An Agreement as to the Sharing of Losses Is an Essential Element in Determining if a Partnership Was Formed

Forensic accountants are often involved in litigations that involve the issue of whether or not a partnership ever existed.  We, as litigation consultants, cannot make the legal determination as to whether or not a partnership actually existed, but we can assist the attorneys in gathering the facts that will enable them to make arguments that either the partnership existed or did not exist.  Recently there was a decision by the United States District Court, Southern District of New York, regarding the existence of partnership.

The action arose out of a failed business relationship between the plaintiff and the defendants.  The plaintiff alleged that after entering into a partnership agreement with the defendant, the defendant stole her concept of a home-use airbrush makeup system, thereby breaching the parties’ contract.  After close of discovery, the defendant moved for summary judgment contending that the parties never entered into a legally binding contract and that all of the plaintiff’s claims should be dismissed.

Plaintiff’s first claim of action is that the plaintiff and the defendant were a joint venture by express and implied contract and that the defendant breached the parties’ agreement when the defendant terminated their partnership.  Under New York law, one of the elements of a cause of action for breach of contract is the existence of a contract.  The defendants argue that the plaintiff’s claim fails because there was no legally binding contract.  To create a binding contract, there must be a manifestation of mutual assent sufficiently definite to assure that the parties are truly in agreement with respect to all material terms.  Here the court found that the parties did not agree to all material terms of their agreement; specifically, they did not agree as to how losses would be shared, which is “indispensable” to the formation of a joint venture.  In her deposition, the plaintiff acknowledged that the parties never discussed—let alone agreed on—how the parties would share any losses, an element essential of a partnership agreement.  New York state courts as well as federal courts in the Southern District have consistently held that an agreement to share losses is an essential element of a partnership or joint venture agreement.

In this case, Judge Jesse Furman held that the parties never reached a meeting of minds regarding their alleged agreement as is demonstrated by the failure of an agreement as to the sharing of losses.  Accordingly, defendants’ motion for summary judgment on the plaintiff’s breach-of-contract claim was granted and the plaintiff’s complaint was dismissed.

Sometimes where there is a sharing of losses, the sharing of losses in not done in accordance with what one party holds is a binding agreement.  This could be evidence that, in fact, there was no binding agreement because the parties had not agreed to a method for sharing losses.  As litigation consultants, we can assist the attorney in the analysis of whether or not losses were shared in a manner that was agreed to by the parties to a partnership agreement.  Failure to share losses in a particular way may demonstrate that the parties had never really reached an agreement of minds and that, in fact, no partnership was, in fact, formed.

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