What are the General Standards of a Partner’s Conduct?

§404 of the Revised Uniform Partnership Act is titled General Standards of Partner’s Conduct.  This section applies to conduct of partners and is also applicable for most other business organizations with multiple entities involved.  §404 states that the duty of loyalty to one’s partner(s) implies that each must account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in use of partnership property, or appropriation of partnership opportunity, including the winding up of the partnership; not dealing adversely with the partnership or on behalf of anyone who is adverse to the partnership; and to refrain from competing with the partnership.  It also states that duty of care owed to the partnership means that one should refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.  This section also mandates that one shall discharge their duties and exercise their rights consistent with the obligation of good faith and fair dealing.  This section also notes that a partner doesn’t violate the agreement solely through conduct that furthers the partner’s own interests.  The section also allows a partner to lend money the partnership or transact business with the partnership, and gives that partner all the rights that a third party has relative to the partnership.

 

One example of can be seen in the following situation.  Jane and John become partners when they entered into a 20-year lease of a hotel.  Jane puts up the money to renovate the hotel, while John manages it, and gives her half of the profits.  Jim, owner of the building, originally had planned at the end of the lease to sell the site to investors to tear down and construct new buildings, but as the lease wound down, all of his investors dropped out of the deal.  With four months left on the lease, Jim approaches John, the manager of the hotel with an offer for him to buy the building at the end of the lease.  What are John’s fiduciary duties to Jane in relation to this opportunity?  Does he have to disclose the deal?  Can he keep quiet and take the deal all by himself.

 

Because John’s position is partner and manager of the hotel, he is put into the position of trustee for the partnership, and he owes a proper accounting of opportunities, to his partner Jane, that come to him as manager of the hotel.  Partners owe to one another the duty of finest loyalty, and a trustee is held to something stricter than the morals of the market place, which is not honesty alone, but a standard of honesty most sensitive, which is enforced with uncompromising rigidity in the courts.  Thus, while the lease is still in place, following the principles of good faith and fair dealing, John needs to disclose opportunities that come to the partnership.  Had John been approached in his own capacity, not in his capacity as manager of the hotel, but by another individual of his personal acquaintance to buy the hotel, then he wouldn’t likely have had the same duty of disclosure.

 

Picture by: Moyan Brenn