Most people who become business partners have known one another, whether personally or professionally, for some time and generally trust each other. Nonetheless, it’s still critical to create a solid partnership agreement to ensure that they understand their specific obligations to each other and the business.
An effective partnership agreement also needs to detail the consequences and remedies if one of them breaches the agreement (a breach of contract) or their fiduciary duty to act in the best interests of the business.
The latter is known as a breach of fiduciary duty. Many breaches of fiduciary also involve a breach of contract. However, a breach of fiduciary duty can be particularly serious because it often involves someone using their position to act in their self-interest – to the detriment of the business.
Examples of common breaches of fiduciary duty by partners
Partners aren’t the only ones who have a fiduciary duty to a business. However, they often have unique access to assets and information and the power and influence to misuse it if they choose. Doing so is a breach of fiduciary duty. Some others include:
- Self-dealing – acting for one’s own or someone else’s benefit instead of the business’s
- Insider trading – using nonpublic information for personal gain
- Failing to disclose a conflict of interest or other pertinent information
Negligence and incompetence can also be considered a breach of fiduciary duty if a person doesn’t act with the care or competence required of them.
Potential remedies for breach of fiduciary duty
These breaches can be extremely costly to the business, to other partners and to customers and vendors. They can seriously harm or even destroy a business.
Some carry criminal penalties in addition to civil ones. To hold a partner civilly liable for breach of fiduciary duty it’s necessary to prove that:
- They had a fiduciary duty.
- They breached that duty.
- The breach caused harm that can be compensated.
It’s crucial to monetize the harm done. Some is easily monetizable – for example, if they literally stole money or other assets from the business. Other harm requires careful calculation to put a dollar figure to.
First, however, it may be necessary to get an injunction to stop the illegal activity. That’s why getting early and experienced legal guidance is key for anyone who learns or even suspects that a partner is breaching their fiduciary duty to the business.
