A partnership is created whenever two or more people get together and decide to carry on any business as co-owners. A partnership is a legal entity distinct from the individual partners. In Illinois, the Revised Uniform Partnership Act (RUPA) provides a default set of rules that partnerships must abide by. Many business partners often choose to formalize their relationship by creating partnership agreements. Either way, partners are bound by certain state rules governing partnerships.
When everyone does what he or she is supposed to, partnerships can be very beneficial and profitable arrangements. They allow two or more persons to pool their resources and talents for common gain, and depending on how they are structured, they can even insulate individual partners from personal liability for the costs incurred by the partnership. But they also carry great risk if one partner acts in a way that compromises the partnership’s financial health or even survival. For instance, what if you suspect your partner is using partnership funds for his own personal expenses or going behind your back and making clandestine deals on behalf of the partnership? What if you suspect the other partners are leaving you out of certain decisions or ventures?
All partners have a fiduciary duty of loyalty and care to act in the best interests of the partnership and to engage in “good faith and fair dealing.” A partner may not attempt to benefit himself at the expense of the partnership. The partnership as a whole is liable for any wrongful act or omission of any partner acting in the ordinary course of business of the partnership. The partnership must reimburse a loss when one partner mismanages a client’s or other party’s money or property. With so much at stake, it is easy to see why partners would want to check fellow partners before their actions bring disaster on the partnership and even destroy it.
RUPA expressly states that a partner has remedies at equity or at law, including the right to inspect files and to receive an accounting, in which all of the transactions among the partners are sorted out and the net amount owed or owing to each partner is determined. Like the duties of loyalty and fair dealing, a partner’s right of access to partnership books and records may not be waived in a partnership agreement. Records must be available to partners, and even former partners, for inspection and copying. The partnership must account to the partners, and every partner must also account to the partnership for any benefit personally derived from the partnership.
To avoid costly litigation, partnership agreements often include a clause requiring arbitration for any dispute related to rights, duties, or liabilities of partners. Illinois has strong public policy favoring arbitration; however, Illinois courts are willing to enforce the rights and obligations of partners when necessary. Partnership disputes are often resolved in chancery court. Some of the remedies available are temporary restraining orders and preliminary or permanent injunctions requiring a partner to refrain from certain actions; imposition of a constructive trust; and judgments for compensatory and punitive damages.
Partnerships can and often do survive partner disputes and litigation among partners. However, Illinois courts will go as far as dissolving a partnership when a partner has been wronged or shut out by other partners.
Michael A. Reiter, Frequent Partnership Issues, CBA Rec., JULY 1997, at 28, 30
Susan J. Swinson, Partner v. Partner: Actions at Law for Wrongdoing in A Partnership, 9 Ga. St. U. L. Rev. 905, 906-07 (1993)
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