In business partnerships, each partner owes the others a fiduciary duty. They have a legal obligation to act in good faith, with loyalty and care. However, business partners can sometimes break their promises to the company — and the other partners — by failing to contribute capital, acting in their own self-interests, or violating the partnership agreement in another way. It’s vital for business partners to take measures to enforce accountability and implement strategies to protect the company.
Establish Expectations at the Beginning
One of the best strategies to protect your company from breaching partners is to establish expectations from the beginning of the partnership’s existence. A strong partnership agreement should be drafted that outlines each partner’s role and responsibilities with the company. Provisions should be included in this document that address the following:
- Management structure
- Admission and withdrawal of partners
- Decision-making authority
- Compensation
- Owner percentages
- Financial contributions
- Profit and loss distribution
- Drawings and distributions
- Dispute resolution procedures
If a business partner breaks their promises, the terms in the partnership agreement are legally binding — and can be enforced in court if necessary. All partners should regularly review this document and update it when necessary.
Encourage Open Communication
Encouraging open communication is a good strategy to protect your company and strengthen the partnership. It helps ensure that all partners are aligned in their goals and expectations as they work to achieve a common objective. Open communication can help to facilitate problem-solving in the business partnership, build trust, and reduce the potential for misunderstandings that could lead to conflict.
Be Proactive in Identifying Problems
The best legal strategy to protect your company from partnership disputes is to be proactive in identifying any problems before they escalate. It’s crucial to review financial records regularly and investigate any financial discrepancies that are observed. Schedule meetings on a regular basis and encourage an environment where all partners feel comfortable addressing their concerns. If there is a problem that cannot be resolved internally, you might consider bringing in a third-party mediator who can assist with reaching a mutually agreeable solution.
Consider Having Partners Sign Non-Disclosure Agreements
Many businesses have a significant amount of proprietary information that is critical when it comes to maintaining a competitive edge. While business partners often have access to this confidential data, a non-disclosure agreement can be a valuable tool to protect sensitive information and establish trust. Having all partners sign a non-disclosure agreement when the partnership is formed can prevent a partner from improperly using trade secrets, client lists, and business strategies.
Pursue a Legal Remedy
If a business partner breaches their fiduciary duty, there are various legal remedies available to the partners who have been harmed or the business itself. The partner who suffered economic injury may be entitled to pursue compensatory damages caused by the breach. In addition, an accounting may be ordered — and the breaching partner may be required to return any profits they gained due to their improper actions. In cases where the breach involved fraud, malice, or other egregious conduct, punitive damages may be available.
In many commercial matters, equitable remedies are also available. For instance, a court may issue an injunction to stop the partner from continuing their harmful actions or appoint a receiver to investigate any financial mismanagement. In some cases, specific performance may be ordered, which would require the breaching partner to fulfill their obligation.
Contact an Experienced New York Business Attorney
If you are facing a dispute with a business partner, an experienced business attorney can best advise you regarding your legal rights and options. At Barnes & Barnes, P.C., we offer high quality legal services and trusted counsel for a wide range of business matters, including those involving partnerships. Contact us at (516) 673-0674 to schedule a consultation.
