A breach of fiduciary duty puts the partnership at risk

On Behalf of | Jan 20, 2021 | business litigation

Business partners usually establish an agreement in which they divide responsibilities, whether they are financial or managerial duties. Partners also share a set of duties under the law.

WHAT IS A PARTNER’S FIDUCIARY DUTY?

Business partners hold a fiduciary duty to their business and their partnership. Put simply, this duty requires business partners to make decisions and act in the best interest of the business partnership.

California law clearly outlines the obligations included within this duty. General partners have:

  • A duty of loyalty: Of course, business partners would expect each other to have a sense of loyalty to the business. However, this specific duty means partners should not work against the interests of the business or compete against it. This includes placing the business’s interests above one’s own interests.
  • A duty of care: This obligation requires partners to offer and maintain the best possible service to the partnership. Therefore, partners must avoid acting negligently or in any way that knowingly violates the law. Essentially, partners should always act in good faith.

In many cases, the partnership agreement also includes these responsibilities. Even if it does not, California law still requires partners to uphold these duties.

WHAT ACTIONS CAN BE TAKEN IF PARTNERS BREACH FIDUCIARY DUTIES?

Breaches of a partner’s fiduciary duty often manifest as:

  • Omitting financial information in certain records;
  • Taking opportunities from the business for their personal gain;
  • Making decisions in favor of a conflict of interest; or
  • Even, in extreme cases, engaging in insider trading.

In a partnership, any of these actions can feel like a betrayal. They can also result in significant losses for a company – which are primarily financial.

Partners who breached their fiduciary duties are liable for the damages the business suffered as a result of that breach. The other partners who suffered from the breach can file a legal claim to recover damages over:

  • The breach of the fiduciary duty itself; or
  • Any resulting breach, such as a breach of contract.

Regardless, they should ensure they follow any guidelines the partnership agreement provides for them in the event of a dispute. Disputes involving a breach of fiduciary duty can be complex. Business owners facing such a case should consider consulting an experienced business attorney so they can determine how to manage the dispute – and the damage caused – while protecting the future of their business.