How Can Partners Recognize Acts of Sabotage?
Many entrepreneurs and business partners consider sabotaging a clearly defined offense. Movies, television, and other media sources are at least in part responsible for this limited view of sabotage.
However, sometimes sabotage is a less obvious act that is still very damaging. Therefore, sabotage is not always easy to identify or monitor. Sometimes, sabotage is obvious, but other times it is subtle.
For example, let’s say that Vicki and Tina are partners in one of the top investment firms in Newport Beach, California. For years, the two colleagues have run a profitable business until their relationship begins to suffer.
After one particularly fierce argument about a particular client, Vicki begins to lose her sense of ambition. Tina realizes that Vicki’s motivation has disappeared and that she does not care about the investment firm anymore. While she thinks Tina might leave the firm at some point or request a buyout, she is unprepared for Tina’s actions.
Little by little, Tina begins harming the business. She stops paying some of the company bills and never shows up to meetings on time anymore. When clients call her, she rarely calls them back. All of these relatively minor infractions spell trouble for the firm. Business and profits dwindle, but Tina doesn’t care in the slightest. Tina even shares secret business information with a group of friends while at a bar. Meanwhile, Vicki is beside herself.
In this example, one may not see Tina’s actions as sabotage; yet they are. Likewise, Tina’s small acts may be subtle but still harm the business.
Sabotage also manifests itself in more obvious, traditional ways. These acts include:
- Diverting business opportunities by giving up company business to another individual or entity
- Taking the business’s opportunities for individual use, known as self-dealing
- Verbally condemning the business to others, known as disparagement
- Purposefully disrupting business relationships, known as interference
- Purposefully revealing company trade secrets or internal information, known as disclosure
- Stealing or giving away intellectual property
- Breaching contracts, terms of employment, corporate confidentiality, or non-compete agreements
- Violating the partnership agreement, operating agreement, or other founding documents
Corporate sabotage is damaging, and no business partner or entrepreneur can justify it, whatever the cause. Some individuals who commit sabotage claim that they did so accidentally, but partners should not take these cases any less seriously. Additionally, some acts of sabotage occur spontaneously, and some are pre-meditated.
For example, Dee is a successful partner in a law firm in Glendale, California. Dee knows the other partner’s strengths and weaknesses since he has been at the firm for many years.
Dee is greedy, and he wants more money and more power. Therefore, he plans to purposefully undermine the other attorneys. Dee knows that if he damages his colleagues’ reputations, he will be able to steal their clients. Therefore, Dee plans to start his own law firm and hopes his acts of sabotage help him reach his goals.
Dee’s example is both hypothetical and hyperbolic. However, similar acts of sabotage have occurred in the business world. In addition, not all acts of sabotage involve hurting the company.
Outside of the business world, sabotage is a federal crime. In this sphere, sabotage usually refers to interfering with military operations.
It is helpful for corporate partners to consider sabotage similarly. The difference is that instead of interfering with military activity, those who sabotage companies interfere with the company’s activities through acts of fraud or embezzlement.
When business partners commit sabotage intentionally and are caught, they can face criminal penalties, and civil liability.
Often, state laws refer to acts of sabotage as “unfair competition.” These acts are also called “violations of fiduciary duty.” Yet, whenever an individual place their interests above those of the company, they inflict harm on their partners. But what is meant by a business partner’s “fiduciary duty?”
In a business partnership, a partner’s fiduciary duty implies that the individual must act in a way that benefits the other partner or partners. Business partners’ actions normally have financial implications for each other and the company. The individual tasked with the duty is the fiduciary; the other party is the beneficiary or the principal.
In corporate partnerships, the fiduciary duty is to act positively for the partnership. Additionally, the fiduciary places the interests of the business above their interests. Therefore, when someone violates their fiduciary duty, they also usually violate the founding partnership agreement.
If there is no existing partnership agreement, it is up to the business partner who claims sabotage has occurred to prove the offense. In other words, the partner must legally prove that their partner has held their interests over the partnership’s interests.
Now that the concept of sabotage is clearer, what can business partners who realize sabotage has occurred do to stop it? How can business partners prevent sabotage from hurting their companies?
How Can a Business Partner Stop Sabotage from Occurring?
To stop employees and partners from committing sabotage, partners must consider various options.
At first glance, many partners think they should file a lawsuit. However, while a court of law can decide on a sabotage case, this process can be time-consuming and expensive. Therefore, business partners and their attorneys should investigate a few other options before taking legal action.
One of the first things a partner can do to be proactive about sabotage is to check on a contractual remedy. First, the business partner should determine whether the harmful partner is tied to contractual obligations. If the partner violates the terms of their contract by committing sabotage, it will be easier to prove their wrongdoing and prevent it from continuing.
Typical contracts to examine include:
- Contracts of confidentiality
- Employment agreements
- Non-compete agreements
- Operating agreements or partnership agreements
- Shareholder agreements
Employment agreements establish the duties and responsibilities of the partners. They also set performance standards and detail the obligations of employees.
Confidentiality contracts define confidential information and establish the partners’ duties regarding them.
Non-compete contracts detail what partners can and cannot do with other companies and other interests outside the current business.
If one or more of these agreements is already in place, the agreements include provisions regarding solutions. These remedies might include, for example, court orders or set amounts that must be paid when partners violate contracts.
With this information in hand, the next step is to tell the business partner that they have breached a contract and that there is documented proof. Sometimes, notifying the wrongful partner will be enough to make them discontinue their actions.
If the saboteur refuses to stop, the business partner may take legal action. Legal action will be easier and more successful based on the presence of the breached contract, so be sure to copy and record it.
Sometimes, partners can settle a sabotage case through a company buyout. Partnership agreements typically include buyout terms. If the partner wants to pursue a buyout and the parties think that is the best option, they should examine the partnership agreement. However, some partnership agreements do not include buy-sell provisions. In this case, the partners must negotiate a buyout with their lawyers. This process includes establishing the company’s price through valuation.
However, if the act of sabotage has led to suspicion, anger, and other emotional reactions, then negotiating the terms of a buyout agreement may be a process that proves far too difficult to attempt.
In some situations, a partner can force the other partner out through the buyout terms. If it works, this is an effective way to end sabotage at any level.
Is sabotaging a business illegal?
Civil action solutions become the choice when the business partner finds that no contracts are in place. As we have discussed, business partners typically sign a partnership agreement when forming a business. This founding agreement certifies that company partners have two main duties:
- A duty of loyalty to the business
- Fiduciary duty to the business
A duty to loyalty means that the company’s interests are placed before the partner’s interest. Fiduciary duty implies that partners answer their responsibilities responsibly and in good faith.
When a business partner commits sabotage against the business and its partners, they violate these obligations. Plus, even careless behavior can violate these duties and minor acts of sabotage.
What Are the Three Categories of Sabotage?
When a partner intentionally interferes with or disrupts a business relationship, they commit tortious interference.
Additionally, a tortious claim can be made if the partner stole or diverted business opportunities or funds that did not belong to them.
For example, Fitz and Nico are 50/50 business partners and run a successful financial advising firm called Ameriplus. However, Fitz is greedy and wants more profits, increased status, and success.
Fitz tells one of Nico’s most valuable clients that he has a deal for them. Fitz will provide one-on-one financial advice for a lower price if the client breaks her contract with the business and works with him.
In this example, Fitz commits tortious interference. He purposefully interferes with Nico’s business affairs and attempts to steal a profitable client from his partner.
Conversion involves stealing business property, such as money, clients, trade secrets, etc.
In civil terms, conversion is most similar to theft. The harmed partner can make a direct claim when their partner commits an act of conversion.
In California, conversion is defined as purposeful interference with another person’s property to deprive the owner of their property.
California law dictates specific elements of conversion:
- The plaintiff must have owned the stolen property or had a right to it
- The defendant must have acted wrongfully and did not respect the plaintiff’s property rights
- The act of conversion needs to have resulted in damages
When partners knowingly commit civil conspiracy, they work together with a third party to damage the company.
The solutions for civil actions include:
– Injunction
-Financial damages
-Punitive damages
-Attorney fees.
-Statutory damages for specific claims
-An order to dissolve the partnership
Many of these remedies are time-consuming, so it is best to contact an attorney experienced with these matters as soon as possible.
Importantly, civil conspiracy is not technically a type of sabotage by itself. However, it is a manner through which sabotage occurs.
For example, Betty, Sue, and Liza are partners at an insurance firm in Cardiff, California. The three women are fed up with their salaries and devise an embezzlement scheme to steal money from their other partner, Minnie. Liza, Betty, and Sue succeed in diverting millions of dollars over the next year by writing false receipts and creating fake clients.
However, Minnie finds out about his partner’s illegal plan. She also locates evidence she can use against them in court.
Minnie can claim civil conspiracy because she can prove that her three partners agreed to commit these offenses together and made plans as a unit.
How Can Contacting a Business Attorney Help?
When sabotage occurs, business partners are understandably shocked and saddened. Immediately, they must stop sabotage from continuing to prevent damage to the company.
At Nakase Wade, we understand that sabotage is an upsetting and urgent matter. However, experience tells us we must learn everything about the case and get to the heart of the matter.
Sometimes, sabotage cases are settled through contractual obligations. Other times, civil solutions are preferred. Our goal is to ensure that business sabotage stops and prevents it from reoccurring.
We hope this article illustrates many potential claims and remedies to explore when a partner sabotages your business. But, of course, the first step for our clients is to contact an experienced attorney who has dealt effectively with cases of sabotage before.
At Nakase Wade, our attorneys understand how invasive acts of sabotage can be. Moreover, we know that unique offenses require inventive, forceful solutions.
Our lawyers want you to know that you have rights as a business partner whose trust was violated. Contact Nakase Wade today for a free consultation. We will offer immediate solutions so you can focus on what is next in your business career.
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