Fiduciary Duties Business Partners Owe Each Other

Partners owe each other exactly two fiduciary duties under the Uniform Partnership Act (1997): loyalty and care. Not an open-ended duty to act fairly, not a duty to maximize the other partner's return, and not, by itself, a duty to disclose everything. Section 404(a) says so directly: "the only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care." A third, non-fiduciary obligation, good faith and fair dealing, rides alongside them and cannot be written away either.

The reason the list matters is that most partner disputes get framed as a breach of trust in general, and the statute does not recognize breach of trust in general. It recognizes three things with definitions: did a partner take a benefit that belonged to the business, did a partner act with gross negligence or worse, and did a partner deal with the others in bad faith. Knowing which bucket a grievance falls into decides whether it is actionable, and under section 103 of the act, whether the partnership agreement could have waived it in the first place.

The duty of care is deliberately weak. A partner who makes a bad decision, misses a market shift, or simply runs the business worse than another partner would have, has not breached anything; section 404(c) sets the bar at grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. This is a lower standard of accountability than most owners assume they are entitled to, and it means a dispute over business judgment, as opposed to self-dealing or dishonesty, is usually not a fiduciary case at all. It may still be a contract case, if the partnership agreement set performance obligations the statute does not.

Section 103(b) of the 1997 act lists what a partnership agreement cannot do, and the fiduciary duties sit near the top of it. The duty of loyalty cannot be eliminated outright, though the agreement may carve out named categories of activity in advance (a partner who also owns a separate rental property business, say) or let the partners ratify a specific transaction after full disclosure. The duty of care cannot be unreasonably reduced, though it starts low. The obligation of good faith and fair dealing cannot be eliminated at all, only have its measuring standard set, and that standard still has to be reasonable.

Delaware allows its LLCs to go further than any partnership act does. Under section 18-1101(c) of the Delaware LLC Act, an LLC agreement may expand, restrict, or eliminate a member's or manager's fiduciary duties entirely, including the duties of loyalty and care. What it cannot touch is "the implied contractual covenant of good faith and fair dealing," which survives any drafting. This is a meaningfully different default from the uniform partnership acts: a Delaware LLC agreement can, in writing, let a manager compete with the company or take opportunities for themselves, in a way a general partnership agreement cannot. An agreement silent on the point still carries the default fiduciary duties; eliminating them takes a deliberate clause, not an accident of drafting.

Judge Cardozo's 1928 opinion in Meinhard v. Salmon is the most frequently cited American statement of what partners (and, in that case, joint venturers) owe each other. Two men formed a joint venture to lease and redevelop a New York building. Near the end of the lease term, the venture's managing partner was offered, and secretly took for himself alone, a much larger renewal and expansion of the lease over an adjoining site, without telling his co-venturer until after the new lease was signed. New York's highest court held that the opportunity belonged to the venture, because it grew directly out of the original lease the two men held together, and that keeping it secret from a co-venturer was itself the breach, regardless of whether the new deal was otherwise fair. The holding is the reason "appropriation of a partnership opportunity" is written directly into section 404(b)(1) of the uniform act: a partner who learns of an opportunity through the partnership's own business, and takes it alone, has breached loyalty whether or not the other partner could have afforded to pursue it too.

In practice, loyalty claims cluster around a short list: diverting a customer, a lease, or a supply contract that came through the partnership to a side business the partner controls alone; competing directly with the firm while still a partner, which section 404(b)(3) forbids outright (and which ends the moment a partner dissociates, under section 603(b)); self-dealing, where a partner sells the firm something, or buys something from it, on terms only favorable to themselves; and taking an unauthorized draw or using partnership property for personal purposes, which doubles as a books-and-records problem covered in what to do when a business partner is stealing from the business. Good faith claims tend to be different in kind: not theft, but a partner using a contractual veto or an approval right to extract concessions the agreement was never meant to give them, which courts have found breaches the covenant even where the letter of the contract was followed.

A partner who suspects any of this has a statutory right to the books, under section 403, and a right to bring an accounting action under section 405 without first dissolving the partnership. Both are the practical starting point, and both are covered in more detail in the stealing guide above. Non-compete clauses that survive a partner's exit, which section 404(b)(3)'s competition ban does not reach once someone has left, are a separate question covered in non-compete rules after a business partnership ends.

This is general information on the uniform partnership act and Delaware's LLC act, not legal advice. What a specific agreement says, and what duties a specific state's courts actually enforce, is a question for a lawyer who has read it.