P'ninat Mishpat: Undoing a Problematic Partnership – part I | Beit Din Eretz Hemda - Gazit | Beit Midrash

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Case: The plaintiff (=pl) and the defendant (=def) started a new business together and signed a partnership agreement. When the prospects for success waned, def arranged for pl to buy out def’s brother-in-law’s (=bil) 40% of an existing business with def for 365,000 NIS. Pl and def added handwritten modifications to their agreement. Pl started paying in installments, and pl and def went to an arbitrator (=arb) to determine at what point in the payments pl would receive rights in the business. Arb decided that pl would have all the rights of partnership from after he paid 300,000 NIS. Soon thereafter, pl complained to def that he lost access to the security cameras, and the next day he complained to def and arb that all of the cash (appr. 30,000 NIS) in a safe, to which only pl and def had keys, was missing. Arb spoke to def and after discontent with his reaction, rendered a ruling that pl could take 26,000 NIS from the company’s account and hold it in a secure account until matters are sorted out. After unsuccessful attempts to improve trust, arb ruled that pl had a right to exit the partnership. Def claimed that arb was partial to pl, and the matter reached the courts, who appointed Eretz Hemdah to adjudicate. Pl demands back the money he invested (based on par. 6.7 of the contract); 21,000 NIS he spent in arranging the money to invest, or 40% of the business’ profits from the time of his investment; and legal fees. Def counterclaims that pl failed in his responsibilities and therefore should lose rights in the partnership (based on par. 6.8).

Ruling: Relevance of par. 6.7 – Def claimed that the clause that allows pl to extract his investment applies only to the original situation, a new business owned by pl and def, whereas in this case, pl only bought out bil’s part in an existing business. Additionally, since pl gave his money to bil, pl should approach bil with claims.
Beit din rejects def’s claims. According to the arrangement between pl and def, the payment to bil was the formation of the partnership between pl and def. On top of the original agreement, where it talks about payment to create the partnership, the payment to bil is written as the partnership’s activator. Therefore, in the second iteration of the partnership, the money paid to bil is what pl recovers when par. 6.7 applies.
Def’s right to activate par. 6.8 – Def’s claim that pl lost his rights in the business because of professional failures and because pl used, for personal purposes, some of the money that arb allowed him to hold, is to be rejected. First, arb already ruled that pl worked sufficiently well in terms of par. 6.8, and while beit din is authorized to rule otherwise, there are not grounds to do so. Regarding pl’s use of the funds, examining the banking records, the one usage that was unauthorized was cancelled the next day; therefore, nothing was mishandled. In any case, par. 6.8 is apparently unenforceable because it draconically would have pl surrender his entire investment of 365,000 NIS due to minor inefficiency or misuse. This type of clause is an unenforceable asmachta. It differs from par. 6.7, which does not penalize def but just allows pl to undo the partnership and recover his payments.