When a business partnership is formed, the parties often create and execute a formal partnership agreement. The primary purpose of a partnership agreement is to outline each person’s obligations and spell out what will happen if the agreement is breached.
Unfortunately, disputes among business partners are not uncommon.
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.
In this article, we’ll address 3 key topics for business owners to understand if they believe their partner is in breach of the partnership agreement:
- The most common elements found in partnership agreements
- The most common ways that partnership agreements are breached
- The potential remedies when a partnership agreement is breached
It’s important to note that the information contained here is general in nature and is not a suitable substitute for considered legal advice. If you are having a conflict with a business partner and wondering about potential remedies, it’s in your best interest to consult with a qualified attorney.
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What Are the Elements of a Partnership Agreement?
Forming a partnership isn’t just about doing business together. It’s also about creating a contractual business relationship. The parties’ preferences and priorities generally guide a partnership agreement’s particular terms.
Most internal business contracts between partners cover the following subjects and questions:
- Who has made a financial contribution to the partnership, and how much?
- Have the partners agreed to make ongoing financial contributions?
- Is the partnership a general partnership, a limited partnership, or another business type?
- What are the rights and responsibilities of each partner?
- How much compensation does each partner receive?
- What happens if a partner breaches the partnership agreement?
- What are the partners’ respective ethical obligations (fiduciary duties) to the partnership?
- Who is entitled to vote and who must vote, and when?
- How does someone become a partner?
A well-written agreement with well-defined terms can make all the difference when a dispute arises.
Our team understands the importance of having the correct business documents. We can review your existing records and update them. We can also help you prepare appropriate contracts and terms for your situation.
Common Reasons a Breach of Partnership Agreement Occurs
A breach of a partnership agreement can stem from a variety of sources.
If you or your business partner deviate from the contract terms, you might benefit from talking to an attorney. The courts and other parties will scrutinize the steps you and the business took after a breach occurs. Not doing certain things after you realize something’s awry can foreclose remedies. An attorney can help get you on the right path.
We routinely, successfully, and efficiently help business partners navigate disputes. We’ll help you resolve the breach through in-court representation or settlement negotiations.
Ambiguous or Missing Terms
If the contract doesn’t say or doesn’t say it well, parties can be confused about their obligations and rights under the agreement. Ambiguous or missing terms can lead to disputes between partners.
Improper Use of Company Funds
Breaches can arise because a partner spends company funds improperly or unscrupulously. Doing so can hurt the business and the partner’s relationships with the other associates.
Related: Breach of Fiduciary Duty in Texas
Acting Outside Scope of Authority
When a partner goes rogue and acts outside of their authority, this can cause business issues. For example, the partner may get over-excited about a possible business deal and sign the company up for something without getting the proper permissions.
Not Recognizing or Addressing Conflicts of Interests
Conflicts of interest can arise when a partner is presented with an opportunity where they stand to benefit personally. The fact that the partner would gain something doesn’t necessarily create a conflict of interest, but it does raise a warning flag. Partners who don’t address potential conflicts of interest may breach their ethical obligations to the company.
What Are the Remedies for a Breach of a Partnership Agreement?
Now that we’ve covered some common breaches, let’s take a closer look at the available remedies for a breach of contract, including a breach of an LLC operating agreement or a partnership agreement.
As a preliminary matter, the terms of the partnership may stipulate what remedies are available. Additionally, the contract may limit your recourse options. Exceptions may apply, so it’s best to talk to a knowledgeable business attorney.
Filing a Breach of Contract or Breach of Fiduciary Duties Claim
If your partner doesn’t abide by the partnership agreement terms, you or the company may have to sue your business partner for breach of contract. This breach of contract action may include allegations that your partner didn’t deal fairly with you or act in good faith. The duty of good faith and fair dealing extends to the partnership under Texas law.
In Texas and most other states, business partners owe a duty of care and loyalty to the company. Depending on what occurred, you may also have a claim that your associate didn’t act ethically. If that’s the case, you may have a claim for breach of fiduciary duties against the partner.
Negotiating a Settlement Between the Partners
One way to resolve a business dispute is to negotiate and finalize a settlement agreement. Typically, you would do this while a lawsuit is pending, but there may be exceptions.
During settlement negotiations, the parties define what went wrong and the appropriate remedy. As part of a settlement, the parties usually agree to keep the arrangement details and the settlement amount confidential.
Expelling the Breaching Member from the Partnership
Depending on the terms of the partnership agreement and the specific circumstances, you may be able to remove the breaching member from the partnership. The applicable law and governing contracts—such as buy-sell agreements—determine if this option is available to you.
Pursuing a Damages Award
Pursuing a damages award may be the best option to remediate the harm suffered by the business. The applicable law and terms of the partnership agreement may define and limit the scope and amount of damages available.
Maximize the damages you may receive by contacting a knowledgeable and skilled business attorney.
Breach of Partnership Agreement? Consult with an Attorney About Potential Remedies
If your partner breaches your partnership agreement, call 214-382-9789 to schedule a free consultation.
Protecting your business, your business relationships, and your investment is typically top of mind for entrepreneurs. We take pride in our ability to draft agreements that accomplish all these tasks.
When business relationships falter, we know that acting swiftly and competently is critical. Our team has a collective 75 years of experience serving as legal advisers and litigators on behalf of businesses.