Fiduciary Duties – Duty of Loyalty and Duty of Care

In partnerships or LLC’s there are many statutory requirements that can be contracted around and changed for the benefit of the partnership and the business’s needs.  However, the duty of loyalty and duty of care can not be eliminated.  Rather than specifically define these terms, they are better understood in context of an example:

Suppose Jane and John are partners in the widget business, which is very successful, and Jane is the managing partner.  Jane finds out that the their building is up for sale.  What should she do? Should she go ahead an buy the building or should she offer it to the partnership?  That depends on the type of partnership that she is involved in.  If their widget business is only involved in widgets, then it would be outside the scope of the partnership, and she would be free to buy it without giving notice.  She would have no duty of care or loyalty owed to her partner to disclose the deal.
Another question to be asked is where did the opportunity come from? If it came to her because the former owner knew she was the managing partner of the business, then it would be her obligation to tell her partner John.  But if it was an old friend who approached her with the possible deal, she would not have an obligation (under her fiduciary duties of loyalty and due care) to disclose the possible sale to John.
However, a better guiding principle for this decision would be: if you think that the partnership would be interested in the deal, you should disclose it.  After all, Jane will be in business with her partner after the deal, and because of Jane’s position as agent for the partnership, the best way for her to fulfill her duty of loyalty and due care to her partner is through disclosure and consent.
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