Fiduciary Duties of Business Partners
A partnership involves people carrying on a common business for profit. Partners in a partnership are fiduciaries to each other. This relationship means that they owe each other, and the business, certain basic duties.
Partners stand in a fiduciary relation to one another in all matters pertaining to the partnership. The partnership relation is one of trust, loyalty and confidence. It imposes upon the partners the highest standards of good faith, the duty to act for the common benefit of all partners in all transactions relating to the business and the duty to refrain from taking any advantage of one another by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.
Partners are required to disclose fully all information relating to the business. This fiduciary relationship partners bear to each other means that if a partner gets any benefits from the partnership, he or she must share them with the other partners according to the terms of their partnership agreement.
Such disclosure may include contributions made, contracts entered, the valuation of a partner’s interest or the availability of a business opportunity in which the partnership may be interested. Full disclosure is particularly important when the business may be sold to one of the partners or to an outsider.
In the context of the sale of the business, this means that no partner can seek to benefit him or herself by the sale, to the detriment of the other partners. If that occurs, the other partners can sue to obtain their fair share of the benefits, whatever those might be.
The obligation of utmost good faith begins with the preliminary negotiations in forming the partnership and continues throughout the life of the partnership, extending to the dissolution and complete settlement of the partnership affairs. Even when relations between partners have become strained, the partners must continue to exercise the highest standard of good faith in all transactions relating to the partnership business.
Breach of Fiduciary Duty
A breach of fiduciary duty occurs when a partner profits or acquires another type of benefit as a result of one of three things:
- Having a conflict of interest
- Having a conflict of duty
- Taking advantage of being a fiduciary
- Conflict of Interest
As a fiduciary, a partner cannot put his or her interests before those of the business. Furthermore, a fiduciary cannot perform actions that are not in the best interests of the business.
Conflict of Duty
As a fiduciary, a partner cannot have conflicting fiduciary duties. For instance, a real estate agent cannot represent a buyer of a house if the agent’s company represents the party selling the house because each party’s best interests cannot be represented.
Taking Advantage of Being a Fiduciary
As a fiduciary, a partner cannot profit as a result of taking advantage of their position. Opportunities for fiduciaries may arise because of their position, and they must make known to all partners any profit they receive as a result of being in the position they are in. The fiduciary can keep the profit only if the other partners give their consent.
Duty Owed Not Limitless
The extent of the fiduciary duty owed between partners is not limitless. The duty varies depending on the circumstances. For example, if a physician is both a partner in a health service partnership and also an independent contractor employed by the partnership, termination of the physician’s contract by the partner-hospital, with the consent of two other partners, as per the terms of the contract, would not be a breach of the hospital’s fiduciary duty to the physician.
Presumption of Fraud or Undue Influence
Where a confidential relationship exists between parties, as in a partnership, a presumption of fraud or undue influence arises where one of the parties has obtained an individual advantage or benefit by virtue of his or her fiduciary status. Such partner then has the burden of rebutting or countering that presumption by showing that he or she has not violated any fiduciary obligations. An offending partner is entirely responsible for any losses suffered by the partnership which were caused by the bad faith of that partner.
General Partners Accountable to Limited Partners
General partners have sole control of the business of the partnership, and are the only ones who can act on its behalf. Thus, they are accountable to the limited partners as fiduciaries. For example, a general partner would breach his or her fiduciary duties by failing to notify the limited partners of the sale of a partnership asset. As a general rule a general partner may not take for himself or herself a business opportunity which should be shared with the partnership. However, a general partner’s obligation to the partnership and the limited partners is not exclusive, and the general partner has the right to participate in similar business ventures to the extent that there is no conflict of interest.
Partnership Funds Must be Used for Partnership Purposes
General partners may not exceed the authority granted to them in the partnership agreement to use partnership funds for anything other than partnership purposes. Creditors who make loans to a general partner with knowledge that the loan will render the partnership insolvent or will breach the partnership agreement may not rely on the apparent authority of the general partner in pursuing any related claims against the partnership.
In a business partnership, under the California Partnership Act, there are two specified fiduciary duties – a duty of loyalty and a duty of care.
Duty of Loyalty:
Duty to Account
A partner may not appropriate benefits from the partnership without the other partners’ consent and may not usurp a partnership opportunity.
If you need any further clarification regarding Fiduciary Duties of Business Partners, please contact us at (310) 477-7767 or fill out the form here.
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