How to Handle a Business Partner’s Breach of Contract

When your business partner breaches a contract, it can feel like you’ve been stabbed in the back. Taking the emotion out of this, the way to handle a partner’s breach of contract largely depends on the relationship between the partners, the severity of the breach, terms of the partnership agreement, and the possible options available to resolve the issue. 

Since the partnership agreement is the main source for dealing with breaches of contract, it’s critical that everything is clearly spelled out. When the agreement is too broad or ambiguous, it paves the way for a partner to shriek their responsibilities and not fulfill their role as a partner, it can lead to breaches and disputes. 

Here are some of the ways to handle the partner’s breach:

1. File a Lawsuit:  You may sue a partner who breaches the partnership agreement, regardless of whether you expel them from the partnership. A certain kind of breach, including misappropriation of partnership assets, allows you to sue the breaching partner for compensatory damages. Typically, the amount of damages will be the partner’s actual damages minus the departing partner’s investment stake in the partnership. This could be an attractive option, depending on the size of your business. 

2. Negotiate a Settlement: Under some circumstances, you may want to forge ahead with the partnership despite the partner’s breach. However, you might require some type of restitution for their breach, and a settlement is a possible way to achieve this. A negotiated settlement allows the possibility of retaining the business relationship between you and the partner. Although you may have to compromise with your partner to obtain their agreement for settlement, you can avoid the costs and time that it takes for a legal battle in court. However, you can also consider filing a lawsuit against your partner and then offer to settle based on terms favorable to you.  

3. Seek Liquidated Damages from the Partner: Some partnership agreements contain liquidated damages clauses, which provide a certain amount of monetary damages to any partner damages by another’s breach. Courts will only enforce liquidated damages when they are reasonable compared to actual or anticipated damages in partnership lawsuit cases. For instance, courts may not enforce a liquidated damages clause that provides for dissolution of the partnership and compensation to any partner in an amount less than that partner’s investment stake in the partnership. If the court deems a liquidated damages clause as invalid, they may award compensatory damages instead. The winning party must seek to enforce the judgment awarded by the court, which isn’t easy to do.

4. Expel the Partner from the Partnership: The breach could be damaging enough for you to want to expel your partner from the company and break off with them completely. However, it is significant to know whether your partnership agreement allows the expulsion of one partner or whether you must dissolve the partnership completely. 

Get Help from a New York Business Law Attorney

If your partnership agreement doesn’t explicitly say what should happen in the event of a breach or a dispute, then you should consider the assistance of a business attorney who can help with exploring your options. Or to prevent complex litigation after a breach of contract, a lawyer can help draft an agreement to avoid future problems. Get in touch with a skilled MOWK Law attorney right away to get started.