Partnership Disputes in California

When first forming a partnership in California, the focus is usually on how to get the business going.  No one likes to think about possible problems that may occur sometime in the future.  However, planning for the worst is easier when things are going well and people are thinking logically about how they would resolve potential conflicts.  Establishing guidelines in advance can help avoid a business divorce, minimizing disruptions to the business and loss of revenue.

There are many reasons why conflicts may arise among partners.  A California partnership dispute typically involves disagreements over how the business is being run, allegations of partner misconduct or a breach of a partner’s obligations to the partnership.

Breach of Contract

Partnership agreements are complex, establishing the roles and responsibilities of the partners as well as the financial arrangements governing their relationship.  In addition, partners may sign other contracts related to the partnership, such as employment, confidentiality, non-compete and operating agreements.  If a partner violates a contract term, a breach of contract action can result.

Breach of Fiduciary Duty

Partnerships create fiduciary duties between the partners and the partnership.  A fiduciary duty is an obligation that a person acts in the best interests of another person or an entity.  Under California law, a partner owes the duties of loyalty and care to the partnership and the other partners.  A party suing for breach of fiduciary duty may be awarded direct and indirect damages, injunctions, restitution, rescission, legal fees and other appropriate remedies as provided under the law.

Misappropriation or Other Partner Misconduct

A partner’s misconduct can be harmful to the business.  Partners are prohibited by law from misappropriating company funds, assets or partnership opportunities.  In addition, partners cannot compete with the partnership or have an adverse interest.  Other types of misconduct include concealing information about the business; gross negligence or recklessness in managing the business; or committing a crime or fraud, whether it relates to the business or not.

Workload Imbalance

Typically, the partnership agreement sets forth the responsibilities of the partners with respect to the work required to operate the business.  However, if the agreement is not sufficiently clear or detailed, disputes can arise among partners regarding their respective share of the workload.

Disagreement Over Operations of the Business

Conflicts can arise among the partners regarding how the business should be run.  This can consist of disputes over the day-to-day operations, investments in and allocation of resources to the business, and decision-making authority.

Some conflict among partners is likely inevitable, but in most cases, disputes should be able to be resolved amicably.  

Alternative Dispute Resolution

Where the parties cannot settle the matter themselves, the partnership agreement may require that disputes be resolved through some form of alternative dispute resolution.  Mediation and arbitration both rely on the use of neutral third parties.  In mediation, a neutral third party (the mediator), helps facilitate discussion and agreement between parties, but he or she does not impose a decision.  Arbitration, in contrast, results in a decision by the neutral party, but whether the award is legally binding depends on the parties’ agreement.  Where it is legally binding, the courts can enforce the arbitration award.

Dissolution of the Partnership

The dissolution of the partnership is a final solution to disputes.  If all partners agree to dissolve the partnership, it is considered a voluntary dissolution.  Where only some of the partners want dissolution, it is involuntary, and the partner requesting dissolution must get a court order to dissolve the partnership and divide the assets and debts of the business.

In either case, it is important to wind down the business properly, which includes dealing with existing contracts, vendors, clients, bank accounts, intellectual property rights and other matters.  A receiver may be appointed by the court to manage the business until the dissolution is final.

If conflicts between partners become inevitable, our business litigation attorneys can walk you through the available legal recourse to help you resolve disputes.

Some conflict among partners is probably inevitable, but in most cases, it should be able to be resolved amicably. Negotiation is the first step and allows the parties to come to a settlement where everyone wins and loses something.

Partnership disputes can lead to a disappointing end to a business.  However, thinking through the potential pitfalls and having a well-drafted partnership agreement in advance can often make a significant difference in avoiding or minimizing conflict.  Our Los Angeles attorneys can help partners understand their rights and responsibilities and quickly address potential problems before they do irreparable harm to the business.

Romano Law can provide guidance on partnership disputes in New York, California and Florida.

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