Simon's Megalomaniacal Legal Resources

Partnerships - Partnerships and Fiduciary Duties

. Extreme Venture Partners Fund I LP v. Varma

In Extreme Venture Partners Fund I LP v. Varma (Ont CA, 2021) the Court of Appeal considered fiduciary duties generally, here in the context of corporate general partners:

[102] It is well established that the “categories of fiduciary relationship are never closed”: Frame v. Smith, 1987 CanLII 74 (SCC), [1987] 2 S.C.R. 99, at para. 36; see also Guerin v. R., 1984 CanLII 25 (SCC), [1984] 2 S.C.R. 335 at 384. Certain status relationships—solicitor-client or doctor-patient, for example—give rise to a per se fiduciary relationship. In other circumstances, courts can find an ad hoc fiduciary duty. Such a duty arises where: (1) the fiduciary has the discretionary power to affect the vulnerable party’s legal or practical interests and (2) the fiduciary has made an express or implied undertaking that it will exercise the discretionary power in the vulnerable party’s best interests: Galambos v. Perez, 2009 SCC 48, [2009] 3 S.C.R. 247, at paras. 66, 83.

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[104] Further, I note that certain jurisdictions in the United States have similarly determined that the liability owed by a general partner to the limited partnership should be expanded: see Colin P. Marks, “Piercing the Corporate Veil” (2015) 19 Lewis & Clark L Rev 73 at 83; J. William Callison & Maureen A. Sullivan, Partnership Law & Practice (St. Paul, MN: Thomson Reuters, 2021) at § 22:18; In re Harwood, 637 F (3d) 615 at 622 (5th Cir 2011); One seminal American case is In re USACafes, L.P. Litig., 600 A (2d) 43 (Del Ch 1991). Delaware courts have consistently upheld and in certain cases expanded the reach of that decision: Marks, at 83, 85. In USACafes, Chancellor Allen drew an analogy to corporate trustees:

While the parties cite no case treating the specific question whether directors of a corporate general partner are fiduciaries for the limited partnership, a large number of trust cases do stand for a principle that would extend a fiduciary duty to such persons in certain circumstances. The problem comes up in trust law because modernly corporations may serve as trustees of express trusts. Thus, the question has arisen whether directors of a corporate trustee may personally owe duties of loyalty to cestui que trusts of the corporation. A leading authority states the accepted answer:

The directors and officers of [a corporate trustee] are certainly under a duty to the beneficiaries not to convert to their own use property of the trust administered by the corporation. . . . Furthermore, the directors and officers are under a duty to the beneficiaries of trusts administered by the corporation not to cause the corporation to misappropriate the property. . . . The breach of trust need not, however, be a misappropriation. . . . Any officer [director cases are cited in support here] who knowingly causes the corporation to commit a breach of trust causing loss . . . is personally liable to the beneficiary of the trust. . . .

Moreover, a director or officer of a trust institution who improperly acquires an interest in the property of a trust administered by the institution is subject to personal liability. He is accountable for any profit. . . . Even where the trustee [itself] is not liable, however, because it had no knowledge that the director was making the purchase . . ., the director . . . is liable to the beneficiaries. . . . The directors and officers are in a fiduciary relation not merely to the [corporation] . . . but to the beneficiaries of the trust administered by the [corporation].

[105] Chancellor Allen also made the following comments that are particularly pertinent to the circumstances of the case at bar:

The theory underlying fiduciary duties is consistent with recognition that a director of a corporate general partner bears such a duty towards the limited partnership. That duty, of course, extends only to dealings with the partnership's property or affecting its business, but, so limited, its existence seems apparent in any number of circumstances. Consider, for example, a classic self-dealing transaction: assume that a majority of the board of the corporate general partner formed a new entity and then caused the general partner to sell partnership assets to the new entity at an unfairly small price, injuring the partnership and its limited partners. Can it be imagined that such persons have not breached a duty to the partnership itself? And does it not make perfect sense to say that the gist of the offense is a breach of the equitable duty of loyalty that is placed upon a fiduciary?[1]

. Tim Ludwig Professional Corporation v. BDO Canada LLP

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.