Partners and joint venturers owe duties to one another called “fiduciary duties.” But, what are these fiduciary duties? And, how to partnerships and joint ventures differ? This blog answers those questions.
A. What are fiduciary duties?
A partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other. In Leff v. Gunter (1983) 33 Cal.3d 508, 514, the California Supreme Court offered the following definition of a fiduciary relationship between partners: “Partners are trustees for each other, and in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.”
While not exclusive, Section 16404 of the Corporations Code provides three distinct fiduciary duties that partners owe to one another: (1) the duty of loyalty; (2) the duty of care; and (3) the obligation of good faith and fair dealing.
B. Duty of loyalty
Pursuant to California Corporations Code, Section 16404(b), partners owe their partners a duty of loyalty. The duty of loyalty includes the following:
(1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.
(2) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.
(3) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
Subpart (1) is the duty to share business opportunities with the partnership (i.e., the corporate opportunity doctrine). For example, in Enea v. Superior Court (2005) 132 Cal. App.4th 1559, the sole asset of a partnership was an office building that it owned and rented. The Court of Appeal determined that several of the partners violated their fiduciary duties to another partner by renting it to themselves at below fair market value because it resulted in lost rent for the partnership.
C. Duty of care
Under California Corporations Code, Section 16404(c), a partner's duty of care is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. Thus, the partner’s duty of care does not extend to regular negligence. The partnership assumes the risk that a partner will commit negligence. But, the partner is liable if it engages in gross negligence.
D. Obligation of good faith and fair dealing
Under California Corporations Code, Section 16404(d), a partner shall discharge the duties to the partnership and the other partners with the obligation of good faith and fair dealing.
E. What if a partner violates his or her fiduciary duties?
A partnership may maintain an action against a partner who breaches the partnership agreement or violates a duty to the partnership that causes harm to the partnership. Corporations Code, Section 16405(a). In addition, a partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business, to: (1) enforce the partner's rights under the partnership agreement; (2) enforce the partner's rights or the partnership's or other partners' obligations; and (3) enforce the partner's rights and otherwise protect his or her interests, including rights and interests arising independently of the partnership relationship. Corporations Code, Section 16405(b).
For further questions regarding fiduciary duties, contact Joshua Borger of Berliner Cohen, LLP at (408) 286-5800 or by e-mail at Joshua.Borger@Berliner.com.