The recent decision of the Court of Appeal in Greenaway vs Sovran brings
forward an interesting point about the enforceability of a
restrictive covenant in a partnership agreement involving only two
In this case, the parties were partners with each other in an
accounting practice that operated for over 20 years. They carried
on practice in two separate locations, each partner working out of
a different city in Ontario. There were no other partners.
The partnership agreement was poorly drafted, having been prepared
without legal advice by one of the parties based on a precedent
that he had obtained at a conference in the United States (I pause
to note that in my experience, this type of thing happens with
alarming frequency – even among professionals).
The agreement contained a covenant providing that where a party
withdraws from the partnership, that party will suffer a reduction
in his capital account by 500% of the average fees billed by the
firm to clients who transfer their files to him within the
following 24 months. The Court characterized this as a
In this case, Greenaway gave notice to Sovran that Greenaway
would be retiring from the partnership. He subsequently
provided a further notice confirming that he was retiring from the
firm, and giving notice of his intention to dissolve the
partnership as of the date of his retirement.
The date came and went. Both parties continued to provide
accounting services to what were essentially former clients of
Sovran took the position that Greenaway was subject to the
restrictive covenant, so that his capital account now reduced by $1
million given the number of clients who transferred their files to
him after the dissolution of the firm. Greenaway took the opposite
position and the matter was dealt with by way of Application.
Greenaway took the position that the dissolution of the
partnership prevented Sovran from trying to enforce any covenant
against him. Sovran responded by pointing to a clause in the
agreement stating that the "interest of the firm should take
precedence over the interest of an individual," suggesting
that this meant that there was in contemplation a continuing
business entity following the departure of a partner which would be
entitled to the protections contained in the restrictive language
in the agreement. The Application judge found that Greenaway
had indeed withdrawn from the partnership triggering the clause in
the agreement that reduced his capital account.
The Court of Appeal disagreed. As far as the Court of Appeal was
concerned, the agreement between the parties was intended to apply
to multiparty partnerships and not a partnership of two.
Greenaway's withdrawal coincided with the dissolution of this
two-member firm at which point, according to the Court of Appeal,
the firm ceased to exist and the parties were free to pursue their
own practices without any reduction in Greenaway's capital
account. There was no contractual term preventing them from doing
so and if either had wished to include a specific term permitting
one partner to prohibit the other from competing, which could have
been done. In the absence of such a provision, the Court felt that
it was reasonable to conclude that the partners should be limited
to their common law and statutory rights in the event of
dissolution and nothing more. Otherwise, an unhappy partner would
have to choose between remaining handcuffed to the other partner or
quitting the partnership and, for practical purposes, leaving the
entire business to the other partner.
This is an important case for partnerships involving no more
than two partners. It demonstrates the care that must be taken in
drafting any provisions in an agreement intended to govern the
relationship between the parties if the partnership is dissolved.
If proper care is not taken, the parties run the risk that upon the
dissolution of the partnership, covenants of a restrictive nature
contained in their agreement may be unenforceable.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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