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Legal Topics in the Works




PARTNERSHIPS


1. General
2. Definition of Partership
3. Limited Partnerships
4. Common Law and Partnerships Act
5. Partners and Fiduciary Duties
6. Partners and Punitive and Aggravated Damages
7. Expulsion of a Partner

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1. General

Partnerships, while having a common law component, are basically now creatures of statute as most features of partnership are now codified by provincial Partnerships Acts.

Ontario's Partnerships Act is linked here:

https://www.ontario.ca/laws/statute/90p05#BK0


In McCormick v. Fasken Martineau DuMoulin LLP (SCC, 2014) the Supreme Court of Canada makes some general comments on the nature of partnerships:
[29] This brings us to partnerships generally. British Columbia’s Partnership Act is modeled on the U.K. Partnership Act 1890[14] (Alison R. Manzer, A Practical Guide to Canadian Partnership Law (loose-leaf), at p. 1-2). Section 1 states that “‘firm’ is the collective term for persons who have entered into partnership with one another”. Section 2 defines a partnership as “the relation which subsists between persons carrying on business in common with a view of profit”. Accordingly, a partnership is by its nature an entrepreneurial relationship among individuals agreeing to do business together.

[30] The conventional view of a partnership was famously described in Lindley & Banks on Partnership (19th ed., 2010) as a collection of partners, rather than a distinct legal entity separate from the parties who are its members:
The law, ignoring the firm, looks to the partners composing it; any change amongst them destroys the identity of the firm; what is called the property of the firm is their property, and what are called the debts and liabilities of the firm are their debts and their liabilities. [para. 3-04]

....
[31] Among the distinctive features of a partnership is that partners generally have a right to participate meaningfully in the decision-making process that determines their workplace conditions and remuneration (J. Anthony VanDuzer, The Law of Partnerships and Corporations (3rd ed. 2009), at p. 75; Partnership Act, s. 27(e)). This is reflected in, for example, the duty to render accounts to other partners in order to permit them to have the information they need to participate in workplace decisions and ensure that their interests are adequately considered. This duty is set out in s. 31 of the Partnership Act:
31 Partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his or her legal representatives.

2. Definition of Partership

The definition of a partnership is set out s.2 of the Partnerships Act:
2 Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

3. Limited Partnerships

In Hudson's Bay Company v. OMERS Realty Corporation (Ont CA, 2016) the Court of Appeal makes some observations on limited partnerships:
[16] The application judge’s reasoning, which we adopt, can be summarized as follows.

[17] A limited partnership is not a legal entity. It is required by law to have a general partner through which it normally acts: Kucor Construction & Developments & Associates v. Canada Life Assurance Co. (1998), 41 O.R. (3d) 577, 1998 CanLII 4236 (ON CA), 1998 CanLII 4236 (C.A.). A limited partnership cannot hold title to real property. It can hold title to real property only through its general partner.

4. Common Law and Partnerships Act

In Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017) the Court of Appeal contrasts the role of the common law of partnerships with the Partnerships 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.

5. Partners and Fiduciary Duties

In Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017) the Court of Appeal considers the fiduciary role of a partner:
[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.

6. Partners and Punitive and Aggravated Damages

In Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017) the Court of Appeal discusses partners and punitive and aggravated damages:
[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.

7. Expulsion of a Partner

In Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017) the Court of Appeal discusses 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.”

.....

[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.

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