Large law and accounting firms ostensibly bear little
resemblance to traditional, small-scale partnerships. Nevertheless,
in the recent Ontario Superior Court decision in Tim Ludwig
PC v BDO Canada LLP, 2016 ONSC 2225, a partner's
expulsion serves as an important reminder that the bedrock
principles of 19th century partnership law continue to
apply to all partnerships today.
In a decision released on March 31, 2016, Justice Mew considered
a summary judgment motion brought by Tim Ludwig, who was formerly a
partner of the defendant accounting firm, BDO Canada LLP. Mr.
Ludwig's claim was for breach of contract as a result of his
forced retirement from the firm in 2014.
On July 8, 2014, Mr. Ludwig was informed by two other partners
of BDO that he was required to resign, pursuant to a decision of
the firm's CEO. The reasons cited for his expulsion were purely
economic, based on market decline. When Mr. Ludwig refused to agree
to retire, BDO invoked the firm's Partnership Agreement and
ultimately convened the firm's Policy Board, which voted to
expel Mr. Ludwig on the purported ground that his expulsion was in
"the best interests of the Partnership".
Justice Mew found that the defendant's actions were in
breach of the firm's Partnership Agreement, and found in favour
of Mr. Ludwig in the amount of $1,294,937 for lost profits and
retirement benefits, and awarded an additional $100,000 in
aggravated damages for injury to his reputation.
In its analysis of the facts, the Court determined that Mr.
Ludwig's forced resignation was without cause, was
pre-determined by BDO's CEO, and that the Policy Board's
vote constituted a "mere rubber stamp" to the CEO's
decision in breach of the fiduciary duties Mr. Ludwig's
partners owed him.
The Court reaffirmed the foundations of contemporary partnership
law in rendering its judgment. Justice Mew relied on relevant
legislation and jurisprudence from as far back as the 1800s, as
well as on principles now codified in the Ontario
Partnerships Act. Significantly, the Court
confirmed that the bedrock principles of partnership law apply as
much to modern large partnerships as they do to more traditional
Importantly, the Court recognized that partners are not
employees. They do not enjoy the same legal protections as
employees, and their relationships are governed by partnership
agreements and by fiduciary duties owed to one another and the
Partners enjoy a property interest in the partnership. Justice
Mew emphasized this entitlement, asserting that "[t]he
cardinal principle in play goes to the proposition that, 'since
a true power of expulsion is expropriatory in nature, it will
always be construed strictly'".
None of this is to suggest that a partner can never be expelled
from a partnership, but such an act must be done diligently, in
good faith, and in accordance with the partners' fiduciary
obligations and the partnership agreement. A fiduciary cannot
fulfill his or her duties while acting "under dictation",
without the ability to exercise discretion rationally and in good
In this case, BDO failed to demonstrate good faith in its
decision-making processes. The Policy Board acted impermissibly at
the direction of the firm's CEO, in violation of its fiduciary
obligations and of the firm's Partnership Agreement.
Ultimately, this judgment is a cautionary tale for all large
LLPs and other non-traditional partnerships – a partnership
of any size remains a partnership in the eyes of the law.
Importantly, this means that any committee of partners that
purports to expel another partner needs to be able to demonstrate
that each committee member exercised his or her own considered
discretion in compliance with the fiduciary duties that he or she
owes to the partner in question.
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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