Blame for Failed Partnership | Various Rabbis | Beit Midrash

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Based on ruling 70039 of the Eretz Hemdah-Gazit Rabbinical Courts

Case: The defendants (=def) had a business for raising aquarium fish and interested the plaintiff (=pl) in investing 200,000 shekels for a 10% share in the company, including veto power, along with other major investors, in the company’s decisions. Def told pl that a marketing company (Daga) was committed to sell all fish they produced; the two disagree whether he said there was a contract with that company or just an understanding. After a short time, Daga reported that they would be limited and selective in marketing the company’s fish, and after half of a year, def closed the company due to ongoing losses. Pl is suing to recoup his investment, with the claim that def misrepresented their investment and because the liquidation of the company was done without agreement or even consultation. For one year, he accepted free use of def’s warehouse as payment worth 40,000 shekels, but he does not want to continue this practice. Pl therefore demands 160,000 shekels.

P'ninat Mishpat (803)

Various Rabbis

483 - Payment to a Lawyer when Agreement is in Dispute - part II

484 - Blame for Failed Partnership

485 - Responsibility for a Collision

Ruling: While there is a discrepancy as to whether def assured pl there was a signed contract with Daga, in any case, they painted a picture of assured sales, thereby embellishing the company’s worth inaccurately. Such misrepresentation is a violation of geneivat daa’t (see Rambam, Deiot 2:6). Pl, who is an experienced businessman, did have the ability to check out the matter, a fact that could preclude his voiding the sale (Shulchan Aruch, Choshen Mishpat 228:14). Pl claims (def deny) that he was requested not to discuss the deal with Daga, but it is possible that he did not think such an agreement made much difference, perhaps because it is anyway difficult to enforce (including, according to Halacha). Still, it is clear that def did not act properly, as they minimized the extent of the danger of the investment. This is mitigated by the fact that at that time, def themselves invested a lot of their own money in the company, showing that they believed in it.

It is clear that def was obligated to discuss with pl and other partners steps the company could take other than closing it. Additionally, def ran the business with its funds mixed in among those of another business of theirs, which did not allow investors to properly appraise the state of the business. Therefore, even, as it seems, pl would have had little choice but to give up on the company, which was losing money monthly without a good prospect for improvement, def violated their commitment to pl.

With the authority we have to rule based on compromise, we consider def responsible for the loss of pl’s investment at the rate of 80%, or 160,000 shekels. Since pl has already received 40,000 shekels of equity from the warehouse, def remains obligated to pay 120,000 shekels. Although def wants to continue payment in the form of use of the warehouse, pl has reasonable concerns, especially that it is not legally registered. We accept pl’s concern, but based on compromise allow def to pay in monthly installments, which approximately conform to the rental value of the warehouse. It is to be paid whether or not def succeeds in renting it out to someone else.

P'ninat Mishpat