A partnership involves people carrying on a common business for profit. Partners in a general partnership are fiduciaries to each other. This relationship means that they owe each other, and the business, certain basic duties.
General Partners’ Fiduciary Duty
Partners stand in a fiduciary relation to one another in all matters pertaining to the partnership. The partnership relationship is one of honesty, good faith, fairness, and loyalty. It imposes upon the partners the highest standards of care, the duty to act for the common benefit of all partners in transactions relating to the business, and the duty to refrain from taking advantage of one another by any misrepresentation, concealment, threat, or adverse pressure relating to the partnership and its business.
Duty of Good Faith and Fair Dealing
The obligation of good faith and fair dealing begins with the preliminary negotiations in forming the partnership and continues throughout the life of the partnership, extending to the dissolution and complete settlement of the partnership affairs. Even when relations between partners become strained, the partners must continue to exercise the highest standard of good faith in all transactions relating to the partnership business. The duty of good faith and fair dealing continues after dissolution of the partnership, through the winding up and final settlement of all partnership business and affairs.
Duty of Loyalty
Partners must always place the interest of the partnership above their own personal or business interests. As part of the duty of loyalty, partners must refrain from self-dealing and avoid conflicts of interests between their duties as partners and their own personal or business interests. If a conflict arises, partners have a duty to disclose the conflict to the other partners and either refrain from the activity or transaction or obtain the other partners’ consent before proceeding. The duty of loyalty terminates when a partner leaves the partnership unless the parties have entered into an agreement extending the time frame.
Opportunities for partners to benefit from partnership-related transactions can arise because of a partner’s position as an insider with the partnership. Partners cannot take advantage of their position and engage in any partnership-related transaction where they stand to gain a benefit unless they fully disclose the relevant information to the other partners and obtain their consent to proceed. It is a breach of the duty of loyalty for a partner to make a secret profit from partnership-related business.
Duty of Care
General partners in a partnership are in charge of the partnership's business activities. The duty of care requires partners to act in a reasonably prudent manner with regard to their responsibilities for carrying out the partnership’s business and activities. Generally this means that the partners must act reasonably, in good faith, and without any conflict of interest when making business decisions for the partnership.
Duty of Full Disclosure
Partners are required to fully disclose to other partners any information relating to the partnership and its business that could affect a partner’s interest in the partnership. This includes any information regarding potential business opportunities, contributions made to the partnership, contracts entered into, and partnership finances and operations. Partners also have a duty to disclose anything involving a potential conflict of interest where they could personally benefit from a transaction with the partnership.
Full and complete disclosure is particularly important in the context of a sale of the partnership. If one or more partners would benefit more than other partners from the sale of the partnership, that information must be disclosed to all the partners. If a sale occurs without full disclosure, any partners harmed could sue to obtain their fair share of the benefits they should have received.
Presumption of Fraud or Undue Influence
A partner has the burden of proof in a claim alleging breach of fiduciary duty for self-dealing or unfair advantage in a transaction involving the partnership. In that situation, a presumption of fraud or undue influence arises and the challenged partner has the burden of rebutting or countering the presumption by showing that he or she acted fairly and fully disclosed all material facts to the other partners. An offending partner is responsible for any losses suffered by the partners or the partnership that were caused by the bad faith of that partner.
Changing Partners’ Fiduciary Duties
The fiduciary duties of partners are determined by state statute and case law. Partners can change their fiduciary duties by agreement, provided the changes are reasonable and allowed under state law. Certain fiduciary duties cannot be altered or eliminated by agreement. Before entering into an agreement that includes any modification or change to your fiduciary duties as a partner, be sure to check your state law or you may want to consult with an attorney to see what is allowed in your state.