Doing business with another person, or multiple people (called “partner(s)”), usually means you are sharing profits and losses with those partners. And where there is risk and the dividing of money, there can be problems. Sometimes those problems are created when one of the partners breaks the promises they made to the other partners. In the legal world, we call this a breach of contract or a breach of the partnership agreement.
What do you do if you end up in this situation? This post explains the steps to take if your business partner suddenly breaches the contract you agreed upon and signed. Different legal remedies include calling a meeting of the partners to discuss the issues, removing the breaching partner from the business, suing the partner for damages, or settling the dispute with the partner.
Most of these options have various exceptions and important minor details, so let’s address them one by one.
Call a Meeting of the Partners to Discuss the Issues
In today’s 24-hour news cycle world, we are sometimes quick to blame without getting all of the facts. In partnerships, it is important to have communication with the other partners as to what is happening with the business. If you are not involved in the day-to-day operations of the company, then it is possible you do not know what it takes to operate the business, financially. When seeing that profits are not as high as you hoped, it could make you first think that your business partner is taking money (especially when the partner is all of a sudden driving around in a new sports car).
However, getting facts before raising accusations is key to any good relationship, including the partnership relationship. For example, it is possible that your partner took money from the company to buy the sports car, or it is also possible that your partner just inherited money from the death of a relative and used that money to buy a sports car.
Most partnership agreements explain the protocol for how to call a meeting of the partners. Most, if not all, partnership agreements also allow every partner access to the financial records of the company. Taking the opportunity to communicate with your partners before raising accusations can be critical to the long-term success of the partnership.
Removing a Partner from the Business
If you do find out that a partner has taken actions in violation of the partnership agreement, then it may be appropriate to remove the partner from the business.. The rules for how to remove a partner from a business are often found in the partnership agreement. For a Limited Liability Company (LLC), that partnership agreement is called an “Operating Agreement.” In a corporation, that partnership agreement is called “Bylaws.” If you do not have any rules for how to remove a partner in a partnership agreement, then look to the Arizona Statutes as found in A.R.S. §29-601 et seq.
When removing a partner, you must follow the rules for removal as found in the partnership agreement or in the statute. Otherwise, you could end up being sued by that partner for a breach of the partnership agreement. Therefore, it is essential that you follow protocol and seek legal advice at the beginning of this sort of process to ensure proper approaches to things such as the other party’s monetary rights.
Suing the Partners for Damages
If a partner breaches the partnership agreement, one option to look at for recovering money is suing the partner. When you are a majority partner in the partnership, this can be fairly simple. When you are a minority partner in the partnership, then sometimes it is more difficult. This is because when a partner breaches the partnership agreement, it usually causes harm not only to the other partners, but also to the business itself. Since the business is its own legal entity and is typically controlled by a majority vote of the members of that entity then as a minority member you often cannot get the vote of the majority member (the breaching person) to have the company sue that person.
That is when you will be required to follow the laws as found in A.R.S. § 29-831 et seq. for what is called a “derivative action”. Since there are many nuances to this process, it is important to get the help of an experienced business partner litigator to assist you with taking the right steps when dealing with these issues.
Settling the Dispute with the Partner
Litigating partnership disputes can be expensive and time-consuming. Because of that, looking to resolve a dispute with a partner, when possible, is a good option. If compromising with your partner and working to restore the business relationship between you is a path you would rather take, there is the possibility of a negotiated settlement. These settlements are as binding as the other aforementioned contracts and court-enforceable.
Though this option requires a willingness to and patience in compromising with your partner in a difficult situation, it helps you avoid partaking in a legal battle. However, sometimes you will have to show that you are willing to fight by actually filing a lawsuit, to then have the leverage to settle the dispute with your partner out of court.
Contact Counxel Legal Firm
We would love to help you navigate any business partnership dispute to make sure you get the best possible outcome. Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.
This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.
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