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Settling Professional Partnership Disputes When There’s No Signed or Written Agreement in Place (or It’s Expired)

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By: Roy Jimenez, Managing Partner, TLD Law

Doctors are not lawyers

We are fortunate in this country to have doctors, dentists, and practitioners that are excellent clinicians. They fix broken limbs, do surgeries, extract teeth, treat our ills, and save lives. We need them, especially these days. However, these brilliant and highly educated humans are not lawyers and preparing or interpreting the agreements they have with their professional partners can be extremely challenging. These situations may involve relationships in which there is no written partnership agreement, or there may be an outdated partnership agreement with ambiguities, which can cause disputes.  Furthermore, changes or amendments to partnerships as years pass and relationships change can cause difficulties. Here’s the problem: memories are hazy, and the shine often falls off the rosy color that made the agreement a good idea when it was created—if it was created. Sometimes, there never was a written partnership agreement or contract that stipulated the business relationship between two or more parties. As the saying goes, “actions speak louder than words” in today’s California courts.

No need for written contracts?

As will be seen, cases can be proven at trial without a specific written contract, as the California Civil Jury instructions CACI 300 series explains.  CACI instructions explain how various agreements—whether written contracts, oral contracts, or implied contracts—are enforceable.  Specifically, CACI 305 addresses implied contracts, which are based on the conduct of the parties.  Most jurors have a preconditioned belief contracts have to be in writing to be enforceable but CACI 305 instructs jurors contracts can be implied as well through the parties’ conduct.  This is not the ideal situation to be in but this is where a lot of litigation is fought.

Why written contracts are better

Here’s the deal. Most cases that go to trial are implied or oral contracts because they are harder to prove. Written contracts usually lead to a quicker settlement because there is clarity, and there are usually all the bells and whistles such as a venue clause, an arbitration clause and an attorney’s fees clause, which motivates people to settle. Why? Without a written contract that contains an attorney’s fees clause, each side has to pay their own legal fees, win or lose. Included below are some examples of the types of partnership agreements that can lead to litigation.

Improperly Diverted Funds Example

One type of predicament can occur if a business partner improperly diverts and retains income that was supposed to benefit both business partners in a dusty, forgotten agreement from the past. This occurs when contracts are amended at different points in time and when contracts are assumed by (taken over by) various parties, especially in the medical field where specialists and medical groups change affiliations with other groups or are bought out by larger groups. Additionally, fee-for-service and capitation payment models alter back and forth across one or another medical group, often with physicians seeing patients and providing services for multiple groups at the same time. Monies flowing into and out of these separate groups and deposited into various banks can get “lost.” If the lost deposits are fraudulently diverted from the proper payment per the original (dusty or forgotten) agreement, the situation requires legal action if the parties cannot agree.

In this example, the original partnership agreement has to be found.  The intent of that agreement can be defended by seeing the implied contract based on the parties’ actions, even if the contract has been muddied with years of alterations. Digging through the mess of contracts and paper trails takes time, but the intent can be proven through tracking the parties’ conduct as the months and years passed, and as dictated by a study of bank records, deposit slips, and accounting reports. The research takes time, patience, and a belief in doing the right thing for all parties concerned.

Failing to Pay Benefits and Distributions Example

There are situations in which a partnership could be dissolved, which is fine. But when the decision to terminate a partnership is made with the intent of denying payment of benefits and distributions that the partnership agreement had supported, the situation can devolve into a lawsuit. The trick is to unearth the agreement’s intent, which can be proven by the actions of the parties prior to the dissolution.  Then by research indicating other parties have been paid according to the terms of the agreement, a pattern of conduct emerges that supports the implied contract. Bank transactions, disbursement journals, and financial records are mined for indications of actions that prove the point.

Business Agreements in General

Partnership agreements are a subset of the many arrangements that companies have to conduct their businesses and deliver their products and services clearly and legally. Generally, contracts are a way to grease the wheels that smooth the path of businesses’ progress. Yet, disputes happen, and people are busy. It is better to have a written contract for many reasons, one of which is to avoid litigation that arises from a more difficult proving of the relationships set down in those unwritten agreements. Even so, the CACI 300 series reminds juries that “actions speak louder than words.” The research to support the actions takes longer and is more expensive than under written contract disputes, but California’s legal system is in place to protect everyone.

Disclaimer: This information is not intended as legal advice but is more informational in nature.  Always check with your own company’s attorney, financial adviser, accounting professional, and lending institutions before proceeding.

About the Author:

Roy Jimenez, managing partner at TLD Law, has over 23 years of experience in business and real estate litigation. Mr. Jimenez has extensive experience in resolving or litigating large, small, and complex business disputes.

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