It is often the case that shareholder agreements, partnership agreements, or limited liability company operating agreements contain express provisions which require an aggrieved party to give the other side written notice of disputes and an opportunity for the other side to fix the problems before resorting to a claim. “Notice and Cure” is the name of these provisions.
I’ve seen litigants take “self-help” by terminating the business relationship based on the behavior of the other party. However, they failed to follow the contract. It amazes me how many times this happens without the parties even taking the time to check their contract.
New Jersey requires strict compliance with notice provisions in a partnership, shareholder or operating agreement. Likewise, this applies to provisions which might require an opportunity to cure any problem. In fact, an entire body of law has developed on this specific issue. If you fail to follow a notice and cure provision and take unilateral action, you will likely breach the agreement yourself. “Breach of Contract-Failure to Follow Termination Procedures,” 18 Causes of Action 229 (2020)(recognizing that “[w]here the plaintiff can establish the existence of a contract requiring the defendant to follow specified procedures before a discharge, proof that the defendant failed to follow those procedures will establish breach of contract”).
The consequences of this could be severe, and could impact the business in many ways. If there is a determination of a breach, you may have to pay damages to the other side. You also may have to pay attorneys’ fees and costs if permitted under your contract. Moreover, depending upon the situation, your breach could relieve the other party of performance, including, in certain situations, perhaps relieving that person of a requirement to provide capital to the business or relieving that person of a prohibition on their ability to compete against the business.
In short, before taking action against a partner, co-shareholder or co-member, carefully evaluate the strategy with competent counsel. You should closely scrutinize the provisions of any written agreement between the parties.
Please contact me for help handling a partnership dispute, or with any other business owner issues.