What is partnership by estoppel and how would it affect my business?

Under the Uniform Partnership Act § 7(1), the general rule is that persons who are not partners as to each other are not partners as to third persons.  But under that same act, a person who represents himself, or allows a third party to represent him to anyone as a partner in a partnership, is liable to any such person to whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership. See U.P.A. §16(1).

This means, that though two people or entities are not partners, if one partner allows the other to advertise or otherwise solicit business based on the representation that the two are partners, then in the eyes of the law, they will be seen as partners to that third party.  This is particularly important because partners are jointly and severally liable for everything chargeable to the partnership.  Which means if one partner, who may not have many assets, makes a mistake and incurs massive liability that he can’t cover, then the other partner will be liable for his mistakes.

 

An example of this can be seen in the case of Young v. Jones 816 F.Supp. 1070 (D.S.C. 1992).  There PW-Bahamas [Price Waterhouse, Chartered Accountants, a Bahamaian Partnership] issued an unqualified letter regarding the financial statement of a foreign investment entity.  Based on this letter, investors from Texas invested their money, which was subsequently lost.   It turned out that the information that PW-Bahamas based its letter upon was falsified.  The Texas investors sued PW-Bahamas and PW-US to recover their investment, though the two were not actually partners.  The investors argued that because the brochures of Price Waterhouse describes itself as one of the “world’s largest and most respected professional organizations,” which helped gain public confidence in the firm’s stability and expertise, then it should be estopped from denying the existence of a partnership with other foreign offices. The court held PW-US could not be considered a partner by estoppel.   The court reasoned, that because the investors never relied on the brochures nor made any decision on the basis of or statement by PW-Bahamas that the two were partners, no liability under South Carolina statutory law existed.

 

Had reliance on statements or brochures taken place by the investors, PW-US would have been liable for the mistakes of PW-Bahamas.  Check your local jurisdictional rulings and local counsel to determine what risks your company may incur with similarly situated entities.

 

Photo by: Moyan Brenn