What are my rights when my partner operates the business contrary to the decisions made by the partnership?

What rights does a partner have when one partner makes decisions and acts contrary to the formal decisions made by the partnership?  The Uniform Partnership Act (1914) § 18(h) states that “Any difference arising as to the ordinary matters connected with the partnership business may be decided by a majority of the partners.”  Other related subsections bestow equal rights for the management and conduct of the business upon all members of the partnership.  Similarly the only reasonable interpretation of UPA (1914) § 18(h) is that, when no other agreement between the partners speak specifically to the issue at hand, differences between the partners must be decided by a majority, (meaning more than half).

 

Take for instance, the example of two partners Jim and John who are in a partnership and run a trash collection business together.   They mutually agree that in cases when either of them can’t work, they will hire someone to replace themselves out of their own pocket, rather than the partnership paying for them.   Jim decides that he wants the business to make more money and approaches John about hiring an additional employee, but John refuses.  On his own initiative, Jim hires the additional employee, and pays his salary out of his own pocket.  The employee works out well and increases profits for the business, but John still does not agree to pay him from partnership profits or hire him permanently.  Should the partnership reimburse Jim for the expense of the additional employee?

 

Legally, and by the partnership agreement, the partnership owes Jim nothing for his additional expenses, despite the fact that John retained the profits earned by the labors of the additional employee.  John did not just acquiesce to the actions of Jim, and thus did not ratify his actions by receiving the profits made by the additional employee.  It is unjust to allow recovery of an expense that was incurred individually and not for the benefit of the partnership.  Similarly it would be unjust for the partnership to pay for the employee if he decreased profits.  The outcome of the action is not the deciding factor, but the approval, or lack there of, that makes the difference.

 

Had Jim been the manager of the business and John the investing partner, with Jim using partnership funds to pay for the additional employee, then Jim would be liable to the partnership for actions he made individually that were not approved by both partners.  Rather than insist on litigation right away, partners should look to the long-term stability of the business and figure out a way to resolve differences without further hardship to the partnership relations.

 

Consult with your local counsel before your partnership agreement is finalized in order to plan for ways to resolve these future potential conflicts, and to understand what your State statutorily requires.

 

Picture by: Moyan Brenn