usually choose an arbitrator they trust to hear their case instead of having a judge or jury decide the case.

You may opt to pursue arbitration in consultation with your attorney, or the terms of your partnership agreement may require that all disputes be submitted to an arbitrator before proceeding to litigation or in place of going to court.  If the final decision is yours, it is essential to understand that arbitration and other forms of ADR are not always an appropriate substitute for litigation.  Your attorney should take the time to carefully listen to and consider your needs, then formulate a unique strategy to achieve optimal results in the most cost-effective way possible.

Should You Keep Your Partnership Dispute Private or Make It Public?

A partnership dispute can significantly affect your company’s reputation and bottom line.  If you are tempted to go public with your conflict, there are a few things you need to consider first:

Privacy Concerns

Keeping a partnership dispute private (e.g., through mediation or arbitration) prevents sensitive information from becoming public knowledge.  This is especially important for closely held businesses, where partner disputes can negatively impact day-to-day operations.

Reputation Management

The decision to make a partnership dispute public should account for the potential impact on each partner’s reputation and the company’s overall standing.  Public disputes may damage credibility and negatively affect future business opportunities.

Legal and Financial Implications

Going public with your dispute means filing a lawsuit, which can result in costly fees and potentially large damage awards.  Depending on the nature of your dispute, private resolution methods such as mediation and arbitration could prove less expensive and might allow for more control over the outcome.

Takeaway

Yankwitt LLP represents businesses and high-net-worth individuals across a broad range of matters.  As seasoned business litigators and trial attorneys, we understand the significant damage partnership disputes can inflict on an enterprise and its principles, particularly when the conflict involves a family or other closely held business.

As Westchester County’s go-to law firm for high-stakes, bet-the-company litigation, we take pride in our ability to optimize outcomes in the most cost-effective manner possible.  While we have achieved some of our greatest successes at court-sanctioned settlement conferences, mediations, and binding arbitration, we will enthusiastically take your partnership dispute to trial if a settlement proves impossible.

To learn how we can assist with your partnership dispute, contact us at 914-686-1500.