When a partnership is formed, all parties involved execute a partnership agreement. Although it doesn’t need to be in writing to be enforceable, having a written partnership agreement makes conflict much easier to resolve.
Unfortunately, partnerships don’t always end on good terms. One or more partners may breach one of the terms or obligations found in the agreement.
As with other legal contracts, violation of a partnership agreement opens up the breaching party to liability to other partners in the contract. This then allows them to have access to several different legal remedies.
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Expulsion from the Partnership
When one partner violates the terms of the partnership agreement, expelling them from the partnership may be the necessary course of action. Because of laws surrounding how a partnership operates, whether expulsion is possible depends on several factors.
Usually, the partnership must dissolve before either partner can get expulsion from the business. From there, a new partnership can form without the offending partner. Increasingly, however, partnership agreements are being drafted to include language that allows the partnership to continue existing even in the event that one partner is expelled.
When one partner seeks to expel another, a critical aspect of expulsion is that it’s done in good faith. Attempting to expel a partner without good reason could result in the departing partner suing for damages.
Suing for Breach of Contract
There are many ways a partner may breach the partnership agreement. For example, if the partnership agreement defines the length of time the partnership exists and one partner walks away before that time is up, he or she has breached the agreement and may be sued. Similarly, if a partner engages in fraud or theft, other partners may sue that partner for damages.
As an extension of suing for breach of contract, some partnership agreements include clauses that will pay out a set amount of money, called liquidated damages, to any partners harmed by the breaching party. Liquidated damages are only enforced when they are reasonable with respect to the actual anticipated damages in a partnership lawsuit.
If the partnership agreement contains a liquidated damages clause that is too small or too large, a court will probably not enforce it. When that happens, they may award compensatory damages instead. Keep in mind, even after a favorable court decision, the winning party must still seek to enforce the judgment. This can be very difficult in certain circumstances.
Negotiate a Settlement with Your Partner
If a partner has breached the partnership agreement, chances are they are not on good terms with the partners. If, there is no harm to the relationship, you may be able to avoid a lawsuit. In this case, you can reach a settlement agreement.
This option allows for the possibility of restoring the business relationship between the parties even after a breach has occurred. If possible, this option offers many benefits, including the reduced cost of avoiding a lawsuit.
Remedies Provided By Law
The Texas Busines Organizations Code (TBOC) provides remedies in case there is no partnership agreement. They also provide remedies even when the partnership agreement is incomplete. Under Section 152.211(a) of the TBOC, “A partnership may maintain an action against a partner for breach of the partnership agreement or for the violation of a duty to the partnership causing harm to the partnership.”
Subsection (b) allows that a partner may initiate legal action against another partner for equitable relief. This is to enforce a right under the partnership agreement, a right provided by the TBOC. Also, it allows one to enforce the rights and interest of the partner, including those independent of the partnership relationship.
Dealing with a Partnership Dispute?
Hiring a Texas business law attorney can make the hassle of navigating issues in a business partnership much easier. Contact the experienced attorneys at Wood Edwards LLP today.