What to Do When Your Business Partner Breaks the Contract
Business partnerships are a flexible corporate form that benefits those seeking a joint venture. But conflict may threaten the existence of the partnership, especially if it arises from a breach of the partnership contract. It is only natural for other partners to seek a remedy when they face this situation. Here are your options if you’re involved in a partnership dispute because your business partner failed to adhere to the contract.
Cure the Breach
Sometimes, a breach in a partnership agreement can be “cured,” or fixed. If this is possible and parties agree to move on, this may be your least costly option.
For example, if a partner completes accounting records incorrectly and that results in a large financial loss, there may be an agreement to compensate the partnership for that loss using personal assets. Other cures can be as simple as agreeing to never indulge in actions that violate the partnership agreement again, such as making a large purchase without consulting other partners.
This is an appropriate course of action for minor transgressions between partners who wish to continue the business. It may not be possible with criminal activity or egregious violations of the contract.
File a Lawsuit
If the breach is of a more serious nature, such as embezzling assets or incurring liability against the partnership, you may file a civil suit for damages to compensate losses. This assumes the offending partner has no intention of replenishing assets or taking responsibility for the shortcoming.
Even if you must take this extreme measure, there is a chance you can settle the matter and restore partnership assets. Sometimes in cases where there are hard feelings or emotions involved, it takes this step to start productive discussion.
If a partnership contains more than two partners with equal authority, you may have the option of expelling the offending partner. This allows the partnership to continue without the offending partner.
This course of action must be authorized by the contract. Sometimes, partners list specific conduct that can lead to expulsion. However, if your contract is not that specific, you may find it difficult to justify this action. Expulsion may be possible with or without taking the step of formally taking legal action against the breaching partner.
In two-person partnerships where a dispute leads to breakdown of the partnership, the only possible solution is to dissolve the partnership and liquidate its assets, which are then split evenly. Dissolution is also a possibility in larger partnerships where the damage resulting from the breach is too extensive to repair.
Dissolution ends the partnership, but does not necessarily end the business. You can convert it to an LLC or a new partnership with a new party. That can be finalized during the wind down process.
Many of these remedies depend on the terms of your partnership agreement. For example, you may not be able to expel an offending partner unless your agreement authorizes that action. You may also lack authority to continue the business as a sole proprietor if dissolution is necessary.
To help you interpret your contract correctly and make informed decision on how to proceed, consult with attorney with experience managing partnership disputes. The Law Office of Christopher Q. Davis will inform you of legal responsibilities and help you design an effective course of action. Contact us today at (646) 430-7930 for your free case evaluation.