It’s any business owner’s worst nightmare: the partner you have built your company with has broken a critical agreement you both set, and you must take action against them. Business partner relationships require the highest levels of trust. When money is part of the equation, trust is of the utmost importance. When that trust is broken, it can mean more than the end of a relationship. It can also mean the end of a source of income for more than just the parties involved. More than that, it can mean lawsuits.
So, what do you do when a partner breaches a contract? Here are some important steps to follow:
Document Everything You Can
When you’ve identified that a partner has breached a contract, the first thing to do is identify and document any evidence you can gather. You may have been told of the breach of contract, which could be the case if your partner shares that what they have done. In some cases, however, you may have evidence before discussing or confronting your partner. For this reason, you want to start by collecting documentation to confirm your suspicions. This could be in the form of receipts, emails, or legal documents. Protect yourself and gain a better understanding of what’s at stake by gathering appropriate documents in the process. This will be useful in the event that your case is taken to court or you need to seek legal counsel for assistance with certain steps of the process.
Determine the Liability for the Breach
Every business contract is unique. Therefore, there may be many ways for an individual to breach a contract in a business relationship. In order to determine the necessary legal route to pursue, you must first identify the nature of the breach. Some instances of partner dissolution may feel improper but are not necessarily breaches of contract. This would be the case if a partner decided to leave the company, for instance.
In other cases, however, a partner could breach the contract by mishandling company funds or assets, trading insider secrets, or making under-the-table deals, among many other scenarios. In these situations, you could have grounds to sue the breaching partner for liability.
Remove the Partner from the Company
In some cases, this may be easier said than done. Your ability to act depends on the nature of your partnership agreement and your ability to prove that your partner has breached the contract. In most cases, unless your partnership agreement discusses removing a partner outright, you will need to dissolve the partnership first.
This process may have a varying level of difficulty depending on the size of your organization. If you are a two-person operation, you can operate solely on your own and proceed. However, if you have a partnership of more than two people, you may need to create a new partnership without the breached partner. Of course, this must be done in good faith with the departing partner. In many cases, the removal of a partner from a company can become contentious, in which case it’s best to contact an attorney to avoid a potential suit.
Removing the partner from your company protects you from any further business damage while making clear that you and your partner are legally individual actors in the process to come.
Negotiate a Settlement with Your Partner if You Can
In many situations, breaches of contract can lead to or even be caused by strong contention between business partners. There may be bad blood among the partners, which can lead to needing the court’s assistance in leveling settlements.
In some cases, however, partners are able to split amicably. In these cases, you can reach a settlement agreement. Settlements could be less costly, especially when handled out of court. It’s also possible that the parties involved could maintain business relationships in the future, depending on how everyone feels about the outcome. This could be a useful option to explore early in the game, where it makes sense.
Seek Liquidated Assets or Damages from the Partner
When you decide to sue the partner who has breached the contract, you can sue for breach of contract. Part of this includes seeking liquidated damages, a payout of a set amount of money from any partners harmed by the breaching partner. When working with an attorney, you can determine the number of damages you may reasonably be able to enforce to receive. In some cases, the court may award compensation. From there, if you were to win the case, it would be your responsibility to enforce the ruling and receive what you are owed. This can be a challenge at times, which is why it’s helpful to work with a professional.
Consider Revisiting Your Business Documents
When going through the process of removing a partner and fashioning a new business identity, it helps to get a handle on other business concerns as well. If you’ve formed a new partnership or are looking for a new partner, you may consider overhauling your contracts or other clauses to better protect your organization from future harm. An experienced business attorney can help with these matters.
What to Do Next?
Suing your partner who has breached a contract, and even winning that suit, are not the end of your journey. When the dust has settled after the dissolution of a partnership, there may still be issues to deal with. If your partner invested money in the company, owned stock, or had other bookkeeping items open at the time of the dissolution, you’ll need to attend to those items. If the disruption was sudden, you may experience an immediate fallout in the form of disorganization and concern from your team. Remember that concerns like this have many implications and to be mindful of this before, during, and after settlement.
If you’re dealing with a breach of contract situation and are in need of guidance, let Lubliner Law attorneys help. Our business attorneys are skilled in mediation and litigation and will help you navigate this difficult transition as smooth as possible.