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Did You or Your Business Partner Breach a Fiduciary Duty?

by | Partnerships

The law regards certain relationships in business as ‘special’ because they involve a heightened level of trust or reliance of one party on another. These are known as ‘fiduciary’ relationships and include those between attorneys and clients, business partners, employees and employers, and family members, among others. Parties with a fiduciary relationship must treat each other with the upmost good faith, fairness, and loyalty. If they breach their fiduciary duties, they are subject to more severe consequences than would exist in the usual arms-length transaction. As a result, it is important to understand when a fiduciary duty exists and what obligations the parties owe to each other.

As noted above, fiduciary relationships exist between business partners so many disputes that arise will allege a breach of fiduciary duty. However, not all conduct constitutes a breach of a fiduciary duty. For example, let us assume that Jim owns a restaurant with Paul, “JP’s Place.” Jim and Paul are equal owners. Two years ago, JP’s was doing great and both partners wanted to explore the possibility of acquiring a new restaurant in the next town. They came across an opportunity to acquire a restaurant (Sports Pub) but at that time, the seller decided not to sell.

Over the years, both owners have had full managerial and fiscal oversight of JP’s Place and they each know that food, liquor, and other costs remain at a relatively consistent percentage of sales. However, for the past 6 months, Jim has taken a less active role in JP’s because he was attending to a personal issue. Two months ago, Jim learned that food and liquor costs spiked over the past 4 months and questioned Paul why the restaurant overhead spiked and the business was less profitable. Paul responded that he didn’t know, and he guessed that employee waste or breakage might be the cause of the increased costs of food and liquor. 

Three weeks ago, Jim realized that the food orders to suppliers were being increased dramatically over and above what the equivalent orders were (for that month) in years past. Upon further investigation, Jim discovered that Paul went behind his back and acquired the Sports Pub without him, and that Paul has been supplying the Sports Pub with food and liquor that he diverted from JP’s Place. 

As co-owners, Jim and Paul owe fiduciary duties to each other. As such, they cannot cheat, compete with each other, usurp a corporate opportunity for themselves, misappropriate corporate assets, or engage in blatant self-dealing. Under the facts stated above, Jim can claim that Paul breached his fiduciary duties in buying the Sports Pub and diverting food and liquor from JP’s to use for the Sports Pub. As a result, the dispute will be treated differently in litigation.

Unlike ordinary lawsuits involving arms-length parties, a defendant who owes a fiduciary duty is required to account to the plaintiff and show that he (the defendant) treated the plaintiff fairly in the transaction being challenged. In the above example, the burden would be placed on Paul (the defendant) to prove the entire fairness of Paul’s acquisition of the Sports Pub and diversion of JP’s goods to the Sports Pub. If a court finds that Paul breached his duty to his partner, Jim will be awarded monetary damages or a piece of the benefit that Paul gained in the challenged transaction.

Fiduciary duties entitle the parties to special treatment under the law. If you are involved in a business relationship where you or the other party may have fiduciary duties, it is essential to consult an experienced business attorney about your rights and obligations to each other. Contact us for a consultation.

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