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Ford v. Vauss

A-4841-03T5 (N.J. Super. App. Div. 2005) (Unpublished)

PARTNERSHIPS — An agreement can create a partnership even though the term “partnership” is not used in the agreement if it provides that the parties are to equally share in the profits and losses of the business.

Two men were co-workers and friends of many years. One purchased a candy store and converted it into a deli shop. Four years later, they entered into a written agreement prepared by the deli owner using a “Sales Agreement” form contract from an office supply store. Prior to signing the agreement, the deli owner’s friend consulted with an attorney regarding the contract terms. Under the contract, the friend purchased fifty percent of the deli owner’s business and was designated part owner of the business. The contract provided that both would equally share in the profits and losses of the business. It further provided that the deli owner had the exclusive authority to sell the business, and to hire and fire employees. The business never made a profit and the deli owner wanted to sell the business. He told his friend of his desire to sell the business, and the friend requested a refund of the money that he invested in the business. Shortly thereafter, they had a disagreement and the friend refused to speak with the deli owner. He then filed an action against the deli owner for breach of contract and failure to provide an accounting of the business. A trial was held during which the friend testified that he was entitled to a refund of his investment because a partnership had not been formed. He asserted that, under the contract, he had no role in running the business, but was merely a silent investor. In response, the deli owner testified that the contract formed a valid partnership under which the profits and losses of the business were to be equally shared. The deli owner contended that his friend was not entitled to any money because the business failed and there were no profits were earned to split. The lower court reviewed the contract and held that the terms of the contract indicated that an investment partnership had been formed, and not an operating partnership for the deli. It found that the agreement could not be deemed to be an operating partnership for the deli because the friend was an unsophisticated business person who did not understand the consequences of signing the contract. The deli owner appealed the lower court’s ruling.

The Appellate Division reversed the lower court’s ruling. It held that the parties entered into a valid contract that created an operating partnership. It rejected the lower court’s holding that the parties were unsophisticated and did not understand the legal consequences of their actions. It noted that the man consulted with an attorney before executing the contract, which indicated that he fully understood the terms of the agreement as well as the consequences of signing the agreement. The Court held that absent a showing of fraud, a party who signs a contract is bound to the terms of the contract. It further held that an agreement can be found to be a partnership even though the terms “partner” or “partnership” are not used in the document. The elements of a partnership include an agreement, the sharing of profits and losses, ownership and control of the partnership’s property and business, a community of power, and rights upon dissolution of the partnership. From the fact that the contract expressly provided that the parties were to equally share in the profits and losses of the business, the Court found that a partnership was formed. As a result, the Court held that the friend was not entitled to a refund of his investment and that he would only be entitled to half of the profits of the business, if any. The business did not generate any profits, and the Court concluded that the friend was not entitled to any money from the business.


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