Disloyal Business Partner? How to Handle a Breach of Fiduciary Duty
If you’re dealing with a disloyal business partner, then you’ll need to know how to properly handle a breach of fiduciary duty.
Read all the details here.
Introduction
Starting a business can have its challenges, which is why so many people choose to bring others into their business. Maybe they are only a small part of the company, maybe not. But, doing so opens business owners up to greater risks – as you are giving up some insider knowledge and control over your business to another party.
For many, this relationship works well. Unfortunately, though, that is not the case for everyone. Sometimes things go sour and trust is broken. When it comes to a business, this disloyalty can come at a steep price.
If you have found yourself in this situation or you are suspicious about your business partner, it is important to understand how you can handle breach of fiduciary duty so that you can protect your rights and your business.
What is Fiduciary Duty?
The California Civil Jury Instructions define a fiduciary relationship as “any relation existing between parties to a transaction wherein one of the parties is in duty bound to act with the utmost good faith for the benefit of the other party.”
Simply put, a fiduciary duty is having an obligation to act with a person’s best interest in mind, based on whatever the nature of the relationship with said person. There is a level of confidence and trust that is expected – and the fiduciary duty is one that each person is to protect and uphold. Fiduciary duty can arise in many instances throughout the legal system, in business transactions, and so on. It basically boils down to two parties – whatever they may be – having an understanding that every action and decision is made in good faith and for the benefit of the other.
There are many different types of fiduciary relationships, such as:
- A lawyer has a fiduciary duty to the client.
- A trustee has a fiduciary duty to the beneficiary.
- An executor has a fiduciary duty to the heir.
- An employer has a fiduciary duty to the employee.
- A corporate officer has a fiduciary duty to the shareholder.
Depending on the situation and the relationship, duties may vary. But, it can be stated that there are two duties: duty of care and duty of loyalty that need to be upheld.
Duty of care is when business decisions are made only after careful review, analysis, and due diligence. Any and all steps that need to be taken to ensure the best interest of the business are the basis for decisions.
Duty of loyalty is when each party does not use his or her status or interest in the company for personal gain or to advance private interests. All activities that may interfere or have been of conflict of interest must be disclosed.
What is Fiduciary Duty Between Business Partners?
When it comes to your business partner, fiduciary duties need to be met. This person, whether a shareholder, business owner, limited liability company member, and everyone else involved all have a fiduciary duty.
What does this relationship look like for businesses?
You hire someone to help you. Maybe you have even had them sign a written contract or simply just made an oral agreement because this person is a good friend. You expect this person to have your back in your business.
And, they do. That is – until they don’t.
What is a Breach of Fiduciary Duty in California?
It happens all the time. Business partners get greedy. They see a way to make money for themselves, maybe start up something on the side and sway clients. When do the actions of this business partner constitute a breach of fiduciary claims?
If a fiduciary relationship can be defined as a contractual relationship that relies heavily on the honesty and loyalty of the other party, then it can lead to a legal claim for breach of fiduciary duty if this honesty or loyalty is broken.
A business partner knows very personal, detailed information about a company, and a level of confidentiality is expected. Because these instances are so varied from situation to situation, there are no hard and fast laws that specifically state when something is a breach of fiduciary duty. However, when that trust, loyalty, and care has dissipated, it is evident that the fiduciary duty has been breached.
Determining the Damages
Since fiduciary relationships will not always have a written contractual agreement, there is never a set dollar amount listed for damages. This means other methods need to be used, such as the formula often used to determine fraud or punitive damages.
When determining damages, you may want to consider the following:
- The amount of profits lost.
- Difference between the value paid and the value received when referring to professional relationships.
- Mental suffering, anguish
In California, the state law allows for tort damages – and this includes punitive damages. According to California Civil Code Section 3333 and California Civil Code Section 3294, it may also be used when a fiduciary duty is intentionally breached.
How an Attorney Can Help
As you can tell, there are a lot of questions that arise when it comes to fiduciary duties and whether or not they have been breached. Because you need to have the trust and understanding that comes with having a fiduciary relationship for them to work, you leave yourself vulnerable.
This doesn’t mean you deserve to experience disloyalty.
If you have a business partner who has concealed profits, engaged in insider trader, made negligent management decisions, handled business on the side, misrepresented financial situations, and so on, then you likely have a claim for breach of fiduciary duty.
A civil litigation attorney is someone who can review your personal situation and determine whether or not you have a claim. And, if you do, can help you determine what the damages are. Because you are already likely feeling like a victim, don’t try to go through this alone. Instead, get the help of a professional who knows exactly how to handle disloyal business partners – and get them removed from your business.
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