Partnerships often come unraveled when communication between the partners breaks down. Partners are left wondering what their rights and duties are under the partnership agreement. Or more precisely, partners often ask “what are my rights and what are my partner’s duties?”
What is a partnership?
A partnership is an association of two or more persons to carry on as co-owners a business for profit. Many partnerships have a written agreement that set forth each partner’s rights and obligations, but many partnerships are more informal and do not have a written agreement. While a partnership is a distinct entity (separate from the individual partners), the partners still share liability for the partnership.
What is a fiduciary relationship?
Partners share a fiduciary duty between themselves. This means that the partners owe each other duties of loyalty and care. A partner may not take advantage of his knowledge or position in the partnership to steer profits or opportunities to himself instead of the partnership. Moreover, he must account to the partnership for deals and profits relating to the partnership. Generally, a partner may not compete with the partnership.
A partnership agreement may authorize partners to engage in competing activities (such as other real estate developments or allow partners to spend their times on other similar business ventures), but it may not impinge on other basic rights of a partner. For example, a partnership agreement may not curtail a partner’s right to review the books and records of the partnership, to receive partnership documents or eliminate the duty of loyalty. A partnership agreement may not negate each partner’s obligation of good faith and fair dealing.
Can I see the partnership records?
Much partnership litigation arises from a partner who is denied access to the partnership’s books and records. A partnership has a duty to maintain the books and records and to provide access to them to all partners, their attorneys and their agents at the partnership’s principal place of business. This means that a partner may inspect and copy those documents (and that the partnership may charge a reasonable fee for this). Even a former partner is entitled to review the documents relating to the time in which he was a partner.
In addition the partnership must allow a partner to review those documents concerning the partnership’s business “reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement.” This can include documents generated by the partnership’s attorney and the attorney-client privilege does not prevent a partner from discovering this information.
What happens when these duties are breached?
Partnership lawsuits can either take the form of a lawsuit by the partnership or a lawsuit by individual partners. A partnership can sue a partner for breach of the partnership agreement or violation of a duty by the partner to the partnership. More common is a lawsuit by a partner against the partnership or his other partners. A partner may bring a lawsuit to enforce his rights under the partnership agreement, to enforce guaranteed rights under California law even if not set forth in the partnership agreement, or to compel a dissolution and winding up. Common causes of action in partnership litigation include breach of fiduciary duty, breach of contract, accounting and dissolution.