Partnership By Estoppel

Before we discuss the meaning of “partnership by estoppel,” it can be helpful to know what the definition of a partnership is first. A partnership is typically defined as a specific type of business organization that involves two or more persons who act together as owners of a business for profit. If the business partners do not opt for a different form of business, such as a corporation, a partnership will be formed. Partnership is the default position.

A key feature of partnerships is that each partner is held responsible for the losses, profits, and violations of the law of the partnership. It does not matter whether the individuals in the partnership intended to create a partnership. It only matters that they intend to proceed as co-owners of a business for profit. Whether this was intended can be determined by examining whether the parties have a right to control the business and whether they share in the profits.

Although there are four different kinds of partnerships, for this article, we will only focus on general partnerships since this is the only type wherein a “partnership by estoppel” relationship would transpire.

Unlike the other three forms of partnerships, in the eyes of the law a general partnership does not need to be created. It can occur naturally between persons who simply wish to be co-owners of a business for profit. In other words, a general partnership can be formed, regardless of whether the individuals wanted or intended to create one.

For instance, suppose two people own a restaurant. They split any profits they earn evenly and make joint management decisions. Though they never refer to themselves as partners nor have any agreement (such as a partnership agreement) stating as much, they have unintentionally formed a general partnership.

This is what “partnership by estoppel” means. The phrase refers to people who have not intentionally chosen to be partners but will still be held liable as partners for any debts or damages incurred by a business or owed to a third party. Interestingly, the original reason the doctrine of partnership by estoppel was created was to prevent persons from defrauding and taking advantage of outside lenders or creditors who loaned them money.

What Are Some Guidelines for Partnership By Estoppel?

Guidelines establishing this relationship are provided in the Revised Uniform Partnership Act (“RUPA”), which states that if an individual permits another party to solicit business or advertise as if they are partners, they will be viewed as such by third parties.

The RUPA guidelines also provide that persons who form a partnership can be held jointly and severally liable for any incidents in connection to the business. Therefore, if you are unknowingly involved in a partnership, and there is a dispute over the business, then you can be held legally responsible for the actions of the other partners.

Remember, it does not matter whether you meant to form a partnership or if you did not partake in the acts that caused the liability or damages; you will still be held responsible as a general partner if the court believes that you and the other individuals have acted and represented yourselves as a partnership.

Am I at Risk of Being Held Liable as a Partner?

As previously discussed, any individual determined to be a partner in a business can and will be held liable for all debts, losses, or damages incurred by the partnership. For instance, if the partners are late on payments or cannot make payments on debts, then all of the partners can be held liable by the business’s creditors.

Each state has adopted its own partnership statutes, which are similar to the rules found under the RUPA. Thus, while the exact elements of partnership by estoppel may vary by state, this type of relationship will generally arise if any of the following situations occur:

• The individuals have held themselves out to third parties that they were partners, either by verbal expression or by implied conduct such as activities with vendors or creditors
• The individuals have advertised or solicited business as if they were partners in a partnership
• The parties allow themselves to use each other’s names when conducting business, just as a partnership would do
• If third parties have assumed that they were running a partnership, the business owners have failed to correct them
• The person claiming estoppel against the partnership and the partners has relied on the fact that the business was a partnership
• All parties actively participate in making management-level decisions about the business

Whether a party can specifically be held liable as a partner in a partnership by estoppel case will depend on the following factors:

• If the party represented themselves as a partner or allowed another party in the business to introduce them as a partner to a third party
• If the third party relied on the representation in good faith to either extend credit, goods, or services to those associated with the business

Since any evidence can be used to establish that the parties held themselves out as partners, the key to liability in partnership by estoppel cases hinges on the second factor in the above list. If it can be shown that a third party relied to their detriment on the individuals’ representation as partners, then they will most likely be held liable for any damages that they caused to the third party.

As mentioned, the original reason that the doctrine of partnership by estoppel was created was to prevent persons from misrepresenting themselves to outside lenders or creditors who loaned them money or sold them goods. A plaintiff who files a lawsuit to recover damages for the parties’ misrepresentation will have the burden of proving that a partnership by estoppel exists. The plaintiff will do this by proving that:

• The defendant either held themself out as a partner or allowed others in the business to hold them out as a partner.
• The plaintiff relied on this alleged partnership in good faith to either extend credit or do business with the parties.
• The plaintiff suffered damages due to the above deceptions.

Accordingly, if these three elements can be sufficiently proven, then the defendant or defendants will be liable to the plaintiff for potentially large awards of monetary damages. People who could be liable for their partners’ actions in a partnership by estoppel should contact a local business attorney for representation as soon as possible.

Should I Contact an Attorney About My Partnership Issue?

As discussed above, the doctrine of partnership by estoppel was formed by case law and eventually became part of the RUPA. While not every state has an exact definition of partnership by estoppel, each state has adopted similar versions of the RUPA and may hold alleged partners liable for actions like misrepresentation or deception.

Thus, if you believe that you are not involved in a partnership or a partnership by estoppel and a third party is attempting to collect money from you as if you were a partner, then you should consult a local corporate attorney immediately for advice.

Your attorney will determine if there are any defenses available that you might be able to raise against the other party’s claim or if there are any counterclaims you can make against the opposing party. In addition, your lawyer can also assist with drafting any necessary legal documents for your case and provide representation in court.

An experienced business attorney can ensure that your rights and interests are protected per the relevant laws.