How to Deal with a Potential Business Penalty that Wasn’t Your Fault

No matter how careful you are, people make mistakes. With a federal laws and agency regulations, 50 different state laws, and thousands of local ordinances, even the best attorneys and accountants cannot keep up with continuously changing laws. When a mistake occurs, your company may face a potential business penalty. But what happens when the mistake occurred at the fault of your partner?

Dealing with a Potential Business Penalty

Your partnership agreement sets forth the responsibilities of each partner. When a partner fails to fulfill a responsibility, the partner is often liable for resulting damages. In the case that a potential business penalty may be assessed, you may consider talking to your partner about signing a release agreement.

What is a Release Agreement?

A release agreement ‘releases’ your partner from liability in exchange for a something of value. While the value is usually money, it doesn’t have to be. It might seem repetitive to sign a release agreement is the appropriate remedies are outlined in the partnership agreement. However, a release agreement will save you time and money from litigation or arbitration. By signing a release agreement, your partner acknowledges responsibility for the negligent action resulting in a potential business penalty, and is then released from liability typically by providing full or partial payment for the penalty.

In a release agreement, the damaged party would be the Releasor. In the business situation described above, you would be considered the damaged party because the potential business penalty would be cutting into the profit of the business, and ultimately your personal profit. The Releasee is the part at fault, which in this case is your business partner.