Rights of Partners Among Themselves

Partners owe the partnership they are in the duty of care similar to the directors and officers in a corporate setting who owe the duty of care to their shareholders along with other fiduciary duties. Partners are considered agents of their partnership and therefore owes the principal a duty of care.

The Revised Uniform Partnership Act (RUPA) and the Delaware Revised Uniform Partnership Act (DRUPA) provide the standard of care generally recognized by United States courts. The Uniform Partnership Act (UPA), on the other hand, did not provide a definition for the partners’ duty of care. The duty of care is defined by both RUPA and DRUPA as the act of “refraining from engaging in grossly negligent or reckless conduct, international misconduct, or a knowing violation of law” (as cited in Kleinberger & Agency, p. 17). It may be expected that gross negligence formulations used in the corporate setting can also be applied in evaluating cases in partnerships. In concrete terms, acts which exhibit reckless indifference to or outright disregard to shareholder or unreasonable actions may be considered as grossly negligent acts in the corporate setting. The duty of care applies to all aspects of partners’ relationships for the whole duration of the partnership. However, the duty of care expected of partners may be modified in the partnership agreement. Nonetheless, the duty of care must not be unreasonably reduced.

A keyword in evaluating breaches in the duty of care is “gross negligence” and “reckless conduct” (Cross, 2008, p. 32). In relation to this, a partner will not be made liable to his or her partners for committing honest judgment errors or other acts resulting from simple negligence. However, the standard of gross negligence in a partnership is less demanding than the standard applied to paid agents. This is probably due to assumption that partners simultaneously act as agents and principals. Thus, partners are in better position than an ordinary principal (such as a shareholder) to supervise, make interventions or guard against possible breaches in fiduciary duties.

Under the UPA and the RUPA, a partner’s misconduct may suffice to incriminate the partner and the partnership, without briefing the partner’s duty to the partnership. Negligence is enough to qualify for tort liability under RUPA and for vicarious liability under the UPA.

In cases of rightful or wrongful dissociation of a partner, the partner’s duty of care shall continue only with respect to events that occurred before the dissociation. This is unless the partner participates in winding up the business of the partnership.

Business Associations > Agency and Partnership > Rights of partners among themselves > Duty of loyalty

The duty of loyalty is one of the basic fiduciary duties of a partner to his or her partners in a business partnership. It basically requires a partner to report to the partnership “any property, profit, or benefit” acquired by the partner in the course of business or from the usage of business properties.

The state of Delaware in the United States, through its Delaware Revised Uniform Partnership Act, gives a more detailed definition of the duty of loyalty as seen below(Glover and Wasserman, 2003, p.5-4):

1. to account to the partnership and hold as trustee for it any property, profit or benefit derived by the partner in the conduct or winding up of the partnership business or affairs or derived from a use by the partner of the partnership property, including the appropriation of a partnership opportunity;

2. to refrain from dealing with the partnership in the conduct or winding up of the partnership business or affairs as or on behalf of a party having an interest adverse to the partnership; and

3. to refrain from competing with the partnership in the conduct of the partnership business or affairs before the dissolution of the partnership.

Based on the above definition, partners are not allowed to engage in acts that essentially compete or work against the partnership. In concrete, the duty of loyalty can be breached by acts of disclosing trade secrets, misusing of properties of the partnership, self-dealing, and grabbing business opportunities for oneself. It is clear that the partnership could not serve the private business interest of a particular partner alone. This takes off from the understanding that a partners are people who have bonded together to pursue common interests. A partner is generally allowed to pursue personal endeavors outside the reasonable scope of the partnership.

To illustrate the concepts further, we can review the 1928 case of Meinhard vs. Salmon. Meinhard and Salmon partnered in developing a leased building into a commercial complex. The commercial complex was leased out to shops and offices. While both men shared the profits, Meinhard solely managed the building. However, after sometime, the building owner offered adjacent properties for lease to Salmon. Salmon, without informing his partner, signed in as the sole leaseholder of the adjacent property. In the lawsuit that ensued, the court ruled Salmon as guilty of breaching fiduciary duty to the partnership by not informing Meinhard of the business opportunity and taking advantage of an opportunity for himself. Meinhard was granted by the court 50 percent interest in the new lease.

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Business Associations > Agency and Partnership > Dissolution

Dissolution may be defined as the termination of a partnership relation. It can take place in different ways and can happen in an instant. Meanwhile, the Uniform Partnership Act (UPA) defines the dissolution of a general partnership as the change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on its business. Under the UPA, a dissolution does not end the partnership. It merely puts the partnership into a winding up period.

A partnership can be formed for a single purpose or transaction. If that is the case, a partnership ceases as soon as the business is completed. Some partnerships are formed by articles for a definite period. If a partner wishes to dissolve the partnership within the agreed-upon period of business in this said case, he or she may not do so without mutual consent among partners.

However, for business partnerships with no definite agreed-upon term of existence, any partner may withdraw or diassociate at the moment’s notice or as pleased, which may therefore lead to the dissolution of the partnership. A reasonable notice is deemed advantageous to the partnership or to the company as a whole. Yet, except for cases related to fraud, a partner reserves the right to choose a very unexpected moment to exercise his or her right to withdraw from a partnership. A partnership with no fixed term is fundamentally considered to be one “at will.” Therefore, such partnership can be dissolved by any partner at any time by his or her “express will.” It follows then that the date a partner withdraws from a partnership shall also be the date of the actual dissolution of the partnership. The date of a partner’s withdrawal is similarly the date on which a partner states his or her desire to have the partnership dissolved.

A dissolution may take place upon the voluntary act of the parties, or of one of the partners. A partnership may also be deemed dissolved if a partner is unable to contribute his/her skill, industry and capital to the business venture by reason of death, lunacy or insanity. In addition, the insolvency or bankruptcy of an individual partner or the partnership itself may dissolve a partnership. Partnerships may be dissolved via judicial decree for various reasons. At the same time, dissolution may be caused by more external reasons such as by the operation of law, by reason of war between the governments to which the partners respectively belong. In the case of the latter, a continuation of business operations may be considered impracticable and unlawful by association.

Business Associations > Agency and Partnership > Dissolution > Distinguished from winding up and termination

Dissolution is defined by the Uniform Partnership Act as the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissolution does not end in the termination of the partnership. It basically means that the partnership has no future, except to go through the course of finishing in one way or another already started work and to settle accounts and liabilities among partners. After dissolution, the partnership goes through a period winding up for this limited purpose.

Corwin (2003) defines winding up as “the practical business of marshaling the assets of the partnership, paying its liabilities and distributing the remainder if any” (p. 2-38).The winding up process includes the collection and preservation of partnership assets as well as the discharge of liabilities (which practically means paying debts or releasing payables). The value of partners’ interest in the partnership will also be accounted.

To wind up, the partnership must satisfy or answer to its obligations to outside obligees. This means for example that a partnership must finish the projects it is committed to if a dissolution happens during the period of project implementation. If a partnership in unable to finish a project, it must at least arrange to have someone else or another company to complete the project or get the client’s consent to abandon the said project.

During the winding up period, the partnership will assign outside obligors the right to receive performance, or release performance of the obligation. To give a concrete example, partners will be collecting all their receivable accounts receivable such as the money owed by customers for services rendered or products sold by the company. The partnership may also try to earlier collect amounts owed to them by customers but are not yet due for a compromise, such as a reduced amount. The right to collect the debt when due may also be sold by the partnership to one of the partners, a successor partnership or to other corporations or businesses.

The termination of the partnership affair will only legally and actually take place after the winding up has finished. This means that the liquidation of the partnership and the distribution of partnership property must have been completed. Upon the completion of such processes, the partners shall file a Certificate of Certificate of Cancellation of the Partnership’s Certificate of Limited Partnership. They should also complete all other documents that may be required of them by particular laws governing their location.

Business Associations > Agency and Partnership > Dissolution > Rightful versus wrongful

A partner has the power to dissociate from a partnership at any time. A partnership’s dissolution may be considered rightful or wrongful. If the partner lacks the right to dissociate, then the dissolution may be considered wrongful under the law. Still, any dissociation of a partner in a partnership, whether righful or wrongful, terminates some of the rights of the dissociated partner

A rightful dissolution takes place when the no breach in the partnership agreement occurs. A dissolution of a partnership after the agreed upon existence of the business may be considered rightful. The withdrawal of a partner “at will” or per partnership agreement may also be considered rightful. Cases of dissolution due to the death, insanity or bankruptcy of a partner may also be included in this category.

The term, wrongful dissolution is not expressly and directly defined by the Uniform Partnership Act (UPA). Particularly, the UPA describes a dissolution “caused in contravention of the partnership agreement” which results to a partnership that has been “dissolved wrongfully” (Bainbridge, 2009). Bainbridge infers the meaning of wrongful dissolution as one that breaches the partnership agreement.

One act that breaches a partnership agreement and thus may be considered wrongful is the unilateral withdrawal of a partner in a partnership before the agreed upon existence of the partnership or business.

This is applicable to partnerships witha a definite term of existence. A partner’s gross breaches of hos or her fiduciary duties may also be considered by the courts as wrongful dissolution. Such court judgment took place in the case of G&S Investments v. Belman. In the said case, one of the partners was sued by his partners who have been fed up with the former’s acts. The said partner began abusing cocaine, sexually proposed to a tenant in an apartment owned by the partnership, threatened some partners and rented an apartment unit and not paying rent. The court agreed with the partners and deemed the sued partner’s conduct as wrongful dissolution and thus a contravention of the partnership agreement. The sued partner’s act were deemed to negatively affect the operation of the partners’ business making it impracticable to continue with the partnership.

Partners are also prohibited from assigning partnership property to a cfreditor without the conset of his or her partners. A breach in this rule is also considered wrongful. Dissolution from the refusal of a partner to perform his or her duties required by the partnership agreement may also be considered wrongful.

Damages incurred by the business due to a partner’s wrongful dissolution will be taken from any mount due to the dissociating partner in the course of winding up.