What is a partnership agreement?
A partnership agreement is a legally binding document which is entered into by 2 or more individuals forming a business together. When a partner breaches a partnership agreement, it can cause serious harm to a business. This agreement includes:
- The roles and responsibilities of each partner
- The division of profit and loss from the business
- Length of the partnership
- Terms for what happens when one partner leaves
- Consequences for when a partner breaches the agreement
Many people favour creating a business partnership over conductng business on their own. It lets two or more individuals to use all their relevant experience. It’s easier to raise capital as all parties can contribute, as opposed to just one. However, the main disadvantage is that partners can’t protect themselves from legal action when the business incurs a debt.
In situations where a breach occurs, the terms from the agreement will apply.
Options for Breach of a Partnership Agreement
Depending on the partnership agreement, there are different options for what to do when a partner breaches these terms.
1. Termination of the Partner from the Company
Where a party has committed serious misconduct, you can terminate a partner from a partnership. In a two-man partnership, this will effectively end the partnership. In partnerships with more than two individuals, it has the option to continue after expelling a partner. If termination of a partner is improper, this partner can bring legal action against the business for unfair conduct.
2. Legal Action
If your partner has breached the agreement, you can take legal action against them. This breach can include serious misconduct such as embezzlement or leaving the partnership before the end date specified. However, legal action cannot be taken where the partner had sufficient reasons for committing the breach, e.g. leaving the business before the end date due to unjust treatment. Where there is no reasonable explanation, the partners can sue for damages. This will provide monetary compensation if the partner forfeited deals as a result of leaving, or misappropriated company funds. Depending on the circumstances and the severity of the breach, the legal action will differ.
3. Settlement
A settlement occurs where partners, despite the breach, would like to continue on with the business. Negotiating a settlement allows matters to be set out privately. Furthermore, parties will also avoid paying extra legal fees going to court.
It’s important that you know your rights in a partnership agreement, and that you can act on them. For more information on partnerships agreement, you can refer to the article What is a Partnership Agreement or talk to a contract lawyer.
