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
8. Partnership versus Employment

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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.

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.

8. Partnership versus Employment

. McCormick v. Fasken Martineau DuMoulin LLP

In McCormick v. Fasken Martineau DuMoulin LLP (SCC, 2014) the Supreme Court of Canada considered whether a partner in a law firm was in an employment relationship with them. The context of the case was whether the law firm had committed age discrimination in violation of BC's human rights legislation (which applies to people within employment relationships) but the case is mostly useful for it's review of the basic defining factors of both the employment relationship and the partnership relationship. Caution should be exercised when applying these principles outside of the human rights context, as the court's interpretation is consciously coloured by the interpretive principles that apply in human rights law:

[25] Placing the emphasis on control and dependency in determining whether there is an employment relationship is consistent with approaches taken to the definition of employment in the context of protective legislation both in Canada and internationally: Davidov, at pp. 365-71. The Ontario Labour Relations Board, for example, uses a seven-factor test for determining if an employment relationship exists, based on indicia that relate mainly to control and economic dependency. Among other criteria, the Board asks whether the alleged employer exercises direction and control over the performance of work; imposes discipline; has the authority to dismiss employees; bears the burden of remuneration; and is perceived to be the employer (York Condominium Corp., [1977] OLRB Rep. 645; Adams, at p. 6-36). That said, while significant underlying similarities may exist across different statutory schemes dealing with employment, it must always be assessed in the context of the particular scheme being scrutinized.

[26] While the specific indicia used in other jurisdictions may vary from those adopted by Canadian authorities, the consistent animating themes are control and dependency. For example, in Clackamas Gastroenterology Associates, P. C. v. Wells, 538 U.S. 440 (2003), a case that required the U.S. Supreme Court to define who is an employee under the Americans with Disabilities Act of 1990 (104 Stat. 327, as amended, 42 U.S.C. § 12101 et seq.), the court relied on the following control/dependency factors:

“Whether the organization can hire or fire the individual or set the rules and regulations of the individual’s work

“Whether and, if so, to what extent the organization supervises the individual’s work

“Whether the individual reports to someone higher in the organization

“Whether and, if so, to what extent the individual is able to influence the organization

“Whether the parties intended that the individual be an employee, as expressed in written agreements or contracts

“Whether the individual shares in the profits, losses, and liabilities of the organization”. EEOC Compliance Manual § 605: 0009. [pp. 449-50]

[27] Control and dependency, in other words, are a function not only of whether the worker receives immediate direction from, or is affected by the decisions of others, but also whether he or she has the ability to influence decisions that critically affect his or her working life. The answers to these questions represent the compass for determining the true nature of the relationship.

[28] While control and dependency define the essence of an employment relationship for purposes of human rights legislation, this does not mean that other indicia that courts and tribunals have developed, such as the Crane factors, are unhelpful in assessing the extent to which control and dependency are present. But such factors are unweighted taxonomies, a checklist that helps explore different aspects of the relationship. While helpful in framing the inquiry, they should not be applied formulaically. What is more defining than any particular facts or factors is the extent to which they illuminate the essential character of the relationship and the underlying control and dependency. Ultimately, the key is the degree of control, that is, the extent to which the worker is subject and subordinate to someone else’s decision-making over working conditions and remuneration: Geoffrey England, Individual Employment Law (2nd ed. 2008), at p. 19.

[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]

(Cited with approval in Backman v. Canada, 2001 SCC 10 (CanLII), [2001] 1 S.C.R. 367, at para 41. See also Boyd v. Attorney-General for British Columbia 1917 CanLII 29 (SCC), (1917), 54 S.C.R. 532; Green v. Harnum 2007 NLCA 57 (CanLII), (2007), 269 Nfld. & P.E.I.R. 97 (N.L.C.A.); Blue Line Hockey Acquisition Co. v. Orca Bay Hockey Ltd. Partnership 2008 BCSC 27 (CanLII), (2008), 40 B.L.R. (4th) 83 (B.C.S.C.), at paras. 79-89, aff’d by 2009 BCCA 34 (CanLII), (2009), 52 B.L.R. (4th) 108 (B.C.C.A.); Re Davies and Council of the Institute of Chartered Accountants of Saskatchewan reflex, (1985), 19 D.L.R. (4th) 447 (Sask. Q.B.), at pp. 451-53; Coal Harbour Properties Partnership v. Liu 2004 BCCA 283 (CanLII), (2004), 48 B.L.R. (3d) 237 (B.C.C.A.), at para. 10.)

[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.

......

[44] I appreciate that the Tribunal sought, through the application of the Crane factors, to assess Mr. McCormick’s relationship with his firm, but in so doing, it paid insufficient attention to whether he was actually subject to the control of others and dependent on them. It assessed “control”, for example, in terms of some administrative restrictions on partners rather than examining the underlying power dynamics of the relationship. And it found that Mr. McCormick was “utilized” and “remunerated” by Fasken, while disregarding the fact that the firm was run for the benefit of, and by, its equity partners, including Mr. McCormick.

[45] In the absence of any genuine control over Mr. McCormick in the significant decisions affecting the workplace, there cannot, under the Code, be said to be an employment relationship with the partnership. Far from being subject to the control of Fasken, Mr. McCormick was among the partners who controlled it from 1979, when he became an equity partner, until he left in 2012. The Tribunal therefore erred in concluding that it had jurisdiction over his relationship with the partnership.

• McCormick v. Fasken Martineau DuMoulin LLP (SCC, 2014)
  
• Hudson's Bay Company v. OMERS Realty Corporation (Ont CA, 2016)
  
• Tim Ludwig Professional Corporation v. BDO Canada LLP (Ont CA, 2017)