Breach of Contract in Business Partnerships

The overwhelming majority of commercial lawsuits contain at least one claim of breach of contract. It’s common knowledge that the long-term success of businesses is often predicated on the strength of their underlying contracts. This is especially so with business partnerships, which can easily crumble if a dispute between partners arises and there is no way to deal with the issue under the partnership agreement. So, when any type of business relationship turns sour, there is almost always a contract associated with the relationship that dictates how the issue is resolved. Sometimes, a breach of contract claim is what’s necessary. 

Important Considerations for Potential Partners to Address

No matter how long you and your potential business partner go back together, you need a robust partnership agreement in place to minimize the risk of disputes (and litigation) down the line. Some of these considerations include:

  • The financial obligations of each partner: how will you and your partner secure funding for the business endeavor? Will you attempt to bootstrap the partnership, at least at first? If so, how much should each partner plan to contribute? These are essential questions; allegations that one partner isn’t pulling his or her weight is sure to cause conflict. 
  • The specific roles and involvement of each partner: some partners might want to have a passive role in the partnership, contributing only capital. Others are more likely to have an active day-to-day role in the company. Delineating the day-to-day obligations of each partner is crucial for a successful partnership. 
  • Dispute resolution methods: many partnership agreements mandate that quarreling partners go through mediation or arbitration before commencing litigation. This can save time, money, and, ultimately, the business itself. 

When any of the partnership agreement’s terms related to these areas are breached, the ultimate result may be a breach of contract claim. In court, plaintiffs must prove a few things:

  • A valid contract existed
  • The plaintiff made a reasonable effort to satisfy his or her part of the contract
  • The breaching party failed to satisfy his or obligations laid out in the valid contract
  • The plaintiff suffered losses due to the breach of contract

Implied Covenant of Good Faith and Fair Dealing

Let’s say you entered into a business partnership and neglected to draft an effective partnership agreement. As a result, there are lots of holes in the contract. A few years after you go into business, your partner begins engaging in work on behalf of a competitor. As a result, your partner begins showing up to work excessively late and puts forth poor efforts to sustain the partnership. Because there is not an express clause that prevents either one of you from doing this, your partner can continue behaving this way, right?

Not exactly. There is an implied covenant of good faith and fair dealing that applies to nearly all Arizona business contracts. Depending on the specifics of your case, you might have a good chance to successfully sue your business partner for a violation of this implied covenant. 

Unfortunately, relations between business partners sometimes deteriorate to a point where litigation is the only possible resolution. Many lawsuits stemming from a breach of a partnership agreement can be prevented through a thorough, well-negotiated contract. Our firm would be delighted to help you with either situation; give us a call today at 623-385-3190 to discuss your options.

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Monahan Law Firm, PLC

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