Partnership Agreement
A partnership agreement establishes the rights and responsibilities of business partners, and has the force of law. If your business partner breaches your partnership agreement, your first source of information should be the contract itself, which should have provisions for remedying the breach. Other than the clause such terms can be included in the breach of partnership agreement. If the agreement has no clauses addressing a breach, you might have to take legal action against your partner in a breach of contract suit.
Many small businesses are organized as partnerships. A general partner occupies the role of a fiduciary to the partnership and the other partners. Each partner acts as an agent and must perform acts on behalf of the business in good faith. A partner may breach his fiduciary duties by failing to act in the best interest of the partnership. He or she may also violate any other provision in the partnership agreement, the partner would be considered in breach of the partnership agreement.
Breach Effects
Business partners typically share in decision making, and when one partner breaches an agreement, the consequences for a business can be disastrous. The consequences are included in the breach of partnership agreement. You might not be able to use your business’s money, make staffing decisions or invest capital without the consent of your partner. Some breaches, such as a partner diverting business funds or selling the business without your permission, can tank your company almost immediately. Hence the need of a breach of partnership agreement.
Contract clauses in a breach of partnership agreement
A well-crafted partnership agreement should have clauses addressing how a breach of contract is handled hence a breach of partnership agreement. Your partner might have a certain number of days to cure the breach, for example. Your operating agreement and articles of incorporation may also provide procedures for curing a breach. For example, you and the other partners might be able to vote to remove a partner who has breached an agreement. If, however, you have no legal agreements in place governing how a breach is handled, you’ll have to rely on your state’s breach of contract laws.
Curing the breach in a breach of partnership agreement
Suing a partner can be costly and damaging for your business. Before you take legal action, talk to your partner and notify her in writing that she has breached the agreement. There could be a misunderstanding, and your partner might be able to fix the breach if you discuss the matter. Further, negotiating to cure the breach serves as further evidence of the breach if you have to sue your partner.
Legal action based on a breach of partnership agreement
If your partner refuses to cure the breach, legal action might be your only recourse. Because contracts are legally binding documents, you can sue to enforce the breach of partnership agreement or to nullify your contract. Contract laws vary slightly from state to state, and hiring a contract attorney can ensure that your interests are well represented. Generally, you’ll sue in the jurisdiction in which the contract was signed unless your contract has a “choice of law” clause. If such a clause exists, you’ll sue in the jurisdiction noted in the contract.
Other issues regarding a breach of partnership agreement
Partners need to be aware of potential legal issues that could affect the partnership in general. Unless the partnership agreement contains specific provisions for removing a partner, the partnership may dissolve if a partner is expelled. Such terms should thus be included in the breach of partnership agreement.
Pursuing a breach of contract lawsuit is a legal process. You may be able to resolve disagreements privately without involving the court. The chances for successfully resolving the issue depend on a number of factors, including the severity of the breach. Whether you intend to pursue a formal lawsuit or work out the matter, you should seek independent legal advice.
Three main remedies included in a breach of a partnership agreement
As noted previously, a breach of partnership agreement case will depend largely on the specific terms of the contract and the specific nature of the violation. With that in mind, the non-breaching partner generally has three main options available for pursuing a remedy for this type of contract violation:
- Settlement Negotiations (Mediation) in a breach of partnership agreement. It may be best to find a mutually-workable solution to a breach of partnership agreement case. Through informal negotiation or formal mediation, you and your partner may be able to reach a settlement. When possible, a settlement can help to preserve the viability of the partnership.
- Legal Action (Litigation or Arbitration) in a breach of partnership agreement. You have the right to take legal action against the partner that breached the terms of the agreement. Depending on the circumstances, this may involve filing a lawsuit. Though, in some cases, partnership agreements contain legally binding arbitration provisions.
- Expulsion (Dissolution) in a breach of partnership agreement. A breach of the partnership agreement could mean that the business relationship needs to be terminated. The breaching party could potentially be expelled from the business and/or the business partnership may be dissolved. If you have any questions about partnership dissolution, an experienced attorney can help.
How to handle a breach of a partnership agreement
Many partnership agreements will include an outline of what should be done in the event where one partner is in breach of contract. In cases where the partnership agreement requires mediation or arbitration, speaking to an experienced business law attorney before moving forward is always a good idea.
Some breach of partnership agreements can include terms that clearly state that one partner is unable to bring a lawsuit against another partner for losses. Others might stipulate that you can seek liquidated damages and the amount available. It all depends on what was laid out in the initial agreement.
If your partnership agreement does not specifically address what should be done in the event of a dispute or a breach, then you may have one of several options available to you with the help of a business lawyer:
- Expel the partner from the partnership
- File a lawsuit against the partner for the contract breach
- Seek liquidated damages from the partner
- Negotiate a settlement.
The above options need not be mutually exclusive and could be included in the breach of partnership agreement. For example, you could potentially expel the partner from the business and file a lawsuit against that partner. If the terms of your partnership agreement allow, you also may be able to seek liquidated damages for actual or anticipated damages in your lawsuit.
Partnership contract along with a breach of partnership agreement
The partnership agreement defines partner relations to each other and the business in addition to the rights of each partner. The partnership agreement stipulates the limitations of authority of each partner and includes an overview of the powers of general and limited partners. General partners manage the day-to-day operations of the business, and the partnership agreement may also specify the standards for daily management routines. The contract can include what acts indicate a conflict of interest between a partner and the business. Hence the inclusion of a breach of partnership agreement. A conflict of interest can arise when a general partner acquires personal profits using partnership contracts or property. The other instance is when a partner transacts with third parties without disclosing the full business matters with the other partners.
Partner duties vis a vis a breach of partnership agreement
A partner may not enter into competitive contracts or form outside businesses that compete with the partnership. Hence, each partner must perform acts that are in the best interest of the business. Each partner owes a duty of loyalty to the other partners by disclosing information that affects the operations of the business and the essential nature of the business. Partners also have a duty to keep pertinent information regarding partnership affairs confidential. Depending on the terms of the partnership agreement, other acts may result in a breach. Such include insolvency, criminal conviction, breach of professional conduct in the profession or other forms of misconduct that violate the partner’s fiduciary duties. The preceding necessitates a breach of partnership agreement. The breach of partnership agreement clearly outlines the consequences for such acts.
Remedies
The breach of partnership agreement may provide specific remedies when a partner breaches his fiduciary duties. The partner may be subject to specific penalties that are outlined in the breach of partnership agreement. These include expulsion from the partnership and buying out the dissociated partner’s interest. Other remedies included in the breach of partnership agreement entail reducing the partner’s interest and authority in the business or dissolving the partnership.
Judicial dissolution
The partners may enforce certain provisions in the breach of partnership agreement. This happens when a partner violates the terms of the agreement and seek a court decree to dissolve the partnership. Moreover, it may happen if the breaching partner’s conduct makes it unfeasible to continue the business.
Committing to business deals without consent
A partnership business has two types of partners. General partners have unlimited authority to manage the partnership business. Nonetheless, limited partners are generally mere investors who do not participate in the management functions of the business. A general partner can bind the partnership to business deals and contracts if she’s acting within the parameters of her authority. A breach of the roles of the limited and general partners and the consequences are included in the breach of partnership agreement.
Fiduciary duties
General partners act as agents of the partnership business and have obligations to one another. Each general partner owes a duty of good faith to perform acts on behalf of the business. A partner must conduct business that is in the best interest of the partnership lest adverse acts would be subject to the breach of partnership agreement. Hence, each general partner must notify other partners of any important information that affects the business.
Actual and apparent authority
One general partner can bind the partnership and other general partners to a contract with a third party before notifying the other partners. The other partners are not required to have actual authority of the contract before the contract is enforceable. As long as the general partner has apparent authority to bind the other partners, a third party contract is enforceable. Apparent authority means that a third party reasonably believes, based on the acts of the partners, that one partner may contract on behalf of the business. Although this is a general rule, a partnership agreement may limit a partner’s ability to enter into agreements without obtaining the express authority of the other partners and require all general partners to notify other partners of prospective transactions with third parties.
Statements and admissions
In addition to conducting partnership transactions in the ordinary course of the partnership business, a general partner can also bind the partnership to any definitive statements and admissions made on behalf of the partnership. Thus, other partners are liable for any statements a general party makes to third parties.
Personal liability
Silent partners are usually involved with limited partnerships rather than general partnerships. In a limited partnership, silent partners are shielded from unlimited personal liability for the debts of the partnership business, because silent partners do not exercise any managerial authority over the day-to-day operations of the business. The silent partner only risks losing his capital investment in the business. States laws determine the limits of the involvement of silent partners in management functions of partnerships. However, when a silent partner begins to provide active participation in the daily operations, the silent partner’s personal liability may extend beyond his investment in the business. This is especially in instances where third parties enter into contracts with the silent partner on the assumption that the partner has apparent authority. The authority extends to perform acts on behalf of the business. Moreover, silent partners are subject to the breach of partnership agreement.
References
https://smallbusisness.chron.com
https://yourbusiness.azcentral.com
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