What Happens When a Business Partner Breaches a Contract

It happens all the time. Two friends with a shared hobby make it official and start a business, whether selling handcrafted products, providing niche services, building an online business, or opening a neighborhood storefront. Fast forward, and the business is growing, everything is running smoothly, and the founders are toasting to their success. Then one mentions that they’ve just started another company of their own.

The problem is, the new company directly competes with your existing business, and your partner knows it. Opening a competitor business without your knowledge could be a breach of your business agreement… and more. Depending on the specifics of this new formation, your partner could be on the hook for another kind of breach–a breach of their fiduciary duty. In any case, time is of the essence if you want to seek legal remedies for the broken agreement.

Let’s walk through the basics of breach of a business contract, the time you have to sue, what a fiduciary duty is, and what types of remedies may be available to you under Connecticut business law if your partner has broken your business agreement.

Key Takeaways

• In Connecticut, you must bring a lawsuit for breach of a written contract within six years of the breach, or within three years for breach of an oral contract.
• There may also be an additional claim of breach of fiduciary duty arising from your business partner’s breach of contract.
• The types of remedies available to you will depend on the specific facts of your business dispute, what your business partner did, and the language of your operating or partnership agreement.
• Operating and partnership agreements can modify or allocate fiduciary duties in Connecticut, but they can never extinguish liability for bad faith, willful or intentional misconduct, or knowing violations of law.

Connecticut Gives You Six Years to Sue Over a Written Agreement

You may not immediately want to take your business partner to court over their broken promise. Often, people hesitate to sue a business partner for breach of contract because they want to preserve the relationship and give their partner a chance to right the wrong. In other instances, you may be concerned about damage to the business’s operation or reputation, or be uncertain as to the level of damage the breach has created or could create in the future.

As the old saying goes, “Time is money.” This adage is true not only in business but also in business disputes. So while you may be tempted to take a wait-and-see approach to a business partner’s broken promise, there is a limit on how long you have the option to sue.

In Connecticut, you must bring a lawsuit for breach of a written contract, including a partnership agreement or an LLC operating agreement, within six years of the breach. And generally speaking, the clock starts ticking on the date the breach of contract occurred, not necessarily when you discovered it. If you and your business partner haven’t formalized your agreement by putting pen to paper, you can still sue for breach of contract, but you have less time. Under Connecticut law, you must bring your claim against your business partner within three years.

The difference in these time limits is also another good reason why, if you are in business with someone else, you should put it in writing. Establishing ownership percentages, voting rights, capital contributions, profit distribution, and dispute resolution upfront can save you time and cost later, and provide greater protection if something goes wrong.

A Broken Promise Can Also Be a Breach of Fiduciary Duty

If your business partner has broken a promise, the immediate problem is obvious: breach of your business contract. But in Connecticut, there may be a second legal violation arising from that broken promise. This additional legal issue is breach of fiduciary duty. Let’s look at what the duty is and what constitutes a breach.

Under Connecticut business law, a fiduciary is a person or entity that is legally required to put a company's best interests ahead of their own. In the case of partners and LLC members, there is often a fiduciary duty owed to each other and to the entity. And these duties extend to members of a member-managed LLC and to managers in a manager-managed LLC.

A breach occurs when a fiduciary acts in bad faith, engages in self-dealing, competes with the business, retains secret profits, commits fraud, or fails to avoid conflicts of interest. If your business partner has broken your business agreement, it’s worth considering whether they have, at the same time, breached their fiduciary duty.

Just like in business breach of contract cases, Connecticut law imposes time limits for suing your business partner. Current law allows for three years to file an action for breach of fiduciary duty. The clock typically starts on the date of the wrongful act or omission. But, where there has been fraud or fraudulent concealment, the clock may not start until the fraud is discovered.

Your Agreement Can Narrow These Duties, But Not Eliminate Them

A partnership or operating agreement creates rules, responsibilities, and restrictions. And in Connecticut, a business agreement can also modify fiduciary duties to a certain degree. For example, it would be acceptable to reassign a specific fiduciary duty to one partner, such as managing investments. So, it is always recommended that you review the language of your written agreement to see whether any part addresses fiduciary duties.

But these modifications have limits. A broad provision in a business agreement that in any way authorizes bad faith, willful or intentional misconduct, or knowing violations of law is unenforceable. And, the existence of any such provisions will not be a defense to a fiduciary’s actions or inactions that constitute a breach of their duty.

What Remedies Are Available When a Business Partner Breaches a Contract

When you have been wronged by your business partner’s breach of contract (and potentially breach of fiduciary duty), the question of what you could recover in a lawsuit is a reasonable one. The answer depends on the particular circumstances of the breach.

In a Connecticut business partner dispute, you may be entitled to one or more of the following:

• Damages: This includes compensatory damages for losses directly caused by the breach, as well as consequential or lost-profit damages where they were a foreseeable result.
• An Injunction: A court order stopping any ongoing harm, such as a partner actively competing with your business.
• Buyout or Expulsion: The enforcement of a provision in the agreement that applies to removing or buying out a partner for serious misconduct.
• An Accounting: A court-ordered requirement that a partner who breached their fiduciary duty to disgorge profits or benefits taken improperly from the business.
• Dissolution: In serious, unresolvable cases, a court-ordered winding up of the business itself.

The combination of remedies available to you depends heavily on what your business partner did, of course. The other key consideration is what your operating or partnership agreement says about your business partner’s actions or inactions. This assessment is best performed by a skilled Connecticut business attorney. And, because the clock is ticking, the sooner the better.

Work With a Connecticut Business Law Attorney

In the world of business disputes, no case is exactly like another. That’s why there’s no one-size-fits-all approach to handling them. But with the help of a skilled and knowledgeable Connecticut business law attorney, you can turn your stressful business situation into a manageable one.

The professionals at Lawrence & Jurkiewicz are highly skilled at both drafting operating and partnership agreements for Connecticut business owners and representing them in disputes when a partner or co-owner breaches them. And we’re here to help with your business law questions. Contact us to schedule a consultation today.