Business relationships often arise informally, without reliance on formal documents or even consistent practices by the participants that would clearly reflect their arrangement. All too often the relationship later breaks down and the parties end up in a dispute over the terms and sometimes even the existence of any relationship. That is what happened in Aequus Technologies, LLC v. gh, LLC, (D.N.J., Aug. 7, 2009).
The plaintiff, Aequus, alleged that it had entered into an oral partnership agreement with the defendant, gh, to combine and market and sell services to people with disabilities. Alternatively, Aequus claimed that discussions with gh regarding a possible merger constituted a binding agreement to merge. When gh subsequently denied either agreement, Aequus sued for breach of the alleged agreements and for violation of the New Jersey Oppressed Shareholders Statute, and sought compensatory damages of $250,000.
Reviewing the proofs required under New Jersey law to prove the existence of a partnership, the court found that Aequus had established some of the key elements, namely that the parties: (i) intended to enter into a partnership agreement; (ii) determined the distribution of power and responsibilities of officers in the partnership; and (iii) acted toward third parties in a manner consistent with the existence of a partnership. In fact, Aequus introduced evidence showing that the parties represented to an attorney that they had formed a partnership, that gh gave a presentation at the University of Purdue stating it had “recently partnered with Aequus” and the parties created and sold a product purportedly resulting from “a partnership between gh, LLC and Aequus Technologies, LLC.”
Nevertheless, the court found that Aequus had not shown other significant factors needed to prove the partnership. Aequus could not establish: (i) any agreement as to how the parties would share in profits; (ii) how they would share in the risks and obligations of the purported partnership; (iii) how the two entities owned or controlled partnership assets; (iv) any specific language defining the relationship among the parties; or (v) the parties’ rights upon dissolution of the partnership. Having failed to prove five of the eight required elements needed to demonstrate a partnership under New Jersey law, the court found that Aequus had not carried its burden of proof – despite Aequus’s attempt to show that it had relied on the purported partnership in making a $250,000 payment to one of gh’s creditors. Unfortunately for Aequus, this payment was not memorialized in any writing between Aequus and gh, nor was there evidence that the written agreement between Aequus and the third party was made in furtherance of the purported gh-Aequus partnership. The court also dismissed the plaintiff’s claim that the parties, subsequent to the alleged oral partnership agreement, entered into an “agreement to merge.” While the parties had discussed merger, Aequus could not show an agreement to merge or the essential terms of a merger agreement, or that the parties intended to be bound by their merger discussions or had acted in any way to carry out the alleged merger agreement. The court accordingly rendered judgment against Aequus on all of its claims.
The Aequus decision underscores why parties in a partnership relation must clearly define the scope of their relationship in a written agreement. Without that, one party may later find that its assumptions about a partnership relation cannot be proven in court.