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  4.  » Know your options when a business partner breaches the agreement

Know your options when a business partner breaches the agreement

| May 25, 2021 | Business & Commercial Law |

When you created your business partnership, you probably made an agreement that outlines what responsibilities each partner owes to the other(s). Ideally, you made this agreement in writing so that it would be easier to enforce. However, the agreement may still be enforceable if it is not in writing.

The terms of your agreement may describe in detail what you can and cannot do in response to a breach by one of your partners. Otherwise, the following options are usually available.

Litigation

If a partner breaches the partnership agreement, it may result in losses to your company. If this is the case, it may be possible to litigate the breach and hold your partner liable for the damages sustained. This typically means that the breaching partner is no longer part of the organization. If this is the case, the breaching partner must forfeit his or her investment stake in the partnership in addition to paying compensatory damages.

Expulsion

Your ability to expel a partner while maintaining the partnership depends on two different factors. First, it depends on whether your partnership involves more than two people. If it is a two-person partnership, expelling the breaching partner will dissolve the partnership by default.

If your partnership consists of more than two people, the agreement has to specifically provide for the continuation of the partnership following the expulsion. Otherwise, you must dissolve the partnership completely, although you can reform it without the expelled partner later.

Settlement

Unlike the other options, a negotiated settlement allows you to restore the business relationship between you and your partner if that is what you want. Even if you do not want to restore the relationship, settlement can avoid the costs of litigating a breakup of your company.

Business partnerships go through a life cycle. One way or another, they eventually come to an end. While you may hope that the end comes according to your succession plan, that is not always the case.

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