Partnership by Estoppel.
We often hear the word “partner” thrown around to refer to a variety of business relationships—co-owners, collaborators, coworkers, business associates, and even suppliers and customers . . . you name it. As we explained in our previous blog series on general partnership (available here), it is not the label, but the intent to do what in law constitutes a partnership (e.g., agreement to share profits, right to participate in control of the business, etc.), that controls the question of whether there is a general partnership. But 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] Thus, 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 substantially similar. New York law, for example, provides that, “[w]hen a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person . . . , who has, on the faith of such representation, given credit to the actual or apparent partnership.”[4]
How does this play out in real life? Does this mean that there is a lot of liability risk for throwing around the word “partner”? In many cases, yes.
Stay tuned for future posts in this multi-part blog series on partnership by estoppel. 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.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including 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.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or <a ” ” target=”_blank” href=”http://www.rshawnmcbridelaw.com”>www.mcbrideattorneys.com.
[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).