This blog will discuss the challenges of Partnership by Estoppel.
Partner refers to a variety of business relationships such as co-owners, collaborators, coworkers, business associates, and even suppliers and customers, etc. We explained in our previous blog on general partnership, it is not the label, but the intent to do what in law creates a partnership (agreement to share profits, right to participate in the control of the business, etc.), that controls the question of whether there is a general partnership. However, in certain situations, a person who is not a partner in a partnership may be held liable to a third party when that person represents, or consents to another representing, that he or she is a partner. This is called partnership by estoppel and applies in certain situations, as you will see in this series.
In Texas, the current statute governing general partnerships provides that a false representation or other conduct falsely indicating that a person is a partner does not of itself create a partnership.[1] Likewise, a representation or other conduct indicating that a person is a partner in an existing partnership, if that is not the case, does not of itself make that person a partner in the partnership.[2] When it comes to third parties, however, the statute also provides that the rights of a person extending credit in reliance on such false representation, as well as the rights and duties of a person held liable in such situation, are determined by applicable law other than partnership laws, including the law of estoppel, agency, negligence, fraud, and unjust enrichment.[3] Therefore, a person who falsely represents that he or she is a partner in a partnership can be treated as one and liable to a third party who relies on such representation. The laws in many other states appear to be significantly similar.
How does this work in the real world? Does this mean that there is a lot of liability risk for just using the word “partner”? In many cases, yes.
Watch for the next posts in this multi-part blog series on partnership by estoppel. Coming up in our next post, we will look at Cox Enterprises, Inc. v. Filip, [5] an old case that shows how Texas courts would apply the principle.
[1] Tex. Bus. Org. Code § 152.054.
[2] Id.
[3] Id. § 152.307.
[4] N.Y. P’ship. Law § 27.
[5] 538 S.W.2d 836 (Tex. Civ. App.–Austin 1976, no writ).
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Freeimages.com/Photographer Tom Albrighton.
About the Author
Shawn McBride — R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC. Shawn works successful, private business owners in their growth and missions to make a company that stands the test of time. You can email R. Shawn McBride or call 407-517-0064.
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