What happens if a business partner breaches a partnership agreement?
When a business partner violates the terms of a partnership agreement — such as by taking unauthorized actions, withholding profits, or competing with the business — the other partners generally have options ranging from internal dispute resolution procedures written into the agreement to a formal lawsuit for breach of contract or breach of fiduciary duty. The right path typically depends on what the partnership agreement itself specifies and the severity of the conduct.
Start With the Partnership Agreement
Most well-drafted written agreements include specific procedures for resolving disputes, removing a partner, or handling a breach, and those provisions typically govern the situation before any outside legal process comes into play.
If the partnership operates without a formal written agreement, default rules under state partnership law generally fill the gap, though those default rules are often less tailored to the specific business than a custom agreement would be.
Breach of Contract Versus Breach of Fiduciary Duty
A breach of contract claim focuses narrowly on the specific terms of the partnership agreement being violated, such as a capital contribution requirement or a restriction on outside competing business.
Partners also generally owe each other fiduciary duties of loyalty and care that can be violated independently of any specific written term, with the exact scope of those duties depending on the business structure involved and the applicable state law.
Common Remedies Partners Pursue
Available remedies can include financial damages for losses caused by the breach, a formal accounting to review the partnership's finances and transactions, and a court order, or injunction, to stop ongoing harmful conduct.
In more serious cases, a partner may seek dissolution of the partnership itself, particularly where trust between the partners has broken down to the point that continuing the business relationship isn't realistic.
Why Early Documentation Matters
Keeping thorough records of the partnership's finances, communications, and any specific instances of alleged breach makes it substantially easier to evaluate the real strength of a claim before deciding how to proceed.
That documentation is also typically necessary to pursue mediation, arbitration, or litigation effectively, depending on what the partnership agreement requires or what the partners ultimately choose.
- Can a partnership agreement require arbitration instead of a lawsuit?
- Yes, many partnership agreements include a mandatory arbitration or mediation clause that generally must be followed before, or instead of, filing a court case, and courts typically enforce these clauses if they are validly drafted.
- Can one partner be forced to buy out another after a breach?
- Some partnership agreements include buy-sell provisions that are triggered by certain breaches or disputes. In the absence of such provisions, a court may order dissolution or another remedy depending on the circumstances and the applicable state partnership law.
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