Tuesday, February 16, 2016
My co-blogger Joan Heminway a short while back wrote a great article, The Ties That Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811 (2015). (symposium issue)
I often (and perhaps even usually) agree with Joan on issues of law and life, but there’s a spot in Joan’s article with which I disagree. Joan says:
Although partnership law varies from state to state, as a general matter, partners are not expressly required to contract to form a partnership,88 and a partnership agreement is not defined in a manner that mandates adherence to the common law elements of a contract.89
- Under the Revised Uniform Partnership Act, a partnership exists when two or more persons associate as co-owners to carry on a business for profit. REVISED UNIFORM PARTNERSHIP ACT § 101(6), 202(a) (1997).
- See, e.g., Sewing v. Bowman, 371 S.W.3d 321, 332 (Tex. App.-- Houston [1st Dist.] 2012, no pet.). The Revised Uniform Partnership Act provides the following definition for a partnership agreement: “the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.” REVISED UNIFORM PARTNERSHIP ACT § 101(7).
Joan has case law support, so at least in some jurisdictions, she’s right (as usual), but I think the opinion she relied on got it wrong. That is, I disagree with the idea that "partners are not expressly required to contract to form a partnership” because I think the partnership definition — see footnote 88 above — satisfies (and must satisfy) the requisites for a contract. Unlike an LLC, partnerships can be formed by mere agreement of the parties, which is an agreement I think must rise to the level of a contract.
Partnership law is such that "the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” § 202. Formation of Partnership., Unif. Partnership Act 1997 § 202. 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.
Another Texas case, which the Sewing court decided not to apply, provided:
Clearly, an offer and its acceptance in strict compliance with the offer's terms are essential to the creation of a binding contract. American Nat'l Ins. Co. v. Warnock, 131 Tex. 457, 114 S.W.2d 1161, 1164 (1938); Smith v. Renz, 840 S.W.2d 702, 704 (Tex.App.—Corpus Christi 1992, writ denied). However, even if an offer and acceptance are not recorded on paper, dealings between parties may result in an implied contract where the facts show that the minds of the parties met on the terms of the contract without any legally expressed agreement. Smith, 840 S.W.2d at 704; City of Houston v. First City, 827 S.W.2d 462, 473 (Tex.App.—Houston [1st Dist.] 1992, writ denied). Accordingly, the parties' conduct may convey an objective assent to the terms of an agreement, and whether their conduct evidences their agreement is a question to be resolved by the finder of fact. Estate of Townes v. Townes, 867 S.W.2d 414, 419 (Tex.App.—Houston [14th Dist.] 1993, writ denied). If the finder of fact determines that one party reasonably drew the inference of a promise from the other party's conduct, then that promise will be given effect in law. E–Z Mart Stores, Inc. v. Hale, 883 S.W.2d 695, 699 (Tex.App.—Texarkana 1994, writ denied).
Ishin Speed Sport, Inc. v. Rutherford, 933 S.W.2d 343, 348 (Tex. App. 1996)
I see the formation of a partnership—the agreement to carry on a business as co-owners for profit—to be a higher level agreement than a contract (i.e., contract plus), not less than a contract. We view partnership as a more significant connection between parties than an agency relationship, which does not require consideration. How would it be possible for me to agree with another person to carry on a business as a co-owner seeking profit, without meeting the minimal requirements contract formation? I simply can’t see it. Once a court finds there is a partnership, the agreement that satisfied the partnership threshold carried reciprocal obligations that I must have agreed to, even if I did not knowingly agree at the time to all the obligations that then occur by operation of law because I made the agreement.
A partnership is more than just a contract, and I might even be willing to concede that some of the obligations of a partnership under partnership law are outside or independent of contract law. But to me, if there is a partnership, somewhere, there is an underlying contract. Thus, the question is not whether there is a contract where there is a partnership. The question is what is the scope of the contract?