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Thinking about suing your business partner?

By Anton Katz

Small business owners have to juggle many competing demands in order to succeed. If you are a Toronto small business owner considering litigation against your business partner, you may wish to follow the five tips below before proceeding.

And if things have gone south between you and your business partner, the stressors can be tremendous. They may even be enough to destroy the venture you’ve worked so hard to get off the ground.

1. Review your business agreements

If you have formal business agreements in place, secure a good corporate lawyer to review them to determine whether they touch on the dispute at hand. If you’ve incorporated your business, the lawyer will also need to review the company’s articles of incorporation, bylaws, shareholders’ agreements, and so on to uncover any pertinent provisions therein.

But what if your small business doesn’t have any written agreements in place?

You’re not alone. Many small business owners are unprepared for unforeseen circumstances, such as a dispute with their partner. In this case, you will need to gather any emails, texts, or other evidence that shows consent between you and your partner on the particular issue. Your lawyer will also advise you as to whether there are any business laws that may regulate the type of entity you have created.

2. Find out what your remedies are

Before proceeding with litigation, you may wish to discuss the remedies available to figure out whether it’s worth it to you to proceed with litigation. Available remedies will obviously depend on the issue you are having, but some more common remedies in partnership disputes include:

  • Access to books and records;
  • A forced break up of the business or dissolution of the corporation;
  • Share purchase (where one member is forced by the court to sell his or her interest to the other member); and
  • Claims against a partner that may have damaged you or the business.

With respect to the last remedy listed above, managing members of a business or the officers and directors of a corporation are required to act in good faith and in the best interests of the business and its owners. This is what’s known as a fiduciary duty. So if your partner owes the business such a duty and – for example – engages in fraudulent behaviour, takes company assets for his or her own benefit, or diverts clients away from the business, you may be able to sue your partner directly or on behalf of the business.

3. Figure out whether you need immediate relief

A trial can take years to resolve. If you need help immediately to stop your business partner from doing irreparable harm to the business, you may want to seek injunctive relief. Consult your lawyer as to whether this would make sense in your circumstances. If granted, it will stop your business partner from carrying on conduct that will do irreparable harm to the venture.

4. Try to negotiate yourself out of the problem

Litigation should always be a last resort. When you begin a lawsuit, you need to realize that it is an expensive process that can take years to resolve. You are at risk of hemorrhaging tens of thousands of dollars – if not more. You’ll also spend countless hours gathering evidence that will help your lawyer argue the case. What’s more, litigation hinders your ability to sell your business if you’re looking to exit. So if you and your partner can come to a compromise, it’s worth considering settling the dispute. And remember, settlement is an option no matter how far along in a lawsuit you may be.

5. Contact a good commercial litigation lawyer immediately

The most important thing you can do if you’re considering suing your business partner is to consult a good commercial litigation lawyer. Refrain from undertaking any settlement discussions or negotiations which may jeopardize your position further. 

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