People who become business partners generally already know each other personally and/or professionally. That means they typically believe they can trust one another. However, President Ronald Reagan’s famous words during the Cold War, “trust, but verify” (actually a Russian maxim), apply here as in so many business situations.
A solid partnership agreement is key to helping ensure that partners are clear in their obligations to each other and to the business and those who depend on it. It also needs to codify what the potential ramifications and remedies are for breaching their fiduciary duty to act in the best interests of the business (usually to benefit themselves or others).
Business partners as well as directors, if there are any, and other officers and managers have fiduciary duties to the company. They’re often in a position to take advantage of their access to assets and information and misuse them. That’s why a breach of fiduciary duty can come with civil as well as criminal consequences.
What does a breach of fiduciary duty look like?
Among the most common partner breaches of fiduciary duty are:
- Self-dealing (acting for one’s own benefit or that of someone else instead of for the benefit of the business)
- Misuse of business assets or confidential information
- Insider trading (using nonpublic information for profit)
- Not disclosing a conflict of interest or other pertinent information
Incompetence or negligence can also be a breach of fiduciary duty. Those that have a fiduciary duty are expected to act with care and to know what they’re doing.
Remedies if someone breaches their fiduciary duty
The first step in holding a partner civilly liable for breach of fiduciary duty is to prove that they had a fiduciary duty, that they breached it and that the breach caused harm that can be compensated.
Plaintiffs generally seek monetary damages to compensate the business for harm done to it – for example, if a partner was stealing potential clients for themselves, or maybe a relative or diverting earnings into their own offshore or other personal or business accounts.
An important early remedy to a breach of fiduciary duty is often an injunction to prevent the partner from continuing their harmful actions. That’s why it’s critical to get legal guidance as early as possible if someone suspects a partner or other person with fiduciary duties of a breach. That can help protect a business’s interests from suffering any further harm.