Can You Establish a Partnership Without an Agreement?

The New York Court of Appeals has long defined a partnership as “a contract of two or more persons, to place their money, effects, labor or skill, or some or all of them, in lawful commerce or business, and to divide the profits and bear the loss in certain proportions.” Pattison v. Blanchard, 5 N.Y.186 (N.Y. 1851).

In a New York County Supreme case, Ovsyannikov v. Monkey Broker, LLC, the defendant sought to dismiss the plaintiff’s claim that defendant breached an oral partnership agreement, arguing that the elements requisite to establish a contract did not exist, and even if they did, the Statute of Frauds was a defense to the formation of an oral partnership agreement.

The Court examined the elements that must be asserted to plead the breach of a partnership agreement: (i) the existence of an agreement to enter into a partnership in exchange for a contribution of cash or services; (ii) that plaintiff performed his duties under such agreement; (iii) that defendant breached an obligation imposed by the agreement; and (iv) that plaintiff sustained direct damages as a result of the breach.  Ovsyannikov, 2011 N.Y. Slip Op. 33909 at *6.  In order to form a valid agreement, there must be offer, acceptance, consideration, and mutuality of intent to be bound.  Id. at *7.

Here, at the motion to dismiss stage, the Court liberally construes the pleadings, giving all favorable inferences to the pleading party – the plaintiff.  In doing so, the Court found that the parties had agreed to the existence of some kind of agreement between them based on the fact that defendant offered of shares in the defendant LLC to plaintiff in exchange for plaintiff’s unique employment services in web design and computer programing for defendant, which included, inter alia, the development on an online banner advertising business for defendant’s benefit. Thus, the claim survived.

Interestingly, the defendant asserted the defense that the Statute of Frauds barred plaintiff’s claims.  However, the Court rejected this defense, stating that the Statute of Frauds is not a bar to an oral partnership agreement continuing for an indefinite time period.  There was no allegation in the complaint as to a term of the partnership, or if it would exceed the one year duration that may otherwise trigger the Statute of Frauds writing requirement (N.Y. Gen. Ob. Law 5-701(a)(1)).  

We are constantly advising our business clients that their agreements are so crucial to the success of their business and the preservation of their relationships.  If you are a business owner who is considering the offer of certain incentives – such as shares to the business entity – you should consult with counsel to ensure that you are protecting your business and the intentions of the incentives to the employees and/or contractors by clear writings, aka agreements.  

Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.

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