Vondran Legal® - Oral Partnership Disputes - Breach of contract and breach of fiduciary duty

Introduction

I am seeing a ton of startups in our digital age.  Ex-employees and even old friends are starting new types of tech and media startups including but not limited to:

• Creating a new podcast
• Starting up a YouTube channel
• Forming a partnership for a crypto project (ex. DeFi)
• Artificial intelligence projects
• Mobile application partnerships
• Many other types

It seems to me that many people figure "what could go wrong" or they think "who knows if this will even work out, let's just get started and we can put a formal agreement together later if things work out."  Accordingly, they do not think to start the business relationship on solid ground and supported by written agreements that spell out who does what, how profits are to be paid, and covering potential termination issues.  Then, when things go awry, and the parties are at each others throats, things can get ugly, accounts can be locked out, assets stolen, trade secrets taken, etc.

This can all be prevented with a solid partnership or joint venture agreement that clearly spells out the rights at the duties of the parties, including fiduciary duties.

However, even if you failed to document your agreement in a signed writing, you may still be able to argue that there is an enforceable oral agreement/partnership under California law.  This blog provides a general overview of the key issues.

California oral partnership law

In Jones v. Goodman (2020) 57 Cal.App.5th 521, 531 [271 Cal.Rptr.3d 487]. the Court discussed oral partnerships in California:

The California Revised Uniform Partnership Act, adopted in 1996, applies to all partnerships as of 1999. §16111, subd(b).)” (Corrales v. Corrales (2011) 198 Cal.App.4th 221, 226 [129 Cal. Rptr. 3d 428].) “[T]he association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” (§ 16202, subd. (a).) 

However, “[a]n association formed under a statute other than this chapter, a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this chapter.” (§ 16202, subd. (b).).

A partnership agreement can be written, oral, or implied (§ 16101, subd. (a)(10)), and “[t]he burden of proving the existence of a partnership lies upon the party asserting its existence.” (Mercado v. Hoefler (1961) 190 Cal.App.2d 12, 16 [11 Cal. Rptr. 787] (Mercado).) 

The terms of a partnership are controlled by the partnership agreement, or by the California Revised Uniform Partnership Act (UPA) if the agreement is silent on an issue. (§ 16103, subd. (a) [“[R]elations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership.”]; Holmes v. Lerner (1999) 74 Cal.App.4th 442, 457 [88 Cal. Rptr. 2d 130] (Holmes) [once partnership is established, “other provisions of the UPA and the conduct of the parties supply the details of the agreement”].)

However, “[a] partnership need not be evidenced by writing [citation]. It is immaterial that the parties do not designate the relationship as a partnership or realize that they are partners, for the intent may be implied from their acts [citations].” (Greene v. Brooks (1965) 235 Cal.App.2d 161, 166 [45 Cal. Rptr. 99] (Greene).) “In that sense, any partnership without a written agreement is a ‘de facto' partnership.” (Persson v. Smart Inventions, Inc. (2005) 125 Cal.App.4th 1141, 1157 [23 Cal. Rptr. 3d 335] (Persson).) “[T]he question of partnership is one of fact … .” (Billups v. Tiernan (1970) 11 Cal.App.3d 372, 379 [90 Cal. Rptr. 246] (Billups); see Spier v. Lang (1935) 4 Cal.2d 711, 716 [53 P.2d 138].) See Eng v. Brown (2018) 21 Cal.App.5th 675, 694 [230 Cal.Rptr.3d 771].)

Partnership vs Joint Venture

Distinguishing Partnerships and Joint Ventures: Understanding Their Legal Characteristics and Implications

Introduction:

Partnerships and joint ventures are commonly utilized in the business world as collaborative arrangements. While both serve the purpose of pooling resources, expertise, and efforts of multiple participants, their legal nature, formation requirements, and operational aspects differentiate them significantly. Here are a few general things to know.

I. Definition and Legal Nature

A. Partnership:
1. Partnership is formed when two or more individuals or entities join together to carry out a business venture for mutual profit.
2. It is governed by the law of partnership, which establishes the rights, duties, and liabilities among partners.
3. Partnerships may be created expressly by a written agreement, implicitly through the conduct of the parties, or by operation of law in the absence of any formal agreement.

B. Joint Venture:
1. A joint venture is an arrangement between two or more entities (commonly referred to as "joint venturers") to pool resources and expertise for a specific project or undertaking.
2. It is governed by a contractual agreement between the joint venturers, which outlines their respective rights, obligations, and shares in the joint venture.
3. Joint ventures are typically established for a limited duration and purpose, although they can be ongoing if intended.

II. Formation Requirements

A. Partnership:

1. No formal written agreement is necessary for the formation of a partnership, as it can be created through an oral agreement or implicit conduct.
2. However, it is highly advisable to have a written agreement to clearly specify the terms of the partnership, including capital contributions, profit-sharing arrangements, decision-making processes, and dispute resolution mechanisms.

B. Joint Venture:

1. Joint ventures are always governed by a contractual agreement executed by and between the joint venturers.
2. This agreement should clearly define the objectives, scope of work, project duration, financial contributions, distribution of profits and losses, decision-making authority, and dispute resolution procedures.

III. Liability and Management

A. Partnership:

1. Each partner in a partnership is jointly and severally liable for the actions of the other partners in relation to partnership obligations.
2. Partnerships generally involve shared management responsibilities and decision-making authority among partners, unless otherwise stipulated in the partnership agreement.

B. Joint Venture:

1. Joint venturers typically limit their liability to the extent specified in the joint venture agreement.
2. Joint ventures can be structured to establish a separate legal entity, such as a corporation or limited liability company (LLC), to shield joint venturers from personal liability.
3. The governance structure of a joint venture is adaptable and can be configured to assign roles and decision-making authority based on the agreement, including the appointment of managing partners or a management committee.

In conclusion, partnerships and joint ventures both facilitate collaboration in business endeavors, but they differ fundamentally in their legal nature, formation requirements, liability, management structure, and tax implications. Understanding these distinctions is crucial to make informed decisions when exploring collaborative ventures, ensuring compliance with applicable laws, and protecting the interests of the participating entities.

Overview Video by Attorney Steve®

Liability for acts of other partners

The partners of a partnership are jointly and severally liable for the conduct and torts injuring a third party committed by one of the partners.” See Black v. Sullivan (1975) 48 Cal.App.3d 557, 569 [122 Cal.Rptr. 119], internal citations omitted.)

Liability for breach of fiduciary duty

Each partner or associate operates a fiduciary relationship to the others in all matters pertaining to the partnership enterprise. MacMorris Sales Corp. v. Kozak (Cal. App. 2d Dist. 1968), 263 Cal. App. 2d 430, 69 Cal. Rptr. 719, 1968 Cal. App. LEXIS 2224.

California Corporations Code §16404. Partner's fiduciary duties

(f) A partner may lend money to and transact other business with the partnership, and as to each loan or transaction, the rights and obligations of the partner regarding performance or enforcement are the same as those of a person who is not a partner, subject to other applicable law.

(g) This section applies to a person winding up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

Case law on breach of fiduciary duty

Contact a California Partnership Litigation Law Firm

If you got involved with a tech startup project, or other business venture, call us to discuss your legal rights.  We can be reached at (877) 276-5084 or fill out our contact form for more information.