How the Revised Uniform Partnership Act Affects Partnership Dispute Resolution and Dissolution

Partnerships can fuel innovation and growth, but when disputes arise or a business needs to dissolve, the legal framework governing those events becomes critical. The Revised Uniform Partnership Act (RUPA) has reshaped how California partnerships handle internal conflicts, exit strategies, and wind-down procedures. For business partners and entrepreneurs, understanding these changes isn’t optional—it’s essential.

The Revised Uniform Partnership Act in California

California’s partnership law is based on the Revised Uniform Partnership Act (RUPA), which the state adopted with some modifications as part of the California Corporations Code, Sections 16100-16962. This legislation significantly reformed how partnerships operate, particularly regarding dispute resolution and dissolution.

The term “Revised Uniform Partnership Act” refers to the updated version of the original Uniform Partnership Act (UPA) of 1914. The National Conference of Commissioners on Uniform State Laws substantially revised the UPA in 1994, with further amendments in 1996 and 1997. California adopted these revisions, implementing them through its own statutory framework.

Key Changes Introduced by the Revised Uniform Partnership Act

The Revised Uniform Partnership Act made several fundamental changes to partnership law that directly impact how disputes are resolved and dissolutions are handled:

1. Entity Theory vs. Aggregate Theory

Perhaps the most significant conceptual shift in the Revised Uniform Partnership Act is the move from the “aggregate theory” to the “entity theory” of partnerships:

• Under the original UPA: Partnerships were viewed as an aggregate of the individual partners rather than a distinct legal entity. This meant that when a partner left, the partnership technically dissolved.
• Under RUPA: A partnership is recognized as a distinct legal entity separate from its partners. This fundamental change significantly impacts how partnerships handle disputes and dissolve.

As California Corporations Code Section 16201 states: “A partnership is an entity distinct from its partners.” This seemingly simple declaration has profound implications for dispute resolution and business continuity.

2. Continuity of Business Operations

The Revised Uniform Partnership Act introduced critical provisions that allow partnerships to continue despite changes in membership:

• Dissociation vs. Dissolution: RUPA distinguishes between a partner’s dissociation (leaving the partnership) and the partnership’s dissolution (termination of business).
• Buyout Provisions: When a partner leaves under RUPA, rather than dissolving the partnership, the remaining partners can continue the business and buy out the departing partner’s interest.
• 90-Day Window: Under California Corporations Code Section 16801(1), after a partner’s dissociation that would otherwise cause dissolution, the partnership can avoid dissolution if a majority of the remaining partners agree to continue the business within 90 days.

This continuation right provides significant protection against a single disgruntled partner forcing a profitable business to dissolve—a common scenario under the original UPA.

Partnership Dispute Resolution Under the Revised Uniform Partnership Act

The Revised Uniform Partnership Act provides several mechanisms for resolving partnership disputes that were either unavailable or less developed under the original UPA.

1. Fiduciary Duties and Dispute Prevention

RUPA clarifies and, in some cases, limits the fiduciary duties partners owe each other, creating a more predictable framework for dispute resolution:

• Duty of Loyalty: California Corporations Code Section 16404(b) outlines specific components of a partner’s duty of loyalty, including accounting for partnership opportunities, refraining from adverse dealings, and avoiding competition with the partnership.
• Duty of Care: RUPA establishes a gross negligence standard for the duty of care in Section 16404(c), requiring partners to refrain from “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”
• Good Faith and Fair Dealing: Partners must discharge duties consistently with the obligation of good faith and fair dealing under Section 16404(d).

These clearly defined standards provide a foundation for resolving disputes about partner conduct, helping partners understand their obligations and providing courts with clearer standards for evaluating alleged breaches.

2. Partner Expulsion Mechanisms

The Revised Uniform Partnership Act provides mechanisms for involuntary dissociation of partners, giving partnerships tools to address problematic partner behavior:

• Judicial Expulsion: Under California Corporations Code Section 16601(5), a court may expel a partner for material breach of the partnership agreement or violation of duties.
• Partnership Agreement Provisions: RUPA allows partnerships to include expulsion provisions in their partnership agreements, creating contractual mechanisms for addressing partner misconduct.

These expulsion mechanisms provide partnerships with tools to address serious partner disputes without necessarily dissolving the entire business.

3. Access to Information and Transparency

RUPA establishes clear rights to information that can help prevent and resolve disputes:

• Books and Records Access: California Corporations Code Section 16403 grants partners the right to access partnership books and records, promoting transparency.
• Duty to Provide Information: Partners have an affirmative duty to furnish information concerning partnership business to each other.

These information rights create transparency that helps prevent disputes from escalating due to information asymmetries and suspicion.

Partnership Dissolution Under the Revised Uniform Partnership Act

When partnership disputes cannot be resolved, dissolution may become necessary. The Revised Uniform Partnership Act significantly reformed the dissolution process.

1. Causes of Dissolution

RUPA establishes several specific events that trigger partnership dissolution:

• Completion of Term or Purpose: When a partnership accomplishes its purpose or reaches the end of its specified term.
• Unanimous Consent: All partners agree to dissolve.
• Unlawful Business: When continuing the partnership’s business becomes unlawful.
• Application by Partner: In specific circumstances, a partner may apply for judicial dissolution.
• Judicial Determination: A court may order dissolution when economic purpose is frustrated, another partner has engaged in conduct making continuing the business impracticable, or it is otherwise not reasonably practicable to carry on the business.

California Corporations Code Section 16801 outlines these events in detail, providing a structured framework for determining when dissolution is appropriate.

2. The Winding Up Process

Once dissolution is triggered, RUPA provides a structured process for winding up partnership affairs:

• Completion of Unfinished Business: The partnership can complete transactions begun but not finished at dissolution.
• Orderly Liquidation: Partnership property can be preserved during winding up and applied to discharge obligations.
• Distribution Priority: After paying creditors, any surplus is distributed to partners according to their interests.

California Corporations Code Section 16807 establishes this distribution priority, ensuring an orderly winding-up process that protects both creditors and partners.

3. Partner Buyouts as an Alternative to Dissolution

One of RUPA’s most significant innovations is the buyout alternative when a partner dissociates, but the partnership continues:

• Fair Value Determination: Under California Corporations Code Section 16701, a dissociated partner is entitled to a buyout at “fair value” rather than fair market value, typically avoiding discounts for lack of marketability or minority status.
• Payment Terms: RUPA provides for deferred payment when immediate payment would cause undue hardship to the partnership.
• Damages Offset: The buyout price can be offset by damages for wrongful dissociation.

This buyout mechanism creates a middle ground between continuing a partnership with a disgruntled partner and completely dissolving a viable business.

Practical Implications for California Business Partners

The Revised Uniform Partnership Act’s provisions have several practical implications for California business partners:

1. Partnership Agreement Drafting Considerations

RUPA allows partners to customize many aspects of their relationship through their partnership agreement:

• Dissociation and Buyout Procedures: Partners can establish specific procedures for handling partner departures.
• Dispute Resolution Mechanisms: Agreements can include mediation or arbitration clauses for resolving disputes.
• Valuation Methods: Partners can agree in advance on methods for valuing partnership interests in buyout situations.

While RUPA provides default rules, a well-crafted partnership agreement can create dispute resolution and dissolution procedures tailored to your specific business needs.

2. Strategic Advantages in Dispute Scenarios

Understanding RUPA’s provisions creates strategic advantages during partnership disputes:

• Business Continuity Protection: Remaining partners can continue a viable business despite a partner’s departure.
• Forced Buyout Option: Rather than being forced to dissolve, partners can invoke buyout provisions.
• Judicial Remedies: Partners have access to specific judicial remedies for addressing partner misconduct.

These strategic options provide flexibility in addressing partnership conflicts, often allowing for resolution without business termination.

3. Preventative Approaches

RUPA’s clearer fiduciary standards and information rights support preventative approaches to dispute management:

• Regular Information Sharing: Adhering to information disclosure requirements can prevent suspicion-based disputes.
• Fiduciary Compliance: Understanding and following fiduciary duties reduces litigation risk.
• Early Intervention: Addressing potential problems before they trigger dissociation or dissolution rights.

Preventative practices based on RUPA’s framework can help partnerships avoid reaching the point where dissolution becomes necessary.

How TONG LAW Can Help With Partnership Disputes and Dissolutions

At TONG LAW, our California business attorneys have extensive experience guiding partners through disputes and dissolutions under the Revised Uniform Partnership Act. We understand both the legal framework and the practical business considerations involved in these challenging situations.

Our services for partnerships facing disputes or dissolution include:

• Partnership Agreement Review and Drafting: Creating customized agreements that establish clear dispute resolution and dissolution procedures.
• Dispute Resolution Representation: Advocating for partners in negotiations, mediation, arbitration, or litigation.
• Buyout Negotiation and Structuring: Helping partners navigate the complex process of valuing and structuring partnership interest buyouts.
• Dissolution Planning and Execution: Guiding partners through the winding-up process to protect their interests and comply with legal requirements.
• Business Continuity Strategies: Helping remaining partners implement strategies to maintain business operations during partner transitions.

If you’re facing a partnership dispute or considering dissolution, contact TONG LAW today. Our experienced business attorneys serve clients throughout California from our offices in Oakland and Sacramento, providing strategic guidance through every stage of partnership transitions and disputes.

The Revised Uniform Partnership Act has significantly changed the landscape for partnership disputes and dissolutions, creating both challenges and opportunities for California business partners. With proper legal guidance and understanding of these provisions, you can navigate these challenging situations while protecting your business interests and personal financial well-being.