Options If a Business Partner Is Breaching Their Contract
A business partnership thrives on trust, collaboration, and, importantly, a solid contract that defines each party’s responsibilities. But when a partner breaches that agreement – whether by failing to deliver promised work, misusing company funds, misappropriating company information, or violating non-compete clauses – it can threaten the foundation of your business. Here are key remedies and steps you can take to address a breach and protect your interests:
1. Review the Agreement
Start by closely reviewing your partnership or operating agreement. This document likely outlines each party’s duties, dispute resolution mechanisms, and the consequences of a breach. A thorough understanding of these provisions is critical to determining liability and formulating an appropriate legal response. Under NY law, the terms of the agreement generally control, unless they conflict with statutory requirements.
2. Document Everything
Keep detailed records of the partner’s conduct, including emails, messages, missed deadlines, and financial discrepancies. This documentation can be critical in negotiations or court proceedings. In New York, well-documented evidence is critical not only for breach of contract claims but also for potential equitable remedies such as accounting or injunctive relief.
3. Attempt to Resolve the Issue Directly
If possible, attempt to resolve the issue directly with your partner through open and honest communication. Sometimes, a breach of contract stems from miscommunication or a solvable misunderstanding. Consider having a candid discussion or sending a formal demand letter that outlines the breach and offers an opportunity to resolve the issue without litigation. Efforts to resolve disputes in good faith may also be required under the partnership agreement, and they could be viewed favorably by the court.
4. Consider Mediation or Arbitration
If you and your partner cannot solve the issue directly, you may be able to reach an agreement via mediation or arbitration. Many contracts mandate mediation or binding arbitration as a prerequisite to litigation. In mediation, a neutral third party can help facilitate a resolution. These avenues may offer a faster and more cost-effective resolution than traditional litigation.
5. File a Lawsuit
If your partner refuses to remedy the breach and alternative dispute resolution efforts fail, you may need to pursue legal action. Common claims include:
- Breach of contract
- Breach of fiduciary duty
- Fraud or misrepresentation
- Conversion or embezzlement (in cases involving misuse of funds)
The court may award damages, compel your partner to fulfill their obligations (specific performance), or even order the dissolution of the partnership.
6. Seek an Injunction
If the breach results in ongoing or imminent harm, consider seeking a court-ordered injunction. An injunction can prohibit the partner from continuing the harmful conduct while the case is adjudicated.
7. Partner Buyout
A buyout allows the non-breaching partner(s) to regain control, protect the business’s reputation, and minimize ongoing conflict. This approach can be especially effective if the breach has strained the working relationship beyond repair, but litigation or dissolution isn’t the preferred route. Before moving forward, it’s essential to review the partnership agreement for any buyout provisions, valuation methods, or exit clauses.
8. Consider Dissolving the Partnership
In cases of irreparable trust or repeated breaches, dissolving the partnership might be the best option. This can be done voluntarily or through court proceedings, depending on the circumstances, legal structure of the business, and terms in your agreement.
Always Seek Help from an Attorney
Due to the complexity and potential consequences of partnership disputes, it is imperative to consult an experienced business attorney as early as possible. Partnership disputes can quickly escalate and impact the operation, finances, and future of the business. Also, the legal structure under which the business is organized may determine whether some of the above options are available and the relevant process to be followed for each.
An experienced attorney can help you understand your rights, interpret the terms of the agreement, and evaluate your legal options – whether that means negotiating a resolution, pursuing a buyout, or initiating legal action. Legal guidance ensures you’re protected, helps prevent costly mistakes, and positions you to make informed decisions that safeguard both your interests and the business as a whole.
