Steps to Take if Someone Breaches Their Partnership Agreement

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Table of Contents

• Establish Which Terms Have Been Breached 
• Figure Out Your Ideal Outcome
• Give Notice of the Breach and Opportunity to Remedy
• Explore Opportunities to Negotiate
• Key Takeaways

You may find that your business partner is in breach of your partnership agreement. This can occur if your partner engages in unsatisfactory conduct which jeopardises the commercial viability of the partnership. Such behaviour can be of great concern as partnerships generally hold each partner personally liable for other partners’ actions.

To this end, it is important to understand what rights you may have and the steps you can take to resolve the unsatisfactory conduct. This article will outline a process you can follow if your business partner engages in conduct that breaches the partnership agreement.

Establish Which Terms Have Been Breached 

Firstly, you should examine the terms of your partnership agreement. You should look to determine what your partnership agreement regards as acceptable conduct. If you do not have a formal written partnership agreement, you may rely on other sources to establish the obligations of each partner:

1. Using Implied Terms or Conduct

While it is hard to establish, you may rely on implied terms or conduct to identify obligations one partner owes to the other or the business. You may be able to rely on implied terms if you and your partner have agreed to these verbally. An implied term is a promise, assumption or obligation that is not stated in the contract but can be inferred. Nevertheless, you must abide by and adhere to the implied terms in your partnership agreement.

Alternatively, you may rely on the ongoing conduct of you and your business partner to demonstrate an obligation was present. For example, your business partner may have been performing the accounting work for your business. You could reasonably assert that your business partner was obligated to notify you if the company was on the verge of insolvent trading. Naturally, you will have to provide evidence supporting any assertion of obligations, which may be open to challenge from the other partner.

2. Applicable Legislation

Each state and territory has its own legislation that governs partnerships. 

For example, in New South Wales, partnerships are governed by the Partnership Act 1892 (NSW) (the Act). Under section 24 of the Act, where there are otherwise no express or implied agreements between the partners, the following duties will apply:

1. All partners share equal capital/profits of the business but also must contribute equally;
2. The partnership must indemnify every partner in relation to payments and personal liabilities made by the partner;
3. A partner that pays beyond the agreed-upon share of capital is entitled to interest;
4. A partner is not entitled to interest until after profits are calculated;
5. No partner may take part in the management of the partnership business;
6. No partner shall be entitled to remuneration for acting in the partnership business;
7. No new person can be introduced as a partner without the consent of all existing partners;
8. Any disputes arising from ordinary matters connected with the business can be decided by a majority of partners. However, a change in the business’ nature requires all partners’ consent; and
9. Partnership books are to be kept at the place of business of the partnership. Every partner may have access to and inspect and copy any of them.

3. Fiduciary Obligations

Partners will generally owe each other and the partnership fiduciary duties. Such duties can include a duty to:

1. act with due care and skill under the partnership;
2. disclose all material facts and relevant information to other partners;
3. not to act in competition with the partnership; and
4. to act in good faith and fair dealing.

You should also check the structure of your partnership. Different structures can impose different obligations on the partners. For example, in New South Wales, partnerships generally fall into one of the three categories:

• General partnership –  Involves two or more individuals carrying on a business, sharing equal rights and responsibilities about the business operations and management. 
• Limited partnership – Has one general partner who assumes the full personal liability attached to a general partnership structure. 
• Limited liability partnership (LLP) – Limits individual responsibility for wrongful acts of other partners and personal liability for the business’s debts. 

Figure Out Your Ideal Outcome

Understanding your ideal outcome is key to resolving how you will deal with the business partner’s conduct. It may not be as simple as wanting the conduct to cease. For example, you may want to consider exploring other options, such as:

• exiting the partnership;
• wanting the breaching partner to exit the partnership;
• dissolving the partnership;
• changing the roles/scope of responsibility;
• changing the structure of the partnership or the entity itself; and
• adding more individuals to the partnership.

Give Notice of the Breach and Opportunity to Remedy

If you can establish that a partner owes a particular obligation/duty under the partnership and that they have breached it, you should put the partner on notice. The notice should inform the partner that their conduct is in breach and demand that they take steps to remedy their breach within a particular time.

The partnership agreement usually has a ‘breach’ clause that provides further information on how to issue a breach notice. If you do not have a formal agreement or your agreement does not contain a breach clause, the notice period is usually what is reasonable in the circumstances. However, we recommend getting legal advice here regarding your options.

Explore Opportunities to Negotiate

You should think about whether there are amicable methods to resolving the partner’s conduct without escalating the situation. Considering your ideal outcome can assist with figuring out the least hostile method to resolving the situation.

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Key Takeaways

If you are in a partnership, you should have a good understanding of what you and the rest of the partners’ obligations are, whether they are documented in an agreement or implied. This allows you to act properly in situations where you believe your partner is acting contrary to the interests of the partnership. If your business partner has breached your partnership agreement and you do not know what to do, contact our experienced dispute resolution lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.