Course:Business Organizations - LAW 459/Unit 3

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UNIT THREE (WEEK 3): PARTNERSHIPS

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ALT: A pair of very otters on a log looking at the camera.

Source of image: Morguefile <"http://mrg.bz/tZOqnG">http://mrg.bz/tZOqnG</a>

 

 

UNIT OVERVIEW:

In this unit some of the principal legal characteristics of the partnership as a business form will be reviewed. This will lead to highlighting some of the key differences, from a legal and a practical point of view, between partnerships and corporations.

 

UNIT OUTCOME:

This Unit is designed to provide you with an understanding of partnerships and where they are similar to and dissimilar from to corporations. In this context you will be able to define the key ingredients of the partnership relationship. You will work through a series of cases that will help you identify the legal parameters of partnership as well as the duties and responsibilities of partners themselves, among themselves, and towards third parties. Finally you will learn about newer statutory forms of partnership that limit liability in certain specific ways.

By the end of this unit, you will have come to appreciate that the most significant distinction between corporations and partnerships has to do with liability. You will understand that to outward appearances the practical operating realities of both appear surprisingly similar. The main differences between partnerships and companies include:

(a). That corporations are legal entities created artificially through statutory means while partnership is itself “a recognition” of a form of relationship and not of a separate legal status; and

(b). That while corporations are predicated on the limited liability of their shareholders, statutory concepts of partnership have evolved that also confer some aspects of limited liability.

 

UNIT READINGS:

Please read and watch the following materials bearing in mind what you have already learned about corporations:

 

Casebook pages 1-57.

BC Partnership Act sections 1-4, 7-8,10-11, 13, 16,19, 21-22, 27, 31-34, 36, 38-39, 47, 50-52, 56-58, 64, and 91-93.

Blue Line Hockey Acquisition Co., Inc. v. Orca Bay Hockey Limited Partnership, 2009 BCCA 34 <a href="http://canlii.ca/t/22b29">http://canlii.ca/t/22b29</a>

Palter v. Zeller, (1997) 30 O.R. (3d) 796 <a href="http://caselaw.canada.globe24h.com/0/0/ontario/superior-court-of-justice/1996/10/08/palter-v-zeller-1996-8223-on-sc.shtml">http://caselaw.canada.globe24h.com/0/0/ontario/superior-court-of-justice/1996/10/08/palter-v-zeller-1996-8223-on-sc.shtml</a>

Miah & Others v. Khan, [2001] 1 All E.R. 20 (H.L.) <a href="http://www.bailii.org/uk/cases/UKHL/2000/55.html">http://www.bailii.org/uk/cases/UKHL/2000/55.html</a>

Oral arguments to the Supreme Court of Canada from Fasken Martineau DuMoulin LLP v. British Columbia (Human Rights Tribunal) at <a href="http://scc-csc-gc.insinc.com/en/clip.php?url=c/486/1938/201312130500wv150en,001Content-Type:%20text/html;%20charset=ISO-8859-1">http://scc-csc-gc.insinc.com/en/clip.php?url=c/486/1938/201312130500wv150en,001Content-Type:%20text/html;%20charset=ISO-8859-1</a>

McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39 <a href="https://www.canlii.org/en/ca/scc/doc/2014/2014scc39/2014scc39.pdf">https://www.canlii.org/en/ca/scc/doc/2014/2014scc39/2014scc39.pdf</a>

 

 

 

TOPIC 1: DEFINING PARTNERSHIP

A working description of the corporation could be:

An organizational form recognized by the law, to coordinate the activities of those who provide the various inputs necessary to carry on a business designed to earn profits.

Interestingly this could equally represent a description of a partnership.

Please read page 1 of the Casebook. Review the definition of “partnership” that emerges. Is there anything in that definition that obviously distinguishes partnership from corporate existence?

The B.C. Partnership Act section 2 defines partnership as follows:

2.  Partnership is the relation which subsists between persons carrying on business in common with a view of profit.”

The BC Partnership Act section 3 expressly excludes companies:

3.  The relation between members of a company or association that is

(a) incorporated under an Act for the time being in force and relating to the incorporation of joint stock companies, or licensed or registered under an Act relating to the licensing or registration of extraprovincial companies, or

(b) formed or incorporated by or under any other statute or letters patent or Royal Charter

is not a partnership within the meaning of this Act.”

 

What are we to conclude from all this?

Possibly that partnerships and companies are the same, and that although companies can be part of partnerships (which indeed they can be), a partnership can never be a company (although because of the doctrine of corporate personality it may well hold shares in a companies.

More importantly we should understand that “partnership” is a relationship.  Not an organization in its own right.   

Hence, unlike a corporation, partnerships cannot make contracts, have employees, commit crimes or torts, sue or be sued. For example contracts are in reality executed by the partners, not by the entity known as a partnership. In fact there really are only the partners, and it is their relationship to one another that is the “partnership”.

In other words reference to partnership (or frequently to “a firm”) simply means the partners who comprise the firm.

In this regard please note the definition of “firm” found in Section 1 of the BC Partnership Act:

"firm" is the collective term for persons who have entered into partnership with one another.

 

TOPIC 2: SIGNIFICANCE OF THE PARTNERSHIP “RELATIONSHIP”

In coming to grips with the significance of partnership “relationship” we must understand how fiduciary and good faith duties come prominently into play. 

Please read:

 

  1. BC Partnership Act Part 5. In particular please note Section 91:

91.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.

  1. Casebook pages 22-36 on how partnerships conduct business.

There you will read the case of Olson v. Gullo [1994] O.J. No. 587, 17 O.R. (3d) 790 (C.A.) which deals with the consequences of a partner entering for his own personal benefit into a transaction that ought to have belonged to the partnership.

For a contrasting decision on not entirely dissimilar facts where no partnership was found to exist briefly see Blue Line Hockey Acquisition Co., Inc. v. Orca Bay Hockey Limited Partnership, 2009 BCCA 34 <a href="http://canlii.ca/t/22b29">http://canlii.ca/t/22b29</a>  The Blue Line case concerned a very high profile sale of the Vancouver Canucks hockey team and G.M. Place Arena. Can you spot the differences between Olson v. Gullo and Blue Line Hockey Acquisition Co., Inc. v. Orca Bay Hockey Limited Partnership?

 

There are 3 key ingredients to a “partnership”:

INGREDIENT #1: There must be a “business”. More particularly this means that the “relationship” must arise in connection with a business. 

Sometimes confusion arises where there is also a personal relationship. For example see:

Palter v. Zeller, (1997) 30 O.R. 93d) 796

<a href="http://caselaw.canada.globe24h.com/0/0/ontario/superior-court-of-justice/1996/10/08/palter-v-zeller-1996-8223-on-sc.shtml">http://caselaw.canada.globe24h.com/0/0/ontario/superior-court-of-justice/1996/10/08/palter-v-zeller-1996-8223-on-sc.shtml</a>

In this case Mr. and Mrs. Palter had been friends with Ms. L (a lawyer but not practicing) through whom they had come to meet Zeller, a lawyer.  Zeller and Ms. L married and she joined his firm.  The Palters engaged Zeller and, following a dispute, claimed damages against Zeller and, on the sole basis that she was Zeller’s partner, Ms. L.  The court held that the fact that Zeller and Ms. L were in an equal social and matrimonial relationship did not mean they were partners.

 

INGREDIENT #2: The business must be “carried on in common”.

There can sometimes be questions about whether two or more persons are carrying on separate businesses or a joint business.

 

CONSIDER THE EXAMPLE OF THE FOLLOWING AGREEMENT:

WHEREAS X and Y are co-owners of a men’s only barbershop located at ____________________, Ottawa, Ontario, operated under the trade name ”Z”;

 

          AND WHEREAS X and Y have decided to establish new work schedules and rules for the management and operation of the Business;

Business” means any business or businesses carried on by Z as may be deemed by the Partners to be in the best interest of Z and any other general business activities related or incidental thereto;

2.2    Y shall manage and operate the Business on Mondays, Wednesdays and Fridays of each week and any and all revenues from the Business on such days will be kept exclusively by Y.

2.3    X shall manage and operate the Business on Tuesdays, Thursdays and Saturdays of each week and any and all revenues from the Business on such days will be kept exclusively by X.

2.5    The Lease shall remain in the names of both X and Y for the duration of this Agreement.

2.6    Each party shall be responsible for the procurement and sale of his own hair-related products. Partners are not to sell any product that is not hair-related in the Business premises or under the Trade Name.

2.7    Each Partner shall keep the Business premises clean and well maintained during his days of management and operation.

2.8    Each Partner shall have the right to conduct separate advertising and promotional activities for his respective days of management and operation subject to the following

2.9    Each Partner shall be responsible for fifty percent (50%) of any and all obligations under the Lease.

2.10  Each Partner shall obtain his own H.S.T. and related tax regiSrations and shall be responsible to report to Canada Revenue Agency any revenues and remit any taxes as required by law.

Blog Activity 3.1:

Upon completing Unit 3 consider whether the above agreement is an example of a “Partnership”? Please blog your views on this question and your reasons in less than two pages under the heading “Is it a Partnership?”

 

INGREDIENT #3: The business must be “carried on with a view of profit”.

Many questions concerning the existence of a partnership revolve around the concept of profit motive and profit sharing. It is impossible to establish a partnership if there is no intended financial return from the business.

However even more problems arise in practice from the reverse situation —I.E. when a financial return from a business is argued not to constitute the recipient a partner because, for example, it is really a wage paid to an employee, or interest paid to a creditor.

Originally it was held that mere receipt of a share of the profits established a partnership. The House of Lords repudiated this notion in Cox v Hickman. Today the rule that mere receipt of a share of the profits of a business does not automatically make the recipient a partner is effectively codified in Section 4(c) of the BC Partnership Act:

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business, but the receipt of a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular

(i) the receipt by a person of a debt or other liquidated amount by installments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as a partner,

(ii) a contract for the remuneration of an employee or agent of a person engaged in a business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner,

(iii) the spouse or child of a deceased partner who receives by way of annuity a portion of the profits made in the business in which the deceased person was a partner is not merely because of the receipt a partner in the business or liable as a partner,

(iv) the advance of money by way of loan to a person engaged or about to engage in a business, on a contract between that person and the lender under which the lender is to receive a rate of interest varying with the profits or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person carrying on the business or liable as a partner, as long as the contract is in writing and signed by or on behalf of all the parties to it, and

(v) a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business is not, merely because of the receipt, a partner in the business or liable as a partner.

 

A related question: Must there be a sharing of profits for a “partnership” to exist?

There must be a profit motive for a partnership to exist—but then all businesses are designed to make money and a simple requirement of a profit motive might not, at first sight, seem to add anything to the business criterion already discussed. It has been argued, however, that that is the only requirement as to profit imposed by the Partnership Act. Returning to the words of the section, there must be  “persons carrying on business in common with a view of profit”. These words, so the argument goes, require only a profit motive and not necessarily a share in the profits for each

Partner; I.E. only the business need be carried on ‘in common’, not necessarily the profits. Another, equally appropriate interpretation, however, is that it is a business with a view to profit which must be carried on in common. A share of the profits must on that basis be contemplated for a partnership to be established.

 

It is this later view that was certainly the view taken by the pre -1890 cases such as Pooley v. Driver (1876) 5 Ch. D. 458 (C.A.) which we will be examining below.

More recent cases suggest that a person receiving no form of return from firm could still be considered a partner.  See for example M Young Legal Associates Ltd. v. Zahid, [2006] CA – 2006 1 WLR 2562. You need not read this case in detail.

 

THE KEY PRACTICAL DIFFERENCE OF PARTNERSHIP FROM A COMPANY: NO LIMITED LIABILITY FOR PARTNERS.

Accordingly, each partner is liable without limit for debts incurred by other partners in the course of the partnership business. This is obviously considered a drawback in the business community. Limited liability partnerships now exist pursuant to Part 6 of the BC Partnership Act. Most lawyers, accountants and others regard this as a salutary development even if it robs the age old ritual of introducing a client to your “partner in the firm” of much of the gravitas once implicit to that act.

 

 

TOPIC 3: THE EXISTENCE OF A PARTNERSHIP RELATIONSHIP

 

So when does a partnership exist? 

As a starting point see section 4 of the BC Partnership Act:

4.  In determining whether a partnership does or does not exist, regard must be had to the following rules:

(a) joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to any property that is so held or owned, whether the tenants or owners do or do not share any profits made by the use of the property;

(b) the sharing of gross returns does not of itself create a partnership, whether the persons sharing the returns have or have not a joint or common right or interest in property from which or from the use of which the returns are derived;

(c) the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business, but the receipt of a share, or of a payment contingent on or varying with the profits of a business, does not of itself make him or her a partner in the business, and in particular

(i)  the receipt by a person of a debt or other liquidated amount by installments or otherwise out of the accruing profits of a business does not of itself make him or her a partner in the business or liable as a partner,

(ii)  a contract for the remuneration of an employee or agent of a person engaged in a business by a share of the profits of the business does not of itself make the employee or agent a partner in the business or liable as a partner,

(iii)  the spouse or child of a deceased partner who receives by way of annuity a portion of the profits made in the business in which the deceased person was a partner is not merely because of the receipt a partner in the business or liable as a partner,

(iv)  the advance of money by way of loan to a person engaged or about to engage in a business, on a contract between that person and the lender under which the lender is to receive a rate of interest varying with the profits or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person carrying on the business or liable as a partner, as long as the contract is in writing and signed by or on behalf of all the parties to it, and

(v)  a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business is not, merely because of the receipt, a partner in the business or liable as a partner.”

 

THE CASES:

Le Page v. Kamex, Volzke Construction v. Westlock, and Pooley v. Driver are illustrations of courts analysing facts to determine whether, under the rules set out in section 4, a partnership exists.

  1. A.E. Lepage Ltd. v. Kamex Developments Ltd. (1977) 78 D.L.R. (3d) 223 (Ont. C.A.) which you will find at page 2-4 of the Casebook

The facts were that a group of co-owners of an apartment building (which was held in trust for them by Kamex) agreed that:

  • revenues and profits from the building would be shared in proportion to their interests;
  • they were each liable to contribute to deficiencies;
  • they each had a right of first refusal in connection with a sale to a third party;
  • any sale required a majority vote, and would only be sold through an “open listing”.
  • Profits would be divided in proportion to their interests.

The group of co-owners decided to sell without an exclusive listing agreement.

One of the co-owners, March, signed an exclusive listing agreement with the plaintiff LePage on behalf of all the co-owners – but without the approval of those co-owners. March told LePage he was a member of a partnership.

In the end, the property was sold by Kamex (a co-owner) through a different agent – not LePage. LePage sought the commission that they believed they were entitled to as exclusive real estate agents for the property.

The question before the court was whether March and others were, in law, partners? Were the other co-owners liable to LePage when they had no idea that March had signed and “exclusive” with LePage for real estate agency services, believing it to be an “open (non-exclusive) listing”?

The Court’s judgment was that he mere fact that property is owned in common and that profits are derived therefrom does not of itself constitute the co-owners as partners. The relevant provision of the Partnerships Act (Ontario) Section 3, paragraph1 (equivalent to the BC Partnership Act Section 4 (a)) read as follows:

3. In determining whether a partnership does or does not exit, regard shall be had to the following rules:

  1. 1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.”

In this case almost everything turned on whether the intention was to "carry on a business" or simply to provide by an agreement for the regulation of their rights and obligations as co-owners of a property.

The court was clear that the mere fact that co-owners intend to acquire, hold and sell a building for profit does not make them partners. Moreover, from the facts it was equally clear that the intention of the parties was to maintain their rights as co-owners of the property.

Also helpful in the result was that the co-owners wanted to identify and keep separate their respective beneficial interests in the property for income tax purposes. Those intentions would have been defeated if the owners had been regarded as a partnership and the apartment building had become the property of that partnership. The fact that they were obliged by their agreement to offer a right of first refusal to the other co-owners in the event of sale was not viewed as inconsistent with their basic right to deal with their respective interests in the property.

 

Consider whether the co-owners could have sued March for breach of warranty of authority?

 

  1. Volzke Construction V. Westlock Foods (1986) 45 Alta. L.R. (2d) 97 (C.A.) at pages 5-8 of the Casebook.

The facts were Bonel Properties Ltd. planned to build an expansion on their mall, the Westlock Shopping Centre, which was in the Town of Westlock, Alberta. Westlock Foods was offered space in the proposed expansion but wanted to be an owner not a tenant.  As a result Westlock Foods wished to purchase a 20% interest in the mall for $32K. Bonel Properties accepted the offer and was paid $32,000 in return for that ownership interest.

 

Volzke Construction was a general contractor who wanted the mall expansion construction job. Volzke approached Westlock Foods and was told by its principal Mr. Shefsky that the project would go to tender. Shefsky offered to introduce Volzke to Westlock Foods’ “partners” in the Westlock Shopping Centre, being Bonel Properties – and did so.

 

Volzke Construction got the job but was not paid its final billing.

 

Volzke Construction sues Westlock Foods alleging that Westlock Foods was in partnership with Bonel Properties. Additional facts were:

  • Bonel Properties and Westlock Foods opened a joint bank account—but only officers of Bonel Properties had signing authority;
  • Volzke Construction’s accounts were submitted to Bonel Properties. All paid until Westlock Foods shareholder Mr. Shefsky died. Thereafter Mrs. Shefsky carried on the business activities of Westlock Foods - she had no signing authority on the bank account (as was previously the case as well).
  • Bonel Properties paid for and undertook all repairs and was responsible for 80% of a mortgage taken out jointly with Westlock Foods.

 

A dispute separate from that involving Volzke Construction arose between Bonel Properties and Westlock Foods.

 

The trial court was of the view that there was either a partnership or a joint-venture between them, holding that Bonel Properties and Westlock Foods were co-owners, not partners. On this basis Westlock Foods could not be liable to Volzke Construction. The court felt that there was no intention to enter into a partnership and that Westlock Foods could not be a partner because it had no control over the business

 

The Court of Appeal disagreed. It held that nothing in the definition of partnership requires each partner to have control over the business. The evidence of the parties’ actions showed that Bonel Properties and Westlock Foods had agreed to share costs and profits on an 80/20 basis. The Court of Appeal observed that receiving a share of the profits is prima facie proof of partnership.

 

{Please note parenthetically that section 4(c) of BC Partnership Act contains essentially the wording as the Alberta Act in question: “the receipt by a person of a share of the profits of a business is proof in the absence of evidence to the contrary that he or she is a partner in the business…”}

 

The Court of Appeal further observed that the two parties referred to each other as partners, had joint financial accounts, etc. They concluded that the intentions of the parties are an important but non-conclusive indication of whether or not a partnership exists. Nor is control by one party necessarily determinative of there not being a partnership.

 

Accordingly one must examine the circumstances surrounding the operation of the business to make a final judgment.

 

  1. Pooley v. Driver (1876), 5 Ch. D. 458 (Eng. M.R.) at pages 8-15 of the Casebook.

When reading this case, ask yourself what were the Drivers trying to achieve?

The facts were that the Drivers were investors whose loan had a repayment scheme that varied with the proportion the loan bore to the whole capital of the firm. Accordingly it was in reality more of investment than a credit relationship. The Drivers had a right to participate in the management, and the loan was repayable out of the profits, for the duration of the partnership. There was also an arbitration clause - not unknown in partnership agreements, but very unusual in a loan. The loan agreement describers the lenders (Drivers) as partners; had the same term as the loan and were to share in the profits.

 

The business was liquidated. Pooley, whom the business-owners had owned money, sought to recover his debt from the Drivers, claiming that the Drivers were partners in the enterprise.

 

The question was whether this was just a money-lending situation, or was it a partnership?

 

The Drivers position was that they were lenders based on a contract in writing. Thus, not partners.  One problem was that the loan agreement was not executed.

 

This complex relationship appears to have been expressly designed to ensure that the lenders were not found to be partners by trying to fit into the equivalent of BC Partnership Act s.4(c)(iv):

 

(iv)   the advance of money by way of loan to a person engaged or about to engage in a business, on a contract between that person and the lender under which the lender is to receive a rate of interest varying with the profits or is to receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person carrying on the business or liable as a partner, as long as the contract is in writing and signed by or on behalf of all the parties to it…

 

The court found that the legislation did not apply; the case was open to the contextual factors; the Drivers were in fact partners, and therefore liable. The court further found that the Drivers participated in management of the business, had an interest in the capital as well as that other factors consistent with partnership were present.

 

The underlying theme of this case can be understood to be if you are getting the benefits of partnership, you should correspondingly attract its inherent responsibilities

 

 

 

TOPIC 4: THE CONTEMPLATED PARTNERSHIP

 

Please read Miah v. Khan  [2001] 1 All E.R. 20 (H.L.)  

<a href="http://www.publications.parliament.uk/pa/ld199900/ldjudgmt/jd001102/miah.htm">http://www.publications.parliament.uk/pa/ld199900/ldjudgmt/jd001102/miah.htm</a>

 

This case stands for the proposition that there can be no partnership where an agreement to set up a business activity has not been implemented.

 

Khan and three others agreed that he would finance the opening of a restaurant to be run by two of the others.  A joint bank account was opened, a bank loan was obtained, premises acquired, furniture and equipment bought, a contract for laundry made, and the opening of restaurant was even advertised in the local press.

 

Before the restaurant opened, a falling out among the four occurred. Kahn sought a declaration that a partnership existed before the restaurant had opened.

 

The trial court held there was a partnership.

 

The Court of Appeal reversed the trial judge’s holding and finding that although actual receipt of profits need not be shown, there was not enough to show that the necessary preparations for business had been made. That is to say that in their view the business itself, i.e. the restaurant, must be up and running before there could be a partnership.

 

Lord Millett in the House of Lords observed that whether parties who propose entering into a business venture in partnership together have actually done so is a question of fact:

 

“Whether parties who propose entering into a business venture in partnership together have actually done so is a question of fact into which your Lordships would not normally enter. But the majority of the Court of Appeal did not reverse the judge's findings of fact. They reversed his conclusion because they considered that there was a rule of law that the parties to a joint venture do not become partners until actual trading commences. They recognised the distinction between a contemplated partnership or an agreement to become partners and the partnership itself. They considered that it was necessary first to identify the business that it was intended or agreed should be conducted by the partnership, and then decide whether that business was being carried on by the partners at the material time. They identified the business of the partnership as the carrying on of a restaurant business from the premises in Newbury, and posed the question, at p. 486H:

"were the four parties . . . carrying on a restaurant business at [the premises] prior to 25 January 1994?"

So expressed, the question could only be answered in one way. The restaurant was not open for business. There was nothing for the first respondent to manage, and no function for the two chefs to perform. No food had been bought or bookings taken. Everything that had been done was preparatory to the commencement of trading.

I think that the majority of the Court of Appeal were guilty of nominalism. They thought that it was necessary, not merely to identify the joint venture into which the parties had agreed to enter, but to give it a particular description, and then to decide whether the parties had commenced to carry on a business of that description. They described the business which the parties agreed to carry on together as the business of a restaurant, meaning the preparation and serving of meals to customers, and asked themselves whether the restaurant had commenced trading by the relevant date. But this was an impossibly narrow view of the enterprise on which the parties agreed to embark. They did not intend to become partners in an existing business. They did not agree merely to take over and run a restaurant. They agreed to find suitable premises, fit them out as a restaurant and run the restaurant once they had set it up. The acquisition, conversion and fitting out of the premises and the purchase of furniture and equipment were all part of the joint venture, were undertaken with a view of ultimate profit, and formed part of the business which the parties agreed to carry on in partnership together.

There is no rule of law that the parties to a joint venture do not become partners until actual trading commences. The rule is that persons who agree to carry on a business activity as a joint venture do not become partners until they actually embark on the activity in question. It is necessary to identify the venture in order to decide whether the parties have actually embarked upon it, but it is not necessary to attach any particular name to it. Any commercial activity which is capable of being carried on by an individual is capable of being carried on in partnership. Many businesses require a great deal of expenditure to be incurred before trading commences…

The question in the present case is not whether the parties "had so far advanced towards the establishment of a restaurant as properly to be described as having entered upon the trade of running a restaurant," for it does not matter how the enterprise should properly be described. The question is whether they had actually embarked upon the venture on which they had agreed. The mutual rights and obligations of the parties do not depend on whether their relationship broke up the day before or the day after they opened the restaurant, but on whether it broke up before or after they actually transacted any business of the joint venture. The question is not whether the restaurant had commenced trading, but whether the parties had done enough to be found to have commenced the joint enterprise in which they had agreed to engage. Once the judge found that the assets had been acquired, the liabilities incurred and the expenditure laid out in the course of the joint venture and with the authority of all parties, the conclusion inevitably followed.”

 

As can be readily seen it is not necessarily easy in practice to distinguish acts preparatory to carrying on business and acts that are business activities in their own right.

 

Briefly refer once again to Blue Line Hockey Acquisition Co. In. v. Orca Bay Hockey Limited Partnership 2009 BCCA 34.

 

 

TOPIC 5: THE LEGAL NATURE AND CHARACTERISICS OF PARTNERSHIP

Thorne v. New Brunswick (Workmen’s Compensation Board) (1962), 33 D.L.R. (2d) 167 (N.B.S.C., App. Div.) at pages 16-20 of the Casebook.

The facts were that Thorne and Robichaud entered into an oral agreement to carry on in partnership in a combined lumbering and sawmill business. Robichaud was in charge of the woods operation and Thorne of the milling operations. Each would collect wages of $75/week. They commenced business and notified the Workmen’s Compensation Board of the new undertaking, filed with it an estimate of wages, and paid the provisional assessment applicable.

A few months later Thorne was injured in an accident arising out of and in the course of duties performed by him pursuant to the partnership agreement. He applied to the Workmen’s Compensation Board for compensation.

The issue was whether Thorne was a workman employed by the partnership within the meaning of the Workmen’s Compensation Act so as to entitle him to compensation thereunder?

The decision was no, Thorne was not an employee.

The court’s held that the common law was that no person could enter into a contract with himself or be his own employer. Since partnership has no legal existence distinct from the individuals composing it, no person could be an employee of a partnership firm of which he was a member.

In this regard please watch the arguments before the Supreme Court of Canada decision in Fasken Martineau DuMoulin LLP v. British Columbia (Human Rights Tribunal) which can be found below (58:07 to 154:45 – slightly less than an hour). This video will give you a deeper sense of how the meaning of “partnership” is argued before the courts in the modern day. It is all the more interesting because it deals with questions revolving around partnership in a law firm.    

<a href="http://scc-csc-gc.insinc.com/en/clip.php?url=c/486/1938/201312130500wv150en,001Content-Type:%20text/html;%20charset=ISO-8859-1">http://scc-csc-gc.insinc.com/en/clip.php?url=c/486/1938/201312130500wv150en,001Content-Type:%20text/html;%20charset=ISO-8859-1</a>        

 

Then please read the Supreme Court of Canada’s decision in the case that can be found below. You will see that the court paid significant deference to the concept of partnership. You might wonder how the familiarity to them of partnerships in law firms might have influenced the court’s views:

 

Thorne v. New Brunswick and McCormick v. Fasken Martineau DuMoulin LLP, 2014 SCC 39, establishes the important proposition that partnerships are not separate legal entities.

Please read the Notes at pages 20-21 of the Casebook, especially note 4 on page 21, against the background of the following BCPA provisions that correspond to the provisions of the Ontario Act referred to:

BCPA sections 1         “partnership property” and 23 [which together correspond to Ontario s. 21 (1)] and “firm” and “firm name” [which together correspond to Ontario s. 5]

BC Supreme Court Rules 20 -1 corresponding to Ontario Rule 8.01 (1):

 

“Two or more persons claiming to be entitled, or alleged to be liable, as partners may sue or be sued in the name of the firm in which they were partners at the time when the alleged right or liability arose”

TOPIC 6: RELATIONSHIP OF PARTNERS INTER SE

Please read pages 22-44 of the Casebook as guided below:

  1. The Personal Nature of the Relationship

Please read pages 22-23 of the Casebook on this against the background of sections 34 and 36 of the BC Partnership Act.

Assignment by partner of a share

  1. (1) An assignment by any partner of the partner's share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners.

(2) In case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between that partner and the other partners and, for the purpose of ascertaining that share, to an account as from the date of the dissolution.

(3) The assignee may enforce his or her rights under subsection (2) against the assigning partner, the other partners, or both.

 

Dissolution by bankruptcy, death, dissolution of partner or charging order

  1. (1) On the death, bankruptcy or dissolution of a partner,

(a) a partnership of 2 partners is dissolved, and

(b) subject to agreement among the partners, a partnership of more than 2 partners is dissolved as between the bankrupt, dead or dissolved partner and the other partners.

(2) If the share in the partnership property of a partner is charged under section 26 for the separate debt of the partner, the other partners may by notice in writing to the partner whose share is charged,

(a) dissolve the partnership, or

(b) if there are 3 or more partners, dissolve the partnership as between the partner whose share is charged and the other partners.

(3) A notice under subsection (2) takes effect at the time specified in the notice or immediately if no time is specified.

 

  1. Fiduciary Character

Please read pages 23-37 of the Casebook on this subject, including reviewing once again the decision in Olson v. Gullo at pages 25-33 as well as the “Notes & Questions” at pages 33-35. The relevant provisions of the BC Partnership Act for you to look at in this regard are sections 22, 27, 31, 32, 33, 36 and 91.

 

Fairness and good faith

  1. (1) A partner must act with the utmost fairness and good faith towards the other members of the firm in the business of the firm.

(2) The duties imposed by this section are in addition to, and not in derogation of, any enactment or rule of law or equity relating to the duties or liabilities of partners.

 

Rules for determining rights and duties of partners in relation to partnership

  1. Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:

(a) all the partners are entitled to share equally in the capital and profits of the business and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm;

(b) the firm must indemnify every partner in respect of payments made and personal liabilities incurred by him or her

(i)   in the ordinary and proper conduct of the business of the firm, or

(ii)   in or about anything necessarily done for the preservation of the business or property of the firm;

(c) a partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital that he or she has agreed to subscribe is entitled to interest at a fair rate from the date of the payment or advance;

(d) a partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him or her;

(e) every partner may take part in the management of the partnership business;

(f) a partner is not entitled to remuneration for acting in the partnership business;

(g) a person may not be introduced as a partner without the consent of all existing partners;

(h) any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners;

(i) the partnership books are to be kept at the place of business of the partnership, or the principal place, if there is more than one, and every partner may, when he or she thinks fit, have access to and inspect and copy any of them;

(j) a partner may refer a difference concerning the interpretation or application of the partnership agreement to arbitration for a final and binding decision under the <a href="http://www.bclaws.ca/civix/document/id/complete/statreg/96055_01">Arbitration Act</a>.

 

Partners must render accounts

  1. 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.

 

Partner must account for benefits

  1. (1) A partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership, or from any use by the partner of the partnership property, name or business connection.

(2) This section applies also to transactions undertaken, after a partnership has been dissolved by the death of a partner and before the affairs of the partnership have been completely wound up, by any surviving partner or by the representatives of the deceased partner.

 

Profits of partner carrying on similar business

  1. If a partner, without the consent of the other partners, carries on any business of the same nature as and competing with that of the firm, the partner must account for and pay over to the firm all profits made by him or her in that business.

 

Dissolution by bankruptcy, death, dissolution of partner or charging order

  1. (1) On the death, bankruptcy or dissolution of a partner,

(a) a partnership of 2 partners is dissolved, and

(b) subject to agreement among the partners, a partnership of more than 2 partners is dissolved as between the bankrupt, dead or dissolved partner and the other partners.

(2) If the share in the partnership property of a partner is charged under section 26 for the separate debt of the partner, the other partners may by notice in writing to the partner whose share is charged,

(a) dissolve the partnership, or

(b) if there are 3 or more partners, dissolve the partnership as between the partner whose share is charged and the other partners.

(3) A notice under subsection (2) takes effect at the time specified in the notice or immediately if no time is specified.

 

Rules of equity and common law

  1. 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.”

 

A brief note on: Olson v. Gullo [1994] O.J. No. 587, 17 O.R. (3d) 790 (C.A.) at pages 25-33 of the Casebook.

In this case there was a partnership between the parties to purchase and develop land. Gullo led his partner to believe that farmers who owned some of the land wouldn’t sell. Gullo then turned around and bought that land and sold it for significant profit.

Olson sues Gullo. Gullo argues there never was a partnership but the trial judge rejects that suggestion, finding Gullo to not be a credible witness..

The trial court after reviewing the evidence concluded that Gullo’s purchase and sale of the land was a transaction concerning the partnership. Following that logic, the profits should be paid over to the partnership and then shared equally by the partners. However the trial judge held that because Gullo behaved so badly, Olson should get 100% of the profits.

 

The Court of Appeal held that the equivalent provisions to sections 32 and 33 of the BC Partnership Act require that the partner must account to the firm. Accordingly the profit has to be paid over to the partnership and then the partnership divides it among the partners based on their original agreement. If there is no clear agreement – the Partnership Act says it is to be divided equally. Thus even though Gullo behaved badly the Court of appeal effectively held that was not sufficient reason to go against the scheme of the Partnership Act.

 

Gullo was effectively punished through the Court making him liable for costs in the actions.

 

  1. Agency

Please read pages 35-36 of the Casebook on this subject. Read section 10 of the BC Partnership Act in this context.

 

Notice of restriction of power of partner

  1. If it has been agreed between the partners that a restriction is to be placed on the power of any one or more of them to bind the firm, an act done in contravention of the agreement is not binding on the firm with respect to persons having notice of the agreement.

 

  1. Presumptive Equality

Please read page 36 of the Casebook on this subject. Read section 27(e) of the BC Partnership Act in this context.

 

Rules for determining rights and duties of partners in relation to partnership

  1. Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:

(e) every partner may take part in the management of the partnership business;”

 

  1. Consensual Nature

Please read pages 36-37 of the Casebook on this subject. Read sections 21 and 27(h) of the BC Partnership Act in this context.

 

Variation of rights and duties by consent

  1. The mutual rights and duties of partners, whether ascertained by agreement or defined by this Part, may be varied by the consent of all the partners and the consent may be either express or inferred from a course of dealing.

 

Rules for determining rights and duties of partners in relation to partnership

  1. Subject to any agreement express or implied between the partners, the interests of partners in the partnership property and their rights and duties in relation to the partnership must be determined by the following rules:

(h) any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners;”

 

 

TOPIC 7: RELATIONSHIP OF PARTNERS TO THIRD PARTIES

Generally please read pages 37-44 of the Casebook on this subject as guided below as well as sections 7 and 8 of the BC Partnership Act:

 

Liability of partners

  1. (1) A partner is an agent of the firm and the other partners for the purpose of the business of the partnership.

(2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

 

Acts or instruments in firm name

  1. (1) An act or instrument relating to the business of the firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm, by any person authorized to do so, whether a partner or not, is binding on the firm and all the partners.

(2) This section does not affect any general rule of law relating to the execution of deeds or negotiable instruments.”

 

 

  1. Pre-Partnership Liability

Please read page 38 of the Casebook on this subject. Read section 19(1) of the BC Partnership Act in this context:

 

Liability of partners

  1. (1) A person who is admitted as a partner into an existing firm does not become liable to the creditors of the firm for anything done before he or she became a partner.”

 

  1. Liability as a Partner

Please read page 38 of the Casebook on this subject. Read sections 7(2), 8, 11, 13 and 19 of the BC Partnership Act in this context:

 

Liability of partners

  1. (2) The acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm of which he or she is a member bind the firm and his or her partners, unless

(a) the partner so acting has in fact no authority to act for the firm in the particular matter, and

(b) the person with whom he or she is dealing either knows that the partner has no authority, or does not know or believe him or her to be a partner.

 

Acts or instruments in firm name

  1. (1) An act or instrument relating to the business of the firm and done or executed in the firm name, or in any other manner showing an intention to bind the firm, by any person authorized to do so, whether a partner or not, is binding on the firm and all the partners.

(2) This section does not affect any general rule of law relating to the execution of deeds or negotiable instruments.

 

 

Liability of partners for firm debts

  1. A partner in a firm is liable jointly with the other partners for all debts and obligations of the firm incurred while he or she is a partner, and after his or her death his or her estate is also severally liable in a due course of administration for those debts and obligations, so far as they remain unsatisfied, but subject to the prior payment of his or her separate debts.

 

Liability for misapplication

  1. A firm must make good any loss arising in the following cases:

(a) if one partner acting within the scope of his or her apparent authority receives the money or property of a third person and misapplies it;

(b) if a firm in the course of its business receives money or property of a third person, and the money or property so received is misapplied by one or more of the partners while it is in the custody of the firm.

 

Liability of partners

  1. (1) A person who is admitted as a partner into an existing firm does not become liable to the creditors of the firm for anything done before he or she became a partner.

(2) A partner who retires from a firm does not cease to be liable for partnership debts or obligations incurred before his or her retirement.

(3) A retiring partner may be discharged from any existing liabilities by an agreement to that effect between the retiring partner and the members of the firm as newly constituted and the creditors.

(4) An agreement under subsection (3) may be either express or inferred as a fact from the course of dealing between the creditors and the firm as newly constituted.

 

  1. Holding Out Liability

Please read pages 38-39 of the Casebook on this subject. Read sections 10 and 16 of the BC Partnership Act in this context:

 

Notice of restriction of power of partner

  1. If it has been agreed between the partners that a restriction is to be placed on the power of any one or more of them to bind the firm, an act done in contravention of the agreement is not binding on the firm with respect to persons having notice of the agreement.

 

Person representing himself or herself as partner

  1. (1) A person who, by words spoken or written, or by conduct, represents himself or herself, or who knowingly allows himself or herself to be represented, as a partner in a particular firm is liable as a partner to any one who has, on the faith of any such representation, given credit to the firm.

(2) Subsection (1) applies whether the representation has or has not been made or communicated to the person so giving credit by or with the knowledge of the apparent partner making the representation or allowing it to be made.

(3) If, after a partner's death, the partnership business is continued in the old firm name, the continued use of that name, or of the deceased partner's name, as part of it does not of itself make his or her executor's or administrator's estate or effects liable for any partnership debts contracted after his or her death.”

 

  1. Liability After Withdrawal

Please read pages 39-44 of the Casebook on this subject. Pleases read the Notes on pages 43-44 carefully.  Please note that section 36 of the Ontario Partnerships Act corresponds to section 39 of the BC Partnership Act:

 

Change in firm

  1. (1) If a person deals with a firm after a change in its constitution, the person is entitled to treat all apparent members of the old firm as still being members of the firm until the person has notice of the change.

(2) An advertisement in the Gazette as to a firm is notice to persons who had no dealings with the firm before the date of the advertised dissolution or change.

(3) The estate of a partner who dies or who becomes insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, insolvency or retirement.

 

 

  1. Posthumous Partner Liability

Please read page 44 of the Casebook on this subject. In this context please note that section 16(3) of the BC Partnership Act corresponds to Ontario Partnership Act section 15(2), and that section 39(3) of the BC Partnership Act corresponds to Ontario  Partnership Act section 36(3):

 

Person representing himself or herself as partner

  1. (3) If, after a partner's death, the partnership business is continued in the old firm name, the continued use of that name, or of the deceased partner's name, as part of it does not of itself make his or her executor's or administrator's estate or effects liable for any partnership debts contracted after his or her death.

 

Change in firm

  1. (3) The estate of a partner who dies or who becomes insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable for partnership debts contracted after the date of the death, insolvency or retirement.”

 

 

TOPIC 8: DISSOLUTION OF PARTNERSHIPS

Please read pages 44 and 45 of the Casebook on this subject. In this context please note that section 38 of the BC Partnership Act corresponds to Ontario Partnership Act section 35, and that section 47 of the BC Partnership Act corresponds to Ontario Partnership Act section 44:

 

Power of court to decree dissolution in certain cases

  1. (1) On application by a partner, the court may decree a dissolution of the partnership in any of the following cases:

(a) if a partner is declared under the <a href="http://www.bclaws.ca/civix/document/id/complete/statreg/96349_01">Patients Property Act</a> to be incapable of managing his or her affairs or if it is shown that a partner is, because of mental infirmity, incapable of discharging his or her duties as a partner;

(b) when a partner, other than the partner suing, becomes in any other way permanently incapable of performing his or her part of the partnership contract;

(c) when a partner, other than the partner suing, has been guilty of conduct that, in the opinion of the court, regard being had to the nature of the business, is calculated to affect prejudicially the carrying on of the business;

(d) when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with him or her;

(e) when the business of the partnership can only be carried on at a loss;

(f) whenever circumstances have arisen that, in the opinion of the court, render it just and equitable that the partnership be dissolved.

(2) If there are 3 or more partners, the partnership may be dissolved or may be dissolved as between the partner whose condition or conduct gave rise to the application and the remaining partners…

 

Settlement of accounts on dissolution

  1. Subject to any agreement, in settling accounts between the partners after a dissolution of partnership, the following rules must be observed:

(a) losses, including losses and deficiencies of capital, must be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits;

(b) the assets of the firm, including the sums, if any, contributed by the partners to make up losses or deficiencies of capital, must be applied in the following manner and order:

(i)   in paying the debts and liabilities of the firm to persons who are not partners;

(ii)   in paying to each partner rateably what is due from the firm to that partner for advances as distinguished from capital;

(iii)   in paying to each partner rateably what is due from the firm to that partner in respect of capital;

(iv)   the ultimate residue, if any, must be divided among the partners in the proportion in which profits are divisible.”

 

 

 

 

TOPIC 9: LIMITED AND LIMITED LIABILITY PARTNERSHIPS

 

 

         

 

Generally please read pages 45-57 of the Casebook on this subject as guided below as well as Part 6 of the BC Partnership Act (which is too long to replicate here).

 

  1. Limited Liability Partnerships (LLPs)

 

Part 6 of the BC Partnership Act permits certain professionals to practice in limited liability partnerships (LLPs), provided that the statute governing the profession in question expressly permits a limited liability partnership in the practise of the profession. This is obviously very important to many of us who practice law as it provides the most prevalent business structure for our profession.

It is section 83.1 of the BC Legal Professions Act that permits LLPs:

Law corporation rules

  1. (1) The benchers may make rules as follows:

(a) establishing procedures for the issue and renewal of permits;

(b) establishing procedures for revocation of permits, including

(i)   the adaptation of rules respecting practice and procedure in hearings before a panel, and

(ii)   rules to authorize a panel to consider action against a law corporation as part of a hearing on a citation issued against a respondent who is or was a shareholder, director, officer or employee of a law corporation;

(c) authorizing the executive director to attach conditions or limitations to permits issued or renewed under this Part;

(d) respecting names and the approval of names including the types of names by which the following may be known, be incorporated or practise law:

(i)   a law corporation;

(ii)   a partnership consisting of one or more law corporations and one or more lawyers;

(iii)   a partnership consisting of law corporations;

(iv)   a law corporation that has shareholders that consist of one or more law corporations or one or more practising lawyers, or both;

(e) setting fees for

(i)   obtaining a permit, and

(ii)   renewing a permit;

(f) respecting the disposition of shares of a shareholder of a law corporation who ceases to be a practising lawyer;

(g) setting an amount of insurance that the holder of the permit must carry or must provide to each of its employees or contractors for the purpose of providing indemnity against professional liability claims;

(h) any other rules the benchers consider necessary or advisable for the purposes of this Part”.

 

An LLP is an alternative to the general form of partnership.  As partner in an LLP you would not be liable for obligations of other partners or of the partnership to same extent as would otherwise be the case, unless those obligations result from your own actions or inaction.  If you haven’t personally incurred any debts, the most you would lose is your investment in the partnership. This means that personal and other assets not at risk. So you can be involved in running an LLPs partnership business, and be protected against claims for negligence or wrongdoing of your partners. That is to say that the partners in a limited liability partnership are not personally liable for the negligent acts or omissions of another partner or an employee unless the partner knew of the negligent act or omission and did not take reasonable steps to prevent it. Each partner is personally liable for his or her own actions, and the partnership continues to be liable for the negligence of its partners, associates and employees. Accordingly, there is no reduction or limitation on the liability of the partnership.

Note that the rules relating to limited partnerships require notification where a general partnership becomes an LLP.

If you are interested in subject Alberta Law Reform Institute Report 77 (1999): <a href="https://www.law.ualberta.ca/alri/index.php?option=com_mtree&task=viewlink&link_id=82&Itemid=69">Limited Liability Partnerships</a> can be found here: <a href="http://www.law.ualberta.ca/alri/docs/fr077.pdf">http://www.law.ualberta.ca/alri/docs/fr077.pdf</a>

 

  1. When Does a Limited Partnership Exist?

Limited partnerships are a distinct form of partnership which like a company, comes into existence by being created through an express action, being registration. That is a limited partnership cannot be implied. Like a company, it either expressly exists or does not exist.

Limited partnerships have two classes of partners; the General Partner(s), and the Limited Partner(s). Only the Limited Partners have the advantage of limited liability. The full liability of being an ordinary partner in a partnership attaches to the General Partner. The General Partner is often charged with the operational responsibility for the enterprise, however the statute on its face seems quite flexible. The crucial difference is that limited partners are not liable as a general partner unless they take part in the management of the business

 

 

Please read page 47 of the Casebook under this heading. Note that the BC provisions comparable to those of the Ontario Limited Partnerships Act referred to are contained in Part 3 of the BC Partnership Act. See, in particular sections 50 to 52 of the BC Partnership Act:

 

Limited partnership

  1. (1) Subject to this Part, a limited partnership may be formed to carry on any business that a partnership without limited partners may carry on.

(2) A limited partnership consists of

(a) one or more persons who are general partners, and

(b) one or more persons who are limited partners.

A.          Formation of limited partnership

  1. (1) A limited partnership is formed when there is filed with the registrar a certificate, signed by each person who is, on the formation of the partnership, to be a general partner.

(2) A certificate must state the following:

(a) the business name under which the limited partnership is to be conducted;

(b) the general nature of the business carried on or intended to be carried on;

(c) the full name and residential address of each general partner or, in the case of a general partner other than an individual, the name and address in British Columbia;

(d) the term for which the limited partnership is to exist;

(e) the aggregate amount of cash and the nature and fair value of any other property to be contributed by all of the limited partners;

(f) the aggregate amount of any additional contributions agreed to be made by limited partners and the times at which or events on the happening of which the additional contributions are to be made;

(g) the basis on which limited partners are to be entitled to share profits or receive other compensation by way of income on their contributions.

(3) A certificate may state the full name and last known residential address of a limited partner or, in the case of a limited partner other than an individual, the name and address in British Columbia.

(4) If a partnership agreement contains provisions respecting any of the following, the certificate filed in respect of that agreement must also contain provisions respecting those matters:

(a) the times when contributions of limited partners are to be returned;

(b) the right of a limited partner to substitute an assignee as contributor in his or her place, and the terms and conditions of the substitution;

(c) the right to admit additional limited partners;

(d) the extent to which one or more of the limited partners has greater rights than the others;

(e) the right of a remaining general partner to continue the business on the bankruptcy, death, retirement, mental incompetence or dissolution of a general partner;

(f) the right of a limited partner to demand and receive property other than cash in return for his contribution;

(g) the right of the limited partners or any of them to admit an additional general partner to the partnership or to permit or require a general partner to retire from the partnership.

 

General and limited partners

  1. (1) A person may be a general partner and a limited partner at the same time in the same limited partnership.

(2) A person who is at the same time a general partner and a limited partner has the same rights and powers and is subject to the same restrictions as a general partner but in respect of the person's contribution as a limited partner, the person has the rights against the other partners that the person would have had if he or she were not also a general partner.”

 

Note that section 50(1) explicitly provides that a limited partnership may be formed to carry on any business that a partnership without limited partners may carry on. However that still means we must ask the threshold question of whether the requirements (which we have discussed at some length in this Unit) of section 4 of the BC Partnership Act definition are satisfied. The seemingly simple rule is if it is not a partnership, it cannot be an limited partnership.

Note also that per section 52 of the BC Partnership Act one can be both kinds of partner.

Note that the relative rights of the General Partner and of the Limited Partners are enumerated in sections 56-58 of the BC Partnership Act:

 

Rights of general partners

  1. A general partner in a limited partnership has all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners except that, without the written consent to or ratification of the specific act by all the limited partners, a general partner has no authority to do any of the following:

(a) to do an act which makes it impossible to carry on the business of the limited partnership;

(b) to consent to a judgment against the limited partnership;

(c) to possess limited partnership property, or to dispose of any rights in limited partnership property, for other than a partnership purpose;

(d) to admit a person as a general partner or to admit a person as a limited partner, unless the right to do so is given in the certificate;

(e) to continue the business of the limited partnership on the bankruptcy, death, retirement, mental incompetence or dissolution of a general partner, unless the right to do so is given in the certificate.

 

Liability of limited partner

  1. Except as provided in this Part, a limited partner is not liable for the obligations of the limited partnership except in respect of the amount of property he or she contributes or agrees to contribute to the capital of the limited partnership.

Rights of limited partner

  1. (1) Subject to subsection (2), a limited partner has the same right as a general partner to do any of the following:

(a) to inspect and make copies of or take extracts from the limited partnership books at all times;

(b) to be given, on demand, true and full information of all things affecting the limited partnership and to be given a formal account of partnership affairs whenever circumstances render it just and reasonable;

(c) to obtain dissolution and winding up of the limited partnership by court order.

(2) The executive director may, in whole or in part, exempt a limited partnership from the rights granted under subsection (1) (a) or (b) or both if the executive director considers that it is in the public interest to do so.”

 

 

It is section 64 of the BC Partnership Act that establishes that a limited partner is not liable as a general partner unless he or she takes part in the management of the business. It does so in those exact words:

Liability to creditors

  1. A limited partner is not liable as a general partner unless he or she takes part in the management of the business.”

 

  1. The Legal Nature of a Limited Partnership

Please read pages 47-52 of the Casebook on the subject, including the decision in Kucor Construction v. Canada Life (1998) 167 D.L.R. 94th) 272 (Ont. CA) which deals with the constraints that can come into play in respect of limited partnerships.

The substance of the case is that Kucor Ltd., as general partner, and several corporations and individuals, as limited partners, created a limited partnership, Kucor Associates, to develop an apartment building on certain lands. Under the limited partnership agreement, the limited partners agreed to guarantee any loans required to purchase the land or finance construction, the guarantee to be limited to the amount of the limited partner's capital contribution.

Kucor Ltd. conveyed property to the limited partnership, Kucor Associates.  Kucor Associates purported to mortgage land in favour of a lender (Morguard), and each of the limited partners guaranteed the mortgage (but did not themselves join in the mortgage as a mortgagor).  The terms of the mortgage provided that it could not be prepaid before maturity in 2002.

In 1996 the limited partnership, Kucor Associates, claimed a declaration that it could redeem the mortgage – relying on a statutory provision that “any person liable to pay or entitled to redeem" a mortgage that is not redeemable until after five years has the right to prepay the outstanding balance after five years unless the mortgagor is a “corporation”.

The trial judge found that since Kucor Associates, the limited partnership, is not a legal entity capable of owning property, the mortgage must have been entered into by Kucor Ltd.  Accordingly Kukor Ltd. as a corporation could obviously not take advantage of a statutory prepayment right that was expressly not available to corporations.

On appeal Borins JA reached the conclusion that respected authorities are uniform in the view that a limited partnership is not a legal entity. This has been long accepted by Canadian and English law. No doubt, this is also why a limited partnership is required by law to have a general partner through which it normally acts:

“As Farley J. observed in the case of Re: Lehndorff  at 38, a limited partnership is a creation of statute. As such, had the legislature intended to create a new legal entity it is reasonable to conclude that it would have done so in the <a href="http://www.canlii.org/en/on/laws/stat/rso-1990-c-l16/latest/rso-1990-c-l16.html">Limited Partnerships Act</a>, as it did in <a href="http://www.canlii.org/en/on/laws/stat/rso-1990-c-b16/latest/rso-1990-c-b16.html#sec15_smooth">s. 15</a> of the <a href="http://www.canlii.org/en/on/laws/stat/rso-1990-c-b16/latest/rso-1990-c-b16.html">Business Corporations Act, R.S.O. 1990, c. B.16</a>, which provides that a "corporation has the capacity and the rights, powers and privileges of a natural person".

 

Which leaves us with the interesting question of how can a limited partnership, not being a legal entity, acquire or hold property?

 

Borins JA (see page 51 of the Casebook) found that to solve the problem the intent and purpose of the conveyance of property by Kucor Ltd. to the limited partnership, Kucor Associates, had to be determined. Borins JA found that Kucor Ltd. had acquired the property in trust for a limited partnership to be formed, and that the intent and purpose of the conveyance was to convey the land to itself as the general partner of the limited partnership. The difficulty, of course, was that the grantee should not have been the limited partnership as such. It should have been either the general partner, or all of the partners.

 

Based on this analysis the court took a functional approach to the transaction observing that the purpose of the deed was to regularize the commercial reality that the land was no longer solely the property of Kucor Ltd., “but was the property of the limited partnership, and that in its capacity as general partner, Kucor Ltd. held title to it on behalf of all the partners.” Accordingly the deed was not a nullity but “should be considered as a deed by Kucor Ltd. to itself in its capacity as general partner.”

 

Thus the appeal was dismissed because a corporation had given the mortgage. Given that the statutory provision permitting early redemption of mortgages did not apply as corporations, Kucor Ltd. did not qualify.

[Note that this decision was followed by Newbury JA in Asset Engineering LP v. Forest & Marine Financial Limited Partnership, 2009 BCCA 319  <a href="http://caselaw.canada.globe24h.com/0/0/british-columbia/court-of-appeal/2009/07/07/asset-engineering-lp-v-forest-and-marine-financial-limited-partnership-2009-bcca-319.shtml">http://caselaw.canada.globe24h.com/0/0/british-columbia/court-of-appeal/2009/07/07/asset-engineering-lp-v-forest-and-marine-financial-limited-partnership-2009-bcca-319.shtml</a> ]

 

  1. Limited Partnerships and The Issue Of Control

Please read pages 52-57 of the Casebook which include the decisions in Haughton Graphic Ltd. v. Zivot and Nordile Holdings Ltd. v. Breckenridge. Dealing with the tricky issue of who controls (and who doesn’t control) a limited partnership.

Notice, first, that the language of the two statutory provisions at issue in those cases are somewhat different from one another.

Zivot is concerned with the Alberta Partnership Act that says:

“A limited partner does not become liable as a general partner unless, in addition to exercising the limited partner’s rights and powers as a limited partner, he takes part in the control of the business.”

Nordile is concerned with the BC Partnership Act, section 64 of which says:

A limited partner is not liable as a general partner unless he or she takes part in the management of the business.”

The facts in Zivot were that Printcast Publishing Network was a limited partnership. An individual, Gary Zivot, who was the promoter of the Printcast Publishing Network limited partnership, also incorporated Lifestyle Magazine Inc. as its general partner. Gary Zivot and another individual named Marshall were two of the limited partners.

Nash was the President of the Plaintiff Haughton Graphic Ltd. who provided printing supplies.  Haughton sues Zivot and Marshall. Their defence was that under the statute they did not take part in the control of the business.

The evidence of “control” included:

  • Zivot introduces himself as Printcast’s 'President' (in print, magazine masthead, etc.) and Marshall as a ‘Vice President’.
  • Zivot & Marshall were the directing minds of Printcast, and essentially in complete control.

Zivot was found to be effectively liable as general partner

The facts in Nordile were that John Breckenridge and Hubert Rebiffe were minority shareholders and directing officers of the general partner Arbutus Management Ltd.” and of the limited partner “Arman Rental Properties Limited Partnership".

 

Nordile was 2nd mortgagee on property owned by Arbutus and Arman. Nordile didn't get paid after a foreclosure byby the 1st mortgagee CMHC and sought to hold Mr. Breckenridge and Mr. Rebiffe personally liable.

 

Nordile claimed:

  • Breckenridge and Mr. Rebiffe were in control of Arman's business, and accordingly should be liable as general partners.
  • Breckenridge and Mr. Rebiffe acted "solely in their capacities as directors and officers of the general partner, Arbutus."

 

The court found that Acting solely in one capacity necessarily negates acting in any other capacity." Mr. Breckenridge and Mr. Rebiffe were considered by the court to be merely minority shareholders of the general partner. To find otherwise would have been to ignore the principle that a corporation is a separate legal entity. The point being that if Mr. Breckenridge and Mr. Rebiffe were conceded to not be the directing minds behind  the actual general partner Arbutus Management Ltd., then how could they be held liable as if they are the general partners of the Arman Rental Properties Limited Partnership?

 

Can these decisions be reconciled?  How?

 

See also Sillwater Forest Inc. v. Clearwater Forest Products Ltd., 2000 SKQB 110 (CanLII), <a href="http://canlii.ca/t/1l888">http://canlii.ca/t/1l888</a>

As well you may wish to briefly refer to Donald, Limited Partnerships and the “Control” Liability of Limited Partners, [2007] Can Bus. Law J. 398.

 


Now please consider the example of the following agreement:

WHEREAS X and Y are co-owners of a men’s only barbershop located at ____________________, Ottawa, Ontario, operated under the trade name ”Z”;

 

          AND WHEREAS X and Y have decided to establish new work schedules and rules for the management and operation of the Business;

Business” means any business or businesses carried on by Z as may be deemed by the Partners to be in the best interest of Z and any other general business activities related or incidental thereto;

2.2    Y shall manage and operate the Business on Mondays, Wednesdays and Fridays of each week and any and all revenues from the Business on such days will be kept exclusively by Y.

2.3    X shall manage and operate the Business on Tuesdays, Thursdays and Saturdays of each week and any and all revenues from the Business on such days will be kept exclusively by X.

2.5    The Lease shall remain in the names of both X and Y for the duration of this Agreement.

2.6    Each party shall be responsible for the procurement and sale of his own hair-related products. Partners are not to sell any product that is not hair-related in the Business premises or under the Trade Name.

2.7    Each Partner shall keep the Business premises clean and well maintained during his days of management and operation.

2.8    Each Partner shall have the right to conduct separate advertising and promotional activities for his respective days of management and operation subject to the following

2.9    Each Partner shall be responsible for fifty percent (50%) of any and all obligations under the Lease.

2.10  Each Partner shall obtain his own H.S.T. and related tax registrations and shall be responsible to report to Canada Revenue Agency any revenues and remit any taxes as required by law.

Blog Activity 3.2

Please consider whether the above agreement is an example of a “partnership”? Please blog your views on this question and your reasons in less than two pages under the heading “Is it a partnership?”

 

UNIT WRAP UP:

Now armed with an understanding of the differences between partnership and companies, we can delve into the deepest of the differences, that when it comes to corporations the fiction of corporate personhood can result in considerable legal confusion as to who or what a company really is.