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Partnerships - Fiduciary Duties Amongst Partners

Partnerships - Expulsion of a Partner

Damages - Aggravated Damages - Intangible Harm

Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017)

Here the Court of Appeal considers the situation of an expelled partner in light of both the common law and the Partnerships Act:
(a) The relevant legislative and common law framework

[32] The Ontario Partnerships Act, R.S.O. 1990, c. P.5, sets out the requirements for the expulsion of a partner. The relevant provisions of the Partnerships Act are:

• Section 25: “No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.”

• Section 28: “Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or the partner’s legal representatives.”

• Section 45: “The rules of equity and of common law applicable to partnership continue in force, except so far as they are inconsistent with the express provisions of this Act.”

[33] BDO submits that the motion judge erred in relying too heavily on the common law of partnerships, rather than solely on general principles of contractual interpretation. I do not agree with this submission. In my view, s. 45 of the Partnerships Act imports the common law rules into the analysis of a partnership agreement, except to the extent they have been varied by the agreement or the Act. The relevant common law principles, which inform the construction of a partnership agreement, are explained in Lindley & Banks as follows:

• Because an expulsion from a partnership is expropriatory in nature, depriving the partner of future profits, an expulsion provision in a partnership agreement will be construed strictly: para. 10-123.

• Partners are fiduciaries among themselves and the utmost good faith is owed from every member of a partnership towards every other member: para. 16-01.

• Where a discretion is conferred on the management of the firm or on a majority of partners, a partner will normally be entitled to expect that it will be exercised rationally and in good faith and not arbitrarily or capriciously: at para. 16-09.

[34] This court considered the interplay between the Partnerships Act and the common law in Rochwerg v. Truster (2002), 2002 CanLII 41715 (ON CA), 58 O.R. (3d) 687 (C.A.). Rochwerg involved a partner in an accounting partnership who disclosed to his partners that he was a director of a corporate client of the firm and remitted his director’s fees to the firm, but did not disclose that he was entitled as director to shares and stock options in the company. When he left the partnership, an issue arose as to whether he was required to account to his partners for his shares and stock options.

[35] Cronk J.A. held that both the common law of partnerships and the Partnerships Act imposed an obligation on the partner to disclose his shares and options. Cronk J.A. wrote, at para. 36:
It has long been established that partners owe a fiduciary duty to each other, and that equitable principles hold fiduciaries to a strict standard of conduct, encompassing duties of loyalty, utmost good faith and avoidance of conflict of duty and self-interest. These are well recognized, core principles of the law of partnership. [Emphasis added.]
[36] And, at paras. 62-63:
The fiduciary duty between partners thus arises not only from the reciprocal agency relationship between them but, also, from the duty of utmost good faith which each partner owes to the other. Fundamental to this overarching fiduciary duty is the requirement that each partner place the interests of the partnership, and the avoidance of situations which create, or could create, a conflict between fiduciary duty and the interests of the partnership, ahead of a partner's private interests. Accordingly, partners are required to prefer the interests of the partnership over their own personal interests. The scope of the fiduciary duty in partnerships is of the broadest nature. As stated by Vice-Chancellor Bacon in Helmore v. Smith (No. 1) (at p. 444):
[I]f fiduciary relation means anything I cannot conceive a stronger case of fiduciary relation than that which exists between partners. Their mutual confidence is the life blood of the concern. It is because they trust one another that they are partners in the first instance; it is because they continue to trust each other that the business goes on.
Mutual trust, confidence and good faith are the cornerstones of the modern professional services partnership. Without them, the very essence of the partnership arrangement is eroded and, ultimately, destroyed. In my view, the equitable principles developed over the last century concerning the fiduciary obligations of partners continue to control contemporary partnerships. They may require, however, flexible application to respond to changing partnership structures, activities and settings. [Citations omitted.]
[37] In the result, partners owe each other a duty of utmost good faith at common law and the traditional rules governing partnerships discussed in Lindley & Banks continue to apply in Ontario: see DiPoce v. DeCicco, 2013 ONSC 6409 (CanLII), [2013] O.J. No. 4741, at para. 18; and Springer v. Aird & Berlis LLP (2009), 2009 CanLII 15661 (ON SC), 96 O.R. (3d) 325 (S.C.), at paras. 167-168, aff’d, 2010 ONCA 287 (CanLII), 100 O.R. (3d) 575.

[38] In summary, Article 17.4 of the Partnership Agreement must be interpreted in light of the partners’ duty of utmost good faith towards each other. The expropriatory nature of expulsion and the loss of profits that it entails requires that the provision be construed strictly in favour of the expelled partner.
The court also comments as follows on the the issue of when aggravated damages may be awarded, here for 'intangible harm' (being expelled from a partnership). In doing so it reviewed some of the recent history of aggravated damages, particularly respecting bad faith terminations in the employment context:
[60] Contract damages for intangible harm may be awarded under the principle established in Hadley v. Baxendale (1854), 156 E.R. 145 (Eng. Exch.), where the intangible harm was in the reasonable contemplation of the parties when they entered into the agreement. In Fidler v. Sun Life Assurance Co. of Canada, 2006 SCC 30 (CanLII), [2006] 2 S.C.R. 3 at paras. 44-45, the Supreme Court stated that all types of damages for breach of contract are awarded on the basis of the “reasonable foreseeability” principle: damages are meant to compensate the victim of the breach by reference to what was in the reasonable contemplation of the parties at the time the contract was made.

[61] In Fidler, at para. 52, the court distinguished contract damages for intangible harm from damages for intangible harm arising out of circumstances that aggravate the breach of contract, referring to the latter as “true aggravated damages”:
[These damages] are not awarded under the general principle of Hadley v. Baxendale, but rest on a separate cause of action — usually in tort — like defamation, oppression or fraud. The idea that damages for mental distress for breach of contract may be awarded where an object of a contract was to secure a particular psychological benefit has no effect on the availability of such damages. If a plaintiff can establish mental distress as a result of the breach of an independent cause of action, then he or she may be able to recover accordingly. The award of damages in such a case arises from the separate cause of action. It does not arise out of the contractual breach itself, and it has nothing to do with contractual damages under the rule in Hadley v. Baxendale.
[62] In the employment context, damages for intangible harm arising out of the manner of termination may be awarded pursuant to the Hadley v. Baxendale principle. In Keays v. Honda Canada Inc., 2008 SCC 39 (CanLII), [2008] 2 S.C.R. 362, the Supreme Court confirmed the rule established in Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701, that employers owe an obligation of good faith and fair dealing in the manner of dismissing an employee, such that an employment contract creates an expectation that the employer will be “candid, reasonable, honest and forthright with its employees”: Keays, at para. 58. Breach of this obligation therefore gives rise to damages for intangible harm, which is reasonably foreseeable and in the contemplation of the parties as a consequence of the breach. In Keays the Supreme Court stated, at para. 58:
Fidler provides that “as long as the promise in relation to state of mind is a part of the bargain in the reasonable contemplation of the contracting parties, mental distress damages arising from its breach are recoverable”. In Wallace, the Court held employers “to an obligation of good faith and fair dealing in the manner of dismissal” and created the expectation that, in the course of dismissal, employers would be “candid, reasonable, honest and forthright with their employees”. At least since that time, then, there has been expectation by both parties to the contract that employers will act in good faith in the manner of dismissal. Failure to do so can lead to foreseeable, compensable damages. [Citations omitted.]
[63] Intangible damages for bad faith in the manner of dismissal of employment are therefore not awarded for an independently actionable wrong and are not “true aggravated damages”, as defined in Fidler. They arise from the breach of the employment contract – specifically, the employer’s implied contractual obligation to act in good faith when dismissing an employee.

[64] The decision in Keays overturned that in Vorvis v. Insurance Corp. of British Columbia, 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085, in which the court held that damages for intangible harm in the employment context were only available if the employer committed an independently actionable wrong. Keays also overturned the proposition established in Wallace that bad faith in the manner of dismissal entitles the employee to an increase in damages in lieu of proper notice of termination. As the court wrote in Keays, at para. 59:
[T]here is no reason to retain the distinction between “true aggravated damages” resulting from a separate cause of action and moral damages resulting from conduct in the manner of termination. Damages attributable to conduct in the manner of dismissal are always to be awarded under the Hadley principle. Moreover, in cases where damages are awarded, no extension of the notice period is to be used to determine the proper amount to be paid. The amount is to be fixed according to the same principles and in the same way as in all other cases dealing with moral damages. Thus, if the employee can prove that the manner of dismissal caused mental distress that was in the contemplation of the parties, those damages will be awarded not through an arbitrary extension of the notice period, but through an award that reflects the actual damages.
[65] More recently, this court summarized the availability of intangible damages for breach of employment contracts, along the same lines as those presented above, in Strudwick v. Applied Consumer & Clinical Evaluations Inc., 2016 ONCA 520 (CanLII), 349 O.A.C. 360, at paras. 90-91.

[66] I pause to note that caution must be exercised when directly applying the rules governing intangible damages in the employment context to partners. Courts have held that partners are typically not employees and are governed by a separate legal regime at common law and have specialized legislation, particularly the Partnerships Act: see SMI Sales Inc. v. Ontario (Minister of Finance), 2007 ONCA 451 (CanLII), 226 O.A.C. 169; Weibe Door Services Ltd. v. Minister of National Revenue, [1986] 3 F.C. 553 (C.A.); and McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39 (CanLII), [2014] 2 S.C.R. 108.

[67] However, the reasoning of the court in Keays, in combination with the principles of partnerships law discussed above, suggests that damages for intangible harm are available in the partnerships context on the Hadley v. Baxendale principle where the harm was in the reasonable contemplation of the parties when they made their contract.

[68] Keays holds that, because employers have an implied contractual obligation of good faith in the manner of dismissal, damages for bad faith in the manner of dismissal are within the contemplation of the parties when they enter into the contract. Given the duty of utmost good faith owed between partners, confirmed in Rochwerg, the reasoning in Keays should apply in the partnerships context: damages flowing from bad faith in the manner of a partner’s expulsion are within the reasonable contemplation of the parties when they enter into the partnership agreement. Such damages can be awarded on the Hadley v. Baxendale principle.

[69] In other words, part of what the parties agree to when they enter into the partnership agreement is that they must treat each other with utmost good faith. The intangible harm resulting from a bad faith expulsion is reasonably foreseeable and flows from the breach of the duty of good faith, which is an implied term of the partnership agreement.

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