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When can I sue my business partner?

To file a lawsuit for any reason, you must have legal standing, and there are specific grounds when it’s your business partner. A frequent cause is breach of contract.

Every business partnership starts with an agreement. This can be in the form of a written contract, but an agreement doesn’t have to be in writing to be enforceable. Of course, having each partners’ responsibilities and duties printed and signed by them makes for a clearer legal case, if a partner has breached the contract.

But what is considered a breach of contract in California? The California Civil Code defines a contract as a legal agreement between two parties that establishes obligations for both parties. Each party has both a legal duty to fill the contract requirements and the expectation that the other party will do the same.

A party can be an individual or a company. In either case, when one party fails to meet its obligations as spelled out in the contract, this is a breach of contract and is grounds to sue for damages.

Let’s say you and a partner started an office cleaning business as a limited liability company. Both of you invested an equal amount of start-up money and signed an agreement that specified you would be responsible for finding customers while your partner would handle hiring employees.

Two months later, you’ve established a solid stable of clients, but your partner has come up short on workers to do the cleaning. You now have grounds to sue your partner for damages. This could be the initial financial investment you made — equipment was purchased, a payroll business was paid — plus interest. You can also seek relief through dissolving the partnership or expelling the partner.

While it’s a simpler and more straightforward process when the partnership agreement clearly spells out the process and grounds for dissolution in an expulsion clause, you can still appeal to the courts if the agreement is verbal or doesn’t address breach of contract issues.Negligence and abandonment are other grounds that can fall under breach of contract, especially if addressed in the partnership agreement.

But keep in mind statute of limitations. For verbal agreements, the lawsuit must be filed within two years of the alleged breach. For written agreements, you have four years from the date of the alleged breach to sue.

However, there are other legally valid reasons to sue your business partner, apart from breach of contract. These include:

Breach of fiduciary duty. Fiduciary duty is about loyalty to the company and its partners, who should avoid conflicts of interest and deals that benefit the partner making the deal over the partnership. In the cleaning business we outlined above, if one partner entered into contracts for offices she is legally connected to from a different business, and she offered lower than agreed-upon rates for the service, that could be considered a breach of fiduciary duty.

Fraud. This usually relates to the business’s finances, for example, if your partner submits invoices for supplies for more money than they actually cost. But there are other fraudulent activities in business. Let’s say your partner hired employees not legally allowed to work in the U.S. without your knowledge and now your business is facing criminal charges. That could be also considered grounds to sue.

Theft.If your partner steals money or equipment from the business, you can sue to try to recover the funds or items. Similar to fraud,  theft and embezzlement are criminal matters in addition to civil ones relating to your partnership.

Suing your business partner rarely resolves the dispute, so it’s critical to understand not only your individual rights but to consider the possible outcomes of the lawsuit and what your goal is in filing the suit. Mediation may be the smarter first choice. For a free consultation with LawPLA, just contact us by telephone or through our website.

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PLEASE NOTE: This is not a representation, warranty, or guarantee of a future result or outcome. Every case is different just like every one of our clients.

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