BUSINESS ORGANIZATIONS

PROFESSOR E. ARTHUR BRAID

1995-96

Outline by Casey Chisick

PART I: PARTNERSHIPS
(NOTE: All section references are to the Partnership Act, L.R.M. 1987, c. P30, unless otherwise
indicated)

A. SOLE PROPRIETORSHIP
· A sole proprietorship is the simplest form of business organization; one person owns the
business. In such an organization, there is no “business life” separate from the personal life
of the proprietor; personal creditors can seize business assets and vice-versa.

· There are no legal implications of a sole proprietorship other than the usual business
obligations: zoning, licensing, etc. Business and personal assets need only be separated for
tax purposes.

B. PARTNERSHIP

I. LEGAL STATUS AND FORMATION

· The English Partnership Act of 1890 represents the formal beginning of partnership law.
In fact, its contents were adopted in Canada and it generally remains the same in all
provinces with the exception of the introduction of limited partnerships.

· s. 2(2)
Rules of common law and equity remain in force notwithstanding anything in the Act.

· s. 22
The partners are free to define the terms of the partnership. Only if they subsequently
disagree does the Act come into play.

(1) WHAT IS A PARTNERSHIP ?

· A partnership is a consensual relationship. Fundamentally, THERE MUST BE A

PARTNERSHIP AGREEMENT! This is a contract, which may be either express or
implied. Like any contract, it will confer certain rights, duties and liabilities on the parties.

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· s. 3
A partnership must include...
(a) A relationship between persons
(b) The operation of a business
(c) A view to profit
(d) Ownership in common
Moyen v. Frost (78) Beauty Supplies Ltd. (1993) 88 Man. R. (2d) 105 (Man. C.A.)
· M, a sole proprietorship, and F, a corporation, combined their businesses. M transferred
all his assets to F and expected to carry on business together, but F generally ignored him
and allowed him no input in running the business. M sued for dissolution of partnership,
asking that the assets be divided, but F argued that M was never supposed to be anything
more than an employee.
· Was M a partner?
· At trial, held, that there was a partnership because there was a business in common.
· On appeal, held, that there was NO partnership because there was no partnership
agreement. The two parties had never agreed on the specifics of the partnership; there was
no partnership agreement. Therefore, M received only an accounting of the assets turned
over by him, not an accounting of profits, etc.

· It’s a matter of substance, not form. The courts, in determining whether an

arrangement is a partnership, will look for the real intentions of the parties, examining all
relevant circumstances. No formality is required; conduct of parties may be sufficient to
indicate partnership.

Fenston v. Johnstone (1940) 23 Tax Cases 29

· A advanced money to B for the purpose of buying land. B agreed to develop the land and
that the profit realized would be divided equally between them. The actual agreement,
however, specified that the relationship was not a partnership (i.e., A didn’t want to be
responsible for B’s debts).
· Held, that a partnership existed between A and B notwithstanding their agreement to the
contrary. All the elements of partnership were satisfied, and in particular there was an
agreement to share profits and/or losses. The substance of the agreement spelled
“partnership,” and no disclaimer to the contrary could change that.
· BRAID’S WISDOM: Don’t be fooled into thinking that the partnership was for the purposes of third
parties only (i.e., because this was a tax case). Either there is a partnership or there isn’t, and it wouldn’t
matter if the parties were suing each other (as opposed to a tax case).

M.N.R. v. Shields (1962) 62 D.T.C. 1343 (Ex. Ct.)

· Father owned a construction company and entered into a formal “partnership agreement”
with his 16-year-old son. This entailed splitting the income, in order for the father to avoid
tax. In fact, for the nine years the agreement applied, the father received all the income and
the son was not an active participant in the agreement.
· Held, that this was not a bona fide partnership. The actions of the parties were
inconsistent with there being a true partnership, and no formal agreement could change the
facts.

Sedelnick Estate v. M.N.R., [1986] 5 W.W.R. 660 (T.C.C.)

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· Both husband and wife had been involved in working on a farm. On H’s death, his
executor claimed that the farm had been a partnership.
· Held, that because the facts pointed equally to a spousal relationship or a partnership,
and because most farm relationships are similar to this one without any intention to create
a partnership, in the absence of evidence of a partnership agreement, this was no
partnership. The involvement of both parties alone was not enough.

· In husband and wife relationships, or in other questionable partnership arrangements,

other factors may require consideration:
· Who made the decisions?
· Who maintained control?
· Whose money was contributed initially? (this especially in husband/wife situations)

· There must be evidence of intention that ownership be in common.

Re Zamikoff v. Lundy (1970) 9 D.L.R. (3d) 637, aff’d 19 D.L.R. (3d) 114 (S.C.C.)
· Partnership agreement existed between A, B, C and D respecting land which was
mortgaged. It provided that any partner who defaulted on a payment forfeited his interest.
After the agreement was signed, the land was put in the names of A, B, C, D and X, a
corporation controlled by D and which paid D’s expenses. X subsequently defaulted on its
payments, but argued that its interest had not been forfeited because the agreement was
binding only on D.
· Held, that there had been a “novation” — X had become a partner in place of D. The
actions of the parties belied X’s claim; all had treated X as a partner in their dealings.
Thus, X had forfeited its interest, as per the agreement. No formal document was
necessary to convince the court of the novation; the agreement was altered by implication.

(2) CHARACTERISTICS OF A PARTNERSHIP

(a) Aggregate, not entity

· A partnership is not an entity unto itself, like a corporation; it is merely an aggregate of
individual partners. A partnership has no existence at law outside the parties to the
relationship. That is, the parties and the partnership are one and the same.
· e.g., if Partner A leases a building to Partnership AB and AB defaults on the rent, A
can’t sue AB — he’d be suing himself!

Re Unical Properties et al. (1991) 73 D.L.R. (4th) 761 (Ont. Q.B. Gen. Div.)
· One partner did not pay his share in a land development deal. The partnership tried to
sue him.
· Held, this couldn’t fly — a partnership can’t sue a partner because in effect, that’s a
partner suing himself. The proper route would have been for one partner to sue the other
for breach of partnership agreement.

Robert Porter & Sons v. Armstrong, [1962] S.C.R. 328

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· Held, a partnership is not a legal entity, although the fact that the assets of a partnership
are not divisible in specie and are only available to partners upon dissolution might tend to
point toward its being so.

Seven Mile Dam Contractors v. R. Right of British Columbia (1979), 13 B.C.L.R. 137
(B.C.S.C.)
· A and B were already partners in AB and decided to form a second partnership with X
and Y in which each partner would own 25%. The assets of AB were to be transferred to
ABXY. When the province assessed tax on the full value of the assets, AB objected,
arguing that half the assets were merely being transferred to itself and that only 50%
should therefore be taxable. The province countered that the partnership AB was different
than A and B individually because the definition of “person” in the Interpretation Act of
B.C. included “partnership.”
· Held, the partnership and the partners were one and the same for the purposes of
taxation. A statute of general application ought not to reverse the well-established and
specific common law principle to this effect. Only 50% of the assets were taxable.

Geisel v. Geisel, [1990] 6 W.W.R. 7 (Man. Q.B.)

· Partners in a farming operation built a pit in a barn but installed no guard rail. One farmer
fell in and was killed, and his estate sued the other partner in negligence.
· Held, because the estate sued a partner and not the partnership, this was not a case of a
partner suing himself. It was as if one partner (or, in this case, his estate) was suing
another partner for breach of duty of care, which is a perfectly acceptable cause of action.

(b) Unlimited personal liability of each partner

· s. 12
Joint and several liability of all partners for all debts.

· s. 13
Liability of firm for torts committed by partners while acting in the course of the business
of the firm.

(c) Non-transferability of a partner’s interest

· s. 22
Terms of partnership may only be varied by unanimous consent of partners.

· A partner can assign his interest in the partnership, but not in the partnership’s property.
Partners only have the right to receive a share of the liquidated assets upon dissolution,
once all of the firm’s debts have been satisfied, s. 42, infra.

(d) Control by all the partners — s. 27

(e) A partnership itself can be a partner — s. 7

(f) Distribution of partnership assets

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· s. 42
On dissolution of a partnership, every partner can insist that the assets of the partnership
be used to satisfy the debts and liabilities of the firm.

· In other words, partnership assets are treated as separate from the partner’s personal
assets, so in this respect, the partnership is treated as separate from the partners. Personal
creditors of a partner will have to wait until the partner receives his personal share; they
have no claim to the partnership assets.

(3) ELEMENTS OF A PARTNERSHIP

(a) “Between persons”

· This refers to legal “persons” — note definition in s. 1

· Although s. 1 includes “partnership” in the definition of “person” under the Act, this is
only for the purposes of the act. This is not a change to the common law, and a partnership
still cannot sue a partner or vice-versa.
· BRAID’S WISDOM: This was probably done by mistake, anyway, as an overreaction to the concern
that partnerships would be found not to be able to be parties to contracts (for tax purposes). That should
have been taken care of by s. 7, which allows firms to be parties to partnership agreements, but you know
those goofy legislators...
· However, note that Rule 8 of the Queen’s Bench Rules allows a partnership, as opposed
to its individual partners, to sue and be sued in its own name.

(b) “Business”

· This is different than joint ownership...

· s. 1(a) — “Business” includes “every trade, occupation or profession.”

· s. 35(1)(b) — Business may include “a single adventure or undertaking.”
· s. 4 — Co-ownership does not itself create a partnership (thus implying that this
is not a “business”)

French v. Styring (1857), 2 C.B. (N.S.) 357

· Two people owned a horse jointly, dividing between them the expenses and profits of
racing it.
· Held, this was not a partnership, as there was no “business.” It was merely the joint
ownership of property.

Walsh v. M.N.R., [1965] C.T.C. 478 (Ex. Ct.)

· Two lawyers owned an apartment block jointly and were taxed as partners, but they
argued that there was no business, just a passive receipt of rents, so it couldn’t be a
partnership.
· Held, there was no partnership. Passive receipt of rents cannot itself constitute a
partnership.

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Volzke Construction v. Westlock Foods, [1986] 4 W.W.R. 668 (Alta. C.A.)
· The owner of a shopping centre approached W as a potential tenant, but W insisted on
becoming a 5% owner of the mall. W agreed to allow the owner full authority over the
management of the mall. V was hired to expand the mall and the owner defaulted on the
payment, so V sued W as a partner in the mall. W argued that it wasn’t a partner because it
had no say in the business.
· BRAID’S WISDOM: Strangely, W never argued that there wasn’t a business — assumed there was one
because of the commercial character of the operation. In fact, co-ownership is not enough. Had it been
argued, it probably would have been found that there was no partnership because there was no business!

A.E. LePage v. Kamex Developments Ltd. (1977), 78 D.L.R. (3d) 222 (Ont. C.A.); aff’d
[1979] 2 S.C.R. 155
· A syndicate owned an apartment block as co-owners, with a written agreement
stipulating this and explicitly stating that the arrangement was not a partnership. They
decided to sell the building and agreed not to give an exclusive listing to any agent, but
one of the co-owners did so anyway.
· Was this a partnership? If so, the rogue co-owner’s word could be binding on the
others... [BRAID’S WISDOM: Nonsense! No one partner has the authority to sell the partnership’s only
asset!]
· Held, there was no business and therefore no partnership.

· Middle ground between co-ownership and partnership: JOINT VENTURE, which is

less than a partnership but leads to additional legal responsibilities.

(c) “Carried on in common”

· In other words, the partners must co-own the business. This does not mean that their
shares must be equal, only that each must have a portion.

(d) “View to Profit”

· s. 4(b)
The sharing of gross returns does not itself create a partnership. (Thus, franchises are not
partnerships, prima facie) In other words, there must be sharing of profits.

· “Profit” in this sense means “net profit” — money, net benefit, advantage, etc. — or, in
other words, something left over to divide among the co-owners.
Hayes v. B.C. Television Broadcasting System, [1993] 2 W.W.R. 749 (B.C. C.A.)
· A promoter and BCTV, a TV station, entered into an agreement to co-produce a game
show, whereby BCTV would provide production facilities in return for Canadian
distribution rights and the promoter would produce the show and pay out prizes in return
for international distribution rights. Their written agreement stated that the arrangement
was not a partnership. The promoter never paid out and disappeared, and H, a contestant,
sued BCTV. BCTV argued that it was not liable, as the arrangement was not a
partnership.
· Held, this was not a partnership. The parties were sharing benefits and the gross product,
but there was no mechanism for sharing profits. Also, there was no co-mingling of funds,
no common bank account, no firm name, etc. — nothing in common at all.

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· BRAID’S WISDOM: If it wasn’t a partnership, what was it? A joint venture? Don’t try copping out on
an exam by saying only that it wasn’t a partnership; you must identify what it is.

Waugh v. Carver (1793), 2 126 E.R. 525

· NO LONGER GOOD LAW; stood for the proposition that sharing of profits is a
conclusive test of partnership. Now it’s only prima facie proof.

· s. 4(c)
“The Rule in Cox v. Hickman”
Sharing of profit is prima facie proof of partnership, but does not itself make a person a
partner in the firm. In particular:
(i) Receipt by a person of a share of a firm’s profits in satisfaction of a debt does not
make him a partner in the firm.
(ii) An employee who receives a share of profits as an incentive bonus or otherwise
is not necessarily a partner.
(iii) A surviving spouse or child of a partner receiving an annuity out of profits is not
necessarily a partner.
(iv) A person who has lent money to a partner or partnership and receives a share of
profits in satisfaction of that debt is not by that receipt a partner.
(v) A person who receives a share of profits in consideration of selling the goodwill
of the business is not necessarily a partner.

Cox v. Hickman (1860), 8 H.L. 268, 11 E.R. 431 (H.L.)

· Two partners were carrying on an insolvent business, and creditors convinced them to
turn the business over to trustees. The trustees weren’t any more successful, and there
were new creditors when the business failed again. The new creditors attempted to go
after the old creditors, arguing that the latter had become partners as of the time the
business was turned over to the trustees and the old creditors agreed to receive profits in
satisfaction of their debts.
· Held, the creditors were not partners. The payment of debts to the old creditors was only
in satisfaction of the liabilities of the original owners. Although receipt of profits is prima
facie proof of partnership, it is only that; it is not conclusive proof. Coupled with sharing
of losses, it might be more conclusive.
· BRAID’S WISDOM: How is this “sharing of profits ”? Aren’t the creditors just getting what they’re
owed, if from an alternative source? Profits can only be calculated after debts are paid, so there’s no
sharing of profits! Jesus Murphy!

· BRAID’S WISDOM: Could there still be a partnership even if there is no sharing of profits, if the
partnership agreement so provides? (No sharing, but there is still a view to profit..) The Dean doesn’t
know the answer but suspects that there would have to be some sharing, at least for tax purposes.

Northern Sales (1963) Ltd. v. M.N.R. (1973), 73 D.T.C. 5200 (F.C.C.)

· In an attempt to insulate themselves from price fluctuations, canola traders agreed to
share in each other’s profits and losses at the end of the year. There was also a consulting
arrangement for international sales, but otherwise they were in competition; there was
nothing else in common.
· Held, there was a partnership. Sharing of profits is prima facie evidence of this, and
coupled with sharing of losses, well, say no more!

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· BRAID’S WISDOM: Yes, sharing of losses is important evidence of partnership, but only when coupled
with sharing of profits.

No. 41 v. M.N.R., [1952] 4 D.L.R. 551 (Ex. Ct.), especially at pp. 558-559
· Partners in a law firm wanted their shares to accrue to their wives and daughters on their
deaths. For tax reasons, they set up an arrangement by which widows of partners were
given the option to become partners in their husbands’ places. If they chose not to accept,
they received nothing. M.N.R. argued that this was not a true partnership, as the widows
added nothing to the firm and thus there was no consideration.
· Held, there was a partnership. The actions of the parties were governed by the
agreement, which was drafted by knowledgeable professionals and ought therefore to be
given effect, and the widows would potentially be sharing in losses as well as profits. It
was of no relevance that the widows would not contribute anything to the partnership.

(4) ALTERNATIVES TO PARTNERSHIP

(a) Debtor-Creditor

· Someone who has merely lent money to a firm is not for that reason a partner. This is
sometimes a difficult distinction to make. For example, suppose X lends money to his
brother-in-law, Y, and accepts, in lieu of 20% interest, a 20% share of whatever profits are
earned by the video store Y is opening with that money. There may be other stipulations;
X may demand repayment within a certain number of years, or may require that Y draw no
great salary from the business until X is repaid, etc. Does this arrangement make X a
partner (any more so than a lender who was making similar demands but earning interest
instead of a share of profits)?

(i) S. 4(c)(iv): Profit-sharing lenders

· Recall: s. 4(c)(iv) stipulates that a borrower-lender relationship of this type is not a

partnership, without something more (i.e., other evidence).
· The onus is on the lender, though, to prove that the advance was a loan and not an
advance of capital, which would make him a partner. Also, if there was contemplation of
sharing losses, that would make a partnership more likely.

Pooley v. Driver (1876), 5 Ch. D. 458 (C.A.)

· Formerly, s. 4(c)(iv) was enshrined in Bovill’s Act, and simply stating that a loan was
being made under that Act was sufficient to release the lender from partnership
responsibilities. In this case, a partnership needed to raise £30,000 and decided to do this
by creating 60 units, at £500 each, reserving 40 for the existing partners and selling the
remaining 20.
· Each purchaser would receive 1/60 of profits and would have the right to inspect the
books, compel the money to be used in the business, etc. There was an arbitration clause
to govern disputes, and if a unit-holder went bankrupt, he would be bought out and the
unit cancelled.

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· If on dissolution there was not enough money to pay the other creditors, the unit-holder
would be required to repay any dividends already received in excess of £500, to a
maximum of £500.
· This was all done, supposedly, under Bovill’s Act.
· Held (per Jessel M.R.), that these “unit-holders” were not lenders but partners. Forget
about the Bovill’s declaration; all indications are that this is a partnership. Aside from the
factors common to both a partnership and a debtor-creditor arrangement, other unique
factors (e.g., the absence of a repayment schedule, contemplation of repayment of some
dividends, calculation of return on loans on an equivalent-to-profit basis, concern about
unit-holders’ financial situations) pointed to the existence of a partnership.

· BRAID’S WISDOM: s. 4(c)(iv) includes the words “if the contract is in writing.” However, the absence
of writing is probably not enough to make the arrangement a partnership. Recall that s. 2(2) leaves the
rules of common law and equity in force, and the common law does not require that a valid contract be in
writing. In other words, says E.A.B., you may still be OK with an oral contract — it alone will not, in all
likelihood, make a lender a partner.

Re Canada Deposit Insurance Corp. & Canadian Commercial Bank (1990), 69 D.L.R.
(4th) 1 (Alta. C.A.)
· CCB was failing and several other banks combined their efforts to save it by buying its
bad debts, thus giving it an infusion of money. The banks would thus be repaid for debts
owed to them by CCB by collecting on the bad accounts. There was also a provision
giving the banks the right to CCB profits at a later date, as well as the option to convert
the debts into equity shares of CCB at any time in the future. The bank still failed, and the
question for the court was where the “rescuer” banks stood with respect to the insolvency:
did the arrangement constitute a loan or an advance of capital?
· Held, that the other banks were not partners in CCB. There is clearly a difference
between sharing profits and merely receiving repayment of debts out of profits. There was
no benefit to the lenders other than the repayment of debts actually owed. The banks were
not s. 4(c)(iv) lenders, either; rather than receiving a share of the profits (or a rate of
interest contingent on profits), the profits were merely the source from which they were
receiving money owed to them.
· Note: The court also rejects the argument that a contingent right to become a partner is
equivalent to actual partnership.

· s. 5
When a person becomes insolvent, or enters into an agreement to pay creditors less than
100 cents on the dollar, or dies insolvent, a lender under the terms of s. 4(c)(iv) has his
rights deferred to those of all other creditors. A s. 4(c)(iv) lender stands in line until all
other debts are satisfied.

Sukloff v. A.H. Rushforth & Co. Ltd. (1964), 45 D.L.R. (2d) 510 (S.C.C.)
· Financier X makes three advances to a group of companies, B:
· (1) $35,000, with security on one asset (i.e., mortgage), 10% interest and 10% of
profits while the loan is outstanding.
· (2) $10,000, in return for another 5% profits but no security.
· (3) $20,000, repayable on demand, with no interest provisions.
· What is X’s position when the business becomes insolvent, having repaid nothing to X
and with many other creditors waiting?

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· Held:
· (1) X is still a s. 4(c)(iv) lender, but because of his having taken security on the one
asset, X is first in line for that asset and consequently for the satisfaction of his
debt. (Note, though, that if the security had been redeemable at less than
$35,000, X would have had to stand in line for the remainder.)
· (2) Sharing profits doesn’t make X a partner, but he is a s. 4(c)(iv) lender, and
without security, he has to wait in line behind all other creditors.
· (3) No obligations under s. 4(c)(iv); equal rights to other creditors (see s. 47).
· BRAID’S WISDOM: Section 5 should send a clear message to lawyers: Never advise a client to lend
money in return for a share of profits only; without some security, you’re nowhere, man.
(b) Joint Venture

(i) Elements of a joint venture

(1) Contribution by each co-venturer of money, property, effort and/or skill to a common
effort.
(2) Joint interest of all co-venturers in the venture.
(3) Usually a purpose limited in time and in scope; not generally an ongoing effort.
(4) Each co-venturer has some element of control over the project.
(5) Agreement to share in profits and/or losses. “Profit,” though, is defined more broadly
than in partnerships and can include any advantage or gain. Also, unlike in a
partnership, each co-
venturer can profit in a different way.
(6) There need not be a “business,” per se.

Dollar Land (1995, British case)

· Financier lent money to a developer, who used it to construct a building which he then
leased to the financier. The financier leased the building back to the developer, who rented
out office suites. The rent owed by the developer was paid partially through a share of
gross rents paid by sub-tenants of the suites. Court was asked whether the parties were
partners by virtue of this “joint venture.”
· Held, there was no joint venture, because a joint venture is essentially the same thing as a
partnership, which there definitely was not in this situation. There was no sharing of
profits, only gross receipts, no sharing of losses, and no mutual agency agreement.
· NOTE: This is not necessarily the Canadian position.

Shuckett v. Lockhart and Kyle (1932), 40 Man. R. 344 (Man. C.A.)

· L entered into an agreement with K, a contractor, whereby K would build a house on the
lot and would be paid with a share of the profits when the house was sold. In the process
of construction, K failed to pay S, a supplier. While K was clearly liable, due to privity of
contract, what was L’s liability?
· Held, that L was not liable for the contracts of K because there was no business and
therefore no partnership. The question of a joint venture was not even considered,
probably because of the British position that a joint venture must comply with the same
standards as a partnership.

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· Somewhere between the British position, which holds that a joint venture is nothing but
a type of partnership, and the U.S. position, which holds the joint venture as a separate
type of structure, is the Canadian position, which hasn’t really decided what to make of a
joint venture...

· s. 35(1)(b)
A partnership formed for a single purpose or undertaking is dissolved by the expiration of
that purpose or undertaking.
· But isn’t this a joint venture? Why is it being called a partnership?

(ii) Liability of joint venturers

C.M.H.C. v. Graham (1973), 43 D.L.R. (3d) 686 (N.S.S.C.)

· CMHC’s mandate was to assist in the construction of low-rental housing for Canadians.
Often, developers who owned land would approach CMHC, which would provide funding
and take a mortgage, provided that the projects conformed to the CMHC standards and
mandate. In this case, however, CMHC sought out land owners to construct homes
according to an existing plan. The homes were not constructed well, though, and the
developer refused to repair them. The tenants stopped making mortgage payments to
CMHC.
· Is CMHC liable for the misdeeds of the developer?
· Held, this is a joint venture, and the court seems to adopt the American view that joint
ventures are different in law than partnerships. This was more than a mere borrower-
lender relationship, because CMHC went too far by providing the idea and the initiative.
The developer was no more than an agent for CMHC. However, there was no partnership,
either, as there was no agreement to share profits and losses and no business was being
carried on. However, there is liability for the misdeeds of one’s co-venturer.
· NOTE: Graham also stands for the proposition that there need not be actual division of
profits to qualify an arrangement as a joint venture, but that a view to gain is sufficient.

· With respect to its main ratio, Graham was confined to its peculiar facts in Northern
Electric Co. Ltd. v. Manufacturers Life Insurance Co. (1974), 53 D.L.R. (3d) 303
(N.S.C.A), and Northern Electric Co. Ltd. v. Frank Warkentin Electric Ltd. (1972), 27
D.L.R. (3d) 519 (Man. C.A.), and there has never been another similar case.

· BRAID’S WISDOM: Hopefully, Graham is just a wrongly-decided anomaly. Otherwise, for example,
BCTV would be responsible for the promoter’s misdeeds in Hayes v. BCTV, supra.

· In general, the law is unclear on the liability of joint venturers for each other’s contracts
made with respect to the venture. One approach might be to look for an agency
relationship (see Shuckett, supra), but there are no easy answers to this question.

(iii) Joint liability of joint venturers

· Joint liability: All defendants must be joined in the same action. All those who might
otherwise be liable but are not named in the action are released from liability once a
judgment is rendered.

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· Several liability: All potential defendants may be sued separately without consequence
to other defendants.

· In Manitoba, partners are liable jointly and severally, by s. 15 of the Act. In all other
provinces, though, liability of partners is joint only.

Miller v. First City Development Corp. Ltd. (1987), 35 B.L.R. 278 (B.C. Cty. Ct.)
· Held, that liability of joint venturers is joint, not joint and several.

(iv) Obligations between joint venturers

(1) Fiduciary duty owed by each co-venturer to the other(s), which is no different than the
fiduciary duty owed between partners (requires full disclosure, good faith, etc.)
(2) Each joint venturer is the agent for the other(s) and is liable for contracts made by the
other(s) on matters related to the venture.

Hogar Estates Ltd. v. Shebron Holdings Ltd. (1980), 101 D.L.R. (3d) 509 (Ont. H.C.)
· Parties co-owned land on which they intended to construct a parking lot. When they
were unable to get the appropriate zoning, S offered to buy H out, but during the course
of negotiations discovered that the zoning change would be approved. S didn’t tell H, and
they completed the transaction at a purchase price which was unacceptably low in light of
the changed circumstances. H sued, arguing that the arrangement was either a partnership
or a joint venturer and that in the result, S owed H a fiduciary duty which was breached.
· Held, this was not a partnership (no business), but it was a joint venture. S therefore
breached its fiduciary duty to H. Good faith and full disclosure were required, and as a
result of their absence, the contract of sale was set aside.

· BRAID’S WISDOM: Joint ventures may also be different from partnerships in the sense that joint
venturers may be authorized to act in a particular way while not binding co-venturers. This would be most
likely in a case where this provision was clearly set out in the agreement (whereas such a provision in a
partnership agreement could not supersede the Act with respect to third party claims).

(v) Active and passive joint venturers

· In a case where there is only one active joint venturer and several passive ones, all are
probably liable equally for contracts entered into by the active venturer on behalf of the
others. The active joint venturer has several duties toward the others:

(1) A fiduciary duty is owed by the active joint venturer to the passive ones.
(2) The active joint venturer cannot compete against the passive venturers.
(3) The active joint venturer cannot take advantage of opportunities presented in the
course of
business for his own purposes.
(4) The active joint venturer cannot buy or sell the venture’s assets.

12
 (5) The active joint venturer cannot delegate management functions.

(5) CREATION OF PARTNERSHIPS

(a) Capacity

· As partnerships are governed by partnership agreements, the capacity to enter into such
an arrangement is governed by the ordinary law of contracts.

Loyell Christmas v. Beauchamp, [1952] Ex C. R. 516

· Goods were supplied to a firm in which one of the partners was an infant.
· Held, that a simple judgment could not be obtained against the firm; the judgment must
be against the partners other than the infant partner.
· Note that infants are able to enter partnership agreements, but these will be voidable at
the instance of the infant once s/he reaches the age of majority.

Imperial Loan Co. v. Stone, [1892] 1 Q.B. 599

· Held, that in order to escape from a partnership agreement on the grounds of insanity, it
must be proven that the person in question was insane at the time the contract was made
and that at such time the insanity was known to the other party.

(b) Registration

· A partnership exists whether or not it is registered under the Business Names

Registration Act (although the same is not true of limited partnerships, infra). Still, s. 2 of
the Act requires partnerships to register under the Act. The purpose of the B.N.R.A. is to
protect the public interest by providing a mechanism for the public to discover the owners
of businesses.

· s. 2(1), B.N.R.A.
The following must register under the Act:
(a) Any person or firm carrying on business under a name other than the personal or
corporate name of the owner of the firm.
(b) Any partnership carrying on business.
(c) Any firm whose name indicates multiple owners.

Reference Re: B.N.R.A., [1991] 4 W.W.R. 193 (Man. C.A.)

· Held, that if a firm doesn’t place the word “Ltd.” after its business name, it is not
carrying on business under its corporate name and thus must register, pursuant to s. 2(1)
(a) of the B.N.R.A.

· s. 20, B.N.R.A.
Failure to register under the Act without reasonable excuse will result in a fine not
exceeding $500.

· The following must be registered under the B.N.R.A. as well, and will be published in the
Manitoba Gazette:

13
 · Change in membership, s. 4(1)
· Change in business name, s. 4(2)
· Dissolution of partnerships, s. 4(3)

· Registration must be renewed every three years.

· s. 12(i), B.N.R.A.
Names cannot be registered which are similar to other business names, whether or not
registered under the B.N.R.A. or any other act. (The key question is whether or not the
public would be misled by allowing the name to be registered.)

· Although the B.N.R.A. is not intended to grant proprietary rights over business names, it
is often the first line of attack for someone wishing to assert such a right. For example, if a
longstanding business is suddenly challenged by another business with a similar name, the
fact that the public could be misled would be a prominent argument in trying to block
registration of the similar name.

(c) Illegal Partnerships

· s. 37
A partnership is automatically dissolved if it becomes illegal to carry on the business of the
firm or for the members to carry on business in partnership. (Note that this does not mean
that partnerships are dissolved merely by reason of the perpetration of an illegal act; it
must have become illegal for the partnership to exist at all!)

· It follows from the above that a partnership cannot be formed for an illegal purpose. This
is also consistent with the law of contract — courts will not enforce contracts made for
illegal purposes.

Everet v. Williams (1725), 9 L.Q.R. 197

· “The Highwaymen’s Case”: One highwayman sued another for an accounting of the
“profits” they “acquired.”
· Held, that the courts would not enforce this agreement, and both parties were actually
hanged (and the plaintiff’s lawyer was arrested).

Monroe v. Clarke et al. (1977), 1 B.L.R. 137 (N.S.S.C.)

· A contractor, M, built a tavern owned by C. When C couldn’t pay, he made M a silent
partner. There was a falling out and M sued for an accounting of profits. C argued that it
was an illegal partnership, as the Liquor Control Act states that all partners must be listed
on the liquor licence, and M, as a silent partner, was not listed as such.
· Held, that the partnership was illegal and the agreement would not be enforced. M knew
that the arrangement contravened the L.C.A. The sale of liquor was the very foundation of
the business, so now the nature of the business had become the illegal sale of alcohol.

Maksymetz v. Kostyk, [1992] 2 W.W.R. 354 (Man. C.A.)

· Similar facts and holdings to Monroe.

14
II. PARTNERS AND THIRD PARTIES

(1) GENERAL OBLIGATIONS

(a) Unlimited Liability

· Recall that s. 13 of the Act makes every partner jointly and severally liable for the
wrongful acts and omissions of every partner acting in the ordinary course of the business
of the firm, with the authority of the other partners. This is a question of fact.

(b) Agency and Contractual Liability

· If a partner has the actual authority of his co-partners, any contracts he makes will be
binding on the firm regardless of whether or not the third party knows of that authority.

· s. 8
If a partner makes a contract that is within the usual course of the partnership business,
there is apparent authority. The contract will be binding on the firm, unless the partner has
no such authority and the third party with whom the contract was made either knew that
the partner had no authority or did not know or believe him to be a partner. This is based
on estoppel — one can’t retract a representation once it’s been acted upon.

· In general, every partner is both the principal of the firm and the agent of his co-partners
with respect to carrying on the business of the firm. In agency law, an agent can bind his
principal in respect of a third party only when a representation of the agent’s authority has
been made by the principal. However, when an agent is appointed — even without an
explicit declaration to third parties by the principal — that agent has the apparent
authority to do what is expected of a person in that position.

· Even if the actual authority is something less than the apparent authority, the third party
can safely act on the latter, provided the following questions are answered appropriately:
1. What is the usual course of business of the firm?
2. What is the position of the agent in the firm?
3. What would be the usual scope of authority of a person in that position?
In the case of partnership, a partner is both the agent and the owner — so third parties can
safely assume that the partner can do himself whatever the partnership can do.

· Recall that if the third party knows that the partner has no authority in a given situation,
the firm can escape liability. This “knowledge” requirement is an objective test, i.e.,
“knows or ought to know.” This can also include wilful blindness; the question is what the
reasonable person would expect or suspect.

· The beliefs of the third party are also of concern to the law, such that if the agent
doesn’t explicitly tell the third party that he is a partner, the partnership may still be liable
if the agent led the third party to that conclusion somehow and if the transaction was
within the normal scope of the partnership business (although a strict, Harvey-esque

15
reading of s. 8 would suggest that the firm would not be liable, as this would not be
knowledge but mere belief).

Mercantile Credit Co. Ltd. v. Garrod, [1962] 3 All E.R. 1103 (Q.B.)
· G and a partner operated a parking garage and minor repair service. Their partnership
agreement stipulated that they would not buy or sell cars as part of the business, and
although they had done so on occasion, this was not part of the ordinary course of
business. G’s partner sold a customer’s car to MCU and ran off with the proceeds. Was
the firm liable?
· Held, the firm was liable. The phrase “business of the kind carried on by the firm” can be
interpreted to mean “...by firms of this type,” and it was not unusual for this type of
company to sell cars. It’s an objective test, which is ultimately aimed at the protection of
innocent third parties, who would not generally know whether a firm has chosen to carry
on a certain type of activity.

Sabbaugh v. Rawdah (1978), 16 A.R. 326 (S.C.)

· While R was away, S, his partner, sold the partnership business as a going concern. He
did not inform his absent partner of the transaction.
· Held, that the sale was not binding on R, as it is not within the usual course of business
to sell the entire business.

(c) Liability in Tort

· s. 13
If a tort is committed by a partner while acting in the ordinary course of business or with
the authority of the other partners, the firm and all the partners will be liable.

· The test of “ordinary course of business” here is a subjective one: what is the ordinary
course of business for this particular firm, not for other firms of its type (unlike the
objective s. 8 test, as in Mercantile Credit, supra).

Hamlyn v. John Houston & Co. (1903), 1 K.B. 81 (C.A.)

· A partner bribed a competitor’s clerk to get certain confidential information. The other
partners didn’t know this was happening. When the competitor sued, the partnership
argued that it was not liable, as the partner’s actions were outside the normal course of
business.
· Held, the partnership was liable. It is within the ordinary course of business to gather
information about competitors, and although the errant partner’s actions were unorthodox,
liability for his actions still attached.

Victoria & Grey Trust Co. v. Crawford [Feb. 6, 1987, Lawyer’s Weekly]
· A clerk of the firm defrauded a client for his own personal gain.
· Held, the firm was liable notwithstanding that it did not profit from the fraud.

· Note that the partnership agreement often provides for a system of compensation among
partners if one of them commits a tort and the firm is held liable.

(d) Estoppel

16
· s. 17
The “holding out” doctrine: If a person represents himself or permits himself to be
represented to the public as a partner, he will be liable as a partner, to anyone who gives
credit to the firm on the strength of that representation. Again, this is based on estoppel
and the protection of innocent third parties.

Lampert Plumbing (Danforth) Ltd. v. Agathos, [1972] 3 O.R. 11 (Cty Ct.)

· A, a creditor of the plaintiff firm, insisted on approving the business practices of the firm.
Once, while in the firm’s office reviewing the books, he signed a contract with L, on behalf
the firm, while the owner was away. The owner later breached the contract. Was A liable,
along with the actual owner, for the debt?
· Held, that because A had held himself out as an owner, he was liable as such (pursuant to
s. 17).
· BRAID’S WISDOM: This was probably wrongly decided. In all likelihood, the contractor would have
made the contract with the firm regardless of whether or not the creditor had been present, so the reliance
aspect of s. 17 isn’t satisfied.

Peters v. Klassen, [1994] 5 W.W.R. 264 (Man. C.A.)

· K’s son was a grain dealer, and K represented to P that he would be going into business
with his son. P gave credit to K’s son, and when the son had trouble with repayment of the
debt he said that his father would pay. K himself also assured P that he would do what he
could to see that P was paid. Ultimately, P sued K (the father).
· Held, that K was not liable. The casual statements made by K were not sufficient
representations of partnership or authority, and the son’s comments had no relevance, as
they were made without his father’s knowledge. Also, the court found that P would have
given credit to the son regardless of the father’s involvement.

Corbett v. McKee, 54 N.B.R. (2d) 107 (N.B.S.C.)

· A law firm’s letterhead included the names of its partners. M was a former partner whose
name was still on the letterhead.
· Held, that C would have gone to another lawyer in the firm regardless of M’s presence at
the firm. Therefore, M was not liable as a partner.

Bet-Muir Investments v. Spring (1994, Ont. H.C.)

· A law firm’s letterhead listed the names of partners and associates together. As in
Corbett, causation couldn’t be established; it couldn’t be proven that but for the presence
on the letterhead of a particular lawyer, the client would not have retained another lawyer
in the firm.

(e) Liability after change in membership of firm

· s. 20
(1) A new partner is not liable, prima facie, for debts incurred before his involvement.
(2) A partner who retires from the partnership does not cease to be liable for debts
incurred before his involvement.
(3) The foregoing two sections can be negatived by agreement to the contrary by the
creditors of the firm, either express or implied (i.e., inferred from subsequent course

17
 of dealings). [Override of s. 20(1) would be by novation, where an incoming partner
assumes the liabilities and obligations of an outgoing partner.]

· s. 39(1)
A person who dealt with the firm before the retirement of a partner and who continues to
do so after the retirement is entitled to continue to deal as if the retired partner is still a
partner until notice of the change is received. This represents a sort of statutory estoppel.

· In other words, there are essentially three requirements for this statutory estoppel under
s. 39(1):
1. Previous course of dealings while the ex-partner was still involved.
2. Retirement or resignation of the partner.
3. Another, subsequent dealing.

· If these requirements are met, the ex-partner will still be liable for subsequent debts of
the firm, unless:
1. The third party knows of the retirement at the time of the subsequent dealing; or
2. The third party did not know before the retirement that the ex-partner was in fact
a partner. (This is derived from the words “apparent member” in the section; i.e.,
the ex-partner must have been evidenced in the prior dealings.)
There need not be reliance on the status of the ex-partner. The third party could still have
a claim against the ex-partner even if he would have dealt with the firm regardless of the
presence of the ex-partner.

· The “apparent partner” wording could apply in any of the following situations:
1. Actual knowledge.
2. Indications during course of dealings (e.g., name on letterhead).
3. Indirect information.

· What constitutes “notice” of the partner’s resignation? Note that s. 39(2) states that
registration of change of membership under the B.N.R.A. is sufficient notice only to those
who have had no prior dealings with the firm. In other words, constructive knowledge is
not sufficient for existing clients. However, when a change or dissolution is registered
under that Act, it is automatically published in the Manitoba Gazette. Once this happens,
apparent authority ceases; even existing clients are deemed to know of the resignation.

· In the window of time that inevitably passes between resignation and notification
(publication), the ex-partner will remain liable as a partner. Mere registration under the
B.N.R.A. is deemed to notify only those who have had no prior dealings with the firm.
Thus, more formal notice must be given to existing clients — either through personal
notification or by registered mail (or possibly ordinary mail, although there is no case law
on this).

· Even after notice has been given, it is important to note that s. 17 still applies. That is, if
there is subsequent “holding out” of the ex-partner as a partner, his liability will be
renewed.

18
· The Partnership Act does not deal with liability of remaining partners for the acts of an
ex-partner. Under common law, though, when there is an agency appointment which is
communicated and then terminated, the agent’s apparent authority persists until the
termination of that arrangement is made known.

Eagle Shoe Co. v. Thompson (1956), 2 D.L.R. (2d) 755 (N.B.S.C.)

· A deceased left his shoe business to his son and daughter. At first, the son ran the
business, with the sister as a silent partner, and the sister subsequently resigned from the
partnership. At all stages of ownership, the plaintiff had dealt with the firm, and sued the
daughter for debts incurred after her departure.
· Held, the daughter was not liable for the debts. The plaintiff had never known that the
daughter, who was only ever a silent partner, was actually a partner in the firm. The court,
adopting the reasoning in Tower Cabinet & Co. Ltd. v. Ingram, [1949] 2 K.B. 397, held
that the words “apparent member” relate to the individual claimant, not to the public at
large. Thus, since the plaintiff had never known of the daughter’s involvement, she was
not, to him at least, an “apparent” partner.

19
III. RELATIONS BETWEEN PARTNERS

(1) GENERALLY

· s.22
The partnership is governed by the partnership agreement, and thus the partners can make
their own rules, so long as they abide by them. The Act frequently states that everything in
the Act is “subject to agreement between the partners.”

· s. 27
Sets out default provisions for when the partners cannot agree on what the partnership
agreement contains or if the partnership agreement does not touch a particular issue in
contention.

(2) PARTNERSHIP PROPERTY

(a) Partnership property vs. Personal assets used in partnership business

· This is an important distinction to make, for a number of reasons. For example,

partnership assets are available first to partnership creditors, while personal creditors
cannot seize partnership assets. Further, partnership assets must only be used for the
benefit of the partnership. (Note also that for tax purposes, partnership assets may be
depreciable.)

Water v. Water
· Three brothers were left a tree nursery by their father. One resigned and was
compensated, and the other two were left to run the business. The question facing the
court was whether the land on which the nursery was situated was automatically a
partnership asset by virtue of the fact that a tree nursery needs land in order to operate.
· Held, that the land was partnership property. This wasn’t an automatic decision, though;
it is a question of fact. In the circumstances of this case, when the one brother was bought
out his settlement included compensation for his interests both in the land and in the
business, thus indicating that the land was in fact partnership property.

· Other indicia of property status:

· What does the partnership agreement state, if anything?
· s. 23(1) All property brought into the partnership originally or acquired for the
partnership specifically is considered partnership property.
· s. 24 Property purchased with partnership money is deemed to be partnership
property.
· Conduct of parties: Question of fact. Who controls the asset? Do others ask
permission before using it?

20
 · Financial statements: How does the firm itself deal with the property? Is it listed as
an asset? If not, it will prima facie be considered to be a personal asset, but the
presumption is rebuttable.

(i) Is land personalty or realty?

Darby v. Darby (1856), 25 L.J. Ch. 371

· A deceased father left all his realty to his eldest son and all his personalty to his
daughters, to be divided equally among them. The question facing the court concerned
some land owned by the deceased and being used for the business of his partnership. Was
this to be considered realty or personalty?
· Held, the land was personalty. It was practically conceded that the land was a partnership
asset, which made the decision simple. Since partners have no right to claim partnership
assets in specie, and can only recover upon dissolution of partnership once the assets are
liquidated and the proceeds divided among partners, the partner’s only real interest in
partnership property is a “notional conversion” of the assets into cash. The partner will
only ever see cash, not the actual land, and so his interest in the land is only a cash
interest, which is classified as personalty.

· s. 25
Codifies the decision in Darby. Subject to contrary intention between the partners, when
land or any interest therein becomes partnership property, it is treated as personalty, not
realty.

(ii) Who gets the benefit of an increase in the value of partnership property?

Harvey v. Harvey (1970), 120 C.L.R. 529

· Brothers A and B owned a sheep farming operation as partners, but A owned the land on
which the ranch was situated. Together, the brothers had spent money improving the land
for the use of the business, but upon dissolution of the partnership, A wanted the land in
specie. B sued for compensation for his share of the improvements.
· Held, that A was entitled to the land. During the course of the partnership, the brothers
had always treated the land as if it was A’s and not partnership property. Thus, A was
permitted to take the land subject only to the payment in full of his share of the
improvements. He did not have to pay compensation to his brother for the other share; A
was entitled to the full value of the improvements.

Robinson v. Ashton, [1875] L.R. 20, esp. at 25

· A partner contributed a mill to the partnership business as his capital contribution. The
mill was listed in the firm’s books as an asset, but the partnership agreement listed it as his
property. Upon dissolution, the partner demanded the return of the mill.
· Held, the partner was entitled to the value of the mill at the time of the contribution, as
his portion of partnership capital. The increase in value, though, was to be divided equally
among all the partners. The mill had become a partnership asset and was thus notionally
converted to cash.

(iii) Nature of interest in partnership property

21
· Relevant questions: How can a private judgment creditor of a partner seize the
partnership interest? What if the partner assigned his interest in the partnership until the
debt is paid?

Smith v. Commonwealth Trust Co. (1969), 10 D.L.R. (3d) 181 (B.C.S.C.)

· A law firm had an account with CTC, which froze the firm’s accounts when S, a lawyer
in the firm, came into financial difficulty. There was also an instruction that everyone from
the firm with the exception of S could write cheques at CT. S sued, arguing that he had a
right to the firm’s accounts as partnership property, which couldn’t be seized by any other
partner outside of a dissolution of the partnership.
· Held, that S’s argument was correct.

· s. 26
(1) The court may, on application by a judgment creditor of a partner, charge the
partner’s interest in the partnership property with payment of the debt, and/or may appoint
a receiver of the partner’s share of profits, and/or may give all other orders or directions
that the partner himself could give with respect to a charge of the interest in favour of the
judgment creditor.
(2) The other partners are free to redeem the interest so charged or to purchase it if sale
has been directed.

· Restrictions on the court’s powers under s. 26 (“...all other orders...”) are based on the
restrictions on the powers of a partner in this respect:
· s. 27(g) Can’t unilaterally introduce new partners without the unanimous consent
of the other existing partners.
· s. 34(1) Although a partner is free to assign his interest in the partnership, either
absolutely or by way of mortgage or redeemable charge, an assignee cannot interfere
in the partnership business (i.e., only entitled to share in profits and losses and/or to a
share of liquidated assets upon dissolution).

Duncan v. Anderson (1979), 13 B.C.L.R. 6 (B.C.S.C.)

· A judgment creditor of a partner applied for an order that lands registered in the partner’s
name, but which were a partnership asset, should be sold to satisfy the debt.
· Held, the court so ordered, pursuant to the B.C. equivalent of s. 26.
· BRAID’S WISDOM: This was wrongly decided. It is inconsistent with the tenets of partnership law. The
intended effect of s. 26 is to allow courts to charge the partner’s interest in the partnership with the debt,
not to disrupt the partnership business by ordering the liquidation of a specific asset or assets. In essence,
the court gave the creditor greater rights than the partner himself. However, it is not surprising that the
court came to this conclusion, given the unfortunate wording of the section (“interest in the partnership
property”).

(b) Assignment of partner’s interest

· Recall that s. 34, supra, allows a partner to assign his interest in the partnership either
absolutely or by way of mortgage or redeemable charge. Such an assignment, however,
does not give the assignee any rights with respect to the partnership business, other than:
(1) The sharing of profits and losses (and note that the assignee must accept the
accounting of the other partners in this regard); and

22
 (2) The right, on dissolution, to the share of liquidated assets to which the original
partner would have been entitled.

Hocking v. The Western Australian Bank (1909), 9 C.L.R. 738 (H. Ct. A.)
· The bank was assigned an interest in a mining operation by a partner in that business.
There was no novation — no effort was made to obtain the consent of the other partners
to the assignment. Considering that new partners must generally be admitted with
unanimous consent, was the bank liable for debts incurred by the partnership?
· Held, the bank was not liable. The original partner was still liable, as no consent to the
assignment was obtained from the other partners. Thus, the new “partner” was not a
partner at all; the bank was only assigned the right to share profits and to receive a share
of assets upon dissolution.

Dodson v. Downey, [1901] 2 Ch. 620

· A partner made an absolute assignment — a sale, not a charge — of his partnership
interest to the defendant, but never obtained consent to the sale from the other partners.
When the business became insolvent, the original partner was called upon to pay his share
of the debts. He did this and then sued his assignee for indemnity, arguing that it was
unfair that the assignee should be entitled to all profits while the assignee was still liable
for all debts while receiving no benefits.
· Held, the assignee was liable to the assignor. The assignee should not have all the
benefits and no liability. The court analogized the situation to a sale of an interest in
property, where if the property is owned by a third party, the vendor is in effect a trustee
for the purchaser. He must make payments in the transfer of the property, but is entitled to
indemnity in respect of these transactions because they are made for the benefit of the
purchaser.

· BRAID’S WISDOM: Hey! If the assignee has no control over the partnership debts (i.e., since he’s not a
partner, he has no control over management), why should he be liable for them? He can’t limit his losses!
That really ticks me off! This case may be wrongly decided, but just in case it’s the law, here’s some
advice: NEVER allow a client purchase an absolute interest in a partnership without actually becoming a
partner, or he may be liable to indemnify for losses. That’s an “intolerable situation,” awkward for both
the original partner and the assignee. Assignment by charge is okay, though, as Dodson wouldn’t apply to
that arrangement.

(c) Fiduciary duty

· Partners have a fiduciary duty to one another. They are obligated both to be fair and to
appear to be fair to each other in the exercise of partnership business.

(i) Accounting (s. 31)

· s. 31
Partners are obligated to render true accounts and full information to one another.

Cameron v. Julien, [1957] O.W.N. 430

· Two partners operated an insurance agency. The partnership was dissolved and J, the
active partner, claimed a large amount of uncollected debt for which he could not account

23
and had no evidence or further details. Was C, the silent partner, liable to share in these
losses?
· Held, C was not liable. Because of the fiduciary duty between partners, the onus was on
J, who managed the books, to establish the specifics of the accounts. If he could not do
so, he would be liable personally for the unsubstantiated debts.

(ii) Disclosure (s. 31)

Hogar Estates Ltd. v. Shebron Holdings Ltd. (Supra, at p. 11)

· Facts set out supra. One partner was buying the other out and failed to disclose to him
that there was about to be a favourable zoning ruling that would enhance the value of the
property.
· Held, that since the information affected the partnership, it ought to have been disclosed.
This is a good example of the fiduciary duty of disclosure between partners.

Dockrill v. Coopers and Lybrand (1994), 11 D.L.R. (4th) 62 (N.S.C.A.)

· Partners in an accounting firm went to a lawyer to seek legal advice on how to get rid of
an unpopular partner. The partner in question wanted to see the advice. The others
refused, arguing privilege.
· Held, the information was obtained by the partnership and related to a matter affecting
the partnership, and thus must be shared with all the partners.

(iii) Accountability for private profits

· s. 32
Partners must account to each other for benefits accrued from:
1. Private transactions concerning the partnership;
2. The use of partnership property;
3. The use of the partnership name; and
4. The use of business connections stemming from the partnership.

· This is a very serious breach of fiduciary duty, and carries with it strict liability. If a
partner abuses his position as such, whether in good faith or not, he will be liable.

Meinhard v. Salmon, 164 N.E. 545 (1928) (N.Y. C.A.)

· S held the lease on a commercial building and entered into a partnership with M. The
lease became partnership property. When the lease was about to expire, the owner decided
to tear down the building and build a new and bigger one on the current land and an
adjacent parcel. He told S about the plans and that he would be looking for a building
manager. S never told M about this, and the partnership dissolved upon the expiration of
the lease. S became the manager of the new building and M accused him of breaching his
fiduciary duty by not sharing the new opportunity. S argued that the duty only extended to
the old building, not to a new one which was partially on different land.
· Held, that the fiduciary duty persisted and S was holding the new lease in trust for
himself and M on the same terms as the old partnership. The new opportunity, no matter
how it arose, was within the scope of the partnership business and thus fell under the
fiduciary duty of disclosure. The situation would have been different had there been no

24
nexus of relation between the business and the opportunity presented to S as an incident of
management (e.g., if the new building had been far removed from the existing one).

· The test for a breach of the disclosure duty, as set out in Meinhard v. Salmon, consists of
two questions of fact:
1. Did the opportunity arise as a result of the partnership business?
2. Is there a rational connection between the new opportunity and the nature of the
partnership business, and thus a fiduciary duty?

(iv) Actual competition, s. 33

· s. 33
If a partner, without consent of the other partners, carries on a business of the same nature
as, and in competition with, the partnership business, he must account to the partnership
for profits.

(v) Scope of accountability

Olson v. Gullo Estate (1994), 17 O.R. (3d) 790 (Ont. C.A.)

· Two partners owned land. G secretly sold a portion of the land for $2.5 million, in a clear
breach of fiduciary duty and then had O killed. O’s estate claimed entitlement to the entire
amount, arguing that G should not be able to profit from his own misdeeds.
· On appeal, held, that the profits were to be divided as regular partnership profits. The
accounting is to the partnership, not the partner, so O’s share was to be the percentage of
profits to which he was entitled under the partnership agreement.

(vi) When does a fiduciary duty arise?

· Generally, the fiduciary duty arises when the partnership commences. When potential
partners are negotiating, it’s every man for himself. However, if confidential information
arises in the course of negotiations, there may be constraints on the use of that information
against the interests of the other, disclosing, party.

International Corona Resources v. Lac Minerals, [1989] 2 S.C.R. 584

· ICR was introduced to mineral holdings which it found to contain gold deposits so
extensive that it couldn’t handle the job itself. ICR contacted LM to form a joint venture,
and in the course of negotiations divulged information about the mineral holdings. LM
then negotiated directly with the owner of the holdings, eventually purchasing them
without ICR’s involvement.
· Held, that although there was no breach of fiduciary duty per se, there was a breach of
confidence and LM was holding the land in a constructive trust for ICR. (The court was
split, though, and some did find a fiduciary duty.)

(vii) Can the fiduciary duty be varied?

Molchan v. Omega Oil & Gas Ltd., [1986] 1 W.W.R. 398 (Alta. C.A.)
· A partner sold partnership assets to another company in which he had an interest, but did
so in good faith and with the consent of his partners in the first company.

25
· Held, that the fiduciary duty against private profit can be varied by contract, so this
transaction was legitimate.

(viii) When does it terminate?

· Prima facie, the fiduciary duty terminates upon dissolution of the partnership. However,
it must be certain that all assets have been liquidated and sold, and that information was
received after dissolution. Otherwise, if information received is valuable and used for
profit, the benefits derived must be shared among the former partners, even if realized
after dissolution.

Davis v. Oullette (1981), 27 B.C.L.R. (2d) 244 (Ont. C.A.)

· Parties were partners in a mining operation which was about to be dissolved. Before
dissolution, though, O received information on a financing prospect. He didn’t act on it
until after dissolution, but realized profits when he did.
· Held, that because the information was acquired during the operation of the partnership,
O had to account to the partnership for the benefits derived.

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IV. DISSOLUTION OF PARTNERSHIP

(1) GENERALLY

· This refers to complete dissolution, as regards all partners. Assets are liquidated, debts
paid, and residue divided among the partners. Note, though, that this is rare in
partnerships with more than two partners; in larger organizations, the norm is for some
partners to buy out others, rather than opt for complete dissolution. The partnership is still
technically dissolved and reconstituted, but the law regards it as the same partnership with
different members.

(2) DISSOLUTION WITHOUT RECOURSE TO THE COURT

(a) By agreement

· Most often, the partnership agreement addresses the question of how the partnership can
be dissolved. Usually, a decision of the majority of the partners is required, but some
agreements provide for dissolution at the will of one partner only.

· Another way to dissolve the partnership is by supervening agreement — a contract made

by the partners over and above the existing partnership agreement.

· Agreement to dissolve may be either express or implied.

· In the absence of agreement to the contrary, there are certain rules which bind the
partnership upon dissolution.

(b) By notice, ss. 35 and 29

· s. 35(1)(c)
Subject to any agreement by the partners, a partnership entered into for an undefined time
is dissolved by any partner’s notifying the others of his intention to dissolve.

· s. 29(1)
Where a partnership is for an undefined time, any partner may dissolve it at will by giving
notice of his intention to do so to all other partners.

· Note that both of the above refer only to partnerships of undefined length. A fixed term
partnership cannot, therefore, be dissolved by notice alone.

Blundon v. Storm (1970), 7 D.L.R. 413 (S.C.C.)

· A partnership was formed for the purpose of searching for sunken treasure, for which
one partner had a map. A partnership agreement was signed. Gradually, each partner quit
looking until there was only one left, S. The remaining hunter found the treasure, and

27
when word of this bounty leaked out, all the others wanted in. Were they entitled to a
share?
· Held, that they were entitled to share in the profits. The partnership had not been
successfully dissolved. S, the last active partner, had never notified the others of any
intention to dissolve the partnership, and none of the departed partners had done so either.
Thus, S must be deemed to have been continuing to search for the benefit of the
partnership, because any private profit from the partnership business would constitute a
breach of fiduciary duty. Still, S.C.C. applied equity and drastically reduced the others’
shares under the doctrine of laches.

· s. 35(2)
The date of dissolution is deemed to be the date on which notice is given to the last of the
partners.

Akman & Sons (Fla.) Inc. v. Chipman (1988), 38 B.L.R. 185 (Man. C.A.)
· The parties formed a partnership to develop land in Florida. When a balloon mortgage
payment came due, A gave notice to C that they wouldn’t pay and were thus withdrawing
from the partnership. C agreed to work with A on a buy-out price, and A was never again
involved in the development. Before the buy-out was completed, though, C received an
unusually good offer to purchase the land and accepted it without notifying A. If A was
still a partner, then C could not rightly withhold this information without breaching the
fiduciary duty of disclosure. C argued that in their accepting A’s repudiation of the
partnership agreement the dissolution was complete, and that it wasn’t contingent on
agreement on a buy-out price.
· Held, that C was not liable to account to A. Their acceptance of A’s repudiation
amounted to complete dissolution of the partnership by agreement.

· Recall that anything of value in a partnership must be liquidated upon dissolution, and
any use of an unliquidated partnership asset, even after dissolution, will lead to an
accounting for profits to one’s former partners.

Shuster v. Lebovitz (1976), 29 C.P.R. (2d) 58 (Ont. H.C.J.)

· S and L had an idea for a promotional game, but S soon lost interest and the partnership
was dissolved. L continued at a later date with another partner and eventually sold a
slightly modified version to a company for a modest profit.
· Held, that L was liable to account to S. The idea was an intellectual property right of the
former partnership and the dissolution agreement didn’t deal with that particular asset.

(c) By expiration or termination, s. 35

· s. 35(1)
(a) A partnership for a fixed term is dissolved by expiration of that term.
(b) A partnership entered into for a single adventure or undertaking is dissolved by the
termination of that adventure or undertaking.

· s. 30
If a fixed term partnership is carried on beyond the expiration of that term, in the absence
of any new agreement, it is presumed to be a partnership at will.

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(d) By death, s. 36

· s. 36
Subject to any agreement to the contrary, the death of a partner dissolves the partnership.

Whitney v. Small (1913), 31 O.L.R. 191 (C.A.)

· Parties were partners in a movie theatre for a fixed term: until the expiration of the lease.
Before the lease expired, S died. His estate argued that this event had effectively dissolved
the partnership, and demanded an accounting (of assets) from W. It was argued by W that
the partnership agreement included that its terms “shall be binding on heirs, executors,
etc...” and so the partnership should not be considered to be dissolved.
· Held, the death of a partner dissolves a fixed term partnership. (By contrast, recall that a
fixed term partnership cannot be dissolved by notice.) Per Braid, death would probably
also dissolve a single-adventure partnership. As for the boiler plate “heirs and executors”
clause, that was only intended to cover accounting for profits after death and would not
continue the partnership.

· Of course, it is always open to partners to include a provision in the partnership

agreement that the partnership will survive the death of a partner, and there may be good
tax reasons for doing so. (Recall No. 41 v. M.N.R., supra, where widows of partners in a
law firm were held to have succeeded their husbands as partners, pursuant to agreements
to that effect).

(e) By bankruptcy or insolvency, s. 36

· While bankruptcy is a court order and is easy to determine, the concept of “insolvency”
is trickier. How can the date of insolvency be determined objectively? If it can’t, then it
will be impossible to pinpoint the date of dissolution, which obviously can lead to serious
problems.
· BRAID’S WISDOM: This is just goddamned silly!

(3) DISSOLUTION BY THE COURT

· s. 38
The court may, on application by any partner, dissolve a partnership, where:
(a) A partner is shown to be of permanently unsound mind, in which case application
can be made on that partner’s behalf;
(b) Another partner becomes permanently incapable of performing his partnership
duties;
(c) Another partner has been guilty of conduct prejudicial to the success of the
business;
(d) Another partner has wilfully or persistently breached the partnership agreement
or has otherwise conducted himself such that it is not practicable for the other partners
to continue;
(e) The business can only be carried on at a loss; or
(f) The court finds it just and equitable that the partnership be dissolved.

29
Landford Greens Ltd. v. 746570 Ontario Ltd. (1993), 12 B.L.R. (2d) 196 (Ont. H.C.J.)
· A partnership was formed to build highrise buildings in Toronto, but the market faltered
and so did the development plan. One partner tried to have the partnership dissolved under
s. 38(e), as the business could only be carried on at a loss.
· Held, that s. 38(e) did not apply. It will only be applicable where the business could
never be carried on other than at a loss. The mere fact that the business is currently losing
money isn’t enough.

· When will it be “just and equitable that the partnership be dissolved,” pursuant to s.
38(f)?
1. Where the raison d’etre of the partnership is gone (e.g., if an intellectual property
right has expired).
2. Where there is a justifiable lack of confidence in the management of the partnership
(based on honesty, not competence).
3. Where there is demonstrated deadlock within a partnership, even if the business is
good and operative. It will not be seen as just and equitable to force people who can’t
stand each other to continue to do business together. The court has the option to make
an order for one partner to buy the other out at fair market value.

Alvarez v. Daly (1964), 48 W.W.R. 611 (B.C.S.C.)

· This was a large medical partnership which was governed by a partnership agreement
giving tremendous power and freedom to some senior doctors. Two new doctors
attempted to have the partnership dissolved because the agreement was unfair. They gave
notice and also tried the s. 38(f) route.
· Held, the partnership could not be so dissolved. It was implied in the agreement and in
the circumstances that the partnership could only be dissolved by agreement, and for the
court to allow otherwise would not be “just and equitable.”

(4) DISTRIBUTION OF ASSETS

· s. 47
(a) Creditors are to be paid first out of profits, then out of capital, and finally by
individual partners in the order in which they were entitled to share profits.
(b) Assets are to be paid out in the following order:
(i) Payment of debts to non-partners...
1. Secured creditors
2. Unsecured creditors
3. Section 4(c)(iv) lenders, pursuant to s. 5.
(ii) Payment to partners of advances (i.e., beyond obligatory capital), rateably.
(iii) Capital paid to partners, rateably.
(iv)Ultimate residue to be divided among partners in proportion to division of
profits.

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V. LIMITED PARTNERSHIPS

(1) BASIC CHARACTERISTICS

· Recall the basic characteristics of a “regular” partnership:

1. Unlimited liability of partners, s. 12
2. Apparent authority of partners to bind the firm, s. 8
3. Unless otherwise agreed, each partner has a vote, s. 27

· In a limited partnership, the first two of these characteristics are automatically excluded,
and the third is drastically altered:
1. Limited liability
2. No apparent authority
3. No right to manage, unless otherwise agreed upon.

· Limited liability means that a limited partner is not liable for the debts of a limited
partnership beyond the contribution made by him personally into the capital of the limited
partnership.

· s. 63(5) Further characteristics of a limited partnership

In the absence of agreement to the contrary,
(a) Differences with respect to the ordinary course of business are to be resolved by
a decision of the majority of the general partners;
(b) A limited partner may assign his share with the consent of the general partners,
and the assignee will become a limited partner with all the rights of the assignor;
(c) The other partners may not dissolve the partnership by reason of a charge on the
share of a limited partner;
(d) A new partner may be introduced without consent of the limited partners;
(e) A limited partner is not entitled to dissolve the limited partnership by notice.

(2) SOME RIGHTS OF LIMITED PARTNERS

· Note the common thread here: The rights of the limited partners are carefully drawn so
as not to compromise the rights of third party creditors.

· s. 60(1)
A limited partner may receive interest on his contribution annually, provided the payment
of interest does not reduce the original capital. If after the payment of interest, profits
remain to be divided, the limited partner may also receive his portion of those profits.

· s. 60(2)
A limited partner may demand and receive the return of his contribution,
(a) Upon dissolution of the limited partnership;
(b) At the time, if any, specified in the partnership agreement for return of the
contribution;
(c) After he has given six months notice in writing to all other partners, if no time is
specified in the partnership agreement; or

31
 (d) When all partners consent to the return of the contribution.

· Return of the contribution is subject to restrictions, per s. 60(3). Most importantly, a

limited partner may not have his share returned if there remain outstanding liabilities to
third party creditors or the limited partnership assets are insufficient to satisfy all
creditors.

· s. 60(4)
In the absence of agreement to the contrary or consent of all the other partners, a limited
partner has only the right to receive the return of his contribution in cash, no matter what
form it originally took. In other words, as in a general partnership, a limited partner is not
entitled to receive partnership assets in specie.

· s. 62
This provision gives limited partners some rights with respect to the partnership business.
They may inspect the books of the firm, examine the progress of the business, and may
advise as to management (but the management has no obligation to take this advice).

· s. 64
Limited partners are entitled to an accounting by the general partners for their
management of the partnership business.

(3) FORMATION OF A LIMITED PARTNERSHIP

· s. 51(2)
A limited partnership may be formed by two or more persons according to the provisions
of the Act or by agreement.

· s. 52
A limited partnership can consist of one or more general partners and one or more limited
partners, who must have contributed something of actual value to the partnership.

(a) When is the limited partnership formed?

· To be a limited partnership, there must be an explicit agreement to that effect. Until such
an agreement is made, the limited partnership is not formed.

· s. 55
A limited partner is not entitled to limited liability until the limited partnership has been
registered as such under the B.N.R.A. Policy reason: until then, the public has no access
to information about people’s ability to bind the firm, etc.

· s. 56(2)
Failure to renew registration under the B.N.R.A. after three years makes the limited
partnership a general partnership.

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· Probably, the combined effect of ss. 55 and 56(2) is that a limited partnership is not
formed at all, as such, until registered under the B.N.R.A.

· Without limited partnership status, all partners have the apparent authority to bind the
firm.

(4) DISSOLUTION AND VARIATION OF A LIMITED PARTNERSHIP

(a) Generally

· s. 60(5)
A limited partner is entitled, on application, to have the limited partnership dissolved
where:
(a) The limited partner is entitled under the Act to have his contribution returned to
him but it is not; or
(b) The limited partner would be entitled under the Act to have his contribution
returned but the other liabilities of the limited partnership have not been paid or the
assets of the limited partnership are insufficient for their payment. (Note that the
limited partner would likely not receive his contribution back in any case under these
circumstances, as creditors must first be paid.)

· s. 63(3)
A limited partnership is not dissolved by the death or bankruptcy of a limited partner.

· s. 65
In the case of insolvency or bankruptcy of the limited partnership, third party creditors
must be paid in full before any partner may claim as a creditor. Yes, limited partners stand
in line behind even s. 4(c)(iv) lenders!

(b) Dissolution of a limited partnership qua limited partnership

· s. 56(1)
If a limited partnership for a fixed term continues beyond the expiration of that therm and
is not re-registered as a limited partnership, it becomes a general partnership.

· s. 58(1)
If a limited partnership business is conducted under the name of a limited partner, with his
consent, that limited partner shall conclusively be deemed to be a general partner. Again,
the policy motivation is to avoid confusing the public.

(c) Grant of apparent authority only

· s. 54(1)
If a limited partner, with the knowledge of the general partner(s), takes part in the
management of the business, he has the apparent authority to bind the firm. This is an
estoppel-based rule, and a question of fact:

33
 1. Did the general partners know the limited partner was participating in
management?
2. Did the third party believe the limited partner to have the authority to bind the
firm?
3. Was the act within the scope of the normal partnership business?
If the answers to all three questions are “yes,” then the firm will be bound. The limited
liability of the limited partner will not be affected, though (that falls under s. 63).

· But what does it mean to “take part in management”? Braid says that it probably
involves a representation to the public; i.e., the limited partner must be seen by the public
as a representative of the firm. There must arguably be reliance by the third party, too.

(d) Loss of limited liability only

· s. 62
Recall that this provision gives limited partners some rights with respect to the partnership
business. They may inspect the books of the firm, examine the progress of the business,
and may advise as to management.

· s. 63(1)
If a limited partner takes an active part in the business of the limited partnership, he is
liable as if he were a general partner to anyone with whom he deals on behalf of the
partnership, and who does not know he is a limited partner, for all debts of the
partnership.

· NOTE THE DIFFERENCE BETWEEN S. 54 AND S. 63:

S. 54 deals with the liability of the firm with respect to the acts of a limited partner,
while s. 63 deals with the liability of the limited partner for all debts of the firm.

· Manitoba’s s. 63 is different from every other province’s version, each of which refers to
taking part in control of the partnership. That flows naturally from s. 62 — while giving
advice is okay, taking control is going too far. In other words, why should a person have
decision-making power and all the other benefits of partnership, potentially jeopardizing
creditors, without having any corresponding liability?

· Where does legitimate control end and loss of limited liability result?

Haughton Graphic Ltd. v. Zivot (1986), 33 B.L.R. 125 (Ont. H.C.J.)

· Z was a limited partner in a firm in which the general partner was a corporation of which
Z was the president and CEO. He had been identified to others as the president of the
limited partnership; he had never clarified his roles as being an officer of the general
partner rather than of the limited partnership. When he was sued by a creditor of the
limited partnership, he argued that he ought not to be liable, as he was only a limited
partner and any decision-making he had made with respect to the limited partnership was
under his authority as an officer of the general partner, not as a limited partner himself.
· Held, that Z was personally liable for the debts of the limited partnership. He lost his
limited liability by taking control of the business and never delineating his actual position.

34
Also, the court held that representation to third parties is of no relevance here. Section 63
is not based on estoppel; it is concerned with actual control.

· But this is a very tricky distinction to make. It’s not a formulaic rule, but a question of
fact. This type of limited partnership can work, provided that the shareholders of the
corporate general partner (who are also limited partners in the limited partnership) are
very careful to define their roles with respect to the limited partnership.

Marigold Holdings Ltd. v. Norem Construction Ltd., [1988] 5 W.W.R. 710 (AB Q.B.)
· In a case with similar facts to Haughton Graphic, supra, the court held that the
individual defendants had taken part in the management of the limited partners as partners
in the general partner corporation, not as limited partners. Again, it was simply a matter of
defining roles, which was done more carefully here than in Haughton Graphic.

· The foregoing cases dealt with s. 63 as it exists in other jurisdictions. Manitoba’s s. 63 is

an estoppel-based section, so limited liability is lost only with respect to those people with
whom the limited partner deals and who do not know that he is a limited partner.

· BRAID’S WISDOM: They got it all wrong again! The legislators didn’t understand the purpose of s. 63
when the Act was drafted, and the result is that in Manitoba, third parties have far less protection with
respect to limited partnerships than they do in other provinces. Also, limited partners have more potential
authority in Manitoba. It has been suggested that in Manitoba, the test is a distinction between structural
input and day-to-day input.

· So how does the section work in Manitoba?

· Hypothetically, if a limited partner identifies himself as such and purports to deal with a
third party anyway, the firm will not be bound unless the limited partner was acting with
the knowledge and authority of the general partners. The limited partner does not lose his
limited liability, either, because the third party has notice of the limited partner’s status. If
the limited partner had not identified himself as such, he would be personally liable for any
debts incurred, as the firm would still not be bound by his act.

(e) Warranty of authority

· If a limited partner tells the third party that although he is a limited partner he still has the
authority to bind the firm, and deals with the third party in the regular course of business
of the firm, the firm will not be liable. But what about the limited partner? Section 63
doesn’t quite deal with this situation, where a limited partner is clear about his position but
still claims authority.

· In such a situation, we have recourse to a principle of agency law known as warranty of

authority. In essence, an agent who purports to represent a principal to a third party
warrants that he has the authority to bind the principal. If this is not in fact the case, the
agent will be liable to the third party for breach of warranty of authority. The third party
has no obligation to verify the agent’s claim of authority.

· Breach of warranty of authority will result in the agent’s being required to put the third
party in the same position he would have been in had the representation been true.

35
· In calculating the damages, one must consider not only the potential profit that might
have been realized by the third party had the principal been bound by the agent, but also at
the actual ability to collect from the firm. In other words, if the deal involved a potential
profit of $50,000 but the firm actually has no assets, the third party will collect nothing.
The court will not put him in a better position than he would have been in had the
representation been true and the contract executed.

· In other words, breach of warranty of authority is only as good as the principal’s ability
to pay. The agent’s ability to pay is irrelevant.

36