Direct Claims For Damages In Partnerships

This article examines the right of a partner in a partnership to bring a direct claim for damages, with particular emphasis on the distinction between loss suffered by the partnership and loss suffered personally by the partner. It considers the circumstances in which the conduct of a partner or manager may give rise to an independent tort claim by the injured partner, in particular under Article 919 of the Greek Civil Code. It also distinguishes such a direct personal claim from the actio pro socio, whereby a partner asserts, in a derivative capacity, a claim belonging to the partnership itself.

The Separate Legal Personality of Partnerships

General partnerships (O.E.) and limited partnerships (E.E.), as legal persons, have their own assets, separate and distinct from those of their partners. Contributions, claims and, more generally, the rights comprising the partnership’s assets are vested in the partnership itself rather than in the individual partners.

As a matter of principle, therefore, only the partnership is entitled to protect its assets and pursue claims against its partners or third parties, acting through its managers.

This was also the approach adopted in Thessaloniki Single-Member Court of First Instance Judgment No. 1237/2022, which ultimately dismissed as inadmissible an action brought by a general partner on the ground that the claimant lacked standing, holding that:

“…the claimant, in his capacity as a general partner of ‘… O.E.’, lacks standing to bring the action … because the tort alleged to have been committed by the defendant, according to the facts pleaded in the statement of claim, was directed against the assets of the legal person of the partnership.”

This legal and patrimonial separateness continues during liquidation (see, in this respect, Supreme Court, Criminal Division, Judgment No. 1996/2019), according to which:

“…even after completion of the liquidation process, where it is established that an outstanding matter remains, such as a claim or debt of the Company, the liquidation process is resumed and the dissolved Company continues to be represented by its liquidators.”

Accordingly, even during liquidation, it is the partnership itself that has standing to pursue claims belonging to it, acting through its liquidators.

The General Rule: The Claim for Damages Belongs to the Partnership

Participation in a partnership does not merely confer rights on its partners. More fundamentally, it creates a network of obligations owed to the partnership itself and to the other partners, foremost among them the obligation to pursue the common partnership purpose.

That obligation is an essential element of the partnership agreement and is reflected in Article 741 of the Greek Civil Code. It is, indeed, what distinguishes a partnership relationship from an ordinary exchange contract: the parties do not merely seek to satisfy competing individual interests but agree to cooperate in pursuit of a common purpose.

Closely connected with the obligation to pursue that common purpose are the duties to participate in the management and representation of the partnership, to make the agreed contributions and provide any agreed services, and to comply with the duty of loyalty.

The duty of loyalty, in particular, plays a significant role in shaping the internal relationship between the partners and requires each of them to take account of the partnership interest, as distinct from his or her purely individual interest.

Further obligations of the partners may arise directly under the law, under the partnership agreement, or under agreements entered into between the partners outside the partnership agreement.

As explained above, the partnership has its own legal personality and its own assets. Consequently, where a partner or manager breaches obligations arising under the partnership agreement or the law and that conduct causes loss to the partnership’s assets, the claim for compensation belongs, as a matter of principle, to the partnership.

It is the partnership itself, acting through the persons vested with powers of management and representation, that must seek performance of the relevant obligation and compensation for the loss sustained.

The same principle applies where a tort is committed against the partnership, whether by a third party or by one of its partners or managers. As a rule, the party directly sustaining the loss — and therefore the holder of the corresponding claim — is the legal person of the partnership itself, as a separate subject of rights and obligations.

The Exception: The Same Conduct May Independently Constitute a Tort Against an Individual Partner

The fact that particular conduct causes loss to the partnership and gives rise to rights vested in the partnership does not preclude the same facts from having a second and distinct legal dimension.

It is therefore possible for the conduct of a partner or manager, considered independently, not merely to constitute a breach of his or her obligations towards the partnership, but simultaneously to amount to a tort committed against a particular partner.

In such circumstances, the injured partner has a direct claim for damages against the partners responsible for the loss, provided that their conduct independently and directly infringes rights belonging to that partner personally.

The right of an individual participant in a company to claim damages directly was initially recognised in the context of capital companies, where a shareholder may have an independent claim against members of the board of directors if particular management acts interfere with the very substance of the shareholder’s participation rights.

Thus, Supreme Court Judgment No. 1298/2006 held that:“…shareholders also have an independent claim for damages against members of the company’s management where the harmful act of the latter, considered in its own right, simultaneously constitutes an unlawful interference with the substance of the shareholder’s rights, that is, where it also constitutes, vis-à-vis the shareholders themselves, a tort giving rise to a direct and independent claim…”

The same approach was adopted in Athens Court of Appeal Judgments Nos. 4457/2009 and 5864/2011.

Against that background, the strongly personal character of general and limited partnerships makes it even more readily apparent that certain conduct may, on the one hand, breach the partnership agreement and cause loss to the partnership while, on the other hand, independently targeting a particular partner.

A partner does not acquire an individual claim every time the partnership sustains loss. Direct loss suffered by the partnership will, as a rule, constitute merely indirect loss as regards the partner.

A personal claim arises only where there is, in addition, an independent infringement of the legal or proprietary position of the individual partner himself.

A partner may likewise have a personal claim against a third party who is not a member of the partnership where that third party incurs liability in tort under Articles 914 and 919 of the Greek Civil Code.

For example, a partner may acquire a direct claim against a third party who assisted another partner in implementing a scheme designed to cause loss to the partnership and to the other partners.

Accordingly, the same factual circumstances may be assessed on two distinct legal bases.

First, they may constitute a breach of contract or of a statutory obligation causing loss to the partnership and giving rise to a claim vested in the partnership itself.

Second, when considered independently, the same conduct may constitute an interference with the substance of an individual partner’s partnership interest, thereby causing direct harm to that proprietary right and, correspondingly, direct harm to the partner’s rights arising from his participation in the partnership. In that event, the partner has a personal claim for damages.

The Particular Significance of Article 919 of the Greek Civil Code

Article 919 of the Greek Civil Code may provide an important criterion for determining whether partners are to be regarded as having suffered direct loss as a result of the conduct of their fellow partners.

The starting point must be the following proposition: a breach of the partnership agreement, or even of the duty of loyalty, does not in itself constitute a tort.

A breach of the particular relationship of trust existing between partners may, however, when combined with other circumstances, be contrary to accepted standards of morality and thus acquire an independent tortious character.

Relevant factors may include the wrongdoer’s position within the partnership, his ability to influence its management and decisions of material importance to the partnership interest, an intention to cause harm to a particular partner, and the pursuit of a corresponding personal benefit.

Taken together, such factors may justify the conclusion that the conduct in question is contrary to accepted standards of morality within the meaning of Article 919 of the Greek Civil Code.

By way of illustration:

Supreme Court Judgment No. 1298/2006

In Judgment No. 1298/2006, the Supreme Court took into account the fact that the board of directors — on which the other shareholders of the company served — had arranged for assets of the société anonyme, namely shares, to be sold to another company controlled by them so that they alone could benefit from the anticipated increase in their value.

The Court held that the loss sustained by the claimant shareholder was direct:

“…since the above conduct of the defendants, intentionally directed against the claimant, whose loss they sought to cause for their corresponding benefit, was, specifically as against him, contrary to accepted standards of morality.”

Thessaloniki Court of Appeal Judgment No. 2538/2014

In Judgment No. 2538/2014, the Thessaloniki Court of Appeal took into account the fact that, when the defendant:

“realised that his counterparty was not prepared to agree to and contribute capital for the renovation of the store … he decided to exclude him from the store and subsequently, after renovating it, to appropriate for his own individual benefit the common clientele and goodwill generated through the parties’ joint business activity.”

The Court concluded that the defendant’s conduct constituted a tort and that the claimant was entitled to compensation for non-pecuniary damage.

Another illustrative example concerns the appropriation of a business opportunity.

A manager who appropriates for his own account a business opportunity that came to his attention in the performance of his duties and which could have been exploited by the partnership will, as a matter of principle, incur liability towards the partnership itself.

The position may, however, be different where the appropriation of that opportunity forms part of a broader scheme whose exclusive purpose is to strip the partnership of its business activity, bring about its dissolution, and thereafter continue the same business activity without the participation of a particular partner.

In such a case, the conduct is no longer confined to a breach of the partners’ obligations towards the partnership. Considered independently, it may also constitute an intentional infringement, contrary to accepted standards of morality, of the affected partner’s position within the partnership, thereby giving rise to a direct claim for damages under Article 919 of the Greek Civil Code.

A Direct Claim Is Distinct from the Actio Pro Socio

The distinction between a partner’s direct and indirect loss becomes even clearer when the partner’s direct claim is contrasted with the actio pro socio.

In an actio pro socio, the partner does not assert a claim belonging to him personally. The substantive claim continues to belong to the partnership.

Where the manager fails to act, however, the partner is exceptionally entitled to bring that claim in his own name, acting as a party who litigates in his own name in respect of a right vested in another.

For that reason, the relief sought by means of the actio pro socio is payment to the partnership rather than to the partner personally.

The action is subsidiary in nature, in the sense that it becomes available where the managers who would ordinarily be expected to pursue the partnership’s claim fail to do so.

The position is precisely the opposite in the case of an individual action.

There, the partner is himself the holder of the claim because he alleges direct personal loss arising from a tort committed against him as well. Compensation is therefore sought for the benefit of the partner and not for the partnership.

The distinction may be put simply:

An actio pro socio concerns a right belonging to the partnership which, exceptionally, is enforced by a partner. A direct action concerns, from the outset, a right belonging to the individual partner himself.

Accordingly, inaction on the part of the partnership’s management should not be treated as transforming loss suffered by the partnership into personal loss suffered by a partner.

If the claim belongs to the partnership, it remains a partnership claim even where those responsible for its management fail to pursue it.

By Way of Conclusion

The general rule remains unchanged: where the infringement concerns the assets of the partnership and the loss is suffered by the legal person itself, the partnership alone is entitled to claim compensation.

By way of exception, however, an individual claim by a partner may arise where the breach of intra-partnership duties, by reason of its seriousness, purpose and particular circumstances, goes beyond an ordinary contractual breach and amounts to an independent infringement, contrary to accepted standards of morality, of the partner’s own legal and proprietary position within the partnership.

This exception assumes particular importance in cases involving collusive conduct by the other partners, where requiring the injured partner to seek redress exclusively through a claim brought by the partnership itself would impose an unjustified and, in some cases, practically insurmountable obstacle to effective legal protection.