Friday, February 19, 2016

Comin' Back Atcha, Josh, on Partnerships and the Requirement of a Contract

I love your most recent post, Josh, and have been truly enjoying the ensuing commentary/conversation. I took on the “is it a contract?” issue in the LLC context because of questions similar to those raised in your post and in the comments it generated. I admit that the partnership issue on which you posted has fascinated me for quite some time. (I first encountered it when I undertook to teach Business Associations almost 16 years ago . . . .)

I have to push back on your analysis a bit, however.  In particular, here’s the part of your post with which I have some trouble:

There must be an agreement to associate for a purpose. To me, that requires consideration and assent.  If one has associated sufficiently under the law to make one both a partner and an agent of another (and thus liable for the partner), I don’t see how there is a lack of sufficient consideration or assent to form a contract.

Why does an association for a purpose require an agreement? To "associate" is to combine, connect, or link. The concept of an association builds from that: "connection or combination" or "an organization of people with a common purpose and having a formal structure."  It is clear in the comments to the RUPA that the drafters use "associate" and "association" in these common forms. In fact, the drafters refer to various forms of association created under other statutes, including “corporations, limited partnerships, and limited liability companies.” See RUPA Section 202, cmt 2.  

It is the association--of two or more persons to carry on as co-owners a business for profit--that creates an agency relationship and third-party liability for the obligations of the firm (unless the parties separately agree to those matters--which they may do independently or coincident with the formation of a partnership).  Those parts of the relationship are attributes of a partnership--aspects of the relationship that flow from the legal conclusion that a partnership has been formed. In other words, because of the formation of a partnership, the partners are agents of the partnership and are liable for partnership obligations.

Even assuming an agreement, however, it certainly is true that not every agreement is a contract.  Offer, acceptance, and (as you note) consideration would be required at common law to form a contract.  (Mohsen adds value to that analysis as well in his comment, even if he refers to the partnership agreement as opposed to partnership formation.)  Partners may and do, in fact, contract with each other under that legal meaning.  But I am not confident that a contract is required.  

Tell me what I am missing in all this . . . .

Parenthetically, I will note that I am extending my work on LLC operating agreements as contracts (referenced favorably at the outset in your post, for which I thank you) in future work, and I will be presenting the preliminary ideas on that at KCON XI next weekend in San Antonio.  It will be interesting to share some of these ideas with folks for whom contracts is their primary area of legal inquiry.  And since my associate dean is making noises about me teaching contracts sometime soon, I'd best get myself up to speed with the experts in any case . . . .

Business Associations, Joan Heminway, Joshua P. Fershee, Partnership | Permalink


Joan -- I do not think you are missing much of anything in this. Association creates partnership and brings attributes, some of which are specified in statute and some of which are not. The question becomes particularly important withe respect to fiduciary things and whether they are aspects of association or aspects of a contract (which arguably can be freely changed by contract). The contractarian mission is to load things into the contract realm so contract uber ales. Others, including me, might say "not so fast." However, I have a query -- if it is association, then why does the historical question of who can associate (minors, etc) link to contract law? Is that public policy, ability to exercise agency authority, something else. Just ramblings on a Sat morning while working on my LLC book supplement and lacking the benefit of my partnership book (shameless plug). I look forward to continuing commentary. Joan -- thanks for teeing this up. Callison

Posted by: Bill Callison | Feb 20, 2016 8:20:08 AM

I appreciate these thoughts, Bill. I agree that the "nub" of what many of us are worried about here in the final analysis is the impact of these issues on private ordering, including especially with respect to fiduciary duties. Thanks for putting that out here.

You also ask: "if it is association, then why does the historical question of who can associate (minors, etc) link to contract law? Is that public policy, ability to exercise agency authority, something else." Funny you should ask that question . . . . I am wrestling with that and other similar matters right now in my continuing work on operating agreements and contract law. I hope you'll allow me time to finish this round of that wrestling match before sharing my thoughts. They are not ready for prime time yet (if you know what I mean). But stay tuned. I hope to have good information for you soon. In the mean time, do let me know if you are on a deadline to enjoy the benefits of my research and thinking, OK?

Posted by: joanheminway | Feb 20, 2016 10:35:52 AM

It is worth considering, for context, that a general partnership holds a very special place in the law, together with common law marriages and agency/fiduciary relationships which are implied in fact, as a legal ordering that does not predominantly arise with legal counsel or even carefully considered planning. It is, in essence, a curative tool in the law that provided remedies in the absence of people proceeding with a relationship as they would have if they were well counseled rational actors. As such, it is particularly important for this part of the law to be flexible, liberally interpreted and focused on producing an equitable result.

Posted by: ohwilleke | Feb 22, 2016 3:28:20 PM

I hope I'm not intruding on the party, but I am sort of wondering out loud here if there isn't inherent in the general partnership structure a fundamental agreement with regard to sharing liability that ought to form a basis for consideration and assent? That might distinguish it from the limited partnership - we don't know or can't establish the extent of the agreement of the limited partners as to liability until we know the extent of capital, which could be a justification for not allowing limited partnerships to pop up sans documentation. Just a random thought on a Friday morning with limited coffee....

Posted by: Elaine Wilson | Feb 26, 2016 7:24:34 AM

Not an intrusion, Elaine! This is an open conversation, and you are more than invited to this party. I also view your comment as non-random. So, welcome to the conversation.

Your argument seems to be consistent with Josh’s argument. (I will let him correct me if I am wrong.) Putting your words in his mouth (and asking forgiveness of both of you in doing so), he might argue that partners associate for the purpose of assuming joint and several liability for the firm’s obligations and that the association therefore is an enforceable contract.

I hear you both, and I do struggle with this more than I may show. Let me respond with a simple riposte in the form of a question for you and Josh to consider. What about a partnership that is not recognized as such by the partners themselves but, under partnership law, is a partnership in fact? (You allude to this by referring in your comment to the difference between partnerships and limited partnerships.) Of course, almost every casebook that covers partnerships from a business associations perspective has at least one case like this—where the court “finds” a partnership denied by at least one of the litigants (typically, a defendant). Unless litigants who deny partnership status are doing so dishonestly, they have not associated for the purpose of assuming joint and several liability.

Having said all that, I should note that in other circumstances, it is clear that partners engage in a specific, even express, bargained-for exchange, supported by consideration. Those agreements—written or oral—should be legally recognized as contracts; but partnership law does not require that the association of partners in a legally valid partnership be contractual. That’s my essential point.

Posted by: joanheminway | Feb 26, 2016 9:28:23 AM

This is all a great discussion, and I appreciate how well it has been framed. I have designs on something bigger than a comment or a blog post, but current obligations have been thwarting that effort.

As you probably expect, I will continue to quibble with the argument that “partnership law does not require that the association of partners in a legally valid partnership be contractual.” Joan, you note in your post that “[i]t is the association--of two or more persons to carry on as co-owners a business for profit--that creates an agency relationship and third-party liability for the obligations of the firm . . . .” Perhaps, but it is that association with purpose of “carry[ing] on as co-owners a business for profit” that creates a partnership. And, in tandem, that association creates the contract I think underlies every partnership formation.

As I have noted before, I don’t think the underlying contract I am referring to is necessarily a partnership agreement. I believe that there is a compelling argument that not all elements of a partnership agreement are contractual in nature. And the underlying contract to which I refer could very well be (and usually would be) something less than a partnership absent a law saying the association created one (because the contract may not provide partnership terms). To me, partnership law says, “I see your agreement to operate a business as co-owners seeking profit, and I now say that agreement comes along with the certain rights and obligations.”

Certainly, not every agency relationship has a contract, but it can be based on one (think Cargill). And not every contract that has elements of a business relationship creates a partnership (think Martin v. Peyton). But I don’t think that means any partnership can be formed without a contract of some kind. As Larry Ribstein and/or Jeff Lipshaw wrote in Unincorporated Business Entities (this was part of the book before I became part of the project): “The difficult cases in partnership formation arise when it is not clear when parties mean to carry on a business as co-owners, or whether they are in another relationship . . . .”

Once a court determines the parties “mean” to carry on a business as co-owners, I still think the court is finding some base-level contract to which they are saying gives rise to a partnership. (And that contract, as to the partners, may have even been completed by the time the parties end up in court arguing about whether there is a partnership.) Thus, a partnership is not predicated on any contract, but it is predicated on a specific kind of contract that encompasses certain fundamental points. As such, one can accidentally create a partnership because one did not intend for their contract to lead to the partnership obligations that the automatically law applies if a partnership is found to exist.

However, one does not accidentally form a business with another as a co-owner seeking profit. If a court cannot identify the agreement between parties to form such a business, there can be no partnership, and there would be on contract, either. There can be a contract, but no partnership, but there can be no partnership without contract.

Without question, the above is gappy and question begging, which is why I have been trying to hold out until I can put something more coherent together. But this discussion is too good to wait for my eventual project to come to fruition. Thanks for continuing the process.

Posted by: Joshua Fershee | Mar 3, 2016 5:00:51 AM

This is great, Josh. Thanks so much for these additional ideas. Truth be told, we're not that far away from each other on this matter, as I see it. Read my post from earlier today. It may give you more of a sense of how close we are . . . . And it may enrich any future post you write. Maybe we should consider writing something together on this topic. Think about it.

Posted by: joanheminway | Mar 3, 2016 5:58:52 AM

Great post this morning, and I agree, we're closer on this than I may have initially thought. We should certainly talk about a possible writing project on this. Thanks!

Posted by: Joshua Fershee | Mar 3, 2016 7:09:10 AM

Sorry to be late to the party (thanks to Josh for directing the LNet-LLC mailing list to this excellent discussion)!

Mu $.02: I tend to agree that a partnership is a contract -- an agreement to form, as co-owners, a business for-profit. (It's just an agreement is often is implied by the parties' conduct and has mandatory terms--e.g., fiduciary duties.) It is for that reason, I have always understood, that in order to be partners, the two or more "persons" must have capacity to contract. Further, to the extent that partnership can be viewed as "mutual agency" (which I understand becomes complicated when the partnership is an entity), it is a set of mutual agency contracts between the partners.


Posted by: Joe Leahy | Apr 11, 2016 9:15:26 AM

Thanks for these additional thoughts, Joe. So, what, then, about a partnership agreement differentiates it as a contract (a binding and legally enforceable commitment) from a mere agreement? Can you (as others are helping me to do) argue that it is a common law contract, using the standard elements of a contract or restatement provisions, or are you relying on something else--another type of analysis? I am going to continue to write on this as I further frame my ideas, so I am genuinely interested in your answer, should you choose to provide it here or in a private message.

Posted by: joanheminway | Apr 11, 2016 1:11:06 PM

Post a comment